38205749 analysis of aviation sector in india and its major player

8/8/2019 38205749 Analysis of Aviation Sector in India and Its Major Player

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ANALYSIS OF AVIATIONSECTOR IN INDIA & ITS MAJOR

PLAYER

AVIATION SECTOR :AN OVERVIEW

Revolutionized by liberalisation, the aviation sector in India

has been marked by fast-paced change in the past few

years. From being a service that few could afford, the sectorhas now graduated to being a fiercely competitive industry

with the presence of a number of private and public airlines

and several consumer-oriented offerings.

The promise and the potential of the Indian aviation market

is awesome. Over 135 aircrafts have been added in the last

two years alone. By 2010, Indias fleet strength will stand

500-550.

Economic Survey 2006-07 says:

The years 2004-05, 2005-06 and 2006-07 has been years of

record growth in air traffic in India. During the period April-

September 2006, international and domestic passengers

recorded growth of 15.8 per cent and 44.6 per cent,

respectively, leading to an overall growth of 35.5 per cent.

During the same period, international and domestic cargo

N. L. Dalmia Institute of Management Studies & Research Page # 1


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Analysis of Aviation Sector and its Major Player

recorded growth of 13.8 per cent and 8.7, respectively,

resulting in an overall growth of 12.0 per cent.

India is the second largest aviation industry of theworld

The Indian fleet comprised of 370 at the end of year 2007

and growth is expected to continue apace: the Centre

estimates that Indias fleet will reach approximately 500-550

air craft by the end of year 2010.

In the same period, the domestic market size will cross 60

million and international traffic 20 million. Aircraft

manufacturer Airbus pegs Indias demand at 1100 aircraft,

worth US$ 105 billion, over the next 20 years. According to

Civil Aviation Minister Praful Patel, the country will need

1500 to 2000 passenger planes in 10 years, up from 370

now.

India continues to show steady year on year growth, with a 7

per cent increase in the number of flights into and out of

India (an additional flights and more than 200000 seats a

month). The number of flights has virtually doubled from

6800 in May 2001 to 13200 in May 2007.

In fact, India is in third place in the Top 10 list of countries

with the highest number of additional flights in May last year

behind only China and US.



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As pointed out by Minister of Civil Aviation, Praful Patel

presently, the number of air travelers is about 0.8 per cent

of the population. By the time even 10 per cent of the

pupulation begins fly, India will need about 5000 aircraft.

Upgrading Airport Infrastructure

By 2020, Indian airports are estimated to handle:

100 million passengers

Including 60 million domestic passengers

Cargo in the range of 3.4 million tones per annum

Several improvements are envisaged to sustain this

tremendous growth in the civil aviation sector. The

Governments airport modernization plan proposes

investments of US$ 9 billion. In January 2006, joint venture

companies with 74 per cent private sector participation won

contracts to upgrade New Delhi and Mumbai airports. The

Airports Authority of India has got the contract to upgrade

Kolkata airport and Government is also planning to upgrade

the Chennai airport.

International no-frills budget carriers, especially Asian low-

cost carriers (LCCs) are also making a beeline for India.

Already, Irans Jazeera Airways and Sharjah-based Al Arabia



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have registered their presence here. Other airlines planning

to enter the market are: Tiger Air(a joint venture between

Temasek Holdings and Singapore Airlines), Thailand-based

private carrier Nok Air, Indonesias Lion Air, United Arab

EmiratesRas Al Khaima(RAK) Airlines, Malaysias Air Asia

and Saudi Arabias Sama Airway.

Increased activity in the maintenance and repairs (MRO)

sector has attracted many foreign companies. Lufthansa has

tied up with GMR Hyderabad International Airport Limited(GHIAL) to open an MRO facility for which it intends to invest

US$100 million in a facility in Nagpur.

With airport infrastructure being upgraded, non-aeronautical

revenues(from malls, bookshops and entertainment centres)

are expected to contribute almost 50 per cent to revenue of

airports.

Of late, the domestic market is witnessing a trend towards

consolidation. In a bid to augment capacity and grab market

share, the sector is witnessing a consolidation as well as

rationalization of resources. Accordingly, Jet Airways has

acquired Air Sahara, King Fisher and Air Deccan, Air-India

and Indian Airlines have merged.



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Airlines on a buying spree

With such rapidly growth in the sector, manufacturers like

Boeing and Airbus are filling their order book fast.

