AProject Report
ON
“A STUDY OF THE INDIAN AVIATION INDUSTRY WITH SPECIAL FOCUS ON ATF TRENDS”
SUBMITTED IN PARTIAL FULFILLMENT FOR THE AWARD OF THE
DEGREE OF BACHELOR OF BUSINESS ADMINISTRATION
UNDER THE GUIDANCE OF
Dr. Amit GuptaProject Co-ordinator
SUBMITTED BY:
VIPULBatch BBA III (A)
Enrollment No
STUDENT UNDERTAKING
This is to certify that I have completed the Project titled “A STUDY OF
THE INDIAN AVIATION INDUSTRY WITH SPECIAL FOCUS ON ATF TRENDS”
in Maharaja Agrasen Institute of Management Studies under the guidance
of Dr. Amit Gupta in partial fulfillment of the requirement
for the award of degree of Bachelor of Business Administration
at Maharaja Agrasen Institute of Management Studies, Delhi.
This is an original piece of work & I have not submitted it earlier elsewhere.
VIPULBBA-3(A) Enrollment no.
CERTIFICATE
This is to certify that the project titled A STUDY OF THE INDIAN
AVIATION INDUSTRY WITH SPECIAL FOCUS ON ATF TRENDS is
an academic work done by Vipul submitted in thepartial fulfillment
of the requirement for the award of the degree of Bachelor of Business
Administration from Maharaja Agrasen Institute of
Management Studies, Delhi, under my guidance & direction. To the best of
my knowledge and belief the data & information presented by him in
the project has not been submitted earlier.
Dr. Amit Gupta
PROJECT CO-ORDINATOR
Acknowledgement
I would like to thank my Project Guide Dr. Amit Gupta for his immense guidance, valuable help and the opportunity provided to me to complete the project under her guidance.
I would like to thank all faculty members of Maharaja Agrasen Institute of Management Studies for guiding and supporting me in the completion of project from time to time.
Last but not the least, my gratitude to great almighty and my parents without whose concerned and devoted support the project would not have been the way it is today.
VipulBBA-3(A) Enrollment no.
4
EXECUTIVE SUMMARY
Perpetual change in business has made inevitable for every business
organization to do environmental scanning, so that it may be able to cope
with the latest changes in their respective field of business & to move with
the pace of the industry. The environmental scanning makes it possible for
every organization to study their market & to exploit the available
opportunity.
The Aviation industry has changed during last five years. The market has
been a very high level of competition in the field of Aviation many new
players entered into this industry. So it becomes very difficult to aviation
companies to reduce the cost & earn good profit.
Objectives of the project:
1. To study the trend of the ATF (Aviation turbine fuel)2. To do the ratio analysis of the company3. To do the SWOT analysis of the company and the industry as a whole.
5
TABLE OF CONTENTS
TOPICS.
INTRODUCTION
o About Aviation Industry
o History of aviation industry
o Market Forecast
COMPANY PROFILE
o Company background
o Subsidiary Companies
o Aircraft of Air India
o Organizational structure
o Corporate Vision
o Business Strategy
o Product Upgradation
o Operational Improvement
o Network & Capacity Expansion
o Strategic Relationship
Merger of Air India and Indian Airlines
Major Expenditure
ATF – The major cost
o Type of Fuel
o Monopoly of PSU’s
o ATF price movement in India
o Price Structure in India
o Expenditure of NACIL on ATF
6
Staff Cost
Ratio Analysis
SWOT Analysis of AIR INDIA
SWOT Analysis of AVIATION INDUSTRY
Discussion and Conclusion
BIBLOGRPHY
7
INDIAN AIRLINES INDUSTRY- AN OVERVIEW
Defining Aviation sector
The airlines industry comprises passenger air transportation; both scheduled
and chartered, but exclude air freight transport. Industry volumes are defined
as the total number of passengers enplaned at all airports within the country
or region. Industry value is defined as the total revenue obtained by airlines
from transporting these passengers.
The Indian airlines industry generated total revenues of $6 billion in 2006,
this representing a compound annual growth rate (CAGR) of 27.6% for the
period spanning 2002-2006.
The domestic segment was the industries most successful in 2006,
generating total passenger volumes of 36.4 million, equivalent to 90.9% of
the industry's overall volume.
The performance of the industry is forecast to accelerate, with an anticipated
CAGR of 39.3% for the five-year period 2006-2011 expected to drive the
industry to a value of $31.5 billion by the end of 2011.
Airline passenger volumes increased with a CAGR of 25.6% between 2002 -
2006, to reach a total of 40.1 million people in 2006. The industry's volume
is expected to rise to 205.2 million people by the end of 2011, this
representing a CAGR of 38.6% for the 2006-2011 period.
The international segment contributed the remaining passenger volumes of
3.7 million in 2006, equating to 9.1% of the industry's aggregate volumes.
8
History of Aviation Industry in India
The first commercial flight in India was made on February 18, 1911, when a
French pilot Monseigneur Piguet flew airmails from Allahabad to Naini,
covering a distance of about 10 km in as many minutes.
Tata Services became Tata Airlines and then Air-India and spread its wings
as Air-India International. The domestic aviation scene, however, was
chaotic. When the American Tenth Air Force in India disposed of its planes
at throwaway prices, 11 domestic airlines sprang up, scrambling for traffic
that could sustain only two or three. In 1953, the government nationalized
the airlines, merged them, and created Indian Airlines. For the next 25 years
JRD Tata remained
the chairman of Air-India and a director on the board of Indian Airlines.
After JRD left, voracious unions mushroomed, spawned on the pork barrel
jobs created by politicians. In 1999, A-I had 700 employees per plane; today
it has 474 whereas other airlines have 350.
For many years in India air travel was perceived to be an elitist activity. This
view arose from the “Maharajah” syndrome where, due to the prohibitive
cost of air travel, the only people who could afford it were the rich and
powerful.
In recent years, however, this image of Civil Aviation has undergone a
change and aviation is now viewed in a different light - as an essential link
9
not only for international travel and trade but also for providing connectivity
to different parts of the country. Aviation is, by its very nature, a critical part
of the infrastructure of the country and has important ramifications for the
development of tourism and trade, the opening up of inaccessible areas of
the country and for providing stimulus to business activity and economic
growth.
Until less than a decade ago, all aspects of aviation were firmly controlled
by the Government. 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 was perpetuated for the next forty
years. The Directorate General of Civil Aviation controlled every aspect of
flying
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 was entrusted with the responsibility
of managing all national and international air ports and administering every
aspect of air transport operation through the Air Traffic Control. With the
opening up of the Indian economy in the early
Nineties, aviation saw some important changes. Most importantly, the Air
Corporation Act was repealed to end the monopoly of the public sector and
private airlines were reintroduced.
10
11
Market Volume
The Indian airlines industry grew by 41.4% in 2006 to reach a volume
of 40.1 million passengers. The compound annual growth rate of the
industry volume in the period 2002-2006 was 25.6%.
12
Market value of the aviation sector
MARKET FORECASTS
1. Market value forecasts
In 2011, the Indian airlines industry is forecast to have a value of
$31.5 billion, an increase of 425.2% since 2006. The compound annual
growth rate of the industry in the period 2006-2011 is predicted to be 39.3%.
