TRENDS

IN
INDIA’S
AVIATION INDUSTRY

Submitted By

KOYELI SAHA (2010070)

LINTA JOE (2010076)

MIDHUN MADHAV (2010079)

(PGDM 2010-12)

1 | Trends in Airlines Industry, India

 NIILM-CMS

CONTENTS

Sl.no TOPICS PAGE NO.

.

1. An overview of the Indian Airlines Industry 3-4

2. Growth in Airlines Industry 5

3. Challenges for the Airlines Industry 6-8

4. SWOT Analysis 9

5. Current Trends 10 - 11

6. Conclusion 12 - 13

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 7. Bibliography 14

AIRLINES INDUSTRY IN INDIA – AN OVERVIEW

India is one of the fastest growing aviation markets in the world - the 9th largest aviation
market in the world. The Airport Authority of India (AAI) manages a total of 127 airports in
the country, which include 13 international airports, 7 custom airports, 80 domestic airports
and 28 civil enclaves. There are over 450 airports and 1091 registered aircrafts in the country.

The genesis of civil aviation in India goes back to December 1912 when the first domestic air
route between Karachi and Delhi became operational. In the early fifties, all airlines operating
in the country were merged into either Indian Airlines or Air India, and by virtue of the Air
Corporations Act 1953, this monopoly continued for the next forty years.

With the liberalization of the Indian aviation sector, aviation industry in India has undergone a
rapid transformation. From being primarily a government-owned industry, the Indian aviation
industry is now dominated by privately owned full service airlines and low cost carriers.
Private airlines account for around 75% share of the domestic aviation market. Earlier air

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travel was a privilege only a few could afford, but today air travel has become much cheaper
and can be afforded by a large number of people.

Exhibit 1

The Directorate General of Civil Aviation(DGCA) controlled every aspect of aviation,

including granting flying licenses, pilots, certifying aircrafts for flight and issuing all rules and
procedures governing Indian airports and airspace. Finally, the Airports Authority of India
(AAI) was assigned the responsibility of managing all national and international airports and
administering every aspect of air transport operation through the Air Traffic Control.

Taking the help of the statistics from the Ministry of Civil Aviation, approximately 29.8
million passengers travelled to/from India in 2008, showing a surge of 30% from 2007. The
prediction stated that international passengers will touch 50 million by 2015. More
opportunities in the aviation industry in India are likely to make way for about 69 foreign
airlines from 49 countries.

MAJOR COMMENCE FLEET

AIRLINES D SIZE FLEET AGE
KINGFISHER 2005 74 4.6 yrs
JET AIRWAYS 1993 99 (+3) 5.6 yrs
AIR INDIA 1932 77 (+30) 5.6 yrs
AIR INDIA EXP 2005 21 3.2 yrs
SPICE JET 2005 26 4.4 yrs
INDIGO 2005 37 (+5) 2.2 yrs
GO AIR 2005 10 2.1 yrs
PARAMOUNT 2005 0 (+18)

Exhibit 2: Cost Structure of the Indian Aviation Industry

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 GROWTH IN INDIAN AIRLINES INDUSTRY

It is a phase of rapid growth in the industry with estimated growth of domestic passenger
segment at 50% per annum. This has led to intense price competition due to which full service
carriers like Jet Airways, Indian Airlines and Air Sahara are giving discounts of up to 60-70%
for certain routes to match the new entrants' ticket prices. The customer has thus gained
enormously as a result of liberalization of the sector.

The Indian Civil Aviation market grew at a CAGR of 18%, being valued round US$ 5.6
billion in 2008. Further statistics revealed that the air traffic in August 2009 was a double digit
figure. The domestic airliners flew 3.67 million passengers in August 2009, as against 2.92
million in the corresponding period of 2007, up by 26%. The Centre for Asia Pacific Aviation
(CAPA) has estimated that the domestic traffic will go up by 25% to 30% till 2010 along with
a surge in the international traffic by 15%. There would be more than 100 million passengers
by 2010. Then again by 2020, Indian airports will in all probability handle over 100 million
passengers every year. The investment plans to the tune of US$ 9 billion has been made by
the Aviation Ministry for modernizing the existing airports by 2010.

In terms of domestic passengers' volume, US have always been the leader with followers in
the league like China, Japan and India. The number of domestic flights went up by 69% from
2005 to 2008, with the domestic aviation sector growing at 9-10%.

Exhibit 3

CHALLENGES FOR AIRLINES INDUSTRY

After a period of drastic growth, Indian Airlines is now gripped with challenges on several
fronts that are also impacting the industry across the globe. These include shortage of workers
and professionals, safety concerns, declining returns, excess capacity and the lack of
accompanying infrastructure. Moreover, huge debt burden, stiff competition and rising

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Aviation Turbine Fuel (ATF) costs are also negatively impacting the industry.

1. Employee shortage:
There is clearly a shortage of trained and skilled manpower in the aviation sector as a
consequence of which there is cut-throat competition for employees, which in turn, is
driving wage levels to unsustainable levels. Moreover, the industry is unable to retain
talented employees.

