AIRLINES INDUSTRY

Table of Contents

Table of Contents........................................................................................................... 2

Introduction....................................................................................................................2

Global Scenario and Trends...........................................................................................5

History and the Current Scenario of the Indian Aviation Sector.....................................6

Challenges Faced by Airline Industry...........................................................................10

Future Trends...............................................................................................................11

Opportunities...............................................................................................................13

References...................................................................................................................14

Introduction
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The Airlines is one among the inventions that had changed the way how people
live and experience the world. In due course of time it has now become
impossible to imagine business and leisure travel without air travel. The airline
industry exists in an intensely competitive market. In recent years, there has
been an industry shakedown, which is expected to the trend towards
expanding domestic and international services.

The airline industry is classified into four categories: International, National,

Regional and Cargo. Airlines industry facilitates economic growth, world trade,
international investment and tourism and so plays a key role in globalization
making it a large and growing industry.

Air travel (both business and leisure) has grown by around 7% in the last
decade. Business travel has grown as companies having global presence in
terms of their investments, their supply and production chains and also their
customers. Availability of aircrafts at affordable prices backed by increased
tourism had led to rise in leisure travel. Overall in terms of regions in
developed regions like Europe and North America a slower growth is seen
when compared to developing regions like Asia Pacific.

Airlines' profitability is closely tied to economic growth and trade. So based on

the GDP growth the demand for airplanes and the air travel will increase. So
during 1990-1995, the industry suffered from world recession and the air
travels were further lowered by Gulf War. Thus financial difficulties impact
airlines/aircraft industry. Deregulation is also stimulating competition, such as
that from small, low-cost carriers.

Some of the Key terms and ratios for airline industry are listed below.

1) Available Seat Mile = (total # of seats available for transporting

passengers) X (# of miles flown during period)

2) Revenue Passenger Mile = (# of revenue-paying passengers) X (# of

mile flown during the period)

3) Revenue Per Available Seat Mile = (Revenue) / (# of seats available)

4) Air Traffic Liability (ATL): An estimate of the amount of money

already received for passenger ticket sales and cargo transportation that
is yet to be provided.

5) Load Factor: Measures the percentage of available seating capacity

that is filled with passengers. Analysts state that once the airline load
factor exceeds its break-even point, then more and more revenue will
trickle down to the bottom line.

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Airport capacity, technology used, structuring routes and costs to buy or lease
the aircraft are very vital for the industry. In addition Weather, Fuel Cost and
Labour also play an important role.

The industry has to realise the need for a radical change to sustain and also
ensure growth and prosperity for their survival. Currently many cost cutting
measures are being adopted in the industry.

Also to meet the requirements of customers and elevate to customer delight

from mere customer satisfaction the industry players concentrate on the
quality of service that they offer, both on the ground and in the air. The key
challenge is to ensure meeting of customer requirements and at the same time
make effective cost cutting measures and continuously being efficient and
competitive and profit making.

Nevertheless, the aviation industry is characterized by strong nationalist

sentiments so in many places despite globalisation airlines will face limitations
on where they can fly and restrictions on their ownership of foreign carriers

Ten Aviation Myths

1) More runways are essential

2) Environmental organisations try their best to price people off planes

3) International agreements make the ending of aviation’s privileged tax

free status (including tax-free fuel) become impossible

4) The external costs of the industry are met through Air Passenger Duty
(APD)

5) Building new runways has clear economic benefits

6) Aviation helps the UK tourist industry

7) We may be able to fulfil our international obligations with regards to

climate change and still have uninhibited growth in aviation and airports

8) We can lessen the damage done to our environment, heritage and

countryside that has been caused by aviation and airport expansion and
also compensate for the same

9) Airports can expand and we can still meet EU air quality standards

10) Technology has delivered significant environmental improvements

in the past and will continue to do so

Emerging Markets

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The Asia-Pacific region and Middle East are the emerging markets in airline
industry. They are expected to experience a higher traffic growth and expand
rapidly. For better analysis please see the graph below:

Regional traffic growth (% change year-on-year): 2009 to 2012F

Note: (Data by ICAO (International Civil Aviation Organisation))

Chief Characteristics of Airline Industry

Capital Intensive: It’s a capital-intensive business which requires huge
amounts of money to operate effectively. This industry requires capital for
expensive equipments like aircrafts, maintenance systems, control towers,
simulators etc.