13
14
2. Market Volume Forecasts
In 2011, the Indian airlines industry is forecast to have a volume of 205.2
million passengers, an increase of 411.8% since 2006. The compound
annual growth rate of the industr y volume in the period 2006-2011 is
predicted to be 38.6%. Estimated domestic passenger segment growth is at
12% per annum. Anticipated growth for International passenger segment is
7% while the growth for International Cargo is likely to grow at a
healthy rate of
15
16
AIR INDIA
History of Air India
Air India is India’s national Airline. Air India’s history can be traced to
October 15, 1932. On this day J.R.D. Tata, the father of Civil Aviation in
India and founder of Air India, took off from Drigh Road Airport, Karachi,
in a tiny, light single-engine de Havilland Puss Moth on his flight to
Mumbai via Ahmedabad.
Air India was earlier known as Tata Airlines. At the time of its
commencement, Tata Airlines consisted of one Puss Moth, one Leopard
Moth, one palm-thatched shed, one whole time pilot, one part-time engineer,
and two apprentice-mechanics. Tata Airlines was converted into a Public
Company under the name of Air India in August 1946.
On March 8, 1948, Air India International Limited was formed to start Air
India’s international operations. On June 8, 1948, Air India started its
international services with a weekly flight from Mumbai to London via
Cairo and Geneva with a Lockheed Constellation aircraft.
In early 1950s due to deteriorating financial condition of various airlines, the
Government decided to nationalize air transport. On August 1, 1953 two
autonomous corporations were created. Indian Airlines was formed with the
17
merger of eight domestic airlines to operate domestic services, while Air
India International was established to operate the overseas services. The
word 'International' was dropped in 1962. With effect from March 1, 1994,
the airline has been functioning as Air India Limited.
Air India's worldwide network today covers 44 destinations by operating
services with its own aircraft and through code-shared flights. Important
destinations covered by Air India are Bangkok, Hong Kong, Jakarta, Kuala
Lumpur, Osaka, Singapore, Tokyo, Seoul, Dar-es-Salam, Nairobi, Frankfurt,
London, Paris, Birmingham, Abu Dhabi, Al Ain, Bahrain, Dammam, Doha,
Dubai, Jeddah, Muscat, Riyadh, Kuwait, Los Angeles, Chicago, Newark,
New York, and Toronto.
Air India’s fleet consists of 38 aircrafts. These include 12 Boeing 747-400, 1
Boeing 747-400 COMBI, 2 Boeing 747-300 COMBI, 19 Airbus 310-300,
and 4 Boeing 777-200
18
Incorporation
• Established in 1953 under Air Corporations Act
• Became Public Limited Company in 1994
• Registered Office
• Head Office
• Authorized Capital
• Paid-up Capital
: New Delhi
: Mumbai
: Rs 500.00 Crores
: Rs 153.84 Crores
Subsidiary Companies
Air India has the following Subsidiary Companies with an Authorized /
Paid-up Capital (in Rs. Crores) as under
Authorised Paid-up
(a) Hotel Corporation of India
40.00
(b) Air India Charters Ltd.
30.00
41.00
30.00
(c) Air India Air Transport Services Ltd. 100.00
0.05
(d) Air India Engineering Services Ltd.
0.05
10.00
19
HCI
Subsidiary Companies
Hotel Corporation of India Ltd
Centaur Hotels at Juhu, Mumbai Airport and Rajgir Sold
Centaur Hotel at Delhi, Chefair-New Delhi and Chefair-Mumbai
Under Disinvestment
AICL
Air India Charters Ltd
New Airline Air India Express set-up under AICL
All AI Express operations carried out on B-737-800 with a current
fleet strength of 12.
AIATSL
Air India Air Transport Services Ltd
Incorporated in June 2003
Set up to undertake ground handling & other allied activities
Being operationalized at all domestic airports
20
AIESL
Air India Engineering Services Ltd
Incorporated to undertake engineering and other allied activities
To be operationalized
Cabinet approval required
21
AIRCRAFT OF AIR INDIA
The total aircraft on order are 111 (68 from Boeing and 43 from Airbus).
Aircraft on order include eight B777-200LRs, 15 B777-300ERs, 27 B787
Dreamliners, 18 B737-800s, 19 A319s, 20 A321s and four A320s. Of the
111 aircraft ordered, 24 Boeing (five B777-200LRs, five B777-300ERs, 15
B737-800s) and 21 Airbus (12 A321s and nine A319s) have been in the fleet
so far.
Aircraft
Airbus A 310
Airbus A 319
Airbus A 320
Airbus A 321
Airbus A 330
Boeing 737-800
Boeing 747
Boeing 737
Boeing 777
Airbus A 310 Freighters
Boeing 737 Freighters
ATR*
CRJ 700
Total
Total
8
15
43
12
2
22
6
5
14
4
6
7
3
147
22
Chief
ORGANIZATION STRUCTURE
Organization Structure
Chairman & Managing Director
Director- Director- Director- Director-
Vigilance
Officer
ED - Engineering
Engineering Finance
ED - Finance
Personnel Commercial*
ED – Inflight Services
ED - Engine Overhaul
ED- Operations
9* Yet to be appointed
** Presently in charge in the grade of GM.
ED – Materials Mgmt.
ED – IT
ED - Commercial
ED - Public Relations**
ED - Security
ED - Ground Services
ED - Northern Region
ED – Internal Audit
ED - Planning & Intl’ Relations
ED – Air Safety
ED - Corporate Affairs
ED - Properties & Facilities **
ED - Training *
ED – Co- ordination
Company Secretary
ED – HRD
ED - Medical Services
23
Vision
Mission
Corporate Vision
To be among top five Asian airlines in terms of Yield,
Profitability, Productivity, Size and Quality
Focus on customer satisfaction
Grow with emphasis on sustained profitability
Provide exciting and satisfying work environment to retain and
develop employees committed to Corporate Vision
Focus on social responsibility – environment & community
Objectives
Achieve unit revenue, unit cost, profitability, productivity and
service level targets, based on benchmarked parameters
24
Business Strategy
A Multi-pronged approach
Capacity & Network Expansion – to increase market share & garner
competitive strength
Achieve dominance in core markets (USA/UK/Gulf/SEA)
Increase market access through strategic alliances
Product Upgradation:
Deploy modern aircraft with state-of-art passenger amenities
Operate customer friendly schedules with increased network
connectivity
Operations Improvement – to reduce unit costs through
Increased asset (aircraft & manpower) productivity
Out-sourcing/hiving-off of non-core activities to subsidiaries
Technology upgradation
Benchmarking & adoption of “Best Practices”
25
Product Upgradation
Customer Friendly Schedules Planned
High frequency services with standardized arrival/departures
Network Connectivity
Single aircraft services from source markets
Expanded hub and spoke with own aircraft and from IC, Jet,
Sahara
Customer Service
Plans to match global standards of customer service through
benchmarking, training & adoption of new technologies
Improvements with New Aircraft
Product Improvements
New/Fresh Interior
State of the art Seats/IFE
Better on time performance
Business Class pitch of 76”
Other Benefits
Better Aircraft utilization
Lower Fuel Consumption
Lower Maintenance Expenditure
26
Operations Improvement
Increased manpower productivity
Comprehensive HR Policy with focus on
Motivation, Training & Development, Multi-skilling, Scientific
job description & objective performance appraisal
Special dispensations obtained from DGCA
Operating Crew – Increased Flight Time Limits
Settlement to be reached with pilots
Cabin Crew - Executive crew to fly as per DGCA time-off
regulations
Computerization of Operating/Cabin crew scheduling
Out-sourcing/Hiving-off Non-Core activities
Activities already out-sourced
– Printing Press
– Crew/Employee Transport
Potential for out-sourcing
– Medical Services
– Payroll/Revenue Accounting
– Canteen
– Civil Works
Hiving off to subsidiaries
