civil aviation industry - indian overview

Indian Overview Of

Civil Aviation Industry (June 08)

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Civil Aviation – Indian Overview Indian aviation industry began with the birth of Tata Airlines, through the business relationship

between Mr. Nevill Vintcent, a Royal Air Force pilot and Mr. JRD Tata, the first Indian to get an

A-license. The Tata Airlines rechristened as Air India in August 1946. In 1953, the Air

Corporation Act nationalized all existing airline assets and established the Indian Airline

Corporation and Air India International for domestic and international air services respectively.

These two companies enjoyed monopoly power in the industry until 1991, when private airlines

were given permission to operate charter and non scheduled services under the ‘Air Taxi’

scheme to boost tourism. Under the ‘Air Taxi’ scheme they could not publish time schedules, or

issue tickets to passengers. The Air Taxi Scheme was introduced in 1986 to boost tourism and

augment domestic air services. As a result, a number of private players including Jet Airways,

Air Sahara, Modiluft, Damania Airways, NEPC airlines and East West Airlines commenced

domestic operations. Subsequently in 1994, following the repeal of the Air Corporation Act,

private players were permitted to operate scheduled services. However, the carriers with more

efficient operations and strategies were managed to survive and by 1997, only Jet Airways and

Air Sahara (Now, it is JetLite) made the cut from the original groups.

The entry of India’s first no-frill airlines, Air Deccan, in late 2003 truly revolutionized the Indian

airline industry. Since then, Spice Jet (restructured Royal Airways and Modiluft), Go Airways

and Kingfisher Air have also entered the industry. Another entry is the Paramount Airways as an

‘all business class’ airline. As far as international flight services are concerned, govt permitted

the Indian scheduled carriers in December 2004, with a minimum of 5 years of continuous

operations and a minimum fleet size of 20 aircraft to operate scheduled services to internationals

destinations. On January 11, 2005 the government designated four scheduled Indian carriers (Air

India, Indian Airlines, Jet Airways and then operational Air Sahara) to operate international

services to and form Singapore, Malaysia, Thailand, Hong Kong, the UK and the USA.

The civil aviation industry has made substantial contribution for development of trade and

tourism in India, providing easier access to the places having natural beauty. It is acting as a

driver for the growth and economic prosperity of nation.



2.1 Overview of Indian Civil Aviation Industry

2.1.1 Competitive Position of Airlines Major players in Indian civil aviation industry have the following fleet size, as on June, 2008

(table 2.1). Table 2.1 gives a comparative study various Indian airliners on selected parameters.

2.1.2 Carrier-wise Passenger Traffic The passengers carried by various Indian airliners during 2006, 2007 and Jan-Mar, 2008 are

detailed in Table 2.2. Except Jet Airways, all other airlines shown increase in the passenger

traffic from 2006 to 2008. Another notable trend is significant increase in passenger traffic in

LCCs like Deccan, SpiceJet, Paramount, GoAir and IndiGo during 2007 compared to 2007.

Table 2.1: Comparative Study of Indian airliners Company Revenu

e (Rs. billion) during 2007-08

Fleet size (in numbers) as on June, 2008

Domestic Market share (%) as on June, 2008

Employee strength

NACIL 92.51 (2005-06)

Air India has 102 aircrafts (66 orders) apart from 6 cargo carriers. Indian has 61 flights.

Indian Airlines (14.7)

33,000 (June, 2008)

Jet Airways

27.27 84 + (44 orders) = 128

22.7 10,017 (March, 2007)

JetLite 15.05 25 +(10 orders)=35 7.1 2200 (July, 2007) Kingfisher NA 44

+(107orders)=151 14.5 NA

Deccan 17.75 43 14.6 3384 (March, 2008)

SpiceJet 6.40 19 10.3 2400 IndiGo NA 19 10.3 NA GoAir NA 5 4.4 NA Paramount airways

NA 5 1.3 Approximately 1000 (as on June, 2008)

Source: Company website and Wikipedia Note: NA- Not Available



2.1.3 Factor Inputs for the Aviation Industry Airfares in India are one of highest among the world.

Labour cost tops the list of airlines costs with 35%

share of total cost, followed by the other costs (32%),

fuel cost (12%) and passenger traffic commissions

(10%) during 2005.

2.1.4 Business Models of LLC and FSC Carriers in India The concept of LCC was accepted by the Indian

aviation players from 2003; however this concept was

originated on early 1970s in US and by

1990s in Europe. The term originated

within the airline industry referring to

airlines with a lower operating cost

structure than their competitors.

2.1.4.1 Business Model of LCCs

Indian LCCs have many characters that are

common to global LCCs, as discussed in

Chapter 1. It is obvious that the major cost

of flying is attributed to fuel, maintenance and salaries. In addition there are parking and landing

charges as well, which are quite high. Therefore, Indian LCCs are focusing on these parameters

to achieve efficiency.

It was Capt. G R Gopinath of Deccan Aviation, who initiated the concept of LCCs in India.

Airlines like SpiceJet, Paramount Airways, IndiGo and GoAir followed the suit. Air Deccan was

also the pioneer in cost cutting measures. The business model of Deccan can be, unarguably, one

of best LCC business model, which is discussed below.