Boeing has received a US$ 1.5 billion order for 10 aircraft

from Jet Airways, Indias private airline. Airbus plans to

invest more than US$1 billion in the Indian aviation industry

in the next 10 years. Bombardier Aerospace, a Canada-

based company that manufactures regional aircraft and

business jets, is looking to tap the growing regional market

in India for flight services. SpiceJet has ordered 10 next-

generation Boeing 737-800 aircraft valued at a list price of

more than US$ 700 million.



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FDI Policy in Indian Aviation

Paving the way for foreign investment in domestic airlinecompanies, the Reserve Bank of India (RBI) has said that

foreign institutional investors (FIIs) can pick up stake in

these airlines beyond the sectoral FDI cap of 49 per cent

through secondary market purchases.

1. Airports

For greenfield airports, foreign equity upto 100 per cent

is permitted through automatic approvals.

For existing airports, foreign equity upto 74 per cent is

permitted through automatic approvals and upto 100

per cent thorugh special permission (from FIPB).

2. Air Transport Services



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Foreign equity upto 49 per cent and NRI investment

upto 100 per cent is permissible in the domestic air

transport services through the automatic route;

Equity from foreign airlines is not allowed, directly or

indirectly, in the domestic air transport services.

A Brief History of Indian Aviation

1912 First flight from Karachi to Delhi started by Indian

State Air Services and Imperial Airways UK

collaboration.

1932 Tata Airline introduced by JRD Tata.

1946 Tata Airlines was transformed into Air India.

1953 The Government of India nationalized the airline

industry in 1953 through enactment of the Air

Corporations Act. Pursuant to this Act, there were

only two players left in the Indian aviation sector,both of which were owned and controlled by the

government: (a) Indian Airlines, primarily serving

domestic sector with operations to select



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international destinations; and (b) Air India,

serving the international sectors.

1990 Liberalization in the aviation industry began in

1990, with private-sectors players being allowed

to operate as air taxi operators, but not permitted

to operate scheduled services. A number of

private players (including Jet Airways, Air Sahara,

Modiluft, Damania Airways, NEPC Airlines and East

West Airlines) commenced domestic operations asair taxi operators.

1994 With repeal of the Air Corporation Act, private

carriers were permitted to operate scheduled-

carrier status upon fulfillment of certain applicable

criteria.

1995 Jet, Sahara, Modiluft, Damania, NEPC, East West

granted scheduled carrier status

1997 4 out of 6 operators shut down. Jet & Sahara

continue

2003 Air Deccan, Indias first low carrier, started

operations in August 2003, taking the total

number of private players providing scheduled



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service to three. The Naresh Chandra Committee

Report was set up to chart out a road map for the

civil aviation sector. Private domestic airlines were

given permission to fly to international

destinations in the SAARC region with effect from

December 2003.

2004 Some of the Naresh Chandra Committees

recommendations were implemented.

2005 On 11 January 2005, Jet and Sahara obtained

permission to operate internation services to and

from Singapore, Malaysia , Thailand, Hongkong,

the United Kingdom and the United States of

America. However, the Persian Gulf routes were

reserved for three years for public carriers Air

India and Indian Airlines. Kingfisher, SpiceJet and

GoAir launched services in the domestic sector.

Airline Industry Infrastructure

The scheduled airline industry requires infrastructure,

particularly airports. According to the information currently

available on the website of the MoCA, there are

approximately 450 airports in India managed by the AAI,



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Defence Services, state governments or private

parties.Presently, the AAI manages 126 airports in India, of

which 89 are civil domestic airports, 11 are international

airports and 26 are civil enclaves in defence airports.

Formed in 1995, the AAI is responsible for creating,

upgrading, maintaining and managing civil aviation

infrastructure both on the ground and in Indias air space. It

has been tasked with the integrated development,

expansion and modernisation of operational, terminal andcargo facilities at the international and domestic airports, as

well as at the civil enclaves of defence airports. The only

privately owned airport is located at Cochin. Two privately

owned international airports are currently under

construction at Bangalore and Hyderabad. In addition, the

Government is seeking to modernise and restructure the

Mumbai and Delhi airports.

The Indian aviation sector is broadly divisible into four main

categories:

Domestic airlines, which operate scheduled flights

within India and to select international destinations,

International airlines, which operate scheduled flights to

and from India,



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Charter air operators, which include charter operators

and air taxi operators and

Air cargo services, which includes air transportation of

cargo and mail.

