1. "AIRLINE INDUSTRY – CHANGING TIMES”
Guide : Prof N.S.Shetty
Submitted By
SHREEKALA SHAH
MFM III B
ROLL NO. 136
NARSEE MONJEE INSTITUTE OF
MANAGEMENT STUDIES,
VILE PARLE, MUMBAI.
2001-2002.
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2. ACKNOWLEDGEMENT
I would like to place on record my sincere thanks to
Prof. N.S.SHETTY, my guide, for his guidance which
helped me to select and focus my study on this
subject.
I would also like to thank Ms. Gautami Kad, my
colleague for her invaluable assistance during the
course of this project.
SHREEKALA SHAH
NMIMS
MFM-III ‘B’
Roll No: 136
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3. TABLE OF CONTENTS
1. INTRODUCTION …….01
2. INDIAN AVIATION HISTORY …….03
3. INDIAN AVIATION INDUSTRY …….05
Operational - Domestic …….06
Indian Airlines …….07
Jet Airways …….10
Yield Management – Fares War …….19
Operational – International (Air India) …….23
Infra Structural …….25
4. REGULATORY …….28
5. RECENT DEVELOPMENTS …….30
6. FUTURE TRENDS …….31
7. CONCLUSION …….33
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4. 1. Introduction
The airline industry is one of the fastest growing sectors in the world, boosted by
deregulation, open markets, technological advances and a quest for travel. Economic
liberalisation has wrought radical changes in India's civil aviation sector. Among the
most significant of these are a rapid increase in capacity and a dramatic improvement
in service quality. Aviation has a highly significant role as a driver of globalisation,
with an impact of the airline industry on the world economy. At the start of a new
millennium, airline industry has a role to play, in encouraging the fullest flowering of
the freedom to travel and ship goods everywhere in the world, to the greatest benefit
of mankind, and to ensure that all the forces that are essential to making it happen are
moving in the same direction!
But before reaching to a conclusion it may be appropriate for us to review briefly,
where the airline industry came from, where it is, and how we see it growing and
contributing to the economy. This is the objective of this study.
The Indian aviation industry can be broadly classified into two main segments -
civil and cargo. In fact, the birth of civil aviation is attributed to air cargo and mail. In
the beginning, mail and air cargo were the important elements of air carrier services
than passengers. The major players today, in the Indian context are Air India in the
international segment and Indian Airlines, Jet Airways and Air Sahara in the domestic
segment.
Over the years, the aviation sector in India has evolved and today it is on the threshold
of a major shake out with the divestment of the Indian government's stake in Air India
and Indian Airlines on the cards. A number of domestic and foreign parties have
evinced interest in the divestment process. Recently, foreign airlines like Virgin
Atlantic of Britain and Singapore Airlines have also entered the Indian skies.
The Indian aviation sector till recently was highly regulated by the government. As
recently as the eighties saw the introduction of some new initiatives like the air taxi
scheme, whose main objective was to boost tourism.
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5. In an increasingly global society, the economic and social contribution of this industry
to the world is highly significant and continues to grow. Contribution by the airline
industry to the world economy is as follows:
- By the year 2010 aviation's economic growth impact could exceed USD 1,800
billion and provide the basis for over 31 million jobs.
- During the next 20 years, airlines are likely to buy 16,000 aircraft, worth USD
1,200 billion, and that infrastructure providers - airports and air traffic services
will need to spend USD 350 billion to accommodate the growth in air traffic.
- International aviation is the prime engine of travel and tourism, which
presently contributes more than USD 3,500 billion to the world economy or
nearly 12 percent of the total.
- More than 192 million jobs will be generated, 8 percent of the total.
- Capital investment for travel and tourism is at present USD 733 billion a year
and this represents more than 11 percent of the world total.
How does the future for Indian industry look like?
Domestic and international passenger traffic in India is projected to grow annually at
12.5 per cent and 7 per cent respectively over the next decade. At the same time,
domestic and international cargo traffic is expected to grow at 4.5 per cent and 12 per
cent respectively. By the year 2005, Indian airports are likely to handle 60 million
international passengers and 300,000 tons of domestic and 1.2 million tons of
international cargo.
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6. 2. Indian Aviation History
Nevill Vincent, a former RAF pilot came to India from Britain in 1929, on a
brainstorming tour to survey a number of possible routes. It was through providence
that he met JRD Tata, the first Indian to secure an A-license within the shortest
number of hours. Vincent worked out a scheme, secured JRD's approval and together
they presented it to Mr. Peterson, the director of Tata Sons and also JRD's mentor. Sir
Dorab Tata, the then chairman of Tata Sons, pleasantly surprised all by giving the
scheme his okay. So they went ahead and drew plans for the operation for the first
flight from Karachi to Mumbai with a single stopover at Ahmedabad.
All that they asked was a guarantee from the government for a year for the sum of
Rs.100,000. This, however, was turned down. The Tata-Vincent combine was
naturally disappointed but not dismayed. A second scheme was prepared. This time
the guarantee asked was Rs.50,000 for the first year, Rs.25,000 for the second year
and no guarantee at all from the third year onwards. This scheme was rejected too.
The team then tried a third time. This time they offered to donate an air service to the
Government of India with no strings attached. The Government finally agreed and
thus was born Tata Airlines that later became Air India.
On 28th May 1953, consequent to the coming into force of the Air Corporations Act,
1953, the Government of India nationalized the airlines industry as a result of the
recommendations of the Air Transport Inquiry Committee headed by Shri
Rajadhyaksha. Nationalisation took place to make further and better provision for the
operation of Air transport services in India.