Table 2.2: Carrier-wise Passenger Traffic Data (2006-2008) in million

Carrier 2006 2007

Jan-Mar, 2008

Indian 6.90 8.13 1.64 Jet Airways 10.03 9.68 2.54 Jetlite 2.82 3.14 0.80 Deccan 5.88 7.34 1.64 Kingfisher 2.79 5.23 1.63 SpiceJet 2.22 3.76 1.16 Paramount 0.23 0.56 0.14 GoAir 0.91 1.79 0.49 IndiGo 0.41 3.24 1.15 Indus Air - 0.01 - Total 32.17 42.85 11.19 Source: DGCA

Fig 2.1: Factor Inputs for the Aviation Industry (2005)

Interest 3%

Landing fees2%

Passenger traff ic

commission

10%

Passenger foods4%

Fuel 12% Others

32%

Labour35%

Advertising &

promotion2%

Source: www.foolonahill.com



Cheaper ticket in price-sensitive Indian market

Air Deccan (now, Deccan) was the first airlines in the Indian Aviation Industry, who came up

with the concept of cheap tickets. Initially they came out with Rs. 500 tickets and after that they

came out with free tickets, only passenger has to pay the other taxes for the tickets. Deccan

issued around 1.1m tickets. Deccan are the first airline to offer fares from Re 1/- to Rs 500/-.

Deccan follows a dynamic pricing strategy, wherein pricing is a function of demand and supply

so the earlier one books the lesser one pays. The cheaper tickets gave the Deccan a big start in

the price- sensitive Indian market. Its attractive pricing has succeeded in broadening the air

travellers segment also.

Ticketing system

Deccan is also the pioneer in e-tickets in India. Deccan incurs 7-8% costs on ticket sales, while

competitors incur between 25 and 28%. The higher percentage of selling costs in the case of

legacy airlines are due to higher travel agent commissions, cost of credit, printing regular airline

tickets, etc. A typical large legacy airline can have outstanding payments from its global network

of travel agents of over Rs.10 billion at any given time. This leads to enormous costs of funds,

reconciliation issues with travel agents, need for a battery of accountants to do this

reconciliation, as well as need for physical reconciliation of airline ticket counterfoils. All this is

obviated in the case of Deccan, where the ticket is only a printout from the Internet, which the

passenger or travel agent is expected to download. All ticket sales ultimately converge on the

Internet. The airline has not issued a single paper ticket. All the revenues from these sales flow

instantly into the airline's coffers as cash, since the airline does not offer any credit to travel

agents.

Deccan also tied up with Citibank, ICICI Bank, etc. to handle payment through credit cards for

tickets that were purchased through the Internet using Deccan's website. Phone bookings were

done with the provision of a PNR number to customers. On the production of these numbers at

designated travel agencies, customers can get e-tickets in exchange for on-the-spot payments.

Passengers who do not have a credit card can make phone bookings and collect their e-tickets

within 24 hours from any of the several thousand e-ticket collection centers across the country.

These collection centers retain 2.5% commission for their services, and the rest accrues to



Deccan. The computer generates the e-ticket only after crediting the payment to the company. In

fact, travel agents maintain a cash deposit with Deccan to facilitate such transactions, and keep

topping up the account as it gets depleted in the process of generating tickets. Structurally, this is

an antithesis of the conventional model for air travel. Such transactions between the travel agents

and Deccan do not go through the payment gateway. Both share the resulting savings. The

company also has several hundred corporate accounts, which operate in a similar manner. The

cheapest tickets are obviously for those who go direct to the Internet.

The airlines has seven thousand ticket distribution channels include grocery stores, India Post,

HPCL petrol pumps, Reliance Web-worlds, mobile ticket vans, travel agents, and travel websites

apart from the traditional methods.

Under the Dynafares scheme, the airline opens bookings for any flight 90 days in advance with a

starting fare of Rs.500 (plus taxes). This has been extended to days before the date of flight

departure. The fares keep moving up closer to the date of departure.

Through its Internet based system, Deccan can dynamically track load factors and adjust fares on

an on-line basis. It just takes one broadcast on the Internet for Deccan to announce its fare for a

particular flight on a particular day, and this is immediately picked up by passengers who are

constantly tracking the company's website for lower fares. As the departure time of a flight

comes closer, if the flight is relatively empty, the airline can offer a special fare to enthuse

potential customers to go for the special fare. All revenues and costs of every flight are

calculated on a real-time basis, giving concerned managers a flight-by-flight pulse of the airline's

top and bottom lines, facilitating dynamic decision-making.

No-Frills approach

Deccan follows a 'no frills' approach on all its flights. There are no in-flight services like other

FSC airlines but one can buy food or a drink on-board. All seats are economy class and there is

no prior allocation of seats. The airline offers its cabin crew a 10% commission on all beverages

and food that they sell to passengers on the flight. Usually a single stewardess manages the

aircraft cabin and sells snacks to the passengers for a price.

Revenue Optimization



The company has implemented a number of innovative measures to maximize its revenues. Its

Airbus 320 carries 180 passengers against 154 carried by Indian. It has no executive class and

uses space on the aircraft frugally, leading to a straight 20% advantage over its competitors in

terms of enhanced seating capacity. Turnaround time of Indian Airbus is 50 minutes while for

Deccan it is 30 minutes. This allows Deccan to keep its aircraft in the air for up to 12 hours a day

against Indian’s 9 hours. The turnaround time for Deccan's ATRs is 15 minutes and can be

reduced even further. Typically, they have quick turn around time, which means higher aircraft

utilization, online ticket reservation to save costs on commission to agents, reduction in flight

services - no free meals, no newspapers and no frequent flier programs either.

The aircraft are used as an advertising medium. It sells advertisement space on seats, cabin

interiors, as well as on the body of the airplane.