2. High Aviation Turbine Fuel (ATF) Prices:

ATF prices now form around 80% of the total operating costs of Airline Industry. The
industry across the world continues to be plagued with high ATF prices which have
demonstrated the inverse relationship between airline stock prices and fuel prices.
ATF prices have almost doubled over the last year. Almost all Indian carriers are also
feeling the heat and are desperately resorting to measures like cutting routes,
increasing fuel surcharge, promoting the use of e-tickets and charging for food items
to reduce their losses. Skyrocketing ATF prices, depreciating rupee coupled with
global recession has directly impacted the Indian Airline Industry. The industry
reported a $10.4 billion loss in the last year. Increasing air fares have worked against
the logic of increasing profits, as it has resulted in decreased air traffic. Besides
focusing on designing fuel efficient engines, aircraft manufacturers like Boeing and
Airbus, along with OEMs are developing sustainable bio-fuels which will give them
some relief from the vulnerability of profits due to consistently rising fuel prices.

3. Excess Capacity
Driven by the drastically increasing passenger traffic over the last 3 years, almost all
Indian airlines build their capacity assuming the growth would continue over the next
few years. Several new aircrafts were bought within a short span of time which
resulted in excess capacity of around 15% to 20%. Aircrafts ordered during good times
are being delivered during recession. According to industry experts, around 17% of the
current fleet (around 4,000 aircraft) are scheduled for delivery during the next 3 years.
Even though the industry grew above 40%, almost half of the growth was primarily

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 stimulated due to low fares. Maintaining such low levels of fares has become difficult
due to excess capacity, especially during the ongoing global slowdown. Consolidation
therefore seems to be the next logical step to get rid of this excess capacity problem.
Exhibit 4

4. Huge Debt Burden

Healthy profits and increasing passenger traffic saw airlines raising significant amount
of capital from Financial Institutions and Banks to fund their aggressive expansion
plans. Banks also were liberal in lending airlines. The top three airlines including Air
India, Kingfisher Airlines and Jet Airways are now carrying a cumulative debt burden
of approximately $8 billion. Incidentally, this is almost equivalent to the losses of $8.5
billion posted by all global carriers. Restructuring this huge amount of leverage will be
a challenge as resorting to equity capital will also be equally difficult during economic
slowdown.

5. Gaps in infrastructure:
Infrastructure continues to be a major constraint for Indian Airline Industry today,
which has been aggravated further due to excess capacity created during good times.
Maintenance and Air Traffic Control (ATC) infrastructure are grossly inadequate to
support growth. While steps are being taken on this front to upgrade major airports in
Mumbai, Delhi and Hyderabad, security concerns still remain to be addressed. Results
will be visible only after 2-3 years. Attracting investments from private sector will go
a long way to develop and maintain the infrastructure which is crumbing due to the
built-up excess capacity.

6. Regional Connectivity:

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 Even though the industry is weighed down with excess capacity, regional connectivity
continues to be poor, primarily due to the lack of infrastructure and airports. Industry
experts suggest that increasing regional connectivity instead of concentrating in metros
and redeploying current fleet to routes where there is demand will help airlines in
managing their excess capacity.

7. Declining yields:
LCCs and other entrants together now command a market share of around 46%.
Legacy carriers are being forced to match LCC fares, during a time of escalating costs.
Increasing growth prospects have attracted & are likely to attract more players, which
will lead to more competition. All this has resulted in lower returns for all operators.

8. Trunk routes:
It is also a matter of concern that the trunk routes, at present, are not fully exploited.
One of the reasons for inability to realize the full potential of the 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.

SWOT ANALYSIS OF THE AIRLINES INDUSTRY

STRENGTHS
1. Growing tourism
(The estimated growth of domestic
passenger segment is at 50% per annum
and international passenger segment is
at 25% per annum)
2. Rising income levels
(Due to the rise in income levels, the
disposable income is also higher
WEAKNESSES
1. Under penetrated market
(The total passenger traffic was only 50
million as on 31st Dec 2005 amounting
to only 0.05 trips per annum as
compared to developed nations like
United States have 2.02 trips per
annum)
2. Untapped air cargo market

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 3. Infrastructural constraints
(The infrastructure development has not
kept pace with the growth in aviation
services sector leading to a bottleneck.
Huge investment requirement for
physical infrastructure for airports)

OPPORTUNITIES
1. Expected investments
(investment of about US $30 billion
will be made)
2. Expected market size
(Average growth of aviation sector is
about 25%-30% and the expected
market size is projected to grow
upto100 million by 2010)
THREATS
1. Shortage of trained pilots
2. Shortage of airports
3. High prices
(Though enough number of low cost
carriers are already existing in the
industry, majority of the population is
still not able to fly to other destinations)

Exhibit 5

CURRENT TRENDS IN THE AIRLINES INDUSTRY

1. Development of new airports and modernisation of existing ones:

The AAI is set to spend over US$ 1.02 billion in 2010, towards modernisation of non-
metro airports. AAI is planning the city-side development of 24 airports, including
those at Ahmedabad and Amritsar. Additionally, 11 new greenfield airports have been
identified to reduce passenger load on existing airports, according to Praveen Seth,
member-operations, AAI. AAI also plans to spend around US$ 3.07 billion in the next
five years for developing, upgrading and modernising metro and non-metro airports.

