Case Study: Indian Aviation Industry

Overview of the Industry

The aviation industry in India is one of those sectors that saw a constant pace of growth among the other industries in the world over the past many years. The open sky policy of the government has helped a lot of overseas players entering the aviation market in India. From then, it has only been growing in terms of players and the number of aircrafts. At present, private airlines account for around 75% portion of the domestic aviation market. The 9th largest aviation market in the world is India. Taking the help of the statistics from the Directorate General of Civil Aviation, Passengers carried by domestic airlines during Jan-Jul 2012 (half yearly) were 354.52 lakhs as against 348.47 lakhs during the corresponding period of previous year thereby registering a growth of + 1.74%. The prediction stated that international passengers will touch 50 million by 2015. More opportunities in the aviation industry in India are likely to make way for about 69 foreign airlines from 49 countries. India is one of the flourishing global aviation markets. As per Airport Authority of India (AAI) statistics, there are 127 airports in India which incorporates 13 international, 80 domestic, 28 civil and 7 custom airports. Moreover India has around 1091 registered aircrafts. Over the years there has been steady growth in the number of private players establishing their business in India due to increasing liberalization and deregulation. Hence, at present aviation industry consist of three types of players namely, Full cost carriers, Low cost carriers (LCC) and other start-up airlines.

Summary
The Indian Aviation Industry has been going through a turbulent phase over the past several years facing multiple headwinds high oil prices and limited pricing power contributed by industry wide over capacity and periods of subdued demand growth. No one is benefitingthe carriers, the consumers, the airport operatorall suffer. Yet Indias intrinsic favors a robust aviation sector. According to IATA (International Air Transport Association), India's highly competitive aviation sector is in "crisis," crippled by high costs and exorbitant taxes. Over the near term the challenges facing the airline operators are related to high debt burden and liquidity constraints - most operators need significant equity infusion to effect a meaningful improvement in

balance sheet. Improved financial profile would also allow these players to focus on steps to improve long term viability and brand building through differentiated customer service. Over the long term the operators need to focus on improving cost structure, through rationalization at all levels including mix of fleet and routes, aimed at cost efficiency. At the industry level, long term viability also requires return of pricing power through better alignment of capacity to the underlying demand growth. While in the beginning of 2008-09, the sector was impacted by sharp rise in crude oil prices, it was the decline in passenger traffic growth which led to severe underperformance during, 2008-09 to 2009-10. The operating environment improved for a brief period in 2010-11 on back of recovery in passenger traffic, industry-wide capacity discipline and relatively stable fuel prices. However, elevated fuel prices over the last three quarters coupled with intense competition and unfavorable foreign exchange environment has again deteriorated the financial performance of airlines. During this period, while the passenger traffic growth has been steady (averaging 14% in 9m 2011-12), intense competition has impacted yields and forced airlines back into losses in an inflated cost base scenario. To address the concerns surrounding the operating viability of Indian carriers, the Government on its part has recently initiated a series of measures including Proposal to allow foreign carriers to make strategic investments (up to 49% stake) in Indian Carriers Proposal to allow airlines to directly import ATF Lifting the freeze on international expansions of private airlines and Financial assistance to the national carrier.

However, these steps alone may not be adequate to address the fundamental problems affecting the industry. While the domestic airlines have not been able to attract foreign investors, foreign airlines may be interested in taking strategic stakes due to their deeper business understanding, longer investment horizons and overall longer term commitment towards the global aviation industry. Healthy passenger traffic growth on account of favorable demographics, rising disposable incomes and low air travel penetration could attract long-term strategic investments in the sector. However, there are two key challenges:

Aviation economics is currently not favorable in India resulting in weak financial performance of airlines, and Internationally, too airlines are going through period of stress which could possibly dissuade their investment plans in newer markets.

Indian Aviation Industry Recent Updates

India's major carriers, including state-owned Air India, lost around $2 billion in the last fiscal year to March and are carrying debts of some $20 billion. The financial situation of Kingfisher (owned by liquor baron Vijay Mallya) is dire and (staterun) Air India is on government life support, The government is considering allowing foreign airlines to take stakes in domestic carriers, a step that carriers such as debt-laden Kingfisher see as a potential lifeline. Indian carriers though have posted some profit in the first quarter with yields firming up, analysts say airlines like Jet Airways (pre tax profit of Rs 33.3 crore) and SpiceJet (Profit of Rs 56 crore) who scrapped through with minimal profits in the quarter are staring at loss after the lean second quarter ends. Kingfisher posted huge loss and is struggling to stay afloat. The airlines have a combined debt of $20 billion with losses mounting to over $2 billion. The International Air Transport Association (IATA) has said that, Indian domestic air traffic during the month of July fell 1.1 per cent compared to a year ago, the worst performance for any market, reflecting the weakening economy among other factors,. According to IATA, after expanding at 20 per cent plus rates through 2010 and early 2011, the Indian market stopped growing at the end of 2011. The rapidly expanding aviation sector in India handles about a staggering 2.5 billion passengers across the world in a year; moves 45 million tonnes of cargo through 920 airlines using 4,200 airports and deploys 27,000 aircraft. Today, 87 foreign airlines fly to and from India and five Indian carriers fly to and from across 40 countries in the world. A data released by the Directorate General Civil Aviation (DGCA) indicates that about 5.33 million passengers were carried by domestic airlines during January 2012 which is a steep of 8.06 per cent rise against 4.94 million during the corresponding period of previous year. The data released by Department of Industrial Policy and Promotion (DIPP), has shown The Indian Air Transport (which includes air freight) has reportedly attracted a huge foreign direct investment (FDI) worth US$ 429.70 million from April 2000 to December 2011. In addition to the 10 per cent increase in the number of international passengers last year, a further increase up to a 10-12 per cent range over the next 12 months is expected.

