The history of Indian Aviation Industry started in December 1912 with its first domestic air route between Karachi and Delhi. In 1948, the Indian Government and air India set up a joint sector company, Air India International to further strengthen the Aviation Industry of India. By the year 2000 several private airlines have entered into the aviation business in succession and many more were about to enter into the arena.
The history of Indian Aviation Industry started in December 1912 with its first domestic air route between Karachi and Delhi. In 1948, the Indian Government and air India set up a joint sector company, Air India International to further strengthen the Aviation Industry of India. By the year 2000 several private airlines have entered into the aviation business in succession and many more were about to enter into the arena.
The history of Indian Aviation Industry started in December 1912 with its first domestic air route between Karachi and Delhi. In 1948, the Indian Government and air India set up a joint sector company, Air India International to further strengthen the Aviation Industry of India. By the year 2000 several private airlines have entered into the aviation business in succession and many more were about to enter into the arena.
Indian Aviation Industry is one of the fastest growing airline
industries in the world. The history of Indian Aviation Industry started in December 1912 with its first domestic air route between Karachi and Delhi. It was opened by the Indian Air Services in collaboration with the UK based Imperial Airways as an extension of London-Karachi flight of the Imperial Airways. Tata Sons Ltd., the first Indian airline, started a regular airmail service between Karachi and Madras three years later without any backing from the Indian government.
During the period of independence, 9 air transport companies were carrying both air cargo and passengers in the Indian Territory. In 1948, the Indian Government and Air India set up a joint sector company, Air India International to further strengthen the Aviation Industry of India. As part of nationalization in 1953 of Indian Airlines (IA) brought the domestic civil aviation sector under the purview of Indian Government. Later till the mid 1990's government-owned airlines dominated Indian aviation industry. When the government adopted the Open-sky policy in 1990 and other liberalization policies the Indian Aviation Indian made underwent a rapid and dramatic transformation. By the year 2000 several private airlines have entered into the aviation business in succession and many more were about to enter into the arena. Indian aviation industry today is dominated by private airlines and low-cost carriers like Deccan Airlines, GoAir, and SpiceJet, etc. And Indian Airlines, the giant of Indian air travel industry, gradually lost its market share to these private airlines. According to the report of CAPA, these budget carriers are likely to double their marketshare by 2010 -- one of the highest in the world.
Size of theIndustry There are about 450 airports and 1091 registered aircrafts in India Today. Geographicaldistribution Mumbai, Kolkata, Hyderabad, Delhi, Pune, Bangalore, Chennai. Output per annum Growth rate of 18% per annum Timeline
1912: Indian State Air service and Imperial Airways, UK collaborate to ply on first domestic route, between Delhi and Karachi. 1915: Tata Sons start airmail service between Delhi and Madras. 1932: Tata Aviations established. It goes to Colombo in 1938. 1948: Designated as flag carrier under the name Air India International with 49% govt. control.
1953: Indian Airlines Corporation formed through Air Corporation Act, 1953, by nationalizing Air India and Indian National Airways. 1994: Air Corporation Act. 1953 repealed and thus allowed private players to come. 2003: Entry of low cost carriers. Air Deccan, Spice Jet, Go Air, Indigo. Major Milestone
1953 Nationalization of all private airlines through Air Corporations Act; 1986 Private players permitted to operate as air taxi operators 2001 Aviation Turbine Fuel (ATF) prices decontrolled 2003 Air Deccan starts operations as Indias first LCC 2005 Kingfisher, SpiceJet, Indigo, Go Air, Paramount start operations 2007 Industry consolidates; Jet acquired Sahara; Kingfisher acquired Air Deccan 2010 SpiceJet starts international operations 2012 Government allows direct ATF imports, FDI proposal for allowing foreign carriers to pick up to 49% stake under consideration
Introduction Indian Aviation Industry has been one of the fastest-growing aviation industries in the world with private airlines accounting for more than 75 % of the sector of the domestic aviation market. With a compound annual growth rate (CAGR) of 18 % and 454 airports and airstrips in place in the country, of which 16 are designated as international airports, it has been stated that the aviation sector will witness revival by 2011. In 2009 with increase in traffic movement and increase in revenues by almost US$ 21.4 million, the Airports Authority of India seems set to accrue better margins in 2009-10, as per the latest estimates released by the Ministry of Civil Aviation.
This is being primarily attributed because of the increase in the share of revenue from Delhi International Airport Limited (DIAL) and Mumbai International Airport Limited (MIAL). Passengers carried by Indian domestic airlines from January-February 2010 stood at 8,056,000 as against 6,761,000 in the corresponding period of 2009- a growth of 19.2 %, according to a report released by the Ministry of Civil Aviation. Today Hyderabad International Airport has been ranked amongst the world's top five in the annual Airport Service Quality (ASQ) passenger survey along with airports at Seoul, Singapore, Hong Kong and Beijing. This airport in Hyderabad is managed by a public-private joint venture consisting of the GMR Group, Malaysia Airports Holdings Berhad and both the State Government of Andhra Pradesh and the Airports Authority of India (AAI).