In accordance with this Act, the two air corporations, viz. Indian Airlines Corporation
and Air India International, were established and the assets of all the then existing
airline companies like Air Services of India Ltd; The Himalayan Aviation Ltd; The
Bharat Airways Ltd; The Indian National Airways ltd; The Kalinga Airlines; The
Deccan Airways (nine) were transferred to the two new Corporations, since, the Air
transport inquiry committee felt that the existing private operators were running under
heavy losses.
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7. The operation of scheduled air transport services was under the monopoly of these
two Corporations and the Act prohibited any person other than the Corporations or
their associates to operate any scheduled air transport services from, to, or across
India.
However, after 40 years, in 1994, the wheel had turned a full circle as the Air
Corporation Act, 1953 was repealed with effect from 1st March 1994. That ended the
monopoly of the Corporations on scheduled air transport services. Air transport in
India is now open to any carrier who fulfills the statutory requirements for operation
of scheduled services.
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8. 3. The Indian Aviation Industry
The civil aviation activities can be broadly classified into three areas: Operational,
Infra-structural and Regulatory-cum-developmental. On the operational front, Air
India provides international air services while Indian Airlines is involved in the field
of domestic air services. Pawan Hans supplies helicopter support services, primarily
to the petroleum sector. Air India, Indian Airlines and its subsidiary Alliance Air,
which also provides domestic services, and Pawan Hans are government-owned.
Indian Airlines Ltd had a monopoly in domestic air services, but since the opening up
of this area to private operators, it has been joined by several private airlines. Infra-
structural facilities are supplied by, Airports Authority of India (AAI), which was
formed in April 1995 through the Airports Authority of India Act, by merging the
separate 'national' and 'international' airport authorities that existed earlier.
In terms of size, the Indian aviation industry's turnover was approximately Rs.40
billion in FY99. 14 million passengers traveled using its services in FY99. The
growth profile of the industry in the last three decades is given below.
Year Aircraft (mn km Passengers flown Passengers (mn km flown)
flown) ('000 nos)
1970-71 37.8 2,123 1,559.0
1980-81 41.2 4,850 3,917.2
1990-91 58.7 7,912 7,028.1
1995-96 88.8 10,356 9,249.3
1996-97 112.5 12,312 11,047.3
1997-98 109.4 11,549 10,702.9
1998-99 117.2 12,017 10,820.3
From the above table, it is clear that the aviation industry in the country has grown by
leaps and bounds in terms of kilometers flown and also number of passengers
serviced. However, as compared to the previous decades, the rate of growth has fallen
in recent years. In fact, in the period FY97 to FY99, the number of passengers has
fallen and so has the length of passenger kilometers traveled.
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9. 3.1 Indian Aviation Industry – Operational :
Let’s take a look at what is happening in the Domestic & International front for India.
A) Domestic Airlines
Till recently, Indian Airlines had a monopoly in the sector. However, in 1993 the
skies were opened for private participation and 8 airlines got the nod to commence
operations like East West Airlines, Jet Airways, NEPC, ModiLuft, Damania, Archana
Air. Of these, two major operators who have survived are - Jet Airways and Sahara
Airlines.
A government survey conducted in 1990, which predicted an increase in air traffic by
5% per year, was the basis on which the open sky policy was initiated by the
government. Though the number of seats offered by the airlines grew, the expected
rate of growth of the industry as predicted did not take place. Instead the industry
grew by 0.05%, which saw suddenly, for the first time after nationalization a situation
where supply exceeded demand. Seats on many of the airlines started going empty.
The seat factor of Indian Airlines, which till then was 100%, started declining as seats
stated going vacant. As many operators vied for a share in the pie, the buyers started
putting in their own demands. Fare wars and discounts were the order of the day.
During the period from 1991 till date there has been a lot of changes in the aviation
scene. From carrying 8 million passengers in 1995 which amounted to approximately
22,000 passengers per day slowly the amount fell and by 1997-98 Indian Airlines was
carrying approximately 17,000 passengers a day. Its market share fell to 37.69 in
February 2000.
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10. Another airline, called Crown Express, has very recently got an approval from the
government to start domestic operations. The promoter is Ms Neera Radia. Of the
total investment of Rs1.11 billion, family and friends will bring in 60%, while FIIs
and Venture capital funds will contribute the rest. Modiluft, which is planning to re-
enter the sector, will be renamed as Royal Airways in its new form. It proposes to
come out with a public issue to raise funds from the public.
The market share of Indian Airlines vis-à-vis private players is given below.
Airlines Market Share Aircrafts Owned
Indian Airlines 47% 55
Private Airlines* 53% 35
* - Represents all private airlines operating in the country viz. Jet, Sahara and
others.
Over the past few years, Indian Airlines has lost market share and is currently second
to private operators. Its market share has fallen from 50.5% in 1999 to 46.8% in 2000.
The major gainers are the two domestic operators Jet and Sahara, the major
beneficiary being Jet Airways. The combined market share of both of them has risen
from 49.5% in 1999 to 53.2% in 2000. In terms of plant load factor too IA lags
behind. While the average for all domestic operators was around 63.4%, Indian
Airlines clocked a performance of 61.9%. Jet had the highest plant load factor of
around 71.8%.
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11. 3.2 A-1) Indian Airlines
In 1953, a new dream took shape - to airlink the vast South Asian subcontinent by a
single, modern, and efficient airline. The Airline was Indian Airlines. Today, Indian
Airlines, together with its fully owned subsidiary Alliance Air, is one of the largest
regional airline systems in Asia with a fleet of 56 aircrafts, 11 wide bodied Airbus
A300s, 30 Fly-by-wire Airbus A320s, 11 Boeing 737s and 3 Dornier D-228 aircrafts.