Outsource non-core activity

Deccan resorts to extensive outsourcing of non-core activities that helps in its cost-containment

strategies. Given that Deccan operates out of many small airports, the traffic levels are very low.

In many of these places the company may have just one flight a day, requiring ground crew to

work for a couple of hours a day. It does not make sense to have its own staff there and keep

them idle for most of the day. It is here that outsourcing is a very effective way of controlling

costs.

In some of the areas like aircraft overhaul or repair, the company has subscribed to schemes such

as 'fly by the hour' offered by specialist third party agencies that keep spares, etc. and take

responsibility for the overhaul and repair activities. Deccan only pays a pre-agreed charge, akin

to that of an insurance policy. The company however keeps its own staff for the routine day-to-

day maintenance.

2.1.4.2 The Business Model of FSC in India

Typically airlines like NACIL and Jet Airways qualifies for FSC category in India. The business

model of FSCs is detailed below.

Ticketing



FSCs offers e-tickets, which can be bought through booking agents, booking counters at airports

and internet booking.

Quality in-flight entertainment

The FSCs offer quality in-flight entertainment. For example, in Air India, seats in business class

include an 18" Personal Television (PTV) with Audio Video on Demand (AVOD). These

features are available only on the Boeing 777-200LR, Boeing 777-300ER and some Boeing 747-

400. All seats on Airbus A321, Boeing 777-200LR, Boeing 777-300ER, some Boeing 747-400

and all Airbus A319 aircraft feature PTVs with an AVOD in-flight entertainment system with a

widescreen LCD touch screen. Other aircraft such as the Airbus A310, Airbus A320 and Boeing

747-400 aircraft do not have individual seatback entertainment; they only have a central

projection screen.

In case of Jet Airways, its first class features a 23-inch Widescreen LCD monitor with audio

video on-demand (AVOD), in seat power supply, and USB ports etc. Jet Airways is the first

airline in India to have fully-enclosed first class suites on its aircraft; each suite has a closeable

door, making for a private compartment. It is the 3rd best First Class in the world as conducted

by Skytrax. The only airlines that surpass Jet in First Class are Singapore Airlines and Emirates

Airline.

Seating

Seats are allotted at time of buying of ticket. The airlines have First Class, Executive Class and

Economy Class like Air India. The business class seats are in a shell, which allows the seat to

turn into a bed. Economy class seats are red in colour and feature 32" seat pitch. Jet Airway’s

Boeing 777-300ER aircraft feature three classes of service: First, Première (Business), and

Economy. The Airbus A330-200 aircraft feature two classes: Première and Economy. All A330-

200 and 777-300ER aircraft have this feature. The 737-class aircraft are configured differently.

Jet Airways has a 5 star rated Business and First Class, and is in the top 5 business class

reviewed by Skytrax. Economy class has been reviewed as a 4 star product by Skytrax.

Frequent flyer programme



The FSC offers frequent flyer programmes to its members. Air India offers the frequent flyer

programme called ‘Flying Returns”. Aside from flight mileage, members receive seat discounts,

class upgrades, free hotel stays, and other benefits. Jet Airways has its freqnet flyer programmer

under the name ‘Jet Privilege”.

Airport lounges

FSC operates special lounges in different airports. For example, Air India operates lounges

called “Maharajah Lounge” to First

and Executive class passengers. Jet

Airways operates its lounges under the

name of “Jet Lounge”.

2.2 Growth of Air Passenger Traffic

Indian civil aviation industry has been

consistently growing over the last five

years (Fig 2.2). Consequently,

passenger traffic during 2007-08 has crossed the level of 100 million and has made India the 9th

largest aviation market in the world. During the period from 2003-04 to 2007-08, the industry

has grown at a CAGR of 19.12%. During the same period, the domestic passenger traffic has

increased by a CAGR of 22.09% while that of international passenger traffic has been 12.38%.

During 2007-08, Indian aviation industry handled 116.87 million passengers including 29.81

million international passengers (25.5%) and 87.06 million domestic passengers (74.5%).

Regarding the surge in international passenger traffic during the year 2007-08, airports

experiencing major growth were Mangalore (381.4%), Coimbatore (255.0%), Tiruchirappalli

(89.3%), Ahmedabad (64.6%) and Lucknow (32.0%), as per AAI,. Air Arabia, Silk Air and Sri

Lankan Airlines started international flight operations in the phased manner since April 2007,

which led to the huge growth at Coimbatore airport. Besides this, Tiruchirappalli airport

Fig 2.2: Trends in Air Passenger Traffic in India during FY04-FY08

0

20

40

60

80

100

120

140

2003-04 2004-05 2005-06 2006-07 2007-08

Nos

. in

milli

on

051015202530354045

% g

row

th

International (Nos) Domestic (Nos)Total (Nos) International (% grow th)Domestic (% grow th) Total (% grow th)

Source: AAI and Cygnus Research



experienced huge growth after starting the operations by Mihin Lanka from July 2007 and

increase in frequency of operation by Sri Lankan Airlines and Air India Express. This overall

growth was achieved due to competitive international fare between Indian and international

destinations and better international linkages of Indian and international destinations. The

airports which have shown highest growth in domestic passenger traffic during 2007-08 are

smaller airports like Bhubaneswar (99.9%), Jaipur (90.7%), Raipur (68.6%), Ranchi (67.6%) and

Tiruchirappalli (65.9%).

As far as the aircraft movements are

concerned, it has grown at a

CAGR of 15.47% during the

period from 2003-04 to 2007-08 and

shown consistent increase during the

period (Fig 2.3). The movements of

the international aircrafts have

grown by CAGR of 13.37% while

the movements of domestic

aircraft have increased at a

CAGR of 16% during the same

period.