Classification of Indian Aviation sector The Indian airline sector can be broadly divided into the following main categories: 1. Scheduled air transport service, which includes domestic and international airlines. 2. Non-scheduled air transport service, which includes charter operators and air taxi operators. 3. Air cargo service, which includes air transportation of cargo and mail. Scheduled air transport service: It is an air transport service undertaken between two or more places and operated according to a published timetable. It includes: 1. Domestic airlines, which provide scheduled flights within India and to select international destinations. Air Deccan, Spice Jet, Kingfisher Airline and IndiGo are some of the domestic players in the industry. 2. International airlines, which operate scheduled international air services to and from India. Non-scheduled air transport service: It is an air transport service other than the scheduled one and may be on charter basis and/or non-scheduled basis. The operator is not permitted to publish time schedule and issue tickets to passengers. Air cargo services: It is an air transportation of cargo and mail. It may be on scheduled or non- scheduled basis. These operations are to destinations within India. For operation outside India, the operator has to take specific permission of Directorate General of Civil Aviation demonstrating his capacity for conducting such an operation. At present, there are 2 scheduled private airlines (Jet Airways and Air Sahara), which provide regular domestic air services along with Indian Airlines. In addition there are 47 non-scheduled operators providing air-taxi/non-scheduled air transport services.
Major Players
Air India
Jet Airways
Jet Lite
Spicejet
Go Air
IndiGo
Market Size India is one of the fastest growing aviation markets in the world. A total of 127 airports in the country, which include 13 international airports, 7 custom airports, 80 domestic airports and 28 civil enclaves are managed by The Airport Authority of India (AAI). There are about 450 airports and 1091 registered aircrafts in India today. Total domestic passengers carried by the scheduled domestic airlines between January and May 2013 were 25.998 million, as against 25.808 million during the corresponding period of previous year thereby registering a growth of 0.74 per cent, revealed the statistics from Directorate General of Civil Aviation (DGCA). No-frill carrier IndiGo lead in terms of market share with 29.7 per cent of the pie, followed by Jet Airways-Jet Lite combine at 25.3 per cent, Air India Domestic at 19.2 per cent, Spice Jet at 17.5 per cent, and Go Air at 8.3 per cent for the month of July 2013. The air transport (including air freight) in India has attracted foreign direct investment (FDI) worth US$ 456.84 million from April 2000 to July 2013, as per the data released by Department of Industrial Policy and Promotion (DIPP).
Industry Statistics MARKET SHARE OF SCHEDULED DOMESTIC AIRLINES
CAPACITY VS DEMAND
PASSENGER LOAD FACTOR OF SCHEDULED DOMESTIC AIRLINES
Low-cost model now dominating the skies; viability remains to be seen Internationally the LCC model came into existence when the US Congress passed the Airline Deregulation Act in 1978 easing the entry of new companies into the business and giving them freedom to set their own fares and choose routes (Prior to this routes and fares were fixed by a Government Agency). This was followed by entry of carriers like Southwest, which pioneered the LCC concept. Majority (~60-65%) of an airline cost are dependent on external factors, which cant be managed by an LCC. This includes the fuel cost (~40%), maintenance cost (~12%) and ownership cost (~12-15%). LCCs try to achieve a cost advantage in other ways by avoiding the in-flight services, operating from secondary airports, selling tickets through the internet, higher number of seats in the aircraft, inventory reduction through use of similar aircraft and lower employees per aircraft. The Indian aviation sector was exposed to intense competition with the advent of a low-cost airline - Air Deccan back in 2003. The success of Air Deccan spurred the entry of other LCCs like SpiceJet, Indigo, Go Air and subsequently low fare offerings from Jet airways and Kingfisher airlines. As a result, the sector which was completely dominated by full-service airlines till a decade ago is now dominated by low-cost airlines. However, longer term viability of LCCs models in India remains to be seen (Kingfisher exited the segment recently) as airport charges are same for FSCs and LCCs in India. Besides, the fuel costs forms a larger proportion of overall costs as compared to international standards due to higher central and state government levies (viability of direct ATF imports remains to be seen due to lack of supporting infrastructure) and high congestion at major airports (half an hour hovering at major airport could increase fuel costs by Rs.60,000 to Rs. 115,000 depending on aircraft, besides impacting aircraft utilizations). These constraint can be resolved only if there significant improvement in infrastructure such that LCCs could operate on secondary airports.