– Maintenance
27
– Ground Handling
– Information Technology
– Security
– Cargo
Technology Upgradation – IT Projects
Revenue Management – PROS implemented
Ticketing Time-Limit software implemented
Direct connect with GDS’s
Integrated computerization system for MMD
Disposal of surplus/redundant inventory
Implementation of Unit Load Device management system
Disaster recovery site at remote location
Air India Express IT Infrastructure
Data Mart for CRS sales data
Ramp Assistance Billing System for GSD/Finance
Online Financial Information System (FINESS)
28
Network & Capacity Expansion
Identified need for
Non-Stop Operations to New York – to commence effective
April/May 2007
Services to 12 New Destinations
San Francisco, Washington, Houston, Manchester, Beijing,
Taipei, Sydney, Lagos, Mauritius and South Africa
Increased frequencies on existing routes
New airline subsidiary for distinctive brand positioning
– Air India to offer “premium product” in long/medium-
haul markets
– Air India Express to offer “value for money product” in
price-sensitive
markets
Gulf/Middle-East/South-East Asia
Availability of aircraft, pilots and slots could be a constraint
Plan may have to be modified based on developments
29
Strategic Relationships
• Strategic Alliance with Lufthansa (LH)
MOU signed in August 2003
Joint capacity plan till 2007
– Additional frequencies
– AI : 22 (18 via Frankfurt to USA) - LH: 15
• LH to provide AI commercially viable slots at Frankfurt
• 19 slot pairs provided till winter 2004 (in exchange for 4 additional
frequencies)
• Reciprocal World-wide Free Flow Code Share & FFP Cooperation
under implementation
• Special Prorate Agreement implemented in November 2003
• Cooperation in IT/MRO/Cargo being pursued
• Air India developing relationship with other Star Alliance partners –
United Airlines & Air Canada
Joint Marketing
Special Prorate Agreement
Reciprocal code share
FFP cooperation
• Will pursue FFP cooperation with other domestic airlines in India to
generate incremental revenue streams
• Will continue existing code shares with existing 14 airline partners &
pursue such relationships with other airlines
• May also consider becoming a full-fledged member of a global
alliance in the future
30
Awards and Recognitions
• Air India was conferred the ‘Best West Bound Airline from India’
award at the Galileo Express Travel and Tourism awards 2005
function held in Mumbai on 7 December 2005.
• The ‘Most preferred Brand’ Award in the international airlines
category by CNBC AWAAZ, a leading Hindi business television
channel, was presented to Air India at the AWAAZ consumer
awards 2006 function held in New Delhi on 18 July 2006.
• ‘Reader’s Digest Trusted Brand Gold’ Award was presented to Air
India at a function held in Mumbai on 18 May 2006.
31
Amalgamation of Air India Limited and Indian Airlines
Limited with National Aviation Company of India Limited
The Government of India, on 1 March 2007, approved the merger of Air
India and Indian Airlines. Consequent to the above, a new Company viz
National Aviation Company of India Limited (NACIL) was incorporated
under the Companies Act, 1956 on 30 March 2007 with its Registered Office
at Airlines House, 113 Gurudwara Rakabganj Road, New Delhi. The
Certificate to Commence Business was obtained on 14 May 2007.
Presently, the Board of NACIL consists of:
Shri Raghu Menon, Addl Secretary & Financial Advisor, Ministry of
Civil Aviation
Shri R K Singh, Jt Secretary, Ministry of Civil Aviation
Shri Rajiv Bansal, Director, Ministry of Civil Aviation
The Scheme of Amalgamation of Air India Limited and Indian Airlines
Limited with National Aviation Company of India Limited was approved by
the Board of Directors of all the three Companies.
Thereafter, the Meetings of Secured and Unsecured Creditors of Air India
and Indian Airlines were held in New Delhi on 28 June 2007, in which the
Scheme of Amalgamation was approved by the Creditors. The final hearing
of the merger petition was held on 31 July 2007 wherein the last date for
submissions of objections was fixed on 8 August 2007 and the Order of the
32
Ministry of Corporate Affairs is awaited.
The Authorized and Paid-Up Share Capital of the merged entity will be
Rs.1500,05,00,000/- and Rs.145,00,00,000/-, respectively.
It has been decided that post merger, the new entity will be known as “Air
India” while “Maharaja” will be retained as its mascot. The logo of the new
airline will be a red coloured flying swan with the “Konark Chakra” in
orange placed inside it. The flying swan has been morphed from Air India’s
characteristic logo “The Centaur” whereas the “Konark Chakra” was
reminiscent of Indian’s logo. The Corporate Office of NACIL will be at
Mumbai.
The Government has approved the appointment of Shri V Thulasidas and Dr
V Trivedi as Chairman & Managing Director and Joint Managing Director,
respectively, of the merged entity, with effect from the date of merger.
33
MAJOR EXPENDITURE
1) ATF (AVIATION TURBINE FUEL):- Almost 40% of the
total revenue.
2) SALARY:- Almost 20% of the total revenue.
ATF (AVIATION TURBINE FUEL)
Aviation fuel is a specialized type of petroleum-based fuel used to power
aircraft. It is generally of a higher quality than fuels used in less critical
applications such as heating or road transport, and often contains additives to
reduce the risk of icing or explosion due to high temperatures, amongst other
properties.
Most aviation fuels available for aircraft are kinds of petroleum spirit used in
engines with spark plugs i.e. piston engines and Wankel rotaries or fuel for
jet turbine engines which is also used in diesel aircraft engines. Alcohol,
alcohol mixtures and other alternative fuels may be used experimentally but
are not generally available.
34
TYPE OF AVIATION TURBINE FUEL
1) Duty Paid Fuel: - It is a type of fuel which is used for the operation with
in India like a flight from Delhi to Mumbai. This type of fuel is expensive
then the foreign fuel because it includes the sales taxes according to state
wise and also the exice duty which will affect to increase the price of ATF.
2) Bonded Fuel: - It is a type of fuel which is used for the operations outside
the India in this case fueling is done in India only and flight is moving
outside the India like a flight from Delhi to Bangkok. The bonded price
applicable for international flights ex-India is higher than the ATF price in
the international markets.
3) Foreign Fuel: - It is a type of fuel which is used for the operation outside
India in this case the fueling is done in the foreign station only and flight is
coming from abroad to India like a flight is coming from New York to
Delhi. This is the cheapest type of fuel among all of the fuels.
35
Last few years have once again clearly highlighted the highly cyclical nature
of the Aviation industry worldwide. ATF consumption has roughly doubled
from 2002 to 2007
Until April 2001 ATF prices in India were determined by Government
through an Administered Price Mechanism (APM).
This was based on a system of cross-subsidy – for socio-
economic reasons prices of some petroleum products such as
kerosene and diesel were “subsidized” by setting higher prices for
ATF.
In April 2001, the APM was dismantled and the Oil Companies
given freedom to price ATF based on input costs and world
market prices.
Thereafter ATF prices in India have fluctuated widely depending on
movements in world prices.
Despite withdrawal of APM and linkage of ATF pricing with
international market prices, price of ATF in India continues to be
much higher than the prices prevailing worldwide.