Scheduled domestic airlines can also be divided into

two categories: full-service carriers and low-cost

carriers. Currently in India, low-cost carriers operate

predominantly as domestic carriers

Key industry characteristics

1) Under-penetrated markets

Despite recent growth in air passenger traffic, India

continues to have relatively high under penetration of

air services. According to the CMIE, domestic air traffic

in the year ended March 31, 2005 reached 20 million.

For a country with a billion plus population, thisamounts to an average Indian making 0.02 trips per

annum which is one of the lowest in the world,

compared to an average of 2.02 trips per person per

year in the United States for the same period.



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Consequently, there is a high level of potential demand

which may be generated as the Indian economy grows

and air travel becomes more affordable for a larger

population.

2) High fixed cost operating environment

Despite recent reforms, the domestic aviation sector in

India continues to experience high input costs in terms

of overnment charges levied on fuel and airport related

charges. These fixed costs often represent a substantialportion of the operating costs of most airlines. Domestic

airlines generally have to pay higher charges than

those paid by international airlines procuring fuel within

India, as such international airlines are exempt from

paying excise duty and sales tax.

3) Regulatory constraints

The domestic aviation sector in India continues to be

highly regulated. The Route Dispersal Guidelines issued

by the DGCA require all scheduled airlines operating in

India to provide a minimum number of ASKMs on routes

that service certain rural or smaller urban destinations

that are classified as Category II and Category IIA,

which results in lower average passenger load factors

and yield for many airlines.



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4) Infrastructure constraints

With the entry of four new players in the short span of a

year and with more having announced their intentions

for the same, the continued growth of the domestic

aviation sector may be hampered by shortage of

enabling infrastructure, such as airport facilities,

parking bays, air traffic control facilities and takeoff and

landing slots.

5) Relatively limited reach across the country

Historically, many areas of the country have not been

served by scheduled airlines. Although the Route

Dispersal Guidelines have helped to ensure that certain

areas of the country are serviced, airport infrastructure

and economic feasibility have meant that many airportsdo not have scheduled airline service. Of the

approximately 450 airports in India less than 100

airports have a daily flight.

Demand Drivers

1) High economic growth

Growth in air transport (both passengers and cargo) is

closely associated with growth in GDP. According to the

IATA (International Air Transport Association) air



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transport can be projected to grow at roughly twice the

rate of GDP growth. With Indian GDP expected to

expand at a rate of 7.5% for 2005-2007, the IATA

expects air traffic in India to grow approximately 15%

for the same period.

2) Increasing consumerism and affordability

The aviation market in India consists of leisure

travellers, business-related travellers and corporate

travellers. Leisure and business related traffic tends tobe more price-elastic. Corporate travellers, who fly at

the expense of their employer or client, have

historically formed the majority of the domestic air

travel market in India. However, with increasing income

levels and the emergence of flexible fare schemes and

low-cost carriers, we expect that middle- to high-

income leisure travellers and business travellers paying

their own travel costs are likely to shift more from

premium class travel in trains to air travel. In contrast

to the 15.25 million passengers carried by domestic

Indian airlines in fiscal 2004, the Indian railways carried

approximately 52 million passengers in its premium

class products, i.e., air conditioned and first class

coaches during the same period.

3) Growth in tourism



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The Indian tourism market has been growing at a

significant pace over the last few years, with the

Government giving impetus to the industry through

various schemes and organized events. According to

the World Travel & Tourism Council India 2004 report,

domestic tourists visits in India grew by 19% from

309.0m to 367.6m in fiscal 2004. During the same fiscal

domestic air travel has grown by 13% while in fiscal

2005 domestic air traffic registered a growth of

approximately 27%. The same source has predictedthat travel and tourism expenditure in India is expected

to achieve an annualised real growth rate of 8.8% over

the 10-year period from fiscal 2004 to fiscal 2014.

4) The emergence of low-cost carriers

Low-cost carrier airlines in the United States (such as

Southwest Airlines and JetBlue) and in Europe (such as

Ryanair and easyJet) have created a revolution in the

aviation sector. These airlines have sought to provide

lower, if not the lowest, fares along with relatively high

margins, by providing:

no-frills service;

careful route selection to optimise passenger loads

and yields;



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minimised costs on various aspects of business;

innovative use of Internet and other

communications technology to avoid the high cost of

traditional airline reservations and communications

systems;

innovative approaches to attracting customers;

introducing previously unavailable routes on a

commercially feasible basis; and

lower or lowest initial pricing with careful revenue

management.