Indian Airline's has been setting the standards for civil aviation in India since its
inception in 1953. It has many firsts to its credit, including introduction of the wide-
bodied A300 aircraft on the domestic network, the fly-by-wire A320, Domestic
Shuttle Service and Walk-in Flights.
The network of Indian Airlines spans from Kuwait in the west to Singapore in the
East and covers 75 destinations - 59 within India and 16 abroad. The Indian Airlines
international network covers Kuwait, Oman, UAE, Qatar and Bahrain in West Asia,
Thailand, Singapore, Yangon (Rangoon) and Malaysia in South East Asia and
Pakistan, Nepal, Bangladesh, Myanmar, Sri Lanka and Maldives in the South Asian
subcontinent.
Indian Airlines flight operations centers around its four main hubs- the main metro
cities of Delhi, Mumbai, Calcutta and Chennai. Together with its subsidiary Alliance
Air, Indian Airlines carries a total of over 7.5mn passengers annually.
At present, Indian Airlines has a fleet strength of 55 aircraft's. Out of them, are 11
Airbus A300, 30 Airbus A320, 11 Boeing B737 and 3 Dorniers D0228.
Indian Airlines has developed state-of-the art facilities for all aspects of maintenance,
including engine overhaul. These facilities are used not only by Indian Airlines but
also by other airlines from time to time. The training facilities for Pilots are integrated
at Hyderabad where Commanders and Captains are trained in all types of aircraft in
the Indian Airlines fleet. State-of-the-art full flight simulators are available for A300,
A320 and B737. Several international airlines also avail of these training facilities.
Indian Airlines' technology upgradation, also extends to other areas such as
Reservations, Passenger Handling Systems and Customer Service.
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12. Indian Airlines is presently fully owned by the Government of India and has a total
staff strength of around 22,000 employees. Its annual turnover, together with that of
its subsidiary Alliance Air, is over Rs.40 billion.
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13. 3.3 A-2) Jet Airways
In eight years, Jet Airways’ marketshare has rocketed from 6 per cent to 42 per cent.
In barely eight years, Jet Airways has become India’s most successful private airline
with total assets worth Rs.2,000 crore. It operates the youngest fleet of 33, racked up
US $ 542 million (Rs.2547 crore) in revenue and flew 5.9 million passengers for FY
2001 - a 42 per cent share.
Of the dozen or so airlines that took wing soon after the industry was privatized in
1992, Jet is just one of the two that have survived. Better still, it’s the only private
airline to make profits; the only other Sahara Airlines, still loses money and trails way
behind with a negligible share on a fleet of nine. And the leader, Indian Airlines,
slipped back into the red last year, as a result of a sharp rise in fuel prices. The details:
Jet’s profits for the year ended March 31, 2001, were Rs.12.50 crore as compared to
Indian Airline’s loss of Rs.17 7 crore.
But the fact remains that Jet has been through two big round of borrowings. In 1997,
it raised $380 million or Rs.1,786 crore (85 per cent from Barclays Bank and the rest
from Grindlays) and at the beginning of 2001 it finalized a deal to raise $358 million
(Rs. 1,683 crore) from Stan Chart through an innovative securitised deal. (Jet and
Naresh Goyal will chip in with about Rs.240 crore.) Both the loans have been
guaranteed by, the US Exim Bank.
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14. Jet Airways Milestones - from the time of its inception can be listed as follows:
o 1st April 1992 – Jet Airways India is incorporated as a privately owned
company.
o 5th May 1993 – Takes off with four first for India Boeing 737-300s.
Establishes Mumbai as the base for operations.
o 4th April 1994 – Adds 737-400 to its fleet; again, first in the industry.
o 20th July 1994 – Launches “Frequent Flyer” programme
o 14th Jan 1995 – Gets the scheduled airline status, allowing it to print flight
schedules
o 15th Oct 1997 – 20% stake of Kuwait Airways & Gulf Air each given up
o 29th Oct 1997 – Buys its own aircraft from the Exim Bank Guarantee
o 26th Sep 1998 – Introduces new generation Boeing 737-800
o 28th Nov 1998 – Launches Boeing 737-700
o 12th Aug 1999 – Establishes bonded warehouse to handle international cargo
o 6th Oct 1999 – Introduces ATR 72-500 to service feeder routes
o Dec 1999 – Average fleet age touches 2.8 years (maintained at that since)
o July 2000 – Intorduces Jet Mobile for mobile flight schedule delivery
o Sept 2000 – Launches co-branded credit card with Citibank
o 12th Jan 2001 – Strikes innovative financing deal for purchase of 10 aircraft
o 5th Feb 2001 – Wins the prestigious ATW’s Market Development Award
o 28th Feb 2001 – Turnover crosses the $ 500 million mark
o 15th May 2001 – Launches Jet Mail, India’s first in-flight mail order shopping
o June 2001 – Commissions its own flight simulator and training device
o June 2001 – Welcomes 25th million passenger on board
One of the factors for the survival/success of Jet Airways can be attributed to its
Service Innovations like:
1. Cabin bag – only passengers can check in at any city counter
2. Returning passengers can get two boarding passes at one check in
3. Business class passengers can customize their meal and drinks
4. In-flight mail-order shopping offering premium products at a discount
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15. 5. JetMobile offers automated flight schedules over the cell phones.