Sales Growth: After a strong rebound in 2010, the pax growth has been moderating over the last few quarters due to moderating economic growth and weak industrial activity. Besides, severe competitive pressure from domestic LCC players (rapidly gaining market share) and Air India (trying to maintain market share) have resulted in price wars (at times below cost pricing), lowered yields and moderated sales growth for the airlines. Even on international routes, the yields have remained weak due to weaker economic conditions and severe competition from global airlines.
Rising ATF Prices & Steep Rupee Depreciation: The airlines industry had been severely impacted by the significant increase in ATF prices (up 57% in last 18 months) as Indian Carriers do not hedge fuel prices and have exhibited limited ability to charge fuel surcharges due to irrational and undisciplined pricing dictated by competition rather than costs / demand. Besides, the steep rupee depreciation (~18.7% depreciation in CY11, although partly reversed through 7.3% YTD appreciation in CY12) acts double whammy as apart from fuel costs, substantial portion of other operating costs like lease rentals, maintenance, expat salaries and a portion of sales commissions are USD-linked or USD-denominated
Profit Margins: With combined impact of 1) moderating pax growth 2) lower yields due to excessive competitive 3) rising ATF prices 4) steep rupee depreciation and 5) rising debt levels and interest costs, the profitability margins of the airlines industry have been severely impacted. As per Centre for Asia Pacific Aviation (CAPA), Indian carriers could be posting staggering losses of $2.5 billion (~Rs 12,500 crore) in 2011-12, worse than the losses of 2008-09 when traffic was declining and crude oil prices spiked to $150 per barrel.
Revenue & Income
FY2012 Revenue FY2012 Net Income FY2013 Revenue FY2013 Net Income Air India USD2.6 bn (USD1.4 bn) USD3.0 bn (USD950 mn) GoAir USD278 mn (USD24 mn) USD375-400 mn (USD14-16 mn) IndiGo USD1.0 bn USD23 mn USD1.5-1.6 bn USD100-110 mn Jet Airways USD2.7 bn (USD226 mn) USD3.0bn (USD87 mn) Jet Konnect USD340 mn (USD33 mn) USD387 mn (USD53 mn) Kingfisher USD1.0 bn (USD423 mn) USD91 mn (USD500-520+ mn) SpiceJet USD720 mn (USD109 mn) USD1.0 bn) (USD34 mn) Growth of Indian Passenger Traffic
The results of the October survey show that a majority of respondents expect to see improvements in profitability over the next 12 months. The positive outlook has been broadly stable since the April survey, with anywhere from 63% to 73% of respondents expecting profits to improve over the coming 12 months.
Q3 compared to the year ago period. More than 63% of respondents indicated an improvement, and the proportion of respondents experiencing a fall in Q3 profits slipped from almost 29% in July to 20% in October. Consolidation and efficiency gains have helped airlines in some regions increase profits in the first half of 2013. These improvements appear to be continuing into Q3 as well as supporting the optimistic outlook for airline financial performance for the year ahead.
Profitability Outlook
Traffic volumes in the passenger business increased during Q3 2013, according to survey responses about the past three months. The rate of improvement in October increased compared to the July survey - the proportion of respondents reporting increased growth in air travel rose from 57% in July to 77% in October.
The outlook for the year ahead has also improved. The proportion of survey respondents expecting a rise in traffic volumes is a significant 83%, well above the share in July (62%).
These developments are consistent with improvements in key demand drivers over recent months, with increases in business confidence and exports orders suggesting a more supportive demand environment for air transport in the months ahead.
The results for cargo are also positive and consistent with these developments. While the improvement is not at the same pace as those indicated for the passenger business, there was an increase in positive responses both with respect to the recent past performance and the outlook. Over the past three months, 52% of respondents reported seeing stronger traffic growth, up from Demand Growth 45% in July. The outlook also improved slightly in October compared to July, due to a small rise in both those expecting no change and a pick-up in the year ahead.
Survey respondents indicated a decline in input costs during Q3. Although the price of jet fuel started to increase again in July, after decline in Q2, prices in Q3 were still below those seen during the same period last year. But probably more importantly than developments in jet fuel prices, survey respondents pointed to cost cutting initiatives as reasons for the fall in input costs in Q3.
respondents (17%) expecting a rise in inputs costs over the next 12 months compared to July when that proportion was 24%. On balance, survey respondents now expect input costs to decline over the next 12 months.
Input Cost
The October survey results suggest that passenger yields picked up in Q3 2013, after remaining stable in Q2 (as indicated by the July survey). 41% of respondents said yields increased during Q3, an improvement on the July result of 31%. The outlook also improved, with growth in yields now expected for the year ahead.
declined in Q3. Although the proportion of respondents seeing an increase over the past three months improved slightly in October (23%) compared to July (21%), the share of respondents seeing a decline in cargo yields doubled to 42% in October. Importantly, however, the outlook has improved slightly CFOs and cargo heads expect yields to rise over the next 12 months.