Despite being competitors with possibly differing input and refining
costs, the three Government owned oil companies effectively work as
a cartel; prices charged by the three oil companies are identical
36
Monopoly of PSU Oil companies:
A major reason for high price even after deregulation of ATF price, is the
monopoly of the 3 state owned Oil companies. Because of limited number of
suppliers there has hardly been any effective choice for the airline industry,
with the 3 state owned oil companies fixing the ATF price on a mutually
agreed common formula between them.
The government has granted marketing rights to some companies in the oil
sector like Reliance, Essar , ONGC etc. None of these companies however,
could start supply of ATF as they were not allotted space by the Airport
Authority. Recently Reliance has been allotted land at 25 airports in India;
and is moving towards setting up Aviation Fuelling stations at some of these
airports.
It is hoped that the resultant competition will bring about a reduction in the
unreasonable ATF price levels prevalent in India.
ATF supplied by Indian oil companies is basically from imported
Crude refined by them. There is no direct import of ATF.
Import Duty on Crude is 10% whilst on ATF is 20%.
Oil Companies, however, follow an import parity principle and levy a
20% add-on to the Refinery Transfer Price.
Apart from the import parity principle, the Oil Companies also
include a 16%-49% add-on towards marketing margin and
37
contingencies on the Refinery Transfer Price after the addition of the
import parity add-on.
The add-on varies between the various cities.
On this, the Central Government levies an Excise Duty of 8%.
On the resultant price, the various State Government levy local Sales
Taxes ranging from 4% to 39%: which on an average works out to
25% countrywide.
The Government levies thus works out to an add-on of 35%.
A
Refinery Transfer Price(RTP)
ATF Price
T F
Refined ATF
Add-on of 20% - Import parity
Marketing margin add on 21%
Government levies of 35% - 8% Central
Sales Tax plus 25% State Sales Tax
ATF Price to airlines
Nearly double the world-price
38
Thus, Domestic carriers in India pay nearly double the prices vis-à-
vis elsewhere in the world.
ATF Expenses: Constitute around 40% of the total operating costs for
domestic Indian carriers.
ATF upliftment at metros during 2007-08
14000
12000
10000
Delhi
8000
6000
4000
2000
0
Mumbai
Kolkata
Chennai
Bangalore
Hyderabad
April2007-2008
June Aug Oct
Months
Dec Feb
39
Q
u a n
ti ty
( K
L )
The three Governments owned oil companies viz. Indian Oil
Corporation, Hindustan Petroleum and Bharat Petroleum jointly fix
prices. Also,
Airlines cannot source supply of ATF from any other supplier.
Airlines are offered common terms by the three suppliers, with
no competition amongst themselves.
Government still has a role in determining the applicable prices
even though APM has been abolished.
The infrastructure – Hydrants & Storage facilities– are owned by Oil
Companies, who are unwilling to share these facilities with private
suppliers e.g. Reliance who as a result export the ATF they produce.
Direct import of ATF by Indian carriers is not permitted.
Common carrier principle not applicable for infrastructure facilities.
Indian carriers are also not permitted to hedge ATF prices – Air India
is permitted to hedge to a limited extent on Fuel uplifted outside India.
Worldwide, airlines have derived significant financial benefits by
hedging ATF.
ATF is the most important constituent of the operating cost of airlines
in India.
For successful operations of domestic airlines in India, it is imperative
that ATF costs / prices be brought down to international levels.
40
Policy makers and aviation specialists have recognized the distortions
created in economics of Indian civil aviation industry because of
current high prices of ATF and present pricing policy
A Committee appointed by the Government to review the Indian civil
aviation scenario and make recommendations about future civil
aviation policy has made several recommendations about ATF in its
report.
ATF price movement in India after deregulation (Rs./KL)
Year Duty paid Bonded
Average 2001-02
Average 2002-03
Average 2003-04
Average 2004-05
Average 2005-06
Average 2006-07
Average 2007-08
Average 2008-09
18800
19900
21000
27500
35200
40500
42900
49250
14350
16700
17800
22500
26100
30500
31000
38800
01.08.08 (All time high) 74600
01.05.2009 (Current price) 34400
53780
24500
41
60000
50000
40000
30000
20000
10000
0
Duty Paid
Bonded
2001-
02
2002-
03
2003-
04
2004-
05
2005-
06
2006-
07
2007-
08
2008-
09
42
Movement of ATF in last 2 years
Year
MONTH
2008-2009
Duty
Paid Bonded Foreign
2007-2008
Duty
Paid Bonded Foreign
APRIL
MAY
JUNE(Upto 4th)
JUNE(From 5th)
JULY
AUGUST
SEPTEMBER
OCTOBER
56000 43400 36000 37800 29050 23500
61150 47350 39200 39150 31750 25100
72400 52500 41700 38400 31350 25400
69300 50300 41700 38400 31350 25400
72600 52700 46800 39650 31700 25875
74600 54200 47450 41000 33100 26700
63000 47050 39200 40050 31900 25950
59750 44100 36550 41750 33600 27600
NOVEMBER (1-3) 50100 38050 29500 43450 35050 29350
NOVEMBER (4-
15)
NOVEMBER (16-
30)
47950 36250 29500 43450 35050 31100
42200 36250 29500 43450 35050 32850
DECEMBER (1-15) 39650 30750 24800 49750 39350 31500
DECEMBER (16-
31)
JANUARY
FEBRUARY
MARCH
35300 30750 24800 49750 39350 33250
47700 37850 32000
46900 37250 31350
49400 38750 32750
43
8 0 0 0 0
7 0 0 0 0
6 0 0 0 0
5 0 0 0 0
4 0 0 0 0
3 0 0 0 0
2 0 0 0 0
1 0 0 0 0
0
AT F R AT E S D U R IN G 2 0 0 7 - 0 8 & 2 0 0 8 - 0 9
M O N T H S
2 0 0 8 - 2 0 0 9 D u t y P a id 2 0 0 8 - 2 0 0 9 B o n d e d
2 0 0 8 - 2 0 0 9 F o r e ig n 2 0 0 7 - 2 0 0 8 D u t y P a id
2 0 0 7 - 2 0 0 8 B o n d e d 2 0 0 7 - 2 0 0 8 F o r e ig n
This chart shows the comparative price fluctuation of ATF in last 2
years2007-08 and 2008-09. The highest Domestic ATF price during these 2
years is Rs 74600 per KL in august 2008 which is almost 82% high then the
last year price of Rs 41000. and the highest Bonded ATF prices during last 2
years is Rs 54200 per KL in august 2008 which is almost 64% high then the
last year price of Rs 33100 per KL and the highest international ATF prices
during last 2 years is Rs 47450 per KL in august 2008 which is almost 78%
44
R
s /
K l
high then the last year price of Rs 26700 per KL. But as the year move
further the ATF price of year 2008 start decreasing and in the month of the
December 2008 the ATF price is much lowers then the last year ATF prices.
In December 2008 the domestic ATF prices is 35300 which is almost 41%
lower then the last year price of Rs 49750 per KL and the bonded ATF price
is 30750 which is almost 28% lower then the last year price of Rs 39350 per
KL and the international fuel price is Rs 24800 per KL in December 2008
which is almost 34% lower then the last year fuel price i.e. Rs 33250 per
KL. Indian carriers bought ATF at Rs 37,800 / kl in April 07, while
international carriers paid only Rs 21,800 / kl in Singapore, which is about
73% higher
ATF price structure in India
ATF for domestic flights is subject to Excise Duty @ 8%
- Annual impact - Rs.93 cr. p.a.