Table reflecting the growth of Jet Airways in terms of its
Fleet Size & Market Share:
Fleet Size Marketshare
Year Numbers Year %
1993-94 4 1993-94 6.6
1994-95 6 1994-95 11.0
1995-96 8 1995-96 12.7
1996-97 12 1996-97 19.0
1997-98 19 1997-98 25.6
1998-99 25 1998-99 32.8
1999-2000 29 1999-2000 38.4
2000-01 30 2000-01 41.9
Current 33
* Expected to go up to 38 by the end of 2002 covering additional stations
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16. Comparison of some of the major differences in the Domestic front between
Jet Airways and Indian Airlines
Jet Airways Jet Vs IA Indian Airlines
33 Number of aircraft 57
(June 2001)
5.9 million Passengers carried last 8.0 million
year (2000-01)
71.7% Average seat factor 67.0%
10 hours per day/aircraft Aircraft utilization 7.5 hours per day/aircraft
163 Number of employees/ 397
Aircraft
215 Number of flights/Day 208
2.8 years Average age of fleet 13 years
17,200 Passengers/Day 22,000
Rs.2,547 crore Turnover Rs.177 crore (Loss)
Rs.12.50 crore Profits/Loss Rs.177 crore (Loss)
42% Marketshare 51%
Turnover, Profits & Marketshare for the year ended March 31, 2001
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17. Some of the factors which has lead to the survival of Jet Airways:
Jet has the finest business model of the three airlines. Back in 1992, even before Jet
was formally incorporated, the founders were focused for the long term. This is
evident from the basis of their model selection. When the question of what kind of
aircraft to lease came up, the answer should have been the Boeing 737-200s. Not only
were they cheaper and popular, but there also was a ready pool of personnel
(engineering and flight) available for poaching from Indian Airlines. They, however,
decided to go for the 737-300s. The rationale: although the 300s were twice more
expensive to lease, they were more fuel-efficient (consumed 8 per cent less fuel) and
cost as much less to maintain. Besides, these were new generation CFM 3B engines,
and they had a feeling that a young fleet would help pull in customers.
This decision was bang on target. Even as the new competitors such as Damania
Airlines, East West and Modiluft struggled with older 737-200s, Jet created a new
standard for in-flight service. By the middle of 1996, when Modiluft, the last of
serious competitors, broke up with Lufthansa and subsequently went down, Jet
already had a 13 per cent marketshare.
Jet Airways had a core team of professionals from Air India, Malaysia Airlines,
Singapore Airlines right from its launch. Having experienced hands on board (a lot of
them foreign nationals), also meant that Jet ran its operations better that its
competitors.
With respect to addition to its fleet, Jet would initially dry lease aircraft instead of
buying them. (Today, Jet owns half of its 28 737s; the five ATRs are all leased). The
economics worked out better that way, since Jet could expand faster by using its
precious funds to lease more aircraft than put it all in buying one or two. For example,
buying a Boeing 737 could cost anywhere between US $ 40 and US $ 50 million
(depending on the configuration), whereas a monthly lease could be as low as US $
400,000. The decision to go in for one type of aircraft also meant that operational
glitches were minimized because of the engineering and flight crew’s familiarity with
the aircraft.
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18. Aviation turbine fuel (ATF) costs, which typically make up a quarter of operating
expenses, were kept in check because, it flies the favoured high-altitude air corridos
(30,000 feet), resulting in better fuel efficiency and flight schedules are planned and
adhered to with manic zeal. The result: an average on – time performance of 90 per
cent. The primary reason for this is because officials at Jet believes, that: “In the
airline business, delays and the resulting increase in operating costs can make the
difference between survival and death”.
Within three months of its launch, Jet managed to swing membership of the
prestigious International Air Traffic Association (IATA), quickly followed by an
admission into the IATA Clearing House. The memberships brought with them the
lucrative “interlining” arrangement – for carrying passengers and cargo within India –
with International carriers. Today, Jet has 120 interlining arrangements, which
account for nearly 28 per cent of its revenue. Interlining is especially lucrative
because the fares are in dollars and cost 35 to 40 per cent more.
To ensure it wooed and retained the right kind of passengers, Jet focused on the
business traveler, who historically has accounted for a third of all passengers. But the
decision entailed offering superior service. Ironically, Jet picked up rival Indian
Airline’s service module for the framework and then borrowed a few ideas from KLM
for managing systems. The customer interface format was devised by Speedwing, a
subsidiary of British Airways, partly because they had seen how putting customers
and employees first had helped the British carrier turn the corner.
Today, with more than 17,000 passengers flying Jet everyday, the airline has had to
keep a close watch over its customer service. On all its flights more than 20 minutes
long, light refreshments are served. But on longer flights, passengers are pampered
with non-alcoholic drinks, cold towels and a three-course meal. The 16,500 service
monitor questionnaires (SMQs) that Jet receives every month are analysed at various
levels to plug service loopholes.
Every new flight attendant is put through at least three months of training in the first
year, and thereafter several more hours of in-flight and classroom training. Even the
shade of nail polish, the length of hair, and what deodorants to use are carefully
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19. regulated. The thought behind this service quality is to keep passengers happy, who
would in turn keep them in business.
Part of Jet’s spectacular success, was ensured by Indian Airlines itself. The fact that it
was government owned, long operated in a captive market, was not allowed to expand
its fleet, and had to get the ministry’s approval for everything, made it a poor
competitor. Therefore, while IA served 70 stations with a fleet of 57, Jet plied its 33
aircraft among, until recently, 30 key stations. Even today Jet operates more flights
that IA out of a lucrative station like Bangalore.
Over the recent years, however the national carrier has been pulling itself up by the
bootstraps. For instance, its 737s were flying 1,600 hours a year in 1995. Today, they
do 2,900 hours. Similarly, it’s 320’s are doing 3,100 hours a year, compared to 2,300
hours earlier. By the end of the year 2001, IA plans to have four more A-320s in
service to consolidate its presence in the trunk routes, and also bring in six ATRs (50
seaters) to do short hauls and thing routes.