Overall, the sector has been growing at an appreciable rate and the following major factors can

be attributed to this growth,

• A steady growth trend experienced by the Indian economy since last few years.

• The liberalised air transport policies brought by the aviation ministry to make the sector

more competitive and deregulate the sector.

• Emergence of LCCs in a big way

• Entry of players rich with surplus cash like UB group, Interglobe Enterprises, Wadia

group, GVK and GMR.

Fig 2.3: Trends in Aircrafts Movements in India during FY04-FY08

0

0.2

0.4

0.6

0.8

1

1.2

1.4

2003-04 2004-05 2005-06 2006-07 2007-08

Nos

. in

milli

on

0

5

10

15

20

25

30

35

% g

row

th





2.3 Air Cargo Market – Opportunities & Performance

The growth in the economic

activity of the country, rise in trade

and commerce between nations,

flourishing food processing

sector and entry of new players in the

sector are some of the factors

behind the growth of air cargo

business in India. It is expected that

the Indian air cargo market to reach

12.5 million tonnes by the year 2025.

The commodities exported from India

through air mainly include

garments, machinery,

components, pharmaceuticals, dyes, chemicals and perishables such as fruits, flowers,

vegetables, fish and meat.

Indian air cargo business has recorded a CAGR of 9.91% during the period from 2003-04 to

2007-08. The international air cargo traffic has gone up by a CAGR of 10.58% while the

domestic air cargo has increased by a CAGR of 8.63% during the same period. During 2007-08,

the total air cargo (or freight) handled in by Indian aviation industry was 1.71 million tonnes

which was up by 10.5% over 2006-07. It include 1.15 million tonnes (66.9%) of international

cargo and 0.57 million tonnes (33.1%) of domestic cargo. The airports experiencing major

growth in international air cargo were Ahmedabad (58.2%), Tiruchirappalli (32.8%), Cochin

(22.0%), Chennai (16.7%) and Mumbai (13.9%). Similarly, airports witnessing major growth in

domestic freight traffic included Imphal (71.9%), Raipur (50.9%), Mangalore (37.5%), Indore

(34.1%) and Agartala (32.7%) during 2007-08 compared to 2006-07.

India is ranked among the top 30 global freight markets in terms of total as well as international

operations after a strong growth experienced since 2003. But India’s total market size is still

small when compared to other global markets. It is 2% of the US market and 5% of Chinese

Fig 2.3: Trends in Air Cargo Traffic in India during FY04-FY08

00.20.40.60.8

11.21.41.61.8

2003-04 2004-05 2005-06 2006-07 2007-08

Nos

. in

m.t

0

5

10

15

20

25

% g

row

th





market. Realising the need for improving facilities in air cargo business, government has planned

to set up an airport dedicated to cargo operations at Nagpur, at a cost of Rs.26 billion. Based on

the study of the Inter Ministerial Group to streamline and promote the cargo operations, the free

time available for the cargo has been reduced to three days from the current level of five days.

Besides this, action has been taken to promote cargo operations through Public-Private

Partnership (PPP) at non-metro airports like Ahmedabad and Amritsar, which is likely to boost

the air cargo operations.

Capacity expansion/new players to come up in cargo

The scope of monetary returns involved due to huge growth potential in air cargo business has

attracted large passenger airlines. Almost all the full-service as well as budget airlines operating

on large networks have plans to launch their dedicated cargo carriers.

• State-owned Air India, already having its dedicated cargo flights and market leader with

more than 40% share in air cargo has expanded its alliances with other players and will

launch more dedicated cargo airlines in the next couple of years. Air India has entered

into an agreement with Gati according to which it will supply five aircrafts to Gati.

• Safexpress has decided to procure three aircrafts on lease basis during the year 2008-09.

• The First Flight Couriers has planned to enter air cargo market by procuring two Boeing

737-300 aircrafts on lease to increase capacity in air cargo.

• Logistics start-up company Avicore Aviation has planned to make an investment of about

Rs.4 billion to start a new cargo airline before mid 2008 and also considering buying or

procuring five B737s aircrafts on lease.

• Quickjet is planning to launch its air cargo operations starting services with two B757s.

• Jet Airways, one of the major players in aviation providing full services also plans to start

a cargo airline in 2009.

During January 2008, Government has announced its policy decision to allow the foreign carriers

to acquire stake up to 74% in cargo airlines. Till then, Foreign Direct Investment (FDI) up to

49% was allowed in cargo airlines but international carriers were not allowed to invest in cargo

operations. This decision is likely to boost the air cargo sector. Currently, there are only 12-13

aircrafts dedicated to freighter services in India. Once FDI from foreign carriers is allowed, many

major carriers will buy stakes in Indian cargo carriers.



As per International Air Transport Association (IATA) Study, India is not able to keep pace with

expected airfreight demand and a capacity crunch may come up by 2011. IATA is forecasting a

tumultuous year for the Indian airfreight market because its infrastructure will not be able to

cope with the massive growth expected. Hence, providing infrastructure for air cargo by the

government will have to be a priority.