- Estimated impact for the aviation industry incl. private
airlines
- Rs.269 cr. p.a.
High Sales Tax on ATF in India
- Average Rate
- Highest
- Gujarat
- Tamil Nadu / Bihar
- Kerala
-
-
-
-
25%
30%
29%
29.0375%
45
- Madhya Pradesh
- Lowest
- Port Blair
-
-
28.75%
Nil
- Sales tax Impact for NACIL - Rs. 286 cr. p.a.
- Estimated impact for the aviation industry incl. private
airlines
- Rs. 2754 cr. p.a,
ATF a major cost
ATF is a major cost component of NACIL.
High ATF price in India
The ATF prices in India are substantially higher than its price in
international markets.
Even the bonded price applicable for international flights ex-India is
higher than the ATF price in the international markets. Priced 65%
higher in India on an average, compared to international benchmarks
46
Average ATF prices in India (As on 1st May’ 2009)
Domestic flights
International flights (Ex-India)
ATF prices in international market
(Rs./Kl)
34400
24500
20500
As would be seen from above, the ATF price in India is Rs. 34400 per
Kilolitre i.e. about 68% higher compared to international price of
Rs.20500 per kilolitre. Even the bonded ATF price in India is Rs.
24500 per Kilolitre i.e. about 20% higher compared to international
ATF price.
Despite, deregulation of ATF price since, 1st April, 2002, there has
been no major reduction in ATF price as PSU oil companies continue
to enjoy virtual monopoly for ATF supply in India. There is almost
cartelization amongst PSU oil companies whereby they fix common
ATF price as per some non-transparent formula applied by them.
47
The fuel cost of NACIL including Alliance Air has gone up
manifold over the years as indicated below:
Year
1999-00
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
(Rs.Crores)
1568
2271
2588
3944
5446
6331
7309
2008-09 (Budget estimates assuming 2007-08 av. price) 7700
2009-10 (Budget estimates assuming Feb’09/Mar’09 price) 5291
2009-10 (Revised estimates based on current price) 5300
Total expenditure on ATF
9000
8000
7000
6000
5000Total expenditure on ATF
400030002000
1000
0
1999- 2002-- 2003- 2004- 2005- 2006- 2007- 2008- 2009-
00 03 04 05 06 07 08 09 10
48
From above, it would be seen that ATF cost for the
combined network of NACIL has already gone up for the
current year i.e. 2009-10 by Rs. 572 cr. over and above the
budgeted cost.
Need for ATF price rationalization (Suggestions)
Abolition of Excise Duty.
Need for reduction in sales tax on ATF.
- ATF may be categorized as ‘Declared Goods’ in Central Sales
Tax Act to limit maximum rate of sales tax to 2%
- Initially, ATF sold to turbo-prop aircraft was categorized as
‘Declared Goods’ under Central Sales Tax Act since 2001 and
the same was extended to cover all small aircrafts with
maximum take off mass of less than 40000 Kgs in 2007.
- Some State Governments have reservations about loss of
revenue if they reduce sales tax rate on ATF. However, it may
be mentioned that their sales tax collection on ATF may just be
a fractional percentage of their total sales tax collection and
therefore, financial impact of sales tax reduction on ATF would
be negligible.
- On the other hand, reduction in ATF price would contribute
significantly to their economic, regional & tourism growth
49
- ATF for domestic flights be made available at the same rate
(i.e. bonded price) as applicable for international flights.
- There is a need to fix ATF price by PSU Oil companies in a
transparent competitive manner
Reduction in ATF price is necessary to provide level playing field to
domestic airlines vis-à-vis foreign airlines getting unfair advantage as they
obtain fuel at lower price in their country. A reduction in ATF cost would be
a major factor for domestic airlines in significantly improving their
competitiveness by lowering cost of operations and provide the necessary
financial stability. A booming domestic aviation industry should be seen as a
necessary infrastructural requirement to ultimately boost the economy,
tourism and all round regional development in the country. An FIA estimate
indicates that a reduction in ATF price by 60% (to bring it closer to
international benchmarks) has an impact of lowering airline operational
losses by 25%.
50
Fuel Prices and Lack of Efficiencies Causing Airlines’ Losses
According to Research, airline companies in India would continue to incur
losses even if crude oil prices decline significantly if they do not quickly
undertake a revenue augmentation exercise in conjunction with cost
reduction measures and efficiency improvement initiatives.
The sharp increase in crude oil prices in the first half of 2008 has led to a
corresponding rise in the price of aviation turbine fuel (ATF) for all airline
companies, due to which they are expected to post heavy losses. Fuel cost as
a percentage of total operating costs has increased by 300-600 basis points.
Research has analyzed the movement in breakeven ticket prices of domestic
carriers at various prices of crude oil and at varying load factors and
concluded that a structural increase in ticket prices is required in the near
term.
51
STAFF COST:
A staff cost constitutes nearly 20% of Air India's total cost. Currently, the
carrier runs an annual wage bill of over Rs.3,000 crore. AI is also looking at
improving productivity of employees, elimination of restrictive work
practices and reducing wasteful expenditure. The national carrier has around
31,000 employees. The airline was now targeting a reduction in employee
cost to the tune of Rs 500 crore per annum.
The following efforts were made to reduce the staff cost:
- Freezing of external recruitment in non-operational categories;
- Freezing of vacancies and abolition 781 vacant posts;
- Reduction in staff strength in India through a rolling back of the retirement
age from 60 to 58 years;
- Implementation of Schemes such as Shorter Working Week(SWW) and
Leave Without Pay(LWP);
- Redeployment of staff from non-operational to operational areas;
- Reduction in temporary postings and duty tours abroad;
- Retrenchment of staff at foreign stations through Voluntary Retirement
Schemes.
52
RATIO ANALYSIS
(As balance sheet available of year 2005-06)
Short Term Solvency Ratio
Current Ratio= 1.28 The current ratio of AIR INDIA meets the bare minimum of 1.33, which is
considered by banks as the minimum acceptable level for providing working
capital finance. The ratio indicates that the company not enjoys a better
financial health and would not be able to meet its immediate debts. A ratio
under 1 suggests that the company would be unable to pay its debts if they
come due at that point. While this shows the company is not in good
financial health, it does not necessarily mean it would go bankrupt- as there
are many ways to access financing. AIR INDIA dealings consists a major of
Letter of Credits and bill of Exchanges. Apart from this the policy of AIR
INDIA to issue the ticket only on cash basis has helped AIR INDIA in
maintaining this ratio.
Liquid Ratio= 1.09The liquid ratio of the company is more than the preferred limit of 1. This is
mainly because of the cash transactions which AIR INDIA does. The quick
ratio is more conservative than the current ratio, a more well-known
liquidity measure, because it excludes inventory from current assets.
.
53
Working Capital Ratio=0.08
The working capital ratio is an indicator of the efficiency of a company's
management of stocks, debtors and creditors. If the working capital ratio is
0.2, this means the company needs 8p of working capital for every Rs1 of
annual sales. If annual sales increase by Rs1,00,000 of then the company
will have to invest Rs8,000 in working capital to be able to meet this. A
working capital ratio of less than 1 indicates negative working capital.
Fixed Assets Turnover Ratio=2.61297956
Fixed asset turnover is the ratio of sales (on the Profit and loss account) to
the value of fixed assets (on the balance sheet). It indicates how well the
business is using its fixed assets to generate sales. Generally speaking, the
higher the ratio, the better, because a high ratio indicates the business has
less money tied up in fixed assets for each rupees of sales revenue. A
declining ratio may indicate that the business is over-invested in fixed assets.