Labour Intensive: Airlines need personals like pilots, crew members, security
guards, cleaners, engineers etc. It’s a very labour-intensive industry and nearly
1/3rd of the revenue is used for the payment of workforce.

Thin Profit Margin: The profit margin is very thin in this industry. It averages
to about 1-2% only.

Seasonal: Earlier airlines used to see a heavy load during summers (because
of vacations) and a relatively lesser load during winters. The seasonal factors
results in rise and fall of airline revenues over the course of the year. Over the
years the seasonal effect has reduced to a greater extent.

Global Scenario and Trends

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In the past decade, travel by air has increased by 7% per year, for both -
business and leisure. Large aircrafts like the Boeing 747 have made it
convenient for people to travel at affordable costs. Governments in developing
nations give impetus to the development of infrastructure to lure tourists from
prosperous countries and add to their national economies. Besides tourism,
business travel has grown considerably owing to the rapid growth of world
trade in goods and services. Some airlines are owned by the state. The ones
that are independent are vulnerable to economic uncertainties. Changes in the
regulations of the governments and the presence of an intensely competitive
market have led to many hardships in the industry

Commercial flights began within a decade of the invention of aircraft in the

early 20th century. There was a surplus of aircraft and pilots worldwide after
world wars I and II. DELAG, Deutsche Luftschiffahrts-Aktiengesellschaft, the
world's first airline, was founded on November 16, 1909 with government
assistance, and operated airships manufactured by The Zeppelin Corporation.
Its headquarters were in Frankfurt. By the 1950s, airline companies created
the framework of international travel and commerce that exists to this day.

The Airline industry is highly unionised viz. there exist multi-unions. The
industry is highly regulated in terms of routes, hours of work, etc. De-
regulation in US in 1978 and in Europe in 1990s and again 2007/08 has
removed control of the government over fares, routes and has marked the
entry of new low cost airlines in US, Europe and now India and SE Asia.

In Europe, major players like Iberia, TAP, Alitalia, KLM, Air France, Lufthansa
were all once state-owned. The aviation industry is governed and set apart by
strong nationalist sentiments towards a country’s domestic 'flag carriers'. In
many parts of the world, airlines will, therefore, continue to face confines on
where they are allowed to fly and restrictions on their ownership of foreign
carriers.

The global airline industry being high competitive has resulted in huge
cumulative losses. Many airlines have either gone bankrupt or have collapsed.
For example, Sabena, Swissair, Alitalia, Delta, United.

History and the Current Scenario of the Indian

Aviation Sector
Genesis of Indian Airline Industry
1932: Mr. J.R.D.Tata flies a De Havilland Puss Moth from Karachi to Mumbai as
part of the first Tata Sons Ltd. Flight to deliver mail carried by British Imperial
Airways

1948: Govt. of India acquires 49% stake in Tata Airlines, designated it a flag
carrier and renamed it as Air India International
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1953: Jawaharlal Nehru, in friendly transaction, convinces the Tata group to let
the Government of India acquire a majority stake in Air India International and
nationalizes air transport

1953: Indian Airlines formed by merging eight former independent domestic

airlines

1960: India enters the jet age with an Air India B707. USA and India are
connected for the first time with an Indian Airline

1990: East West Airlines becomes the first private airline since 1953

After 1991
1991: Private airlines were allowed to provide the service under 'air taxi
scheme' to operate chartered and non-scheduled services.

1994: Private airlines permitted to operate as scheduled air service providers.

2003: Air Deccan lowered down the fares to 17% of previously charged rates
thus introducing the concept of budget airlines in India.

Consolidation
The under-pricing of tickets due to the intense competition and the increasing
number of budget carriers resulted in losses to the budget carriers as well as
to the entire aviation sector. Consolidation was looked as the single way out
which would lead to less competition and stable fares.