Yield Environment Employment
Recent past and future expectations for employment in the airline industry have increased according to the October survey results, a solid improvement on 2012 when CFOs and cargo heads were indicating declines in employment. The increase in airline employment activity during the past three months is consistent with the improvement in financial performance. The trend is expected to continue in the year ahead.
outlook fell by 10% points in October compared to July, with a majority (on balance) of the survey group now indicating growth employment.
Challenges Face by Aviation Sector
Employee shortage:- There is a shortage of trained and skilled manpower in the aviation industry. As a consequence, there is cut-throat competition for hiring employees, which, in turn, is driving wages to unsustainable levels. Moreover, the industry is unable to retain talented employees.
Regional connectivity:- One of the biggest challenges facing the aviation industry in India is to provide regional connectivity. The lack of airports is hampering regional connectivity.
Rising fuel prices:- As fuel prices have climbed up, the inverse relationship between fuel prices and airline stock prices has been demonstrated. Moreover, the rising fuel prices have led to an increase in the air fares.
Declining yields:- Low-cost carriers (LCCs) and other entrants together now command a market share of around 46 per cent. Legacy carriers are being forced to match LCC fares, in the times of escalating costs. 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.
Gaps in infrastructure:- Airport and air traffic control (ATC) infrastructure is inadequate to support growth. While a start has been made to upgrade the infrastructure, the results will be visible only after two-three years.
Trunk routes:- At present, trunk routes are not fully exploited. One of the reasons for inability to realise the full potential of trunk routes is the lack of genuine competition. The entry of new players would ensure that air fares are brought to realistic levels, as it will lead to better cost and revenue management, increased productivity and better services. This, in turn, would stimulate demand and lead to growth.
High input costs:- The input costs are also high. Some of the reasons for high input costs are withholding tax on interest repayments on foreign currency loans for aircraft acquisition and increasing manpower costs due to shortage of technical personnel.
SWOT ANALYSIS
PEST Analysis A PEST analysis is an analysis of the external macro-environment that affects all firms. P.E.S.T. is an acronym for the Political, Economic, Social, and Technological factors of the external macro-environment. Such external factors usually are beyond the firm's control and sometimes present themselves as threats. For this reason, some say that "pest" is an appropriate term for these factors. Let us look at the PEST analysis of the Indian aviation sector:
Political Factors In India, one can never over-look the political factors which influence each and every industry existing in the country. Like it or not, the political interference has to be present everywhere. Given below are a few of the political factors with respect to the airline industry: The airline industry is very susceptible to changes in the political environment as it has a great bearing on the travel habits of its customers. An unstable political environment causes uncertainty in the minds of the air travellers, regarding travelling to a particular country. Overall Indias recent political environment has been largely unstable due to international events & continued tension with Pakistan. The Gujarat riots & the governments inability to control the situation have also led to an increase in the instability of the political arena.
The most significant political event however has been September 11. The events occurring on September had special significance for the airline industry since airplanes were involved. The immediate results were a huge drop in air traffic due to safety & security concerns of the people. International airlines are greatly affected by trade relations that their country has with others. Unless governments of the two countries trade with each other, there could be restrictions of flying into particular area leading to a loss of potential air traffic (e.g. Pakistan & India) Another aspect is that in countries with high corruption levels like India, bribes have to be paid for every permit & license required. Therefore constant liasoning with the minister & other government official is necessary. The state owned airlines suffer the maximum from this problem. These airlines have to make several special considerations with respect to selection of routes, free seats to ministers, etc which a privately owned airline need not do. The state owned airlines also suffers from archaic laws applying only to them such as the retirement age of the pursers & hostesses, the labour regulations which make the management less flexible in taking decision due to the presence of a strong union, & the heavy control &interference of the government. This affects the quality of the service delivery & therefore these airlines have to think of innovative service marketing ideas to circumvent their problems & compete with the private operators.
Economic Factors Business cycles have a wide reaching impact on the airline industry. During recession, airline is considered a luxury & therefore spending on air travel is cut which leads to reduce prices. During prosperity phase people indulge themselves in travel & prices increase. After the September 11 incidents, the world economy plunged into global recession due to the depressed sentiment of consumers. In India, even a company like Citibank was forced to cut costs to increase profits for which even the top level managers were given first class railway tickets instead of plane tickets. The loss of income for airlines led to higher operational costs not only due to low demand but also due to higher insurance costs, which increased after the WTC bombing. This prompted the industry to lay off employees, which further fuelled the recession as spending decreased due to the rise in unemployment. Even the SARS outbreak in the Far East was a major cause for slump in the airline industry. Even the Indian carriers like Air India was deeply affected as many flights were cancelled due to internal (employee relations) as well as external problems, which has been discussed later.