Despite strong growth, air travel penetration in India remains among the lowest in the world. In fact, air travel penetration in India is less than half of that in China where people take 0.2 trips per person per year. Domestic airlines are paying 50 per cent more for aviation turbine fuel here than the price in West Asian and the European markets. Sep. 2012, Aviation Turbine Fuel prices raised by steep 7.6%, the biggest ever increase that took the aviation turbine fuel (ATF) price to an all-time high of Rs 72,882 per kilolitre.

Market Share of Key Players in the Indian Aviation Sector

Name of the players

Kingfisher Airlines Jet Airways and Jet Lite Air India and Indian (previously Indian Airlines) IndiGo SpiceJet

Market Share
3.4% 26.6% 18.2% 27% 17.8%

GoAir

7%

The Next Big Thing The Aviation Industry

India is expected to witness substantial growth and development in the aviation industry, and would be amongst the top five nations as far as the aviation sector is concerned, in the coming ten years, according to researches by experts. Emphasizing on how Indian is the 9th largest civil aviation market in the world, Ms Pratibha Patel, the Ex President of India has highlighted the fact that the international traffic will exceed 80 million passengers a year in a decade from now, as recent studies suggest that domestic air traffic will touch 160-180 million passengers a year, in the next 10 years. The aviation sector with a massive growth of 18 per cent in domestic market is expected to generate approximately 2.6 million jobs in the next one decade, thus providing employment opportunities on a large scale. Considering the statistics above and the steep rise in the industry today, India is poised to emerge as the third largest aviation market in the world by the end of this decade says Dr. Nasim Zaidi, Secretary, and Ministry of Civil Aviation. The US-based electrical components company, Eaton Corporation foresees a wide range of opportunities for itself in India's civil and military aerospace story which is still in the process of growing , according to Joe-Tao Zhou, APAC President, Aerospace Group, Eaton Corporation, who opines that "India is expected to emerge as one of the largest aviation markets in the world. The Airports Council International has ranked the Indira Gandhi International Airport (IGI) in New Delhi, India, as the second best airport in the world for 2011. Having handled a record number of 35 million passengers in 2011, The Indira Gandhi International Airport scored this distinction in the category of airports with 25-40 million passengers per annum. Moreover, The Indira Gandhi Airport has an annual passenger capacity of over 60 million out of which terminal 3 can alone handle a mighty crowd of 34 million passengers, In addition to which the airport has also handled over 600,000 tonnes of cargo and over 300,000 aircraft movements in 2011.

Future of Airlines industry in India

The challenges of the Indian aviation industry are cited below: Passenger traffic is estimated to grow at a CAGR of over 15% in the coming few years. The Ministry of Civil Aviation would handle around 280 million passengers by 2020. US$ 110 billion investment is envisaged till 2020 with US$ 80 billion solely for new aircraft and US$ 30 billion for developing the airport infrastructure

Challenges Facing the Indian Airline Industry

The slowdown in travel growth is being driven largely by the recent fall in business confidence in many economies.
Foreign Direct Investment (FDI) has not been showing any major improvement in the past to act as a lifeline for the debt-laden domestic carriers. ATF (Aviation Turbine Fuel) price 50 per cent higher in India, than the price in the West Asian and European market. ATF accounts for nearly half of an Indian carriers operating cost, compared to 20-25 per cent globally. Which eventually carriers push it to the customer hence hike in the air fares. The high cost of ATF, coupled with the high airport charges in India has adverse effect on Indian aviation industry.

Indias multilayer fuel taxation system which includes the central excise duty , and sales tax levied by the state governments, limits the number and range of air carrier service providers and the ability of Indian carriers to compete with foreign carriers providing international carrier services. All the above accounts to increased fare price, which is extreme in terms for affordability for the Indian Customer. Since, income and economy of the people has not been faring well. Rising Labour costs, Lack of confiscated skilled labor, the burden of huge debts, intense competition on prices, insufficient infrastructure & absence of regional connectivity are the major setbacks which industry suffering through. The sector which was completely dominated by full-service airlines till a decade ago is now dominated by low-cost airlines (LCC).

Analysts felt that most of the private carriers ran into problems because of the government regulations and high costs of operation. All the carriers hired planes at international prices and their maintenance was also undertaken by global companies at international rates.

Questions
1. What sort of strategy should DGCA look at for reviving the industry fortunes? 2. What do you think of strategies like the recent proposal to allow foreign carriers to make strategic
investments (up to 49% stake) in Indian Carriers?

3. What are the reasons for superior performance of low-cost carriers like Indigo compared to fullservice carriers? How feasible are these low-cost models in the long run?