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Strategic
Management
Indian Aviation Industry

Group 1
Section B
Strategic Management

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Program & Batch

PGDM 2014-16

Term

IV

Course name

SM

Name of the faculty

Shalini R. Tiwari

Topic/Title

Indian Aviation Industry- A Strategic Perspective

Original or Revised write-up

Original

Group Number

1

Contact no. or Email Id of Group
Coordinator

+91 8130083855 ft14mayankshekhar@imt.ac.in Group Members

Sr. no. 1

Roll no.

Name

Vicky Roy

140102140

2

Nitish Nihal

140103119

3

Ankush Bansal

140103024

4

Mayank Shekhar

140101098

5

Priyanka Thaman

140102135

6

Deepak Jhunjhunwala

140102041

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Contents
Executive Summary…………………………………………………….

3

Indian Civil Aviation Sector- Chronology of events……..

4

FDI Regulations…………………………………………………………..

6

Growing Low Cost Carrier Market share…………………….

6

Air Turbine Fuel Price trends………………………………………

7

Rupee depreciation……………………………………………………

7

LCC Strategies……………………………………………………………

7

Financial Analysis………………………………………………………

8

Current Transformation…………………………………………….

9

Industry Estimations………………………………………………….

11

The Indian Advantage- The Four Big Prospects………….

13

Evolution of the Indian Aviation Sector……………………..

15

Strategic Grouping of Six Major Airlines…………………….

16

Six Major airports………………………………………………………

16

Passenger traffic………………………………………………………..

17

Freight traffic……………………………………………………………..

18

Aircraft movement……………………………………………………..

19

Private Sector players…………………………………………………

19

Airports- notable trends…………………………………………….

20

Porter’s Five Forces Analysis………………………………………

21

Strategies adopted…………………………………………………….

22

Growth Drivers………………………………………………………….

25

Strategic Policies- Industry Growth……………………………

27

Top two players Analysis……………………………………………

28

References…………………………………………………………………

28

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Executive Summary

The Indian Aviation industry has been facing multiple hardships through past few years such as, limited pricing power due to industry wide over capacity, rising oil prices and very bleak demand growth. There is a need for more equity infusion into the industry participants, to curtail the prevailing illiquidity and high debt component on the balance sheet. Being cost efficiency and improving upon the cost structure has been the prime need of the hour. Also, better alignment of existing capacity to the demand with appropriate pricing power should be implemented.
In the beginning of the year 2008-09, the industry was affected by sharp rises in the oil prices, but it was mainly because of the decline in demand that grossly affected this industry. This was the reason for the underperformance till the year 2009-10. In the period 2010-11 there was an improvement in the operating environment because of recovery in terms of passenger traffic, stable fuel prices and capacity discipline.
Despite the steady growth in passenger traffic (an average of 14% in nine months in the period
2011-12), the intense competition had impacted yield which increased losses because of the inflated cost scenario. The declining exchange rate was also affecting the financial performance of our airline industry.
The result was Government took up several initiatives
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Allowance of foreign stake of up to 49%
Allow airlines to import ATF directly
Lifting away the freeze that did not allow private airlines for international expansion
Assistance to our national carrier

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Indian Civil Aviation Sector- Chronology of events

1911, Feb 18: The first commercial flight was made by Monseigneur Piguet, a French pilot. The
Humber biplane covered a distance of about 10 km carrying 6500 mails from Allahabad to Naini.
This marked the beginning of civil aviation in India and is considered the world’s first airmail service. 1912, Dec: Indian State Air services opened the first air route between Delhi and Karachi.
1915: Tata Sons Ltd. started a regular air mail service between Madras and Karachi.
1920, Jan 24: Air mail services was started between Bombay and Karachi by Royal Airforce.
1924: Civil airports construction began in India.
1927, Apr: The Civil Aviation Department was set up to look into the matters of civil aviation.
1933-34: Numerous Indian airlines started operating- Indian National Airways, Madras Air Taxi
Services, Indian Trans Continental Airways etc.
1937: The formulation of the Indian Aircraft Act.
1940: Walchand Hirachand in collaboration with the then Mysore Govt. had set up Hindustan
Aeronautics Limited
1941, Jul: Harlow Trainer, India’s first aircraft rolled out for test flight.
1945: The Nizam of Hyderabad and Tatas jointly founded the Deccan Airways
1946: Tata Airlines changed its name to Air India
1947: This was the time of independence when nine Air Transport Companies were operating.
Later Orient Airways shifted to Pakistan and the number reduced to eight.
1953, March: Air Corporations Act was passed by the Indian Parliament. This resulted in the nationalization of the entire airlines industry under Indian Airlines and Air India International.
1953: The country witnessed the introduction of Civil Helicopter Services.
1972: Formation of the International Airports Authority of India, IAAI.
1986: Formation of the National Airports Authority.
1987: Establishment of The Bureau of Civil Aviation Security.
1990, April: Open-sky policy adopted by our Government.
1994, March: Air Corporations Act repealed and replaced to enable private players operate scheduled services.