The concept of low-cost carriers has also generated

interest in Asia, and a number of no-frills airlines have

emerged. For example, AirAsia is a low-cost carrier

based in Malaysia and Thailand with destinations

including Malaysia, Thailand, China, Hong Kong, Macau,

Indonesia and the Philippines. Air Deccan was the first

such airline in the Indian market, commencing

operations in August 2003, with SpiceJet and GoAir

beginning operations subsequently and plans for more

low-cost carriers announced. Air India Express, a



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subsidiary of Air India, is providing an international low-

cost carrier service. Indian low-cost carriers, seeking to

take advantage of the growth of disposable income in

India and the increasing need for geographic

connectivity, have sought to adapt the low-cost carrier

model to the Indian aviation climate.

Low Cost Carrier (LCC) Model



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LCCs try to achieve a cost advantage by avoiding the in-

flight services, E-ticketing, fewer employees per aircraft,

single class configuration & ancillary revenues

Company Analysis of Deccan AviationLtd.



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Deccan Aviation Limited operates Air Deccan, Indias first

low cost carrier. It is also a leading player in the helicopter

and aircraft chartering services.

Business Segments

Deccan Aviation -Helicopter, Charter & OtherServices

Deccan Aviation (the helicopter & charter division) is Indias

largest private sector charter aviation company with a

network spanning seven locations across the country.

Deccan aviation commenced operations in 1997 aschartered aircraft service provider. It currently has a fleet of

11 helicopters and 3 fixed winged aircraft. It provides a

variety of charter services through out India including Heli-

tourism, VIP and corporate executive travel, Aerial surveys


DECCAN

AVIATION

LIMITED

DeccanAviation

(Helicopter &CharterService)

Air Deccan(LCC Model)

Air DeccanCargo

(ProposedCargo Airline)

DALPL(48% JV withSri Lankan

Companies)


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etc. Deccan aviation cater largely to higher-income

individuals and corporations. Some of its clients are: Adidas,

Dell, Fiat and Bank of America.

Air Deccan

Air Deccan is the low cost, no frills scheduled carrier which

primarily targets the higher end rail travelers and the leisure

travel segment. Air Deccan commenced its operations in

August 2003 and is currently the largest LCC in India. It has

carried more than 14 mn passengers since its launch, with amarket share of about 14%.Since its launch, the airline grew

to 62 destinations by June 2007; with its vision being to

empower every Indian to fly, the airline penetrated

extensively into the deeper pockets of the country and

provided low-cost connectivity to all towns.

DALPL Joint Venture with Sri Lankan Company

Deccan Aviation Lanka (Private) Ltd. (DALPL) is a joint

venture between Deccan Aviation and two Sri Lankan

entities, Favourite Investments & Navamaga Investments. It

was Incorporated in Colombo in December 2003 and will be

providing helicopter charter services with intention of

providing scheduled airline operations in Sri Lanka. Deccan

Aviation Limited currently has 48% stake in the Joint

Venture.



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Key Milestones : Deccan Aviation

1997 Launch

1998 Commencement of Offshore Flying Operations

2001 1st Fixed Wing Aircraft introduced into the Fleet

2007 BOD Approval to spin off the Charter Business into

a separate entity

Key Milestones : Air Deccan



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2003 Launch

2004 Introduction of 1st Airbus into FleetLaunch of Rs.500 Ticket Schemes

Launch of Travel Agent Credit Cards

2005 Tie Up with Club HR

2006 Alliance with Jet Airways for Code Sharing Foray

into Air Cargo business through a wholly owned

subsidiary

2007 United Breweries Group acquires 26% stake by

way of preferential allotment Merger of Air

Deccan with Kingfisher Airlines approved by BOD

2008 Demerger of Scheduled Airline Business of

Kingfisher approved with effect from 1-April-2008

Business model of airline operation



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The elements of Air Deccans no-frills, low-cost air carrier

business model include:

1) Offering low fares to stimulate demand

We believe low fares will help Air Deccan generate new

business throughout India not only in new and under-

served markets, but also in established markets that

have so far failed to offer Indian middle-class

consumers and cost-conscious businesses a choice of

sufficiently cost-effective fares. Air Deccan targets

leisure, small business and corporate customers, and

seeks passengers from the Indian middle class as well

as from the cost-conscious segments of more well off

classes.