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20. In the beginning of the year 2001, Jet was contemplating to cancel the lease on four
ATR turbo-prop aircraft because the 62-seaters, brought in to fly feeder routes, proved
to be unviable. But obviously growing traffic and the need to strengthen presence in
smaller stations have prompted Jet to try and rework the ATR equation. By the end of
FY 2001, it hopes to rack up $6.38 million in revenue. Jet is trying to put into place
systems that should result in a qualitative jump in performance. An external
consultant, has been appointed to access managerial expertise and help optimize
performance. Simultaneously, serious investments are being made on the training
front. An aviation academy, housing the state-of-the-art Boeing 737 700/800 flight
simulator and a flight training device for 737-400s has been set up at a cost of $10
million.
Not surprisingly, Jet’s immediate goal is to consolidate its market share by further
improving its service levels, and adding more routes to its network. By the end of this
FY 2002, Jet plans to have three more ATRs and one 737 in its fleet. That should
increase the number of stations it serves to 45 or so and a satisfied customer may be
the best defence against the threat of new entrants.
The dough to plough into infrastructure and fleet is to come from private placement.
Jet has already tied up a Rs.1,600 crore loan for the purchase of 10 Boeing 737s to be
delivered over the next two years. The innovative deal minimized Jet’s foreign
exchange exposure, since the repayments are to be made in Indian rupees.
Five years after Jet put in an application with the Government to fly nearby
international routes, the proposed new aviation policy could finally bring it the go-
ahead. (Indian Airlines, which could get revitalized following its proposed sale to a
private bidder, already flies to some Middle-east and Far East destinations.) More
importantly, Jet has been scouting for an investor with whom the shares could be
placed as closely-held company. The money will help Jet consolidate its marketshare
and acquire bigger aircraft to fly more destinations in India.
All this could help when Jet begins flying neighbouring countries. It has already
applied for permission to fly countries such as Malaysia, Singapore, and the U.A.E
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21. and although the proposed new aviation policy is likely to recommend that sound
private airlines be allowed to ply such sectors. IA and AI may be given the first right
of refusal. But that clause could go in the wake of their privatization. Still, it will take
Jet at least a year from the date of approval to get a set up in place. Not only will it
need bigger aircraft, it will have to train its pilots and engineers to handle the new
fleet.
There is little doubt that it’s a totally new kind of competition that Jet will face in the
international arena. Apart from AI and IA, which deploys 22 per cent of its capacity
on international routes to get 30 per cent of the revenue, there are international biggies
such as United Airlines, Singapore Airlines, Lufthansa, British Airways, and Cathay
Pacific to reckon with. Besides, in an industry prone to downcycles, Jet’s relatively
shallow pockets and overwhelming dependence on passenger business could prove
fatal, since unlike 1992, what Jet has at stake is not a few million of dollars, but an
airline.
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22. 3.4 Concept of Yield management (Tackling Fare wars):
In the coming competition Airlines have resorted to cutting fares to lure customers
leading to a situation of Fare War. How does this work? As an example – In 1999,
Indian Airlines announced low fares on the Mumbai-Delhi route. The airline had
sufficient reason to want to continue with the discounts as in the months of July and
August 1999, not only did the airline make a small profit on its lower fares, it has
registered higher load factors -- over 70 per cent in July and 80 per cent in August 99
With this rivals Sahara and Jet Air also seemed to be determined to continue the price
war. Sahara announced that it will charge fares that are lower than those of Indian
Airlines or Jet Airways, and Jet Air flexing its marketing muscle offered discounts at
major hotels across India to passengers, and Indian Airlines continued to play safe by
keeping fares low on the Delhi Mumbai route.
The main antagonists in this fare war were Indian Airlines and Jet Airways. Indian
Airlines could easily take on the five-plane Sahara Airlines even if the latter
continued with its low fares and Indian Airlines revises its fares upwards. But in this
dogfight over fares Jet Airways found it hard to hike its fares upward unless Sahara
did it first since Jet had been adversely impacted by the smaller carrier’s aggressive
air fare slashing and freebies like hotel stays and gifts.
In a price sensitive market, the biggest threat to Jet could come form IA’s decision to
go in for flexi-pricing of fares. Towards the end of the year 2000, when Jet increased
its fares, IA had to hold onto its own because it had crashed one of its 737s at the
Patna airport. By maintaining fares, IA had hoped to lure passengers away from Jet.
But the 9W (Jet’s flight code) did not register any fall in numbers, although its rate of
growth slowed.
With flexi-pricing, IA, which flies one out of every two passengers, may be able to
make further inroads. For example, an afternoon Delh-Mumbai flight may be cheaper
than the morning flight on the same route, with the difference in fare could be as
much as 15 per cent. The idea is to even out passenger load and grab customers from
Jet, which-not taking any chances-has also decided to drop its prices by 10 to 15 per
cent on all the key sectors.
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23. The coming competition, will be unlike anything Jet has seen so far. Indian Airlines is
awaiting a buyer, and should the new owners (the government will continue to own
40 persent, though) prove to be somebody like Tata-Singapore Airlines, Jet’s USP of
superior service and on-time flights will be hard to defend. Then, there is Royal
Airways (formerly ModiLuft) threatening to take wing, besides Crown Air and North
Star Aviation. New entrants in the market would certainly hurt Jet. The growth may
not fall in absolute terms, but the rate of growth could be affected.
Almost airlines have cut routes and are discounting heavily to retain the share of a
dwindling customer base. Such differences in prices are due to the airlines wanting to
maximize its revenue or its profits. This is termed by some as revenue management
while some experts call it yield management. The strategy appears to be rather
simple: sell the right seat to the right type of customer, at the right time and for the
right price. The key is to find the tradeoff between selling discount ticketing in order
to fill up the plane totally, and selling full fare tickets and only filling up a portion of
the plane.