The main reason for the increasing costs and reduced efficiency and flexibility
for the Indian aviation sector was poor Airport infrastructure and manpower
shortages. In 2007, there were 13 scheduled carriers which was estimated that
this number would fall to 8-10 by 2010 in this fragmented Indian domestic
aviation sector and the estimation is almost true considering the current
scenario of the aviation sector.

2007: Jet Airways announced that it would buy Air Sahara for US$500 million

2007: Air India and Indian Airlines merged into one entity named NACIL

2008: Kingfisher-Deccan deal was the third alliance in the Indian aviation
sector.

Current Scenario of Aviation Industry

The Indian Aviation Industry, being one of the world’s fastest growing aviation
industries, has a compound annual growth rate of 18%. There are 454 airports
and airstrips in India, of which 16 are international airports. As of May 2006,
private airlines accounted for more than 75% of the sector of the domestic
aviation market.
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The Indian aviation sector saw an increase in revenue by nearly US$ 21.4
million in December 2009 due to increase in traffic movements. Moreover, the
Airport Authority of India may gain better margins in the near future as
predicted by Ministry of Civil Aviation. These have been attributed primarily to
the boost in the share of revenue from Delhi International Airport Limited and
Mumbai International Airport Limited. According to a report released by the
Ministry of Civil Aviation the number of passengers carried by domestic airlines
rose from 67, 61, 000 to 80, 56, 000 for the period January – February 2009
and January – February 2010 respectively. The increase in passenger marked a
growth of 19.2% for the aforementioned period. Some of the factors that have
resulted in higher demand for air transport in India include the growing
purchasing power of middle class, low airfares offered by budget airlines, the
growth of tourism industry, increasing outbound travel from India and overall
economic growth of India.

Besides this, Indian airports are being ranked among the top airports of the
world. The Hyderabad International Airport now ranks amongst the top 5
Airports in the world as per the annual Airport Service Quality passenger
survey. The other airports to figure in the top 5 are the ones at Seoul,
Singapore, Hong Kong and Beijing. There are even talks going on between
India and United States to make the country an aviation hub.

The Airport Authority of India is set to spend over US$ 1 billion in 2010,
towards modernization of airports. The civil aviation ministry has also
converted Delhi airport into an international hub for passenger airlines to help
the airport utilize large amounts of additional capacity.

The investment policy of India in aviation industry currently allows FDI up to

100% under the automatic route for green field projects and for existing
projects, FDI up to 100 % is allowed; unto 74% under the automatic route and
beyond 74% under the government route.

Potential for Growth

Despite the slowdown and slow recovery, Indian Aviation industry sector still
continues to look promising. This is primarily due to the burgeoning middle
class with increasing massive purchasing power, low cost carriers providing
services at very attractive low fares, the growth of Indian tourism and
increasing outbound travel from India. In addition, the Government has
planned to modernise non-metro airports, phasing out new international
routes, putting into place new airports and renovating existing ones. Experts
are estimating the growth of industry as high as 25% YoY.

Since 2006, most of the major Indian airline operators such as Air India, Indian
Airlines, Jet Airways and Kingfisher Airlines have reported large losses, reason
being high aviation turbine fuel (ATF) prices, rising labour costs and shortage
of skilled labour, rapid fleet expansion, as wheel as intense price competition.

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Adding to all these problems are the new players entering the industry even
before the existing players could stabilize their operations. As a result, all the
airlines suffered even further when the recession hit.

Even then also the Indian aviation industry has been more prone to crisis as
compared to their global counterparts and thus, India has the highest
passenger growth rate among the entire airlines sector in the world including
economies like Australia and France.

The total number of passengers travelling by air will be a whopping 400 million
by 2020.” To meet with this accelerated demand, existing players need to
increase fleets and broaden their reach including regional destinations as well.
They are also going to get the competition from international low cost airlines
like Air Asia (Malaysian) and JetStar Asia (Australian).

Flight into the Future

As estimated by the Centre for Asia Pacific Aviation (CAPA), by 2011, the Indian
aviation sector is likely to cross the mark of 60 million domestic passengers,
whereas the total number of passengers i.e. both domestic and international is
expected to cross the 100 million-mark over the next three years.

India is gearing up for heavy investments in the aviation sector of India.