2) Selecting routes to stimulate demand

As of November 30, 2005, Air Deccan offers passengers

a choice of 62 routes and 44 destinations. As at

November 30, 2005, it is the only carrier providing

service to 9 of its destinations and one of only two

carriers providing service to 7 of its destinations. We

believe that Air Deccans route strategy will help it grow

new markets for air travel in India, as well as help it

serve major urban centres with cost-effective fares. As

it grows, we expect Air Deccan to increase the

frequencies of its flights on certain existing routes,



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connect new city pairs among destinations it already

serves and initiate service to new destinations,

including some already served by other airlines and

some currently not served by airlines at all.

3) Reducing costs, increasing utilisation

To help make its low-fare strategy as profitable as

possible, Air Deccan strives to:

(i) Reduce the costs of its operations.

It does so in part by seeking to simplify its

operations, minimise the aircraft types in its fleet

consistent with its route strategy, use technology

when such use can reduce costs and rejecting it

when such use can complicate operations, such as

in passenger check-in, and outsource non-core

business processes.

(ii) Provide a no-frills service.

Air Deccan seeks to provide a simple service in

exchange for its low fares. Product and service

extras that are not reasonably necessary to thecore task of flying passengers safely and efficiently

are eliminated. Practices that many other airlines

engage in regularly, such as providing help to

passengers during layovers or offering frequent flier



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programmes, are not offered. Air Deccan

passengers experience a pareddown version of

flying compared to what many other airlines offer.

But, they can pay less for an Air Deccan ticket and

still get the basic transportation service they

require.

(iii) Seek high aircraft utilisation.

Air Deccan employs dense, single-class seating

arrangements in its aircraft and follows scheduling,ground handling and operational strategies

designed to keep its planes in the air as long as

practical every day. These measures help Air

Deccan to increase its available seats flown. Air

Deccan then uses load factor and yield

management techniques in order to help maximise

the revenues earned from, and help minimise the

operating costs associated with, those available

seats flown.

4) Providing a safe and on-time service.

We consider the provision of safe travel to be of

essential importance to our service. We believe that

customers also demand on-time service and expect a

minimum of delays, flight cancellations,

baggagehandling errors and other inconveniences. We



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strive to provide these requirements while delivering a

safe, no-frills service.

5) Increasing ancillary revenues.

In addition to charging for tickets, Air Deccan earns

revenues from charging for in-flight food and drink,

selling advertising space on the interior and exterior of

its aircraft and in a number of other ways. The airline

regularly seeks to earn ancillary revenues where

opportunities exist and the simplicity of its operations

will not be compromised.



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Competitive strengths of airlineoperation

Air Deccans competitive strengths include:

1) First mover advantage

Air Deccan is the first no-frills, low-cost, scheduled

commercial passenger airline in India. As a number of

existing and new competitors seek to adopt a no-frills

or low-cost approach to one or more parts of their

operations, Air Deccan retains the advantage of being

known the longest as a no-frills, low-cost

carrier and having had the longest time to adopt and

refine its low cost carrier strategies. By moving earlier,

Air Deccan has also had an easier time getting

desirable flight slots and building its operations in other

ways.

2) Simplifly!

Air Deccan follows a strategy of simplifying its

operations to help keeps its costs down, its fares as

affordable as possible and its services as easy for

customers to evaluate, purchase and use as possible.

Air Deccan seeks to embody and project this strategy to



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its employees and customers through the advertising

slogan, Simplifly!. Simplification steps include such

strategies as flying only point-to-point routes without

seeking to facilitate onward connections, outsourcing

services such as in-flight food and drink and moving to

a manual, rather than computerised, flight check-in

system.

3) Strong management team, with leadinglow-cost carrier expertise.

We believe that Air Deccans management team has

the necessary depth and capability to expand the

airlines operations, refine its service delivery and

implement its business model. The Air Deccan team is

bolstered by a Chief Operating Officer who worked as

Head of UK and Europe Operations at Ryanair and by

others with extensive experience at Ryanair and JetBlue

Airways. In addition, the relative youth of the Air

Deccan organisation helps to provide new perspectives

on Air Deccans operations.

4) Load factor and yield management through

dynamic pricing.