However, financial analysts claim that such a ratio is inconclusive:
companies do not generally cite or reference these figures. The fixed assed
turnover ratio of AIR INDIA has been on the lower side. That means it
shows that the company has been not effective in using the investment in
fixed assets to generate revenue. There is no exact number that determines
whether a company is doing a good job of generating revenue from its
investment in fixed assets. This makes it important to compare the most
recent ratio to both the historical levels of the company along with peer
54
company and/or industry averages. But due to lack of availability of data this
could not be done.
Operating Ratio=104.52%
It is a ratio that shows the efficiency of a company's management by
comparing operating expense to net sales. The smaller the ratio, the greater
the organization's ability to generate profit if revenues decreases. An
operating ratio ranging between 75% and 80% is generally considered as
standard. This ratio is considered to be a yardstick of operating efficiency
but it should be used cautiously because it may be affected by a number of
uncontrollable factors beyond the control of the firm. Moreover, in some
firms, non-operating expenses from a substantial part of the total expenses
and in such cases operating ratio may give misleading results. Operating
ratio actually means how much is being spend to earn a rupee. Hence, the
lower the ratio, the better it is.
An operating ratio of 104.52% means Rs 104.52 is being spent to earn a
rupee. So it is not a good figure for AIR INDIA. Precautions are to be taken
to reduce the operating ratio. One way to combat the effects of a business
recession is to work harder by selling ticket and reduce the other overhead
expenses. That's fine, and it's certainly important to maximize every business
opportunity during a slump. It's much easier to reduce these expenses 10
percent through more effective management
55
Operating profit & expenditure analysis (in
crores)
Years 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996
Operating revenue
8439 8833 7588 6146 5275 4751 4927 4448 4135 3837 3533
Operating expenses
9870 9233 7538 6113 5465 4805 4924 4372 4139 4029 3945
Operating profit -1431 -400 50 33
-190 -54 3 76 -4
-192 -412
56
12000
10000
8000
6000
4000
2000
0
-2000
2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996
Gross Profit Ratio=1.06
Opeating revenue
Operating expenses
Operating profit
The Gross Profit Ratio of AIR INDIA has been just 1.06, mainly because of
the fewer profit margins. The only way it can improve its GP Ratio is by
increasing its trading margin, or by decreasing its cost of expenditure. Incase
of AIR INDIA increasing of trading margin is not possible because of the
severe competition they face. Hence they should try to reduce there cost of
Expenses.
Debt Equity Ratio = 23.67
A high debt/equity ratio generally means that a company has been
aggressive in financing its growth with debt. This can result in volatile
earnings as a result of the additional interest expense. If a lot of debt is used
57
to finance increased operations (high debt to equity), the company could
potentially generate more earnings than it would have without this outside
financing. If this were to increase earnings by a greater amount than the debt
cost (interest), then the shareholders benefit as more earnings are being
spread among the same amount of shareholders. However, the cost of this
debt financing may outweigh the return that the company generates on the
debt through investment and business activities and become too much for the
company to handle. This can lead to bankruptcy, which would leave
shareholders with nothing.
Revenue passenger carried
A statistical unit in the airline industry; one fare-paying passenger carried
one mile. A revenue passenger kilometre (RPK) is a measure of the volume
of passengers carried by an airline. A revenue passenger-kilometre is flown
when a revenue passenger is carried one kilometre. A passenger for whose
transportation an air carrier receives commercial remuneration is called a
revenue passenger. This excludes passengers travelling under fares available
only to airline employees and babies and children who do not have a seat of
their own. The RPK of an airline is the sum of the products obtained by
multiplying the number of revenue passengers carried on each flight stage by
the stage distance - it is the total number of kilometres travelled by all
passengers.
58
500000045000004000000350000030000002500000200000015000001000000500000
0
1997- 1998-
Revenue passenger carried
1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006-98 99 00 01 02 03 04 05 06 07
Passenger load factor
Revenue passenger carried
The passenger load factor (PLF) of an airline, sometimes simply called the
load factor, is a measure of how much of an airline's passenger carrying
capacity is used. It is passenger-kilometres flown as a percentage of seat-
kilometres available. This is a measure of capacity utilisation. As airlines
frequently have heavy fixed costs and are capital intensive, the efficiency
with which assets are used is crucially important.
This is an important efficiency measure, but it does not consider the pricing
and the profitability at which the capacity is sold. It also implicitly assumes
that the airline's fleet is fully utilised in terms of the number of kilometres
flown.
59
74
72
70
68
66
64
62
60
58
Passenger load factor
1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006-
Passenger load factor
98 99 00 01 02 03 04 05 06 07
60
SWOT ANALYSIS OF AIR INDIA
Air India is the leading airlines in the India. Air India is based on
domestic enplaned passengers and scheduled domestic departures. Air
India has shown a strong performance in revenues in 2008. Strong
operating performance lends financial stability to the company which
could be leveraged to seek more growth avenues of growth in future.
However, the rising prices of aviation turbine fuel could adversely affect
Air India operating margins.
Strengths
Operational performance
Air India registered a strong operational performance for fiscal 2008-09.
The company recorded revenues of Rs 15000 Crore during the fiscal
year, an increase of 70% over 2005-06. During fiscal year 2008, the
company’s revenue growth was driven by increase in passenger segment
revenue and merger with Indian airlines. The increase in passenger
revenues primarily was due to an increase in capacity, and an increase in
load factor. In addition the revenue growth is backed by growth in freight
and cargo revenues, which was a result of higher rates charged. This
growth was also partly driven by improved efficiency in the company’s
operations. Strong operating performance lends financial stability to the
company which could be leveraged to seek more growth avenues in the
future.
61
Market leadership
Air India is the leading airlines in the India. The airline has been ranked
the top in India’s domestic airline (in terms of number of passengers) by
the bureau of transportation statistics (BTS) in 2005. Air India newly
orders about 68 from Boeing and 43 from Airbus. Air India dominates
the markets it serves, ranking first in market share in India. Its strong
market position is driven not just by consistent delivery of low fares but
also due to reliable service, frequent and convenient flights, comfortable
cabins, in-flight experience, frequent flyer programs, hassle-free airports,
and friendly customer service. Strong market position gives the company
the advantage of scale and helps it in strengthening its brand image.
Weaknesses
High dependence on passenger revenues
Passenger revenues accounted for major part of the Air India total
revenue. Cargo services allow airlines to generate additional revenues
from existing passenger flights. In addition, cargo revenues are usually
counter-cyclical to passenger revenues and have lower demand elasticity
than passenger business, which allows airlines to pass on fuel price hikes
to customers. Small cargo business exposes Air India to the demand
fluctuations in passenger business.
62
Lower load factor
Though the overall operating performance has been steady, Air India
passenger load factor of 63.2%, which was the company’s 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 company’s 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 company’s
margins.
Opportunities
Growing demand for low cost airlines
In mature markets demand for air travel is increasingly being driven by
ticket price and consumer confidence. A survey by the US Commerce
Department shows that ticket price is the number one criterion for
passengers when selecting a flight, well ahead of the availability of a
non-stop service. As markets have progressively matured, the GDP
elasticity of air travel demand has declined. In the US for example, a 1%
growth in GDP will typically result in a 1.2% growth in domestic air
travel, compared with a growth of almost 2% in air travel some 20 years
ago.