2.4 Airport Infrastructure Status

The quality of airport infrastructure makes direct contribution to the international

competitiveness and economic growth of a country by facilitating the smooth traffic flow of

people and cargo which ultimately leads to the growth of trade and tourism. India's biggest

airports have long been among the worst operated airports in the world. In the past, airport

infrastructure has not been developed at the pace as the growth of the Indian economy, especially

the quantum jump in passenger and cargo air traffic experienced since 2002. This growth is

having a major impact on India’s airport infrastructure which has not been properly equipped to

meet these demands. Limited terminal capacity has led to major congestion and most airports

lack modern ground-handling facilities, night-landing systems or cargo handling facilities. This

is due to lack of space, lack of facilities, lack of cleanliness, lack of runway space, lack of

aircraft parking space, poor service, inordinate delays etc. and all these form an important part of

airport infrastructure. Airport infrastructure is one of the most important challenges to be

addressed to exploit the true potential of Indian aviation sector.

Around 40% of India's trade in terms of value and 95% of international travel to and from India

is carried out through the airport mode. The Indian airports are not in the position to

accommodate new aircrafts and the huge traffic flow of passengers and air traffic is causing

congestion leading to continuous delays resulting in losses. The traffic is concentrated in certain

areas e.g. 45% of total traffic is concentrated at Delhi and Mumbai airports while 70% of total

traffic is at top five airports. Operations cannot be started to new destinations because of lack of

new parking slots in Delhi, Mumbai and Bangalore airports. The poor infrastructure is also likely

to have an adverse impact on the growth of aviation sector itself. India is also likely to acquire

400 aircrafts in the next 4 years and there will be many fold increase in air passenger traffic.



These investments and traffic expansion will not be successful unless infrastructure at airports is

improved according to the requirements. Besides this, poor infrastructure at airports is also not

allowing India to raise tourism to its full potential in spite of its rich culture and heritage.

The current infrastructure of airports is not at par with the standards required to handle the

projected growth and can only support 20% growth in passenger traffic and 10% growth in cargo

traffic. Ministry of Civil Aviation has estimated that the sector requires an investment ranging

Rs.260-360 billion to enhance infrastructure. Government of India has estimated that the

development of airport infrastructure, including metro, non-metro, greenfield airports and cargo

hubs that are presently under construction or have been sanctioned is likely to require an amount

of Rs.400 billion. Government has formed a three-member committee in 2007 headed by Prime

Minister which will prepare a new set of guidelines to allow easy development of airport

infrastructure by private players.

2.5 Recent Industry Trends

Some of trends in the industry in the recent past are discussed below.

• The Indian aviation industry is gradually changing its structure with the passage of time.

The Indian aviation industry, have shown continued growth in recent years with the

booming economy, rising personal income, rising business purpose travels as well as

leisure travels, availability of wide choices, emergence of LCCs, etc

• The industry witnessed a series of mergers and acquisitions in the year 2007. The merger

of Jet-Sahara and Indian Airlines and Air India was announced in the year 2006, but it

was actually implemented in the year 2007. Besides this, merger of Kingfisher and

Deccan also came up in the year 2007. These players after consolidation have captured

more than 80% of the market share. The consolidation of players in the aviation industry

has increased the chances of forming cartels among the players in the Indian aviation

sector post consolidation, as there will be lesser number of players in the market.



• The number of passengers in India travelling by air is on rise. The number of passenger

boarding is expected to double by 2025 and aircraft operations expected to triple by the

same time.

• Due to spread of Internet and round-the-clock fare search features, airfares are fully

known to the public and travellers are choosing the option with lowest price. Air travel

has now become a commodity business and legacy carriers will have to adapt further to a

low-cost/low-fare strategy in order to survive. Even business travellers, who are usually

less price sensitive are not willing to pay higher fares. The only premiums that travellers

are willing to pay for are time-of-day and direct flights, not the brand.

• Rise in prices of Aviation Turbine Fuel (ATF) has been made by public sector oil

marketing companies in line with the rise in international oil prices, which will have dent

in the profitability of the airlines. It is also likely to cause an increase in airfares.

• Indian carriers are placing orders for new aircrafts in the coming period without clear

plans to retire older planes. They are also adding significant numbers of regional jets.

Besides this, the fleet size of air taxi is also expanding rapidly. Kingfisher Airlines has

already ordered five Airbus A380 aircrafts that will operate on international routes.

• Low cost carriers are posing great threats to the survival of legacy carriers and due to

which, they are restructuring their pricing policies. Besides this, they are also facing

competition from overseas players.

• Private airlines are known to hire foreign pilots, get expatriates or retired personnel from

the Air Force or PSU airlines, in senior management positions. Further, they outsource

such functions as ground handling, check-in, reservation, aircraft maintenance, catering,

training, revenue accounting, IT infrastructure, loyalty and programme management.

Airlines are known to take on contract employees such as cabin crew and ticketing.

2.6 Consolidation Phase in Indian Aviation Industry

Consolidation is one of the strategies applied by the business fraternity, when they are looking

for expansion, to catch the market, to become the industry leader or when the company itself is



running in red line either of any. In business, it often refers to the mergers or acquisitions of

many smaller companies into much larger ones.

As passenger traffic is growing a rapid rate in the country, each airlines trying to gain as much

market share in a fiercely competitive market that’s characterized by high capital expenditure

and increasing pressure on the revenue per seat. It has led to the current run of mergers &

acquisitions (M&As), making India the fastest consolidating market in the world. Moreover,

India's aviation industry has expanded dramatically in recent years with the entry of a host of

new budget carriers. But losses sustained by many of these airlines are prompting consolidation

in the industry. The most common reason for M&As between airlines is the unviable operations

of one of the entities.

Other reasons behind the consolidations are rise in the ATF, unorganized fleet management,

excessive congestion at the airport. ATF constitutes 40-45% of airlines operating cost which has

increased from 36000 per kilo litre in January, 2006 to Rs. 70,000 per kilo litre in June, 2008.