Many airlines vary ticket prices in the run-up to a flight

in order to balance load factor (the level of filled seats)



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against yield (revenue earned per ticket). Air Deccan

seeks to maximize revenue from ticket sales by

attempting to achieve the best possible ticket price by

filling as many seats as possible. Air Deccan uses

dynamic pricing to help optimise its load factors and

yields. Optimising load factors and yields allows an

airline to better approach a maximum level of revenues

consistent with the preservation and increase of market

share. Using dynamic pricing, Air Deccan can vary its

ticket prices for a given flight over a wide range ofpossible prices, for many weeks prior to that flight, in

order to capture more revenue while also seeking to

extend its market. Air Deccan is in the process

negotiating an agreement for implementing Navitaire

software, for conducting its dynamic load factor and

yield management, which is used by many leading no-

frills, low-cost airlines around the globe for their

revenue management.



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Growth : Air Deccan

DESTINATIONS

NUMBER OF FLIGHTS



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PASSENGERS

AIRCRAFTS



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Domestic Market Share



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Share of Passengers carried by scheduled operators duringJanuary, 2008

FinancialsRs. In millions

Particulars Year endedJune 07

15 monthsended Jun,

06

Year endedMar05

TotalRevenue

21,423.09 13,518.06 3,202.83

Net Profit

after tax

(4,195.76) (3,405.47) (195.31)

Earning pershare

(44.24) (68.24) (8.38)

Price Movement (BSE) of Air Deccanfrom June, 2006 to January, 2008



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It can be seen from the chart that the share price of Deccan

Aviation when the share price of Deccan Aviation Ltd. has

shot up dramatically from Rs. 146 to Rs. 285 during

November-December 2007 when the deal betweenKingfisher and Air Deccan merger deal was announced.

Later in January 2008 the share price of Deccan Aviation Ltd.

Declined from Rs. 285 to Rs. 177 on account of on weak

trends in the global stock markets.


Price Movement of Deccan Aviation fromJune, 06 to October, 2007

Price Movement of Deccan Aviation inNovember-December, 2007

Price Movement of Deccan Aviation inJanuary 2008


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Synergy benefits with Kingfisher

Sharing of physical resources both on ground and in air

could potentially spread fixed cost over a larger base

and hence lower unit cost; to illustrate, if the current

inventory of maintenance spares of the two airlines are

pooled together, both the airlines can induct four

aircraft each without incurring any additional

expenditure on maintenance spares;

Sharing of management bandwidth that has been a

problem for Deccan off late;



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Route and network strategy formation would be

reworked jointly with Kingfisher so that both the airlines

benefit together;

Fleet expansion is set to be optimised so that lesser

capacity is brought in by each of them and at the same

time they could benefit from the premium aircraft

delivery slots prevailing in the market.

The Air Deccan-Kingfisher combine will have a fleet of

71 aircraft and fly to 70 cities and towns. The combinewill control a third of the market and will be closer to

the Jet Airways-Air Sahara market share.

The two airlines will benefit from sharing infrastructure,

ground handling services and security.

Air DeccanThe Story Till Now

1) Hasty growth

The Company grew too fast too soon, without

developing adequate support systems. Over the FY04-

07 period, its fleet strength grew from 4 to 41 and

revenues increased from Rs 682 mn in FY04 to Rs

13,518 mn in FY06 and Rs 21,423 mn in FY07. In a bid

to emulate certain International LCC players and in line

with its vision to make the common man fly, Deccan

placed customer satisfaction and staff empathy as the



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very last factors to drive its success. This resulted in

innumerable customer complaints and negative

reputation, which in turn led to even the first time flyers

disassociating themselves from the airline, let alone the

business travelers/ frequent flyers.

2) Subsidized tickets:

The airline is credited with increasing the market size,

and also with penetrative fares. However, this

penetrative pricing followed by the airline continued toruin the competitiveness of the market, and only led to

further losses for all players.

3) ATR-42 the troublemaker- PerennialCancellations:

This fleet was of aged aircrafts which resulted in

increased maintenance and frequent breakdowns,

resulting in numerous flights getting cancelled or

rescheduled, leaving passengers stranded and peeved.

On an average, the airline had 1 ATR grounded per day.

Many of their aircrafts were flying to destinations not

served by other airlines, which made matters worse.

The company has since addressed this issue by

recently phasing out 5 ATR-42 fleet, which had been

causing enormous operational troubles.