According to the Investment Commission of India, Investment opportunities of
around US$ 110 billion by 2020 are now being predicted. It is estimated that
about US$ 80 billion will go towards purchase of new aircraft and US$ 30 billion
for the development of airport infrastructure.

Over the next 10 years, the Indian aviation sector will try to cash in on the
potential to grow by 25% annually, as said by Praful Patel, the Minister for Civil
Aviation. Also it could attract the highest investments among all the industries
in India i.e. an amount up to $45 billion.

India needs improvements in services offered, huge number of skilled

personnel and to stop already experiencing shortage of pilots and thereby
problems like direct and indirect employment. Hence, India can look at this
time to play a transforming role in this sector, as it holds great promise for
development as well needed for the Indian economy to grow at a faster rate.

Major players in domestic market

1. Indian

2. Kingfisher Airlines Ltd. Full Fare Airlines

3. Jet Airways Ltd.

4. IndiGo

5. Jetlite

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6. SpiceJet Budget Airlines

7. Paramount Airways

8. Go Air

9. Kingfisher Red

Current Market Shares

Challenges Faced by Airline Industry

1) Rising Aviation Turbine Fuel (ATF) Prices: ATF prices form about 40%
of the total operating costs of airline industry. As fuel prices climb, a trend of
airline stock prices going down has been noticed. The rising fuel prices make it
difficult for airlines to increase profits and they are forced to increase the air
fares.

2) High input costs: Input costs are high due to:-

→ Various taxes by State Governments and on repayment of interest on

foreign currency loans taken for purchasing aircrafts due to which some
airlines are under high debts .

→ Due to shortage of technical personnel, manpower costs are also high.

3) Decreasing returns: After the advent of Low cost carriers, the legacy
carriers were forced to decrease their prices and thus profits were impacted.

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With the ever-increasing competition, there is a price war that is giving low
returns to all airline operators.

4) Employee Management: Training, recruiting and retaining talented

employees is a major concern due to shortage of skilled personnel including
pilots, unionism and cut-throat competition. After- recession effects like
retrenchments, salary cuts along with no-new-hiring policy, strikes by Air India
and Jet Airways staff etc. has made this task even more challenging.

5) Infrastructure Upgradation: The infrastructure upgradation progress in

India is far behind the western countries. While steps are being taken to
upgrade major airports in Hyderabad, Delhi and Mumbai, another issue that is
yet to be fully addressed is security considering the recent terror threats.
Proper airline scheduling and passenger handling is another task besides
physical and IT infrastructure. Attracting private sector investments and
implementing the planned projects efficiently is a concern.

6) Overcapacity: There has been excess capacity of aircrafts that were

ordered to increase market share before the global slowdown but were
delivered after the same.

7) Regional connectivity: Though there is excess capacity in some airlines,

some areas are still not well connected due to poor infrastructure. The airlines
have to concentrate on building remote regional connectivity other than
concentrating only on metros.

8) Environmental Regulations: The carbon emission and fuel efficiency

standards have to be met by technology investments and commitment. R&D
on bio-fuels, that have the capacity to reduce aviation’s carbon footprint by up
to 80%, needs to be carried forward aggressively.

9) Congestion: Due to increased passenger traffic and cargo growth, there

has been congestion on major routes on airports like Hyderabad, Delhi and
Mumbai etc. This has to be tackled effectively by either expanding capacity or
creating new airports.

All this needs real strategic planning in the industry with technological
innovations and best management practices.

Future Trends
Worldwide economic activity, reflected in the global gross domestic product
(GDP), is the most powerful driver for airplanes demand. The global GDP is
projected to grow at an average of 3.2 percent per year for the next 20 years.
Reflecting the economic growth, worldwide passenger traffic will average 5.3
percent growth and cargo traffic will average 5.9 percent growth over the
forecast period.

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The above graph represents the growth in the future. However, this growth can
be achieved only if the surging price of fuel is controlled as it directly affect
flight schedules, ticket prices and services offered. So order to survive airlines
need to become more lean and mean by addressing issues like rising costs,
constraints on revenue growth and increasingly dissatisfied customers.