63
Growth in freight business
The Indian economy is one of the fastest growing in the world, but the
boom is not without its stops, starts, and bottlenecks, all of which also
make themselves felt in the country’s freight transport sector. Air India
had also launched a major cargo incentive scheme for cargo agents of Air
India and erstwhile Indian on the entire network. The scheme, which
generated enormous response, entitled top producing agents of each
region to become eligible for an all-inclusive incentive trip on Star
Cruise.
In January 2008, Air India registered a growth of 6.4% whereas industry
showed negative growth of 12% compared to September 2007. In the
month of March 2008, industry grew by 24.8% over January 2008
carriage whereas Air India cargo showed an increase of 43.4%. Strong
economic and foreign trade growth is underpinning the freight upturn.
Expanding passenger traffic in Asia Pacific
The demand for air travel to the Asia Pacific is rising driven by increased
economic activity in emerging Asian countries such as China and India.
Traffic is projected to grow at 7% in China and India combined, above
the world average of 5%. Further, the share of Asia Pacific region in
world passenger traffic (revenue passenger kilometers) is forecast to rise
from 25% in 2003 to 31% in 2023. Against this backdrop, Air India is
64
well positioned to benefit with its increasing emphasis on Asia-Pacific
operations.
Threats
Increasing aviation turbine fuel prices
The price of aviation turbine fuel (ATF) has soared to record highs in the
past few years and continues to hold at that level. Last few years have
once again clearly highlighted the highly cyclical nature of the Aviation
industry worldwide. ATF consumption has roughly doubled from 2002 to
2007
The ATF prices in India are substantially higher than its price in
international markets. Aircraft fuel is a major contributor to Air India
operating expenses.
Moreover, the bonded price applicable for international flights ex-India is
higher than the ATF price in the international markets. Priced 65% higher
in India on an average, compared to international benchmarks. Therefore,
this will need stronger revenue growth and greater cost controls in other
areas to overcome the increase in fuel prices.
65
High interest rates
The past few years have seen Central Banks impose higher interest rates
to check inflation and the over heating of regional economies. The
Reserve Bank of India has led the way raising interest rates. Inflation
fears in the India may see another raise in the short-term.
According to Economics times, the India real GDP growth is 9.20% in
2007 to 9.00% in 2008 and this downward trend is also seen in 2009.
This in turn could depress consumer spending and offset some of the
positive trends in the India for the company.
Year
2003
2004
2005
2006
2007
2008
GDP, constant price
6.88%
7.89%
9.13%
9.75%
9.21%
7.90%
Percentage
Change
50.54%
14.99%
15.79%
6.75%
-5.47%
-14.25%
66
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
GDP real Growth Rate
GDP real Growth Rate
2003 2004 2005 2006 2007 2008
Intensifying competition
AIR INDIA is now competing against more credible low cost carriers
such as Spice jet, Go air, Indigo Airline, and Jetlite etc. Indigo Airlines
remains Air India strongest competitor because of its competitive cost
structure, strong brand name and ambitious growth plans over the next
seven years. Air India also faces increased competition from Air Deccan
low-fares subsidiary, Song. Moreover, major legacy airlines have been
focusing on restructuring costs, which has improved their
competitiveness. With costs restructured, the legacy airlines are
becoming more formidable competitors in terms of increasing capacity,
matching prices and leveraging their frequent flier programs. Increasing
competition could adversely affect the company’s margins.
67
SWOT Analysis of Aviation Industry
Strengths
Liberal Environment: India's airlines operate in a liberal environment in
both the domestic and international spheres. With three major airline
groups and four smaller carriers all operating domestic routes, there is no
shortage of competition, although this factor combined with excess
capacity has tended to depress yields. Nevertheless, carriers are free to
operate any domestic routes without seeking permission from the
government, and without restriction on pricing. One condition that
airlines find onerous however, is the requirement to operate a proportion
of ASKs to remote and underdeveloped regions of the country.
On the international front, the Indian government has pursued an
increasingly liberal approach to bilateral air services agreements with key
overseas markets, resulting in greater access for foreign carriers.
Emirates for example, the largest foreign carrier by capacity into India,
will operate 185 weekly frequencies to ten cities across the country by
the end of 2009. India's carriers have a combined international capacity
share of just over 36% but face strong competition from foreign carriers,
both full service and low cost.
Modern Fleet: In light of the fact that much of the growth in Indian
aviation has occurred in the last five years, the country's airlines operate a
68
relatively young and modern fleet, ensuring a high quality passenger
experience, improved safety and good operational reliability.
High Quality: India's airlines offer a good quality product in each of the
operating models in existence. Jet Airways and Kingfisher Airlines are
competitive in terms of their in-flight service against the leading carriers
in the world. Kingfisher for example is one just half a dozen global
carriers such as Singapore Airlines and Cathay Pacific , with a Skytrax
5 star rating. In fact it could be argued that the full service product on
domestic routes is excessive for the sector lengths involved and results in
a higher cost structure, which the passenger does not necessarily see
value in paying for. The LCC’s too, by and large, offer a comfortable,
efficient and reliable service. Until a couple of years ago, Air Deccan
was one carrier that had developed a reputation for poor on-time
performance, flight cancellations and overbooking, however since being
acquired by Kingfisher, most of these operational issues appear to have
been resolved.
Economic Growth: Economic growth has historically been the primary
driver of air traffic, and the relationship has generally been even stronger
in developing countries. Between 2004 and 2007, India enjoyed four
years averaging 9% per annum GDP growth. This slowed to 6.5% in
2008, however against the background of a global economic recession,
this was a creditable performance. The increased business confidence
following the general election result in May 2009 has eased concerns that
growth may slow further. The stock market has soared 25% in the last
69
month and the outlook for growth and consumption has improved, which
is a positive for the aviation industry.
Political Stability: The re-election of the Congress Party, with a stronger
majority is expected to allow the new administration to push ahead with
further economic reforms, which had to date been blocked by coalition
partners. The prospect of a government which has the ability to last its
full term and pursue its agenda is extremely encouraging. In addition,
Minister Praful Patel, who was the architect of the dramatic
transformation of the aviation sector, has retained the portfolio, which
brings experience and stability to the aviation industry.
Weaknesses
Airport Infrastructure: The rapid growth in air traffic over the last few
years exposed the deficiencies of airport infrastructure across the country.
After decades of neglect, many of India's airports were forced to operate
well above design capacity. The resulting congestion in the terminals and
on the runways delivered a poor experience for the passenger and a
costly, inefficient operating environment for the airlines. However,
although a weakness today, it is also fair to say that it is becoming less
so, as the airport modernisation program starts to deliver results, with
new airports in Bangalore and Hyderabad, and improving facilities at
Delhi and Mumbai. The upgrade of non-metro airports remains behind
schedule so it may be another 3-4 years before we see good quality
facilities across the country, but there are tangible signs of improvement.
70
Airways Infrastructure: Although congestion on the ground is
relatively visible, another current area of weakness is the limited
investment that has taken place in improving infrastructure for air traffic
management. This too results in expensive aircraft holding patterns,
indirect flight paths and sub-optimal use of runways.
National Carrier: The state-owned carrier, Air India, is in a dire
situation. The carrier is estimated to have posted losses of close to USD1
billion in 2008/09, and morale within the bloated workforce is at a low.