4) Lack of customer centric approach:



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The typical Indian air traveler, whether traveling in an

LCC (Low Cost Carrier) or FSC (Full Service Carrier),

continues to be a notch above the rail traveler; hence

he expects high standard of customer service, as is the

norm in service industries. However, here Deccan could

not strike a chord with the customer. In an effort to

drive down costs, almost the entire staff at the airports

was outsourced; there was no training provided by the

outsourcing agency or Deccan to them, which resulted

in callous attitude towards customers and absence of

customer service. With a number of their flights getting

cancelled and rescheduled on account of maintenance

and airport infrastructure issues, and no customer

service offered at the airports, the name Deccan

became associated with an airline of apathy and the

time bound customer slowly moved away from

traveling here.

5) Competition killed the market: Deccan, afrontrunner in driving down fares:

The 2003-2006 period witnessed the entry of a number

of private airlines, each of which offered irrationally lowfares, in order to grab a larger market share.

6) May 2007: Entry of the UB Group: Markinga turnaround:



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As a consequence of its penetrative pricing strategy,

the airline piled up losses of Rs 6.1 bn till 31st March

2007. Capital was drying up, and funding was becoming

increasingly difficult. That was when the UB Group

came in and they acquired shares at a price of Rs 155

per share, and today they hold 46% in Deccan. Since

then, efforts are being made to get the company back

on track. The airline had paid a price for growing too

fast, now corrective action is being taken on many

fronts. Deccan has over the last 6-8 months been able

to stabilize its growth which has in turn given it time to

stabilize processes, systems and engineering to support

current fleet and growth. We believe that the Deccan-

Kingfisher Airlines combine would be better placed in

terms of offering air travel options to both the leisure

and business travelers across a wider network.

Future Prospects

1) Mounting losses gave way to Oligopoly,resulting in hardening yields:

However, undercutting and poor infrastructure soon ate

into the capital of aviation companies and with losses

becoming unmanageable for a few players, acquisitions

set in. In Q1FY08, Jet Airways acquired Sahara whereas



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Kingfisher Airlines picked up a stake in Deccan Aviation.

These developments finally cleared the grounds for an

oligopolistic market with the emergence of three strong

groups Air India-Indian combined, Jet-Sahara comined,

and Kingfisher-Deccan Aviation combined; these three

entities today account for about 85% of the domestic

aviation market. Since then, the domestic airline

industry has been maturing steadily. Moreover, fares

have witnessed a gradual rise due to the increasing

priceinelasticity of passengers.

2) Implementation of an effective revenuemanagement system, with focus onincreasing yields rather than load factors:

Deccan has experienced improvement in yields since

November 2007 to Rs 3,100 per ticket. This has mainly

been on account of implementation of a Yield

Management System, which will result in higher

bookings at higher fares. It has also opened up new

lines of distribution using mobile phones, prepaid cards

and even post offices. As a result of these revenue

enhancement measures, despite an increase in theairlines capacity, it managed to improve its yields by

about 7.5% to Rs 2,745 in the lean season of Q1FY08

from Rs 2,553 in the relatively strong Q4. Besides the

Rs 300 increase in fares, in November 2007, it initiated



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Rs 200 hike in Fuel surcharge. Effectively, about Rs 400

gain per passenger has accrued to the Company. On a

7 mn passenger base, we expect a net revenue

addition of Rs 2.8 bn to the airline.

3) However, Load factors took a hit:

Over the past 1 year, Deccan added about 31% to its

capacity, which resulted in ASKMs (Available Seat

Kilometer) rising to 2,221 mn over Q1FY08 against

1,695 mn in Q1FY07. However, on account of trimmingof certain routes and consistent rise in fares (since

Kingfishers entry), the airline experienced steadily

declining load factors, which fell to 66% in Q1FY08 from

72.6% in Q1FY07. Hence, the RPKMs rose by only 20%

to 1,515 mn. We feel that going ahead, with the

passenger market maturing and Deccan displaying

rationality in route addition, load factors would

gradually rise.

4) Conscious Image makeover:

Despite the odds against Deccans poor quality of

service and customer orientation, its first mover

advantage as the Pioneer of Indias Low Cost Travel



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continued to retain the Top-of-mind recall. Consciously,

Deccan realized that in order to leverage on this

strength and phase out the negative image which the

airline had gained on account of passengers

experiences, a Re-branding exercise was the need of

the hour and it initiated this immediately; it is now

aligning the airline with the corporate identity of the

Kingfisher Group, known for higher standards of

customer orientation and service levels. The prime

focus has been on changing the mindset of thepassenger who felt that the airline perpetually operated

behind

schedule.