The reason for this characteristic is very simple. If capacity were flexible, there would
be no need for a tradeoff. If airlines could add or remove seats or aircraft at will, there
would be no reason to try to manage capacity. Unfortunately, the plane cannot be
enlarged and the only flexibility allowed is to schedule the passenger on a later flight.
Airlines should be able to segment their market. Since one of the purposes of yield
management is to smooth the distribution of passengers, to be effective, the airline
must be able to segment its market into different passenger categories. Keeping in
mind that a tradeoff between maximum load factor and highest paying passengers is
sought, a very good example is the comparison between the time-sensitive business
person and the price-sensitive customer. One is willing to pay a higher fare in
exchange for flexibility (open return, cancellation option, schedule change, etc.) the
other is willing to give-up some flexibility for the sake of a cheaper ticket (stay
overnight Saturday and return on Sunday non-working day - which is a peak day).
Such a strategy allows airlines to fill seats that would otherwise be empty.
In the airline industry, plane seats are referred to as inventory. If the plane leaves the
gate with empty seats, this inventory cannot be stored and is lost. If an airline can
minimize the inventory spoilage, then it will operate much more efficiently. Since
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24. yield management determines the load level to try to maximize revenue, Airlines can
benefit from such a technique.
Airlines should determine their pricing also on the basis of the demand. Yield
management is a tool that can be used to smooth the demand pattern. In peak season,
the airline can increase its revenues by increasing the fare on its tickets and in low
season, it can increase capacity utilization by offering low prices. Past years data can
offer the manager a way to forecast when these peek and low seasons occur. In terms
of characteristics, the aviation industry is seasonal in nature. In the period April to
May and again from November to December, demand is high. However, in the June-
July period demand falls. Demand fluctuates seasonally and also gradually (there is an
increase in the demand for reservation until a few days prior departure).
Airlines have fixed capacity. In order for yield management to work optimally,
additional capacity should be expensive to acquire. In this situation, the cost of a
plane is high, moreover, the lag between the order and delivery is significant. On the
other hand, the cost of an additional passenger should be low (in fact, airlines have
very high fixed costs), such as the negligible cost of drinks and food for a customer.
In fact, if there were low capacity change costs, it would be easy to adapt quickly by
storing a few airplanes in reserve ie. It should manage between low marginal sales
costs and high capacity change costs.
In the global scenario, one needs to look at the past three decades when major
technological advances like wide bodied aircraft (Boeing 747 was introduced in the
late sixties) and fuel efficient jet engines changed the entire cost structure in the
airline industry.
It has been found that yields have reduced by 2.1 per cent per year since 1960 and is
expected to continue to reduce. This has primarily been responsible for the
tremendous growth in air traffic during this period.
However, in the past decade, many major carriers have shifted focus and have
concentrated on the ‘icing on the cake’ rather than the cake itself by promoting first
class and business class travel at the expense of the economy class.
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25. The argument for this strategy was that the margins available on the premium
segment were many folds higher. But first class and business class seating reduces
dramatically the number of passengers an aircraft can carry.
Published information suggests that the load factors among all airlines, whether low
cost or not, hovers around 70 per cent. It can be speculated that the higher margins
from premium passengers have probably not contributed significantly to the bottom
line of the major airlines while their expenses are much higher.
Examination of the performance of the low cost carriers versus the major international
carriers shows that the major carrier’s operating costs per available seat mile is much
higher in comparison to low cost carriers while average while average yields per
revenue passenger mile are nearly at the same level.
Low cost subsidiaries promoted by the major international carriers like British
Airways, Virgin in the West and Alliance Air promoted by Indian Airlines in India
have not shown the same agility and performance as compared with excellent results
of SouthWest, Ryan Air or Easy Jet of the US.
Evidence seems to suggest that low cost carriers have learnt important lessons from
the decades of spectacular air traffic growth where the primary reason for the growth
was constant reduction in yields driven by passenger volumes and a dynamic yield
management system. They have also developed the right focus in terms of
management structures to handle the customer, costs and even turnaround at the
airport gate and probably will ride the present difficult phase unlike the major carriers,
several of them are expected to vanish as consolidation and restructuring takes place.
This can be also applicable to the Indian scenario with the Government owned Air
India & Indian Airlines going for privatization.
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26. 3.5 Indian Aviation Industry – Operational :
B) International Airlines
In the international sector, Air India is the sole Indian service provider. However, in
the international market, the share Air-India is negligible compared to that of the likes
of British Airways and Emirates Air.
B-1) Air India
Air-India International was registered on March 8, 1948 and it inaugurated its
international services on June 8, 1948, with a weekly flight from Mumbai to London
via Cairo and Geneva with a Lockheed Constellation aircraft. Later on in 1962, the
word 'International' was dropped. Effective March 1, 1994, the airline has been
functioning as Air-India Limited.
At present, Air India has a fleet strength of 23 aircrafts. Out of them are 6 Boeing
747-400, 4 Boeing 747-200, 2 Boeing 747-300 Combi, 8 Airbus 310-300 and 3
Airbus 300-B4. The airlines has plans to induct 4 more A-310-300 aircraft on dry
lease effective December 2000.