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1995: Merging of National Airports Authority and International Airports Authority of India resulted in the formation of Airport Authority of India.
1999: The first airport was built with public private participation- CIAL Airport.
2003-04: Entry of low cost carriers- Air Deccan and GoAir.
2004, Dec: The prerequisite for operating scheduled services at international destinations required a player to operate domestically for a continuous period of five years and possess a minimum of 20 fleets.
2005: The two low cost carriers Spice Jet and Kingfisher Airlines commenced operations.
2006: Indigo- another low cost carrier started operations.
2006: Public private model adopted for the modernization and restructuring of the Delhi and
Mumbai airports.
2007: There were three major mergers:
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After the clearance by the Empowered Group of Ministers and approval by the
Cabinet, the AI-IA merged.
Air Sahara acquired by Jet Airways and renamed JetLite.
Air Deccan acquired by Kingfisher Airlines and renamed Kingfisher Red.

2008: Greenfield Airport policy announced by the Government.
2009: AERA was established by an act of the Parliament for the regulation of economic aspects of airports.
2010: Establishment of AERAAT, Airport Economic Regulatory Authority Appellate Tribunal.
2010: International operations started by SpiceJet
2011: Exit by Kingfisher from the LCC segment. International operations by Indigo.
2012: Direct ATF imports allowed and FDI up to 49% by Government of India.
2013: Signing of Etihad Airways and Jet Airways deal. Announcement of TATA-Air Asia and TATASIA joint ventures.

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FDI regulations

Growing Low Cost Carrier Market Share

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Air Turbine Fuel Price Trends, Mumbai (Rs/KLitre)

Rupee Depreciation (INR/USD)

Low Cost Carrier Strategies:
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Aircraft has only single model – This helps in reducing maintenance and inventory cost.
Operations are mainly in secondary airport- Since there is less congestion, the turnaround time and charges are lower.
No In-flight Services- Reduction of cost and thereby maintain low fares.
Point to point model- Reduces wait time at airports thereby improving aircraft utilization.
Configuration based on Single-class- Results in more seats thereby this allows in appropriate cost spread.
Less number of employees per aircraft- Higher employee productivity and lesser employee cost.
E-ticket- Helps in the reduction of expenses associated with selling of tickets.
Ancillary Revenues- These are primarily associated with on board sales.

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Financial Analysis

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Current Transformations:

Currently after the prolonged period of distress, the Indian Aviation Industry is on a high growth trajectory, although their there are minor hiccups. Today there is a vision that by 2020 India will become the third largest aviation market and the largest by 2030.
The turnaround of the industry can be attributed to the factors such as introduction of LCC (Low
Cost Carriers), entry of FDI in domestic industry, growing regional connectivity and improved IT systems. With a size of around USD 16 billion the Indian Aviation Industry is among the top 10 in the world.
However, to achieve the vision a lot more needs to be done.
In the next few decades, the two regions that are projected to lead the growth of the aviation sector are the Asia Pacific region, Latin America and Eastern Europe. There will be an increase in the spending power of the population of both India and China due to the steady economic growth. There is a huge untapped potential here in India and in China, both combined being one third of the world population.
The Government has clearly mentioned in its 12th Five Year Plan (i.e. 2012-17) that it wants to improve the connectivity in tier 2 and tier 3 cities as well. This will give boost to the low cost carriers and also many small airports will crop up. USA’s Federal Aviation Administration had downgraded India to second grade; this will constrain the expansion to global routes. So there will be an increased focus in the domestic aviation sector, in the short run. This will in itself add to the local economies, improving tourism and employment.
Here in India, the Aviation Turbine Fuel is one of the costliest in the world; it is approximately
60% costlier than those sold by ASEAN and Middle East regions. This invariably explains why a three day holiday package at Malaysia or Thailand might be cheaper than travelling a domestic airline to and fro. This is also the reason that tourism in India costs higher, and the current tourism statistics is just a fraction of its overall potential. If estimated, approximately 99.5% of the world’s third largest economy has never seen how the interiors of an aircraft looks like. This in a way translates into the airline industry’s financial ruin.
Recent initiative such as allowing to import ATF is a rightful measure, but more such steps need to be taken to make the industry more investor friendly. We can slowly realize that allowing 49%
FDI has been fruitful. Also removing ban on A380s will help in reducing cost associated with travel and increase arrival of tourists. In fact the 5/20 years rule and other hurdles faced in approving a new airline and aircrafts import should be subdued.
Maintenance, Repair and Overhaul- another regulatory regime is a form of procedural overkill.
Repairs of commercial aircrafts are not done in India. Aircrafts need to be taken to MRO facilities those that are present in the neighboring countries. This involves payment in foreign exchange