Airlines tried to stick themselves in the competition adding additional capacity into their fleet, so

that can fly to different routes. But this strategy didn’t work as the newer routes were not that

profitable according to their expectations and added capacity incurred heavy expenditure. So

rather than exiting from the industry, some of the big players went for the consolidation.

The Indian Aviation Industry saw three complete consolidations in past two to three years. State

owned Indian Airlines with another state owned Air India, Jet Airways with Sahara Airlines, Air

Deccan- Kingfisher. However the latter have not completely merged up, that is why both the

players are operating as separate entities.

Jet Airways- Sahara Airlines Acquisition: It was the biggest consolidation move in Indian

aviation industry. January 2006, it announced to acquire its largest private competitor, Air Sahara

for approximately US$500 million in an-all cash deal, but the deal was dragged till April 2007

when Jet Airways paid US$340million for Air Sahara. Subsequently, in 17th April, 2007 Jet

Airways renaming of Air Sahara as JetLite and was marketed between low-cost carriers and full

service airlines.



Kingfisher- Deccan Acquisition: The United Breweries (UB) Group, parent company of

Kingfisher Airlines, acquired 26% of Air Deccan’s parent Deccan Aviation, in May 2007, at a

cost of Rs.5.46 billion. Later in Dec, 2006 UB Group bought another 20% stake in to increase its

holding to 46% in Deccan Aviation through an open offer. After merger, they are run as two

separate brands.

Air India- Indian Merger: In order to prevent the sliding market share and losses, it is decided

to merge both state-run carriers, Air India and Indian. The merger took official status during

August, 2007 when formation of National Aviation Company India Ltd announced merged entity

of Air India and Indian. The merged airline has a combined fleet size of over 112 aircraft and

rank among the top 30 airlines in the world.

Impact on the Industry: The competitive landscape of the industry changed with the recent

consolidation witnessed in the industry. From a fragmented sector with 10 players competing

with each other, now the industry have 3 large players competing with each other in their

respective segments, with a couple of other smaller players in the LCC space. These three

together have a combined market share of 80-85%. Following understated table summarize the

percentage as well as the fleet size of consolidated companies.

Some of benefits expected from these consolidation moves include,

• The merged entity achieves economies of scale in a number of areas like maintenance,

ground operations, the use of landing slots and parking rights, etc.

• The merger would enable the airlines to leverage their assets and capital better, and build

a stronger and sustainable business.

• A merged company can effectively deliver the classic hub and spoke system that the

largest airlines have been operating: Emirates in Dubai; Lufthansa in Frankfurt and

Munich; British Airways in London; Delta in Atlanta; etc. Similarly, the domestic airlines

will bring passengers to the one of the main gateways of like; also, Air India's domestic

flights can be scheduled to complement the Indian Airlines schedule.

Also, consolidation will help the industry, which was mired by low yields and excess capacity.

With the consolidation set in, these large groups have started on a route– rationalization exercise,



which will help in pulling out excess capacity from sectors, which are susceptible to heavy

discounting to over capacity and heavy competition. The consolidation has also triggered

rationalization of fleet expansion plans by players and will reduce the excess capacity in the

industry.

Therefore, industry experts are of the opinion that consolidation is inevitable and necessary for

airline industry in India. These consolidation moves are also expected to result in resource

rationalization, route optimization, fare rationalization, etc, which ultimately results in a more

viable and profitable civil aviation industry

2.7 Branding in Aviation Industry

Branding is a new concept that captures attention of major players of Indian civil aviation now.

It is obvious that all the airlines around the world are revamping themselves to attract the

customer. Some players are changing their logo or using new colour or presenting themselves in

front of the customer in a new style. A striking commonality among airlines is the use of Red

Colour, which signifies the vibrancy. The Singapore Airplanes is the one who are still applying

the traditional concept of dressing.

Branding is what gets passenger to come back to the airline and definitely the cost of retaining a

passenger is less than that of cost of acquiring one. According to officials of Spice Jet, nearly

45% of the customers are repeat customers, which they attribute mainly branding. US stationed

Southwest Airlines are having a different approach. The entire cabin crew members of the flight

shares and crack jokes with the passengers, so that they can diffuse any tension situations. Mr.

Mallya of Kingfisher Airlines takes a personal round of interview with the candidates before he

recruits them, to ensure the maintenance of quality. This is because cabin crew members come

directly in contact with the passengers, so they are considered to be the brand ambassadors of the

airline.

Dr. Mallya of Kingfisher or Mr. Branson of Virgin Atlantic are flamboyant CEOs. They are the

faces of their respective airlines, their airlines makes the news when they makes the news.



2.8 Major Players in Industry Value Chain

The Indian aviation sector was also characterised by a high degree of government control prior to

1990. The liberalisation of the Indian aviation sector commenced in 1990 with private sector

players being allowed to operate as air taxi operators. The major players in Indian aviation sector

are National Aviation Company India Ltd (NACIL), Jet Airways-Air Sahara, Kingfisher-Deccan,

GoAir, Indigo, Paramount and Spicejet. Besides this, there are other stakeholders in the industry

like GMR and GVK.

2.8.1 GMR GMR Infrastructure Limited (GIL) is an infrastructure holding company which funds its whole

investments in special purpose companies engaged in specific infrastructure projects through its

various subsidiaries. GIL has operations in four segments: airports, energy, roads and others.