Social Factors The changing travel habits of people have very wide implications for the airline industry. In a country like India, there are people from varied income groups. The airlines have to recognize these individuals and should serve them accordingly. Air India needs to focus on their clientele which are mostly low income clients & their habits in order to keep them satisfied. The destination, kind of food etc all has to be chosen carefully in accordance with the tastes of their major clientele. Especially, since India is a land of extremes there are people from various religions and castes and every individual travelling by the airline would expect customization to the greatest possible extent. For e.g. A Jain would be satisfied with the service only if he is served jain food and it should be kept in mind that the customers next to him are also Jain or at least vegetarian. Another good example would be the case of South West Airlines which occupies a solid position in the minds of the US air travelers as a reliable and convenient, fun, low fare, and no frills airline. The major element of its success was the augmented marketing mix which it used very effectively. What South West did was it made the environment inside the plane very consumer friendly. The crew neither has any uniform nor does it serve any lavish foods, which indirectly reduces the costs and makes the consumers feel comfortable.
Technological Factors The increasing use of the Internet has provided many opportunities to airlines. For e.g. Air Sahara has introduced a service, through the internet wherein the unoccupied seats are auctioned one week prior to the departure. Air India also provides many internet based services to its customer such as online ticket booking, updated flight information & handling of customer complaints. USTDA (US trade & development association) is funding a feasibility study and workshops for the Airports Authority of India as part of a long-term effort to promote Indian aviation infrastructure. The Authority is developing modern communication, navigation, surveillance, and air traffic management systems for India's aviation sector that will help the country meet the expected growth and demand for air passenger and cargo service over the next decade. A proposal for restructuring the existing airports at Delhi, Mumbai, Chennai and Kolkata through long-term lease to make them world class is under consideration. This will help in attracting investments in improving the infrastructure and services at these airports. Setting up of new international airports at Bangalore, Hyderabad and Goa with private sector participation is also envisaged. A good example of the impact of technology would be that of AAI, wherein with the help of technology it has converted its obsolete and unused hangars into profit centers. AAI is now leasing these hangars to international airlines and is earning huge profits out of it. AAI has also tried to utilize space that was previously wasted installing a lamination machine to laminate the luggage of travelers. This activity earns AAI a lot of revenue. These technological changes in the environment have an impact on Air India as well. Better airport infrastructure, means better handling of airplanes, which can help reduce maintenance cost. It also facilitates more flights to such destinations.
FIVE PRODUCT LEVELS
The Core Service: The core service of the airlines industry is to transport goods and services to various destinations. As the needs of the people increased the entire system became more organized and formal. After this stage comes the various supplementary services.
The Supplementary Services: The airline industry has many players they had a brand name like Air India, Jet Airways, British Airways. All of them had some common services to offer like connecting flights, through check-in, tele check in, food on board, and complementary gifts etc. Different classes like economy class, business class were introduced. Air concessions are given to school students, old people etc. Singapore airlines were the first to introduce small 8 television screen for every passenger. The freebies are actually win-win deals between airlines and other services. Sahara, for example, offers its passengers a business-plan on two-way economy class ticket, which includes a nights stay with breakfast, STD facility for 3 minutes and boardroom facility at the Park Hotel, New Delhi. To Delhi based fliers to Mumbai, it offers a nights stay with breakfast, airport transfers and VIP amenities at The Orchid, Mumbai. For business class, the plan includes a stay at The Leela, with buffet breakfast and late checkout. All these added service helps the customer to decide upon which airlines he wants to travel. As competition increased and the customers wanted more the next phase evolved and that is the augmented service.
The Augmented Service: This phase is where the customers expectations are met; the service providers kept working on new methods to meet the ever-changing customers demands. The players introduced online booking, which was very convenient for the service users. British Airways business class has showers; its more spacious and comfortable. Sahara airlines offer its passengers six different types of cuisine like vegetarian, fat free, diabetic etc. They also have auction going on board. Virgin airlines have gambling on board, they also have body massage to offer to their passengers. Air Emirates has something called cab service, they have customized pick up and drop cab service. This phase is the most crucial one; with increased competition service will become the final differentiation.
Future Service: As mentioned above the customer needs keep changing, the future is unknown. The customers may be looking in for more frequent inexpensive air travel, something like air taxis, supersonic speed. This decreases the time thus reducing the cost.