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currency. This results in huge loss of revenue due to taxes and exchange. This is due to the short sightedness of our indirect tax policies and hectic customs procedures whilst importing consumables and spare parts.
There has been a constant growth of air traffic and this calls forth better Air Navigation Services.
The ANS directorate should be segregated from AAI, so that it can be well equipped with world class infrastructure. Most probably, there might be a Government decision on this soon.
Emphasis on human capital and regulatory frameworks will help India become a strong aviation player. These reasons have been the cause for the downgrade by the FAA. Creation of operationally separate National Aviation University and Civil Aviation Authority is the need of the hour. The scope for growth in India Aviation Industry is huge since 99.5% still dream of travelling by air, and moreover 40% of this segment are upwardly mobile middle class. The decisions should be based on collaborative thinking by both the industry stakeholders and the policy makers. With prime focus on cost, quality and passenger interest along with the right set of policy decisions
India is poised to become the third largest by 2020 and the largest in aviation industry by 2030.

Total Passenger Traffic ('000s)

160000

140000
120000
100000
80000
60000
40000
20000
0
2010-11

2011-12

2012-13

2013-14

2014-15

Data source: cmie industry outlook
In the above, the line in blue represents the total passenger traffic in thousands. The orange line is the total passenger traffic in the domestic segment and the other in grey represents total international passenger traffic.

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Industry Estimations:

By 2020, India will become the third largest aviation market.
From 159.3 million in 2012-13, passenger air traffic will increase to 450.0 million by 2020.

By 2023, the Travel and Tourism industry of India will be valued atUSD 270.5 billion. 7.9% growth since 2012, USD 119.4 billion

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Growth in the aviation industry will be bosted by business and leisure travel.
Increase in spending on business travel at 60.4 billion (2024) from 20.7 billion (2013). Also increase in spending on leisure travel is forcasted at USD 224.7 billion from USD 77.8 billion. India’s working population shall be hree times the US population by 2030
The working population, aged between 15 and 64 years is estimated to increase to 900 million from 780 million (2011) by 2030.

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The middle income class in India will be thrice Germany’s total population by 2016.
The increase is from 160 million (2011) to 267 million.

Source: World Travel and Tourism Council, Asian Development Bank

The Indian Advantage (The Four Big Prospects):

Source: Ministry of Civil Aviation, MRO India
The above fact clearly justifies the increase in number of operational airports to 125 from 50 in the year 2000.

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Evolution of the Indian Aviation sector:

Source: Airport Authority of India, Planning Commission, Ministry of Statistics

India is ranked 9 among the markets comprising civil aviation of the world.
Ranks 4th in terms of domestic passenger volumes.
By 2020, India is poised to become the world’s 3rd largest civil aviation market.

The total number of airstrips and airports India has – 449; AAI own 125 of them.

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Percentage breakup of activities in airports owned by AAI:

Established in the year 1984, AAI was the outcome of the Airports Authority Act.
It is responsible for maintaining, operating, financing and developing all Govt. airports.
The remaining airports are governed by the The Aircraft Act, 1934.

Six Major Airlines operate in the country (Strategic Grouping):

Source: As published by the Directorate General of Civil Aviation

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India has majorly these six airports:

The increase in passenger traffic seems to remain in a healthy growth phase:

Since the new millennium, the growth has been robust at CAGR of 11.70% over the period
FY06-13.
The domestic passenger traffic grew at a CAGR of 12.52% over the period FY06-13; and is expected to go beyond 209 million by FY17.
The international segment grew at a CAGR of 9.80% over the period FY06-13; and is expected to go beyond 61 million by FY17.