From a total of three stations served at the time of nationalisation, Air-India's network
today covers 44 destinations. The company's network is as follows -
• India: Ahmedabad, Amritsar, Bangalore, Calcutta, Chennai, Delhi, Goa,
Hyderabad, Kochi, Kozhikode, Mumbai, Thiruvananthapuram;
• UK: London;
• Europe: Paris;
• Asia Pacific: Tokyo, Osaka, Bangkok, Hong Kong, Kuala Lumpur, Singapore
and Jakarta;
• Gulf & Middle East: Doha, Abu Dhabi, Bahrain, Jeddah, Kuwait, Muscat,
Riyadh, Dhahran and Dubai;
• USA & Canada: New York and Chicago;
• Africa: Nairobi and Dar-es-Salaam.
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27. In addition, Air India has a so-called 'code sharing' arrangement with a number of
foreign airlines. These include Swiss Air, Bellview Airlines, Austrian Airlines, Asiana
Airlines, Air France, Virgin Atlantic, Scandinavian Airlines, Singapore Airlines,
Aeroflot, Air Mauritius, Kuwait Airways and Emirates.
Air India carried a total of 3.35mn passengers in FY2000 as against 3.17mn in FY99.
This made for a plant load factor of 70.3%.
Financials
Air-India has posted an operating profit of Rs 760 million in FY 2000. This is good,
given the fact that the airline had recorded its highest operating loss of Rs 4.13 billion
three years prior i.e. in FY97. The airline had made its last operating profit in FY95.
The net loss has been contained at Rs370 million partly due to an additional payout of
Rs.1.78 billion during the fiscal due to a hike in global and domestic fuel prices. Air-
India's total turnover during the year was Rs.46.62 billion as compared to Rs 42.36
billion last year - a growth of 10 per cent.
While PBIDT (Profit before interest, depreciation and tax) was a negative Rs 6.48
billion, the firm succeeded in raking in a cash profit of Rs. 4.12 billion during the
year. Air-India has also achieved a positive return on its investments of over 5 per
cent in FY 2000 on capital employed in the business as compared to a negative return
in the last couple of years.
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28. 3.6 Indian Aviation Industry – Infra Structural :
Airport Infrastructure
There are a total of 449 airports/airstrips in the country. Airports are presently
classified as international and domestic airports.
International Airports: These are available for scheduled international operations by
Indian and foreign carriers. Presently, Mumbai, Delhi, Chennai, Kolkatta; Kochi and
Thiruvananthapuram fall into this category.
Domestic Airports: In this category fall those airports, which have custom and
immigration facilities for limited international operations by national carriers and for
foreign tourist and cargo charter flights. These include airports Bangalore (CE),
Hyderabad, Ahmedabad, Calicut, Goa (CE), Varanasi, Patna, Agra (CE), Jaipur,
Amritsar, Tiruchirapally, Coimbatore, Lucknow.
Yet another type of airports are known as Model Airports. These have a minimum
runway length of 7,500 feet and are capable of handing A320 type Airbuses. They can
cater to limited international traffic, if required. These airports are in Bhubaneswar,
Guwahati, Nagpur, Vadodara, Imphal and Indore.
There are 71 domestic airports, which fall in the category of 'Other' Domestic
Airports. There are also 28 civil enclaves (CE) in Defence airfields. Twenty of them
are currently in operation.
Mumbai airport is the busiest in India and handles about 30% of the total passenger
traffic in the country. The Chhatrapati Shivaji International Airport's share of the
country's international traffic is around 40%.
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29. Airports Authority of India
The Airports Authority of India (AAI) was formed after the merger of International
Airports Authority of India and the National Airports Authority by way of the
Airports Authority Act (No.55 of 1994). It came into existence on 1st April 1995. AAI
manages 5 international airports, 87 domestic airports and 28 civil enclaves. It
provides air traffic services over the entire Indian airspace and adjoining oceanic
areas.
The AAI also undertakes assignments like airport feasibility studies, airport design
project implementation, project supervision and manpower training. The AAI has
undertaken consultancy projects in Libya, Algeria, Yemen, Maldives, Nauru and
Afghanistan.
Recent infrastructure developments
Private sector is now allowed in building airports. Among the private sector-aided
airports to be developed in the next five years are Hassan (Karnataka), Mumbai, Goa
and Bangalore. These airports are capital-intensive projects that have to be run
efficiently to make them commercially profitable. The Mumbai project, for instance,
will cost an estimated Rs.16 billion (US $ 457 million). The Government has also
decided to concentrate on developing existing airports rather than on new airports.
The AAI is investing Rs.4.4 billion (US $125.7 million) to develop model airports in
12 cities, with state-of-the-art equipment.
Part financing of facilities through a tax paid by embarking international air
passengers is an idea being tried out at Kozhikode, which generates large West Asia-
bound traffic. A similar method may be adopted for development of airports in
Rajasthan and Goa that are popular tourist destinations.
Among airport construction projects with private participation undertaken is the
Kochi International Airport. The equity will account for Rs. 640 million (US $ 18.3
million), 26% of which the government of the State of Kerala holds, and the rest by
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30. non-resident Indians, banks, users (airline firms) and contractors. Term loans and
short-term borrowings for working capital from banks funded rest of the project.
The AAI has also drawn up a Rs. 40 billion (US $ 1.1 billion) plan to modernize and
expand its airspace infrastructure to meet the demand growth projected for the coming
five years. The growth strategy envisages not only better passenger facilities but also
improved navigational and communication systems. The first phase will involve
upgradation of conventional communication, navigational and surveillance systems as
an immediate measure. The second will be a transition from the present ground-based
ATS systems to satellite-based CNS/ATM by the year 2000.
The internal resources generated at present being inadequate, the AAI plans to
enhance revenues through rationalization of the tariff structure, as well as from
commercial, cargo and duty-free shops.