Regulations governing M&A in India Before going into the issues pertaining to M&A of airlines, we will first have a look at the current policy framework for M&A in India. Regulations governing M&A in India may be divided in to the following categories:
1. National M&A transactions Companies Act, 1956. Companies Court Rules, 1959. Income Tax Act, 1961. Central Sale Tax Act, 1956. Indian Stamp Act, 1899 Competition Act, 2002 (It has been enacted but is not yet fully enforced)
2. M&A transactions involving listed companies o The Securities and Exchange Board of India (SEBI) Regulations o The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 o The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 o Listing Agreements
Airline M&A are on the rise across the globe. These M&A are highly strategic involving several considerations. Airline M&A bear serious implications for travellers as well as airline employees. The airlines industry is abuzz with news of M&A. In the last few years airline M&A have been a growing trend in several countries across the globe. However, M&A in the aviation industry are highly strategic in nature and are undertaken after taking into consideration several important factors.
1. MERGERS AND ACQUISITIONS IN INDIAN CIVIL AVIATION Mergers and acquisitions in the Indian civil aviation dates back to the 1950s when the government of India through the air corporations act 1953 nationalized all airline industry to form Air India and Indian airlines. Tata Airlines became Air India and former freedom domestic airlines, Deccan Airways, Airways India, Bharat Airways, Himalayan Aviation, Kalinga Airlines, Indian National Airways and Air Services of India, were merged to form the new domestic national carrier Indian airlines. In the 1990s after the economic liberalization many private airlines sprang up and competition also increased. The biggest merger year in the Indian aviation industry was 2007 where 6 of the major airlines of India merged into three. Each airline had its own reason for merger which is discussed below.
2. MERGER BETWEEN JET AIRWAYS AND AIR SAHARA Jet Airways, which commenced operations on May 5, 1993, has within a short span of 14 years established its position as a market leader. The airline has had the distinction of being repeatedly adjudged India's 'Best Domestic Airline' and has won several national and international awards. Jet Airways currently operates more than 365 flights daily with a fleet of 80 aircraft, which includes 10 Boeing 777-300 ER aircraft, 8 Airbus A330-200 aircraft, 53 classic and next generation Boeing 737-400/700/800/900 aircraft and 9 modern ATR 72-500 turboprop aircraft. With an average fleet age of 4.3 years, it is the operator of the youngest aircraft fleet in Asia. Air Sahara was established on 20 September 1991 and began operations on 3 December 1993 with two Boeing 737-200 aircraft as Sahara Airlines. Initially services were primarily concentrated in the northern sectors of India, keeping Delhi as its base, and then operations were extended to cover all the country. Sahara Airlines was rebranded as Air Sahara on 2 October 2000, although Sahara Airlines remains the carrier's registered name. On 22 March 2004 it became an international carrier with the start of flights from Chennai to Colombo. Jet Airways announced its first takeover attempt on 19 January 2006, offering US$500 million (2000 crore rupees) in cash for the airline. Market reaction to the deal was mixed, with many analysts suggesting that Jet Airways was paying too much for Air Sahara. The Indian Civil Aviation Ministry gave approval in principle, but the deal was eventually called off over disagreements over price and the appointment of Jet chairman Naresh Goyal to the Air Sahara board. Following the failure of the deal, the companies filed lawsuits seeking damages from each other. A second, eventually successful attempt was made on 12 April 2007 with Jet Airways agreeing to pay 1,450 crore ($340 million). The deal gave Jet a combined domestic market share of about 32%. On 16 April Jet Airways announced that Air Sahara will be renamed as JetLite. The takeover was officially completed on 20 April, when Jet Airways paid 400 crore. The deal would give Jet more than 32 per cent share of the domestic aviation market at that time and add at least 27 aircraft to its 62-aircraft fleet, in addition to prime landing and take-off slots at major airports such as London Heathrow, New Delhi and Mumbai. It would become the only privately owned Indian airline with permission to fly overseas. More than in the capital or asset value, it is in the entrepreneurial advantages and the rights Air Sahara holds in the various domestic sectors and airports, as well as the license to fly a few international routes, that was where its true value lie. Although others in the aviation industry, including rival Kingfisher, were also interested in the acquisition, the price tag apparently kept them out. Jet Airways has taken its own time to work out the deal, under which it says it will not take on the liabilities of Sahara. The deal has distinct advantages for both the parties it can make Jet the major player in the domestic sector, with a market share of about 32 per cent in traffic, and bale Air Sahara out of its mounting liabilities. Going by market reports, much of the amount would go towards settlements of dues and debts. Further, the deal marks the first major step towards consolidation in the Indian aviation industry which has witnessed unplanned and unbridled growth over the past few years. The two airlines were among the first to enter the field when it was opened to the private sector. This combination was expected to dominate the Indian airline market for the near term as Jet will have a larger scale and scope than any other Indian carrier. It was expected to help Jets new business model to align market shifts with products (network, aircraft size, and frequency), cost structure and financial resources. It also helped to leverage its domestic size to develop a stronger international presence. Moreover, in international operations, Jet had bought time, by reducing competition, to put its house in order. Another important benefit that Jet Airways derived from the acquisition of Sahara Airlines was that their order for the additional 10 B737NG aircraft which were scheduled for delivery between June 2009 and August 2011 thereby enabled Jet Airways to have access to additional aircraft to expand its fleet. This represented substantial additional intangible assets for Jet Airways since it had no aircraft on order and delivery positions were not available before 2011 or only available at a premium. 