Airport segment is engaged in the development and operation of airports. Energy segment is

engaged in the generation of power. Roads segment is engaged in the development and operation

of roadways. Others are involved in residual activities. During 2007, the company acquired

99.99% of GVL Investments Private Limited (GVL). Consequently, GVL, Delhi International

Airport Private Limited and Gateways for India Airports Private Limited became subsidiaries of

the company.

2.8.2 GVK GVK Power & Infrastructure Limited (GVKPIL) is a diversified company focusing on

infrastructure and urban infrastructure projects. It also has interests in the hospitality, services

and manufacturing sector. In June 2007, the company acquired equity interest in GVK Aviation

Pvt Ltd. In July 2007, GVKPIL acquired GVK Infratech Pvt Ltd.

2.10 Employment Opportunities

The aviation sector in India is growing at a growth rate of around 20% per annum, creating a lot

of job opportunities. The job opportunities available in the aviation sector at various levels



include Commercial pilot, Co-pilot, Air cargo pilot, Expatriate cabin crew, Air traffic controller,

Cabin safety instructor, In-flight managers, In-flight base managers, Cabin services instructor,

Cabin crew, Training instructor, Maintenance controllers, Licensed aircraft maintenance

engineering, Quality control manager, Cargo officers, Guest service agent and Ground staff. The

sector is particularly facing with a crunch of pilots.

Currently, Indian aviation provides direct employment to more than 100,000 people including

33,000 by Air India, 14,000 by Jet Airways-Jet Lite and 21,000 by airport operators in 2007.

This figure will double by 2012, according to estimates made from the 11th Five Year Plan

(2007-12). One direct job created in aviation generates seven indirect jobs. Jobs will be created

due to various factors including steady growth in air cargo, general aviation, helicopter services

and maintenance, repair and overhaul segments and training.

As per Civil Aviation authorities, public sector and private airlines in the country will need to

acquire more than 800 new aircrafts over the next 5 to 10 years besides their existing fleets. It is

estimated that India will need 40,000 cabin crews during the same period for fresh employment

and replacement.

The industry has 399 aircrafts during April, 2008 and this number is likely to cross the figure of

1,000 aircrafts by the end of 2012. Aviation sector has the potential to create 3 million jobs by

2017. These jobs are likely to come up in the field of flight dispatchers, cabin crew, airline

managers, airport managers and ground handling personnel. Besides this, aviation industry is

currently requiring an estimated 6,000 more certified captains in the next five years to cover the

gap arising due to shortage of pilots. With the present growth of the aviation industry, it is likely

to require 5,000 additional pilots for scheduled operations and 1,000 pilots for non-scheduled

and private operations. The airline industry of India is currently facing shortage of around 1,000

qualified pilots, particularly for wide-bodied passenger jetliners. To fulfil the shortage of pilots,

government has increased the retirement age of pilots, in both public and private sectors, to 65

years.



2.11 Institutions/Vocational Training Institutes in Industry

Currently, there are 25 national flying training institutes in the country resulting in around 150

pilots every year. Following are some of institutes offering training in various aviation services.

• The capacity of Indira Gandhi Rashtriya Uran Akademi (IGRUA) has been increased to

100 trainees from the existing level of 40 trainees.

• The Bureau of Civil Aviation Security (BCAS) has implemented a National Civil

Aviation Security Training Programme (NCASTP) with revised changes. BCAS is also

training people of Central Industrial Security Force (CISF) to assist their induction into

Airports Security Duty.

• Another institute known as Aviation Security Training Centre located at New Delhi is

used to train aviation security staff, employees of airlines and air operators or executive

level staff of AAI.

• The IATA has started its new training courses in India through the Speedwings Academy

for Aviation Services, Cochin, which is the leading training centre authorised by IATA

based in Kochi. These courses are mainly focused on the commercial aspects of airline

and airport operations and are different from the other courses of IATA which are

currently being conducted for passenger and cargo agency training. IATA has authorised

Speedwings to conduct seven new IATA aviation courses, including airline and airport

customer service, cargo marketing and perishable cargo handling and airline call center

training. Customised short-term courses are also planned according to convenience of

airline and airport personnel. Successful trainees of the courses are awarded international

diplomas.

• Canada-based CAE has recently signed an agreement with Government of India to

provide pilot training in the two national flight academies—Indira Gandhi Rashtriya Uran

Akademi (IGRUA) in Rae Bareli (UP) and Rajiv Gandhi National Flying Training

Institute (RGNFTI) in Gondia (Maharashtra). The initial batch strength will be of 200

students at each of the institutes in the first year and is likely to go up to 1,000 students in

the coming years.



• Ministry of Civil Aviation is planning to establish a national flying training institute at

Gondia in Maharashtra to increase the number of qualified and well trained pilots and to

deal with the huge demand for pilots in the industry.

• Chandigarh-based airhostess training institute Flying Cats, already offering one-year

university diploma course in aviation, travel and tourism in technical collaboration with

the Annamalai University, has recently started a three-year Bachelor in Business

Administration (BBA) degree course in aviation.

• Star Aviation Academy located at Gurgaon in Haryana conducts class rooms and

workshops for theory and practical classes for future Aircraft Maintenance Engineers. It

has been approved by the DGCA under Government of India to provide training in light

aircraft, piston engine & jet engine.

• The Delhi-based Air Hostess Academy Pvt. Ltd. (AHA) provides Diploma programmes

in Global Aviation & Hospitality Management through its 35 centres through out India.

• Frankfinn Institute of Air Hostess Training (FIAT) is one of leading company in training

and development of air hostesses. Frankfinn claims that it has produced more air

hostesses and flight stewards than all other Air Hostess Academies in India put together.