5) Focus on deriving higher revenues fromPerishable inventory:

Earlier, focus was on filling seats, so unnecessarily low

fares were offered 2-6 months in advance, just to

increase occupancy levels and to sustain working

capital. Even now promotions would continue; albeit

only from the anticipated perishable inventory, i.e. over

and above the capacity expected to be utilized. Thus,

on the basis of optimal inventory management and

empirical estimates as to occupancy factors, the

remaining unutilized seats would be offered as

Promotional seats.



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The company has initiated several synergy initiatives

which would result in lowering costs, increasing

efficiencies and profitability, resulting in a gain of Rs

1.5 bn over the next 1 year. These would be on

account of:

1) Rationalization of routes and frequencies

by leveraging on the combined strengths

of both the groups in terms of network

reach, connections, frequencies and

infrastructure:

Now Deccan and Kingfisher do not compete with each

other; instead the focus has shifted to improving yields

and occupancies for both, by adequately spacing the

departures of their flights. Also, a number of unviable

routes and frequencies have since been withdrawn.

Kingfisher could leverage on Deccans extensive route

penetration to provide better onward connectivity to its

passengers.



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2) Operations and maintenance and

Engineering headcounts:

The combined entity has adequate engineering

headcounts even for future fleet expansion and would

not need to increase them going forward; this would in

turn help to stabilize future costs also.

3) Inventory management of engines and

spare parts:

Deccans base for future expansion is already built,

since it already maintains sufficient spare inventory to

accommodate future fleet induction. Currently, Deccan

has 5 spare engines and Kingfisher Airlines has 4; a

total of 9, which are adequate for a fleet of 50-60

aircrafts. Against this, Deccan has a fleet of 23 Airbus

and Kingfisher another 24, total of 47. Hence, a scale-

up of fleet would not necessitate any increase in their

spare engines.

4) Enhanced negotiation terms with various

vendors on a joint basis for services like Ground

handling, engine overhaul and vendors of engineering,

rotable suppliers, spare parts, seats, etc.



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SWOT Analysis

Strengths

Flying to about 10 12 airports where it has monopoly

In-House simulators to reduce training costs

First mover advantage in terms of access to airport

infrastructure during peak periods

Deccan Kingfisher control almost 30% of the domestic

market

Weaknessess

Weak Balance Sheet

Dependence on leased aircrafts- 3 aircraft, so incurs

higher inventory cost

Poor perception regarding service quality and reliability



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The strategy of flying to previously unconnected routes

may reduce Air Deccan to just a market discoverer, as

competition kicks in, in these routes.

Opportunities

Growing middle class population and increased

standard of living

Change in perception of air travel as a necessity rather

than a luxury

Increase in tourism

Improvement in airport infrastructure

Potential Demand and Development of Tier II & Tier III

cities

Positive economic factors and strong performance of

service and retail sectors, leading to sustained growth

in passenger traffic

Threats

Over capacity in the sector leading to deteriorating

yields



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Increasing competition

Low Entry Barriers leading to entry of new players in

LCC segment

High fuel prices in India

Shortage of trained manpower

Upgradation of the regional airports would allow

carriers with larger aircrafts to fly there, thereby

nullifying Air Deccans USP of being the exclusive airline

going to these airports.



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Conclusion

Robust growth of economy would lead to high

disposable income and propensity to spend, resulting in

more passenger traffic.

Deccan, with its restructured, focused and better

connectivity is all set to show increase in performance

over the next few years

Deccan Aviation has apromising future



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Bibliography

www.economictimes.com

www.airdeccan.com

www.bseindia.com

www.goole.com

Ministry of Civil Aviation (www.civilaviation.nic.in)

Naresh Chandra Committee Report I

RBI, Mid-Term Review 2005-06; IATA

CMIE
http://www.economictimes.com/http://www.airdeccan.com/http://www.bseindia.com/http://www.goole.com/http://www.civilaviation.nic.in/http://www.economictimes.com/http://www.airdeccan.com/http://www.bseindia.com/http://www.goole.com/http://www.civilaviation.nic.in/

38205749 analysis of aviation sector in india and its major player

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