Now we need to understand that three features are vital. That is services that
give customers more control over their journeys, an infrastructure that can be
easily changed to cope with variations in demand and greater collaboration
among travel providers. The 5 technological innovations that can help the
industry deliver the above mentioned features are

1) Self-service solutions: It’s a cost cutting measure but now gives the
passengers the choice and control they want
2) Integrated baggage handling: Using IT systems and process and
technologies like RFID together and thereby speed up at the same time
efficiently handle the security checks for the customer’s baggage.
3) Shared Services: There are three levels of shared services. One is
share commodity application which reduces infrastructure costs. Next is
common service hosting, which allows applications to be used by the
partners and other clients. Then finally traditional application hosting,
which enables multiple clients to use commodity applications as per their
usage rate.
4) Modular, flexible airport operating systems: Airports need to
improve their operating systems and have a modular, flexible
architecture so has to improve the efficiency and contribute to growth.
5) New Security Technologies: Identity management solutions like finger
print matching etc. and other such improved techniques have to be
employed as the threat of terrorism is growing.

Thus with all such measures we can expect a good growth in the airline
industry.
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Opportunities
The rise in low cost carriers and increasing disposable income of consumers
with the growing population of youth working generation, especially in metros,
all give rise to tremendous opportunities to the aviation industry-

1) Enhancing non-aeronautical revenue streams and Airport retailing:

Revenues from vehicle parking, advertisements, shop rentals etc. are being
targeted with increased modernisation of airports and attracting international
luxury brands for a 24/7 shopping experience for the customers. E.g.- New
airport terminals such as the T3 in New Delhi.

2) Airport development through PPP: The restructuring of airport

infrastructure for metro and non-metro airports, developing Greenfield airports
by attracting large private investments is a part of government’s Eleventh
Plan, where it expects an investment of around US$ 6.5 billion. This would fulfil
the gaps to build world-class user-friendly airports with modern technology and
provide airport capacity ahead of demand.

3) Bio-Fuels: Instead of focusing only on crafting fuel-efficient engines,

manufacturers of aircraft (like being done by Boeing and Airbus),can focus on
developing sustainable bio-fuels that can protect them from wavering profits
due to rising fuel prices.

4) Maintenance, repair and overhaul (MRO) business: This offers high

investment and business potential. An Ernst & Young report says that the MRO
business in the aviation sector can absorb investments of up to US$ 120 billion
2020. Air India has signed an agreement with GE Aviation, a unit of General
Electric Co. (GE), to set up a $90 million facility to maintain aircraft engines in
Mumbai.

5) Private Jet market: With increasing number of billionaires in the country

and the glamour quotient attached to airlines, the private jet market in India is
a great business opportunity. The government is also considering permitting
private airstrips in the country.

6) Heli-tourism and Commonwealth games: A major portion of visitors

during the Common wealth games including spectators, athletes and coaches
will travel via airlines. Tourism to various parts of India can be boosted at the
same time by heli-tourism or attractive offers by airlines connecting major
tourist spots.

7) Exploring alternate revenue streams:

→ Air Cargo operations

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→ Ground Handling opportunities lie in offering comprehensive ground-

handling solutions,3rd party handling and service contracts with private
airports.E.g- AI-CIAL at Cochin

→ Training will be needed for pilots, airhostess, engineers, cabin crew,

technicians, ground staff which is a huge business opportunity
considering the demand for aviation jobs.

→ Internet business can be leveraged for e-ticket bookings thus saving

agent commission costs and airline websites can pose as one stop shops
for all travel related information thus boosting revenues.

→ Emergency medical services (EMS) business Eurocopter, a division

of EADS which is world leader in the field of aerospace defence and
related services, is looking forward to entering the emergency medical
services (EMS) business in India. Leading hospital majors like the Manipal
group and the Apollo group are being considered for the purpose. The
company operates around 480 helicopters in India that cover both the
civil and military sectors. The company also plans to increase its
business area by entering the heli-tourism sector.

References

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http://info.shine.com/Industry-Information/Aviation/140.aspx

http://www.review-airlines.blogspot.com/

http://www.workosaur.com/aviation-industry-overview/

http://adg.stanford.edu/aa241/intro/airlineindustry

http://www.boeing.com/commercial/cmo/

http://www.foe.co.uk/resource/factsheets/aviation_myths.pdf

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