2. Consolidation in aviation sector:

The rise in the number of alliances in aviation industry will help in further growth of
aviation sector in India. The Jet-Sahara merger is probably just the beginning. The

9 | Trends in Airlines Industry, India

 recent 26% stake acquisition by the Dr. Vijay Mallya (United Breweries group) in the
low-cost carrier Deccan Aviation is further confirmation that the Indian aviation
industry is looking forward to more consolidations.

3. The number of passengers travelling by air is on the rise:

With passenger boarding expected to double by 2025, and aircraft operations expected
to triple by the same time, the number of passengers travelling by air is on rise.

Exhibit 6

4. For the travelling public, price is paramount in choosing a carrier:

Due to the Internet and round-the-clock search capability, airfares are fully transparent
to the public and travellers are choosing the lowest price option. Air travel is now a
commodity business, and legacy carriers will have to adapt further to a low-cost/low-
fare environment in order to survive. Even business travellers, who have been less
price-sensitive, are resisting fare increases. The only premiums that travellers are
willing to pay for are time-of-day and direct flights, not the brand.

5. Capacity is growing without much constraint:

Indian carriers are placing orders for new aircraft for delivery in the coming period,
without clear plans to retire older planes. They are also adding significant numbers of
regional jets. The air taxi fleet is also expanding rapidly. Kingfisher Airlines has
already ordered 5 Airbus A380 aircrafts that will operate on international routes.

6. Cost structures will continue to handicap legacy carriers as they compete with newer
airlines, as well as with overseas carriers:
Low cost carriers are posing great threats to legacy carriers, as a result of which they
are restructuring their pricing policies. Apart from this, they are also facing
competition from overseas players.

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 7. Oil prices are not expected to fall:
The public sector oil marketing companies (OMCs) have raised the prices of Aviation
Turbine Fuel (ATF) by 3.5 per cent, in line with the rise in international oil prices.
This is likely to trigger a marginal increase in airfares.

8. Outsourcing:
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, ticketing and check-in agents.
PROFIT/ LOSS ($bn)

YEAR PROFIT
CONCLUSION 1998 8.2
1999 8.5
2000 3.7
2001 -13
2002 -11.3
India is one of the fastest growing aviation markets in the
2003 -7.5
world. With the liberalization of the Indian aviation sector, 2004 -5.6
the industry had witnessed a transformation with the entry of 2005 -4.1
2006 -0.5
the privately owned full service airlines and low cost carriers.
2007 5.6
As of May 2006, private carriers accounted for around 75% 2008 -4.2
share of the domestic aviation market. The sector has also
seen a significant increase in number of domestic air travel passengers. Some of the factors
that have resulted in higher demand for air transport in India include the growing middle class
and its purchasing power, low airfares offered by low cost carriers, the growth of the tourism
industry in India, increasing outbound travel from India, and the overall economic growth of
India.

Exhibit 7

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In addition to these factors, the emphasis on modernization of non-metro airports, fleet
expansion by airlines, service expansion by state owned carriers, development of the
maintenance, repair and overhaul (MRO) industry in India, opening up of new international
routes by the Indian government, establishment of new airports and renovation and
restructuring of the existing airports have added to the growth of the industry.

However, in mid-2006, many airline operators announced large losses. Analysts opined that a
combination of factors such as high aviation turbine fuel (ATF) prices, rising labor costs and
shortage of skilled labor, rapid fleet expansion, and intense price competition among the
players were responsible for the losses in this sector. The problem was also compounded by
new players entering the industry even before the existing players could stabilize their
operations. It was estimated that the industry as a whole could face losses of over Rs. 22
billion in 2006-07. Some experts expect the industry to consolidate in the near future. The
government also was keen to restrict the losses in this sector by closer scrutiny of the business
plans of new entrants, conducting quarterly financial audits, etc.

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 BIBLIOGRAPHY

➢ http://avindia.blogspot.com/
➢ http://www.india-server.com/magazine/airlines-3.html

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 ➢ http://www.aviationweek.com/aw/generic/channel_.jsp?channel=businessweekly
➢ http://indiaaviation.aero/news/blogAirline/257/Air+India+Express
➢ The Economist (March 10, 2011)
➢ The Economic Times
(17 March, 2011, PTI)
(15 March, 2011, PTI)
(14 march, 2011, PTI/ANS)
(Sunny Verma & G Ganapathy Subramaniam, TNN, March 12, 2007)
➢ Business Line
(Monday, June 14, 2010)
(A. Ranganathan, Monday, Aug 03, 2009)
(Our bureau, Thursday, Dec 20, 2007)
➢ Indian Express (march 17, 2011)

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