With no clear direction, management instability at the top and continuing
issues with the integration of Air India and Indian Airlines, the carrier is
in need of radical restructuring. It is imperative that the government
develops a turnaround strategy for Air India as an urgent priority.
Deep Pockets: Over the last three years, India's carriers have
accumulated billions of dollars in losses and debt. Ironically, a
characteristic that would normally be considered a strength - namely deep
pockets - has resulted in carriers remaining afloat that would perhaps in
other circumstances have failed. With the backing of either the
government or large corporations, several carriers have been able to
access funding that they might have been denied on a strictly commercial
basis as standalone airlines. As a result of the intense competition which
has been perpetuated, airlines have struggled to raise fares to break even
levels.
71
High Cost Structure: India's airlines operate in a relatively high cost
environment, primarily due to the punitive taxation structure. The
greatest impact is felt in the area of sales taxation on fuel, which can
increase the cost to 60% above the international benchmark. The
limitations of airport infrastructure also increase costs due to the fact that
carriers are unable to schedule fast turnarounds, resulting in reduced
aircraft utilisation. In addition, the fact that high quality ancillary services
such as MRO and training are not currently available in India, means that
aircraft and personnel have to be sent overseas.
Skilled Resources: Domestic air traffic in India tripled in the five years
to 2008, while international passengers doubled. This rate of growth far
outstripped the capacity to develop skilled technical and management
personnel. The gap was partly addressed by employing expatriates,
particularly as pilots, and by learning on the fly. This means there is a
lack of in-depth experience and knowledge at all levels. Furthermore,
there is an absence of high quality training infrastructure in-country to
deliver the resources to support future growth. This lack of personnel
affects the government as well and the FAA has expressed its concern at
the shortage of qualified safety inspectors within the Directorate General
of Civil Aviation (DGCA). India has been put on notice that unless this
issue is addressed, it may be relegated to a Category II nation, which
would mean that Indian carriers would not be permitted to increase
services to the US.
72
Opportunities
Market Growth: Despite the rapid expansion of recent years, India has
only just scratched the surface of the potential for the aviation sector.
Trips per capita remain low even by the standards of other developing
countries. China's domestic market is more than four times the size of
India's 40 million passengers. Even, Australia, a country with a
population of just 21 million, compared with India's 1.1 billion, has a
market 25% larger. Similarly on the international front, less than 1% of
Indians travel overseas each year. Inbound visitor nunbers at 5.4 million
in 2008 for the entire country, were less than for Dubai or Singapore. It is
not difficult to see the expansion potential from such a low base as
economic growth continues apace.
Geographic Location: India is ideally positioned as a major aviation hub
at the crossroads between Europe, the Middle East and Asia Pacific. The
fact that aviation was a neglected sector for so long has allowed airports
such as Dubai and Singapore to effectively establish themselves as
offshore hubs for Indian passengers, and they now have a significant
head start. However, as India's airports improve, and its airlines receive
international awards for their service, there may be an opportunity to
leverage its huge home market to compete with these longer established
hubs.
Lower Costs, Higher Quality: India has already managed to develop a
dynamic aviation sector despite, and not because of, its environment. The
73
improvements in airport and airspace infrastructure, the development of
indigenous training and maintenance facilities and the potential for fiscal
reform, all point to the potential for Indian aviation to increasingly
operate in a lower cost, higher quality and more efficient manner. This
could in due course lead to an opportunity for India to develop as a global
outsourcing hub in areas such as aerospace manufacturing, MRO and
training.
Threats
Middle East Aviation: The carriers of the Gulf are aggressively
expanding in India, with high frequencies from multiple destinations to
their hubs, from where passengers can access extensive global networks.
The ability for a passenger for example to travel one-stop from
Ahmedabad to Hamburg, or multiple daily frequencies from Mumbai to
London, connecting at an attractive hub, is a strength which Indian
carriers simply cannot match at present. It will take time and the question
is how far ahead will the Middle East carriers be by that stage.
Terrorism: India has seen frequent terrorist activity in recent years. The
country has shown great resilience in bouncing back after each attack;
however inbound international traffic in particular is sensitive to such
events. Similarly the potential for India to develop as a global traffic and
services hub is contingent upon it being seen as a safe and attractive
destination.
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DISCUSSION
Cash-strapped Air India-Indian Airlines has sought an immediate loan of
about Rs 10,000 crore from the government along with an annual equity
infusion of Rs 2,500-3,000 crore for the next four to five years, which
will be linked to the induction of new aircraft into its fleet. In all, the
tottering airline projected a requirement of almost Rs 20,000 crore,
roughly the size of Delhi state's annual budget, over the next five years.
Aviation minister Praful Patel told that the initial equity infusion would
be kept low and would be limited to Rs 2,000-2,500 crore. The
government may make only a partial contribution. The balance will be
raised from the market via the IPO route at a later date. AI is also learnt
to be looking at an immediate soft loan of about Rs 10,000 crore from the
government. The airline currently has an equity base of Rs 145 crore. The
merged airline, National Aviation Company of India Ltd (NACIL),
accumulated losses of Rs 7,200 crore till March 2009. The AI-IA
combine is to receive 111 new aircraft worth $11 billion (list price) to
replace decades-old planes in its fleet. Until now, 51 new planes worth $4
billion have joined the fleet. But the slowdown, which has hit all airlines,
has affected the already struggling AI particularly badly and it needs a
massive cash infusion to stay in the skies.
However, it was made abundantly clear to NACIL that any financial help
from the government will come, if and only if, NACIL is able to
convince it about two things — it has a plan, and more importantly, that
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it can implement it. Also, any assistance from the government would
have to be matched by an aggressive cost reduction, including a drastic
cut on salaries, and a better revenue management by NACIL and that it
must come up with a concrete cost reduction proposal.
On the salary front, AI and IA give their 31,000-odd employees
performance-linked incentives (PLI), which comprises almost 60-80% of
their overall pay package at senior levels. NACIL has an annual wage bill
of Rs 3,100 crore for its 31,000 employees, with PLI accounting for
almost half the salary expense. Now, AI is trying to cut the PLI but
reaching an agreement with unions could be more difficult than pruning
some staff through leave without pay or VRS routes.
The idea is to save money on lease dole outs and, instead, use that for
paying for the new planes that would also be very fuel efficient unlike the
old rented ATF guzzlers. But getting the companies to take the planes
back is going to be a huge challenge. A leased Boeing 777, for instance,
has a monthly rental of $9 lakhs. The airline also told the panel that it
needed new aircraft to phase out the old ones in its fleet in order to
compete.
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Other remedial costs measures taken to improve operating results include:-
- Focus on cost reduction and rationalization of costs in major areas of
Company's functioning;
- closing down uneconomical offices and the down sizing of foreign offices;
- More economical hotel accommodation for operating and Cabin crew;
- Introduction of measures of all stations in India and abroad to curtail use of
hotels for staff on duty tours by encouraging them to return to the base the
same day;
- A cut of 10% in daily outstation allowance payable at all foreign stations
and 25% at Indian stations;
- Reduction of meal wastage and the rationalization of catering on board;
- Curtailment of Cash Publicity Budget;
- Curtailment of overtime, temporary posting and a substantial reduction in
costs in respect of controllable heads viz. Communication, Printing and
Stationery, General Charges etc;
- Outsourcing of staff transport and redeployment of drivers to operational
areas.
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BIBLOGRPHY
www.airindia.co.in
www.wikipedia.org
http://search.ebscohost.com
Business India
Economics Times
I M Pandey
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