2.1 CRITICAL ANALYSIS As per the Centre for Asia Pacific Aviation, the acquisition of Air Sahara by Jet Airways was maybe the carriers first major strategic error. Allowing Sahara to exit from the market would have resulted in a market correction that would have been to the benefit of all players. Jet incurred a high acquisition price and has been funding operating losses ever since. The process of integration has been difficult and costly and continues to negatively impact Jet Airways. It is reported that Jet Airways has yet to settle the full purchase price for the carrier, reflecting the state of its financial situation. Jet Airways bottom line has been further impacted by an aggressive international expansion which stretched the carriers resources and damaged investor confidence. The airline has since been forced to cut a number of existing routes and halt new services as it consolidates its overseas network. To address the overcapacity in its long haul fleet, Jet Airways has leased a number of wide body aircraft to Gulf Air and Oman Air. 3. MERGER BETWEEN AIR INDIA AND INDIAN AIRLINES The government of India on 1 march 2007 approved the merger of Air India and Indian airlines. Consequent to the above a new company called national aviation company of India limited was incorporated under the companies act 1956 on 30 march 2007 with its registered office at new Delhi. The merger of the two airlines would enable them to leverage their combined assets and capital better and build a strong and sustainable business. The potential synergies were expected to enhance the new combined airlines profitability by over US$133 million per annum, or about four per cent, of their current combined assets. By 2010-11, when all the new aircraft ordered by the two carriers are inducted into the fleet, the merged entitys employee-aircraft ratio would come be about 200:1, comparable with any major global airline. While Air-India has ordered 68 Boeing planes, Indian has finalized the acquisition of 43 Airbus aircraft. According to the report submitted by Accenture, there will be no manpower rationalization as the consultancy has suggested careful integration of manpower at various levels. It has also suggested a top-to bottom integration of the employees. It is proposed that the pay-scales be revised to bring parity in promotion procedures. The aim of the merger was to Create the largest airline in India and comparable to other airlines in Asia. The merger between the two state-run carriers will see the beginning of the process of consolidation in the Indian aviation space - the fastest growing in the world followed by China, Indonesia and Thailand. Provide an Integrated international/ domestic footprint which will significantly enhance customer proposition and allow easy entry into one of the three global airline alliances, mostly Star Alliance with global consortium of 21 airlines. Enable optimal utilization of existing resources through improvement in load factors and yields on commonly serviced routes as well as deploy freed up aircraft capacity on alternate routes. The merger had created a mega company with combined revenue of Rs 150 billion ($3.7billion) and an estimated fleet size of 150. It had a diverse mix of aircraft for short and long haul resulting in better fleet utilization. Provide an opportunity to fully leverage strong assets, capabilities and infrastructure. Provide an opportunity to leverage skilled and experienced manpower available with both the Transferor Companies to the optimum potential. Provide a larger and growth oriented company for the people and the same shall be in larger public interest. Potential to launch high growth & profitability businesses (Ground Handling Services, Maintenance Repair and Overhaul etc.) Provide maximum flexibility to achieve financial and capital restructuring through revaluation of assets. Provide an increased thrust and focus on airline support businesses. Economies of scale enabled routes rationalization and elimination of route duplication. This resulted in a saving of Rs1.86 billion, ($0.04 billion) and the new airlines will be offering more competitive fares, flying seven different types of aircraft and thus being more versatile and utilizing assets like real estate, human resources and aircraft better. However the merger had also brought close to $10 billion (Rs 440 billion) of debt. The new entity was in a better position to bargain while buying fuel, spares and other materials. There were also major operational benefits as between the two they occupied a large number of parking bays and hangers, facilities which were usually in acute short supply, at several large airports in the country. This worked out to be a major advantage to plan new flights at most convenient times. Traffic rights - The protectionism enjoyed by the national carriers with regard to the traffic right entitlements is likely to continue even after the merger. This will ensure that the merged Airlines will have enough scope for continued expansion, necessitated due to their combined fleet strength. The protectionism on traffic rights have another angle, which is aimed at ensuring higher intrinsic value , since the Government is likely to divest certain percentage of its holding in the near future. 4. POST MERGER SCENAREO