It offers one year course called BTEC (HNC) in Aviation, Hospitality and Travel

Management course.

2.12 SWOT Analysis of Aviation Industry

Strengths

Booming economy: Indian economy, which has been growing at a rate of around 8% in past

three years, has a direct cause-effect relationship with the logistics industry. The industrial

growth and burgeoning service sector are also fuelling the logistics demand, which drives the

demand for aviation services. Strong economy translates to strong logistics demand.

Rising income levels: Due to the rise in income levels, the disposable income is higher. This is

expected to enhance the number of travellers, flying for various purposes like business, tourism

and leisure.



Growing tourism: Due to growth in tourism, there has been an increase in number of the

international and domestic passengers. India, with its numerous tourist destinations, is attractive

to both domestic and international tourists. The World Travel and Trade Council estimated that

Indian tourism demand will continue to grow at an average of 8.8% between 2004 and 2013,

making India the world's third fastest growing tourist market. This complements the growth of

the aviation industry.

Weaknesses

Underpenetrated market: The total passenger traffic was only 116 million as on March 31,

2008, amounting to only 0.11 trips per annum, per capita, when compared with developed

nations such as the US (2.02 trips per annum, per capita).

It is also a matter of concern that the trunk routes (major routes) are not fully exploited. One of

the reasons for inability to realise the full potential of the trunk routes is the prevalence of unfair

competition among players.

Untapped Air Cargo Market: Air cargo has not yet been fully tapped in the Indian markets.

Although ranked among top 30 major air cargo transporters, India’s volume of 1.71 million

tonnes in 2007-08 is insignificant compared with the US and China. However, it is expected that

large number of players will have dedicated fleets for cargo operations in the future.

Infrastructural constraints: The infrastructure development has not kept pace with the growth

in aviation services sector leading to a bottleneck. Airport and air traffic control (ATC)

infrastructure is inadequate to support growth. Almost all airports have limited terminal capacity

which results in congestion. Most of airports lack modern ground-handling facilities, night-

landing systems or cargo handling facilities which stems from the lack of space, lack of facilities,

lack of cleanliness, lack of runway space, lack of aircraft parking space, poor service, inordinate

delays etc. and all these form a part of airport infrastructure.

Opportunities

Expecting investments: Aviation industry is a capital-intensive industry. Government of India’s

efforts to bring in private players in aviation infrastructure development, air transportation

services, allowing FDI in areas like Greenfield airport development and MRO establishment will



bring in more capital. Indian aviation industry has received an FDI worth Rs. 8.86 billion from

April 2000 to March 2008, which forms 0.36% of total FDI received by India during the period.

Huge investments are expected to take place in aviation sector in the near future. It is estimated

that by 2012, investments of about US$30 billion will be made.

Phenomenal growth of the industry: Aviation industry has witnessed a CAGR of around

19.14% in terms of RPK from 2003-04 to 2007-08; the cargo traffic also recorded a CAGR of

9.83% during the period. The industry is expected to maintain its growth pace, amounting to

passenger traffic of 289.92 million and cargo traffic of 2.77 million in 2012-13. The ongoing

expansion plan of airliners to meet this demand is indeed a big opportunity.

Mergers and acquisitions: Recent mergers and acquisitions in Indian civil aviation industry are

expected to bring in the benefits of consolidation. The recent mergers and acquisitions are Jet

Airways-Air Sahara, King Fisher-Air Deccan and Air India-Indian Airlines. These moves are

aimed at resources optimisation and attaining the economies of scale. These developments would

contain the losses and revive the prospects of profitability.

Preferred location for MRO facility: Emergence of low-cost airlines, increasing passenger

traffic and fleet expansion make India a lucrative destination for setting up MRO facility.

Availability of skill at low cost in India is also a comparative advantage for setting up such a

facility. Although only Boeing and Airbus have announced their plans for setting up MRO

facility in India as of date, more players are expected to establish their facilities in India in the

future.

Threats

Shortage of trained pilots and other skilled personnel: There is a shortage of trained pilots,

co-pilots and ground staff, which is severely limiting the growth prospects. Indian civil aviation

industry is estimated to require 5,000 additional pilots for scheduled operations and 1,000 pilots

for non-scheduled and private operations. The industry falls short of around 1,000 qualified

pilots, particularly for wide-bodied passenger jetliners. Indian flying schools are currently

producing 150 pilots annually, which is far behind the requirement. The shortage of trained and

skilled human resources leads to cut-throat competition for employees, which in turn, is driving

the wages to unsustainable levels. Moreover, the industry is unable to retain talented employees.



Shortage of airport facilities: The shortage of airport facilities like parking bays, air traffic

control facilities and takeoff and landing slots are severe growth limiting factors, considering the

present growth of the industry.

Spiraling fuel prices: Due to heavy taxation on ATF, its price is around 80% higher compared

with ATF in countries like Malaysia and Singapore. The price of ATF is Rs. 70,000 per kilo litre

as of June 2008 compared with Rs. 36,000 per kilo litre in January 2006. As ATF forms major

cost component of the airlines, the continually increasing prices further constrain the industry.

Declining yields: LCCs commanded a market share of around 39% in 2007. The legacy carriers

are being forced to match LCC fares during a time of escalating costs, in order to survive in

price-sensitive Indian market. Increasing growth prospects have attracted and are likely to attract

more players, which will lead to more competition. All this has resulted in lower returns for all

operators.



civil aviation industry - indian overview

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