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31. 4. Indian Aviation Industry – Regulatory :
Civil Aviation policy
The Ministry of Civil Aviation is the main central agency responsible for the
formulation of national policies and programs for development and regulation of Civil
Aviation and for devising and implementing schemes for orderly growth and
expansion of Civil Air Transport. Its functions also extend to overseeing the
provisions of airport facilities, air traffic services and carriage of passengers and
goods by air.
The Government recently approved a new policy to promote private investments in
the Aviation Sector. The highlights of the policy are as follows.
• Foreign equity upto 40% and investment by non-resident Indians (NRIs) or
overseas corporate bodies' (OCBs) upto 100% will be permitted in domestic
air transport services.
• Equity from foreign airlines will not be allowed directly, or indirectly, in
domestic air transport services. Existing companies in which equity is held by
foreign airlines will be advised to disinvest this equity.
• Entry and exit barriers have been removed. There will be a scrutiny of
applications to verify financial soundness and maintenance, security and safety
aspects of operations.
• The choice of aircraft type and size is left to the operator.
• To achieve economies of scale, the minimum fleet size for a scheduled
operator has been raised from the existing three aircraft to five. Also the
minimum amount of shareholders' funds has been increased from the existing
Rs.50 million (US$ 1.4 million) to Rs100 million (US $ 2.9 million) for
aircraft of all-up weight below 40,000 kg and from Rs100 million (US$ 2.9
million) to Rs.300 million (US$ 8.7 million) for all-up weight exceeding
40,000 kg.
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32. • Total capacity requirements in the air transport sector are being projected for a
period of at least five years on an annual basis, to help the developer make
investment decisions.
• In the distribution of this capacity, while preference will be given to Indian
Airlines according to its fleet augmentation plan, private operators' proposals
to induct new capacity will be considered, based on the demand, load factor,
past track record and financial soundness.
• All scheduled operators are required to deploy 10 per cent of their capacity in
NorthEast, Jammu and Kashmir, Andaman and Nicobar Islands and
Lakshadweep.
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33. 5. Recent developments
The government has given the final nod for the divestment of Air India. It has been
proposed that the government will not fix any price for sale but will let the market
decide the price. The government has put up 40 per cent of the equity in the airline for
sale. The strategic partner, which the airline has been scouting for, will take up 40 per
cent stake with only a 26 per cent cap to foreign airlines. The line up of suitors is
formidable with a combine of British Airways and Jet Airways, Singapore Airlines
and the Tata's, a consortium led by Air-France and Delta, Reliance and ITC. Then
came British steel baron Laxmi Mittal who has decided to take the plunge along with
Kotak Mahindra, British Airways and Qantas of Australia.
As far as Indian Airlines is concerned, the Tata group has bid for it in addition to its
bid for Air India. The Hindujas, the SkyTeam comprising of Air France and Delta,
Emirates and the Indian Pilots Guild have also submitted their expression of interest.
Reliance had earlier pulled out from the race.
The Disinvestment Minister Arun Shourie has said that the end of FY01 will see the
completion of the privatization process for Air-India. The government is sadly way
off the target (Rs100 billion) as far as the program for disinvestment goes. It remains
to be seen whether the proposed divestment in Air India does come about by the set
date.
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34. 6. Future trends
Considering the forecasts made by different organizations and taking a reasonably
pragmatic view, the traffic scenario to be expected upto the year 2010-11 has been
projected by the Foundation for Aviation and Sustainable Tourism. The Airports
Authority of India has extended these projections to the year 2016-17.
Year Domestic %age Inter Passengers %age
Passengers increase increase
(in mn) (in mn)
1996-97 12 10.5 10.89 7
(Actual)
1997-1998 13.26 10.5 11.65 7
1998-1999 14.65 10.5 12.47 7
1999-2000 16.2 10.5 13.34 7
2000-2001 17.57 10.5 14.14 7
2001-2002 19.06 8.5 14.99 6
2002-2003 20.68 8.5 15.89 6
2003-2004 22.44 8.5 16.84 6
2004-2005 24.35 8.5 17.85 6
2005-2006 25.05 7 18.84 5.5
2006-2007 27.87 7 19.87 5.5
2007-2008 29.82 7 20.96 5.5
2008-2009 31.91 7 22.16 5.5
2009-2010 34.15 7 23.33 5.5
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35. 2010-2011 36.54 7 24.62 5.5
2011-2012 39.09 7 25.97 5.5
2012-2013 41.44 6 27.24 4.9
2013-2014 43.93 6 28.58 4.9
2014-2015 46.56 6 29.98 4.9
2015-2016 49.35 6 31.45 4.9
2016-2017 52.32 6 32.99 4.9
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36. 7. Conclusion:
The ageing fleet of Indian Airlines and Air India has dampened returns and valuation
but they don’t have the money to buy new airplanes. Neither does the government, for
that matter. Ergo all fleet renewal plans had to be put on hold till a white knight came
along and snapped up the two airlines at the dis-investment altar.
After going through the various factors influencing and trends prevailing in the
industry and the various challenges faced by the Airlines – especially the Maharaja, it
is essential that PRIVATISATION and a huge injection of funds can only be the key
to India's International Flag carrier Air-India's (A-I's) survival. This, unfortunately is
again stalled by the Government, who, should be actually taking the lead in promoting
the industry.
Now once again, after months of indecision, policymakers seem to be coming around
to the idea of new acquisitions because Air India’s suitors dropped out one by one and
there is not much interest forthcoming for Indian Airlines either, and now with aircraft
manufacturer being more flexibile in terms of deliver and pricing this will be the best
time to lease more aircraft and civil aviation ministry needs to extend their consent to
the airlines. Since providing an atmosphere of healthy competition will ultimately
benefit the consumers and society.
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