NACIL's employee-to-aircraft ratio, a gauge of efficiency, is the highest among its peers at 222:1 (the global average is 150:1), resulting in a surplus employee strength of almost 10,000. The wage bill of the merged company, which was 23 per cent of total expenditure at the time of incorporation, is expected to rise sharply due to a grade re- alignment. Fleet Expansion NACIL's fleet expansion seems out of sync with the times, as most airlines are actually rounding their fleet and cancelling orders for new planes. While other Indian airlines have withdrawn over a third of their aircraft orders slated for delivery in 2009, NACIL plans to induct 30 aircraft in this fiscal and another 45 by March-end 2012. This means NACIL would face a wall of debt going forward. Mutual Distrust and strong unions The distrust between the two sides of Air India and Indian Airlines is almost palpable. For sure, many jobs will become redundant when functions are unified. Many of those appointed are from Indian Airlines, fuelling resentment among Air India employees. Integration has become a tightrope walk for the management. Strong opposition from unions against managements cost-cutting decisions through their salaries have led to strikes by the employees. Increased Competition The flux at the top has led to delays in decision-making at a time when demand for air travel has dropped around 8-10% over the last year and competition has heated up in the sector. The national carriers domestic market share has been under pressure ever since budget carriers and new private airlines took wing. Air Indias domestic market share dropped from 19.8% in August 2007, when the merger took place, to 13.9% in January 2008 before rising to 17.2% in February 2009. Lower load factor Though the overall operating performance has been steady, Air India passenger load factor of 63.2%, which was the companys record, lags the industry average of 75% in 2006-07.The load factor difference is even greater when compared to other low fares carriers such as Air Deccan. The companys load factor is decreasing year by year, in 2005- 06 load factor is 66.2% which is more than present load factor. Air India load factor is likely to be low because of the much higher frequency operated on each route. Lower load factor could decrease the companys margins. 4.1. CRITICAL ANALYSIS: The merger between Air India and Indian Airlines made perfect sense on paper for over a decade. Their complementary networks, common ownership and need to generate greater efficiencies all pointed to the benefits of a merged entity. As it was, the merger coincided with a flurry of increased domestic and international competition, placing great pressure on management. Successful implementation required robust guidance and a capable execution team to handle such a complex undertaking. Instead, the process moved ahead without first strengthening the management and organization structure. More attention was devoted to discussion around non-core issues such as long term fleet acquisitions and establishing subsidiaries for ground handling and maintenance, than to addressing the state of the flying business. Air India has continued to see its domestic market share decline. The situation was compounded by the cultural chasm between Air India and Indian Airlines, leading to an increase in internal politics, a potentially messy situation in an entity with 35,000 employees. A bloated workforce, unproductive work practices and political impediments to shedding staff made the creation of a viable business model extremely challenging. The situation calls for a depth of leadership across the organization which still does not exist. There appears to be no clear business plan to revive the carrier and effecting a turnaround now appears to be a herculean task.
Key Developments and Investments Jet has become the first Indian airline to place an order of fuel-efficient 737 Max aircraft with the plane-maker Boeing. Boeing and Jet have recently inked a purchase agreement wherein Jet has agreed to buy 50 such planes at a cost of around US$ 5 billion. The agreement is still under negotiation (for discounts). The service of 737-Max is expected to commence by 2017. India's first ever aviation university, the Rajiv Gandhi National Aviation University at Rae Bareli in Uttar Pradesh, will start imparting training to aspiring pilots, aircraft engineers and cabin crew in September 2014. The educational entity is a Government organisation that has been developed to acknowledge the industry's chronic talent shortage. The university will induct 1, 000 students by 2018 and eventually, all flying schools in India will get affiliated to this university. The Government of Haryana plans to establish a cargo airport in the state by taking up Public Private Partnership (PPP) mode for the green-field project at Meham in Rohtak. The Haryana State Industrial and Infrastructure Development Corporation (HSIIDC) will be the equity partner for bearing the cost of land acquisition for the project. India's first indigenous aircraft carrier (IAC), being developed at the Cochin Shipyard, has been launched in August 2013. The 40, 000 tonne-warship machinery is expected to be operational by 2018. It is done with major fittings and underwater work. Now the superstructure, the upper decks and out-fittings are to be worked upon.
Road Ahead
Indian aviation market is poised to become the third largest across the globe by 2020, according to industry estimates. The sector is expected to handle 336 million domestic and 85 million international passengers with projected investment to the tune of US$ 120 billion. Indian Aviation Industry that chwurrently accounts for 1.5 per cent of the GDP, has been instrumental in the overall economic development of the country, said Mr Ajit Singh the Minister for Civil Aviation. He further stated that given the huge gap between potential and current air travel penetration in India, the prospects and possibilities of growth of Indian aviation market are enormous.