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Total Freight Traffic (in million tonnes):

Freight Traffic by segments:

The total freight traffic grew at a CAGR of 6.60% over the period FY06-13; and finally stood at 2.10 million tonnes.
The percentage CAGR increases for the period FY06-13 are: Domestic freight: 7.10% and
International freight: 6.20%.
Finally the domestic and international freight stood at 0.8 million tonnes and 1.3 million tonnes. By the end of the next two decades freight traffic is poised to grow by five times; by 2032, it will touch 11.40 million tonnes.
There will be immense growth in the export and import trades of India and this will lead to the growth of freight traffic, since 30% of the trade is carried out by air.

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More Aircraft Movement due to growth in Aviation:

Aircraft Movement by segment:

The percentage CAGR increase in aircraft movement is at 8.40%.
The domestic as well as international movement has doubled through this period.
The percentage CAGR increase segment-wise over the period FY06-13: Domestic 8.70% and International 7.40%

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AAI still dominates though private sectors are on the rise:

Airport Authority of India was the only major player in upgrading and developing airports in India.
Now we see that private sector is actively participating post liberalization.
The investments by private sectors is expected to grow to USD 9.30 billion from USD 5.50 billion, when the twelfth fifth year plan is already in place.

Airports- Notable Trends:

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Porters Five Forces Analysis:

Competitive Rivalry
The competition among the major players is fierce. This is majorly concerned with the
LCC (Low Cost Carrier), because the airlines target the middle income group and those passengers who travel by air conditioned coaches of railway transport. Therefore there is very less brand loyalty in this sensitive and the market is very price sensitive.
In fact the competition will become higher with Air Asia being granted the operator license by DGCA.
Threat of New Entrants
Since the industry is capital intensive and there are numerous regulatory hurdles, the threat of new entrants remain low.
There will be more price wars since Air Asia has entered the market.
Substitute Products
Since no other means of transport is as fast and hassle free compared to air, the threat remains low.
Time saving

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Bargaining Power of Suppliers
Since there are only few aircraft and fuel suppliers, the bargaining power of suppliers is always at a high.
The pool of talent such as pilots, maintenance engineers and other staff is also limited.
Bargaining Power of Customers
Since the demand for travelling by air at a lower cost is fairly high, the bargaining power of customers remains relatively low.
The services offered by competing airline services are relatively similar, so by switching between airlines, there is no major advantage to customers.

Strategies adopted:
Expansion:
With additional expansion plans of adding 20 more aircrafts by the second half of the financial year 2014, the LCC segment is poised to grow.
Plans for expansion, by CAPA.
The exit of Kingfisher which had created a void, has helped in the further rise of the
LCCs.
New terminals are coming up in Bengaluru, Chennai, Kolkata and Mumbai. So there will be an increase in capacity.
The fleet capacity will grow double to 800 by 2020. This initiative will help the Indian carriers. Ancillary Services:
The ancillary services are on the rise without complicating the existing model. So the
Indian LCCs are now working towards inclusive services such as priority boarding, customer meals, lounge access and customer loyalty memberships.
The corporate market is primarily targeted by GoAir and Indigo.

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Increasing operations:
There will probably a rise in the operations in the LCCs throughout the regional and international markets- Middle East and Asia Pacific.
Increasing the availability of low cost products and services on international routes that take up to four hours, is a key strategy by Indian LCCs.
This will help the industry in three broad ways- Increased aircraft utilization, deleveraging of the domestic fleet and increased commercial performance.
The strategic location of Chennai in Southern India has the potential to become a prime hub for connecting flights across South East Asia and Gulf regions.
Government’s push:
While there is increase in demand and growth for LCCs, India has a shortage of low cost airports. Our Government have chalked out plans to come up with over 100 airports with low operating cost.
There is a supply gap of aviation personnel. To lessen this gap NIAMAR, National
Institute of Aviation Management and Research has been improved.

GROWTH DRIVERS:
There is an existing strong demand and the added policy support- Leading to increase in
Investments.

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Air Travel demand is on the rise:

Per capita income and population is rising:
Expected increase in per capita income for the period 2009-14E is 6.0% CAGR.
The current working age population (i.e. 15 to 64) is at 64.80%. With this increasing there will be an increase in the employee base, thereby increasing the demand for business travel in India.

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Increase in the number of domestic and foreign tourists:
This in turn will increase the tourism infrastructure.
More ad campaigns directed towards foreigners.
The component of travel and tourism in our GDP has increased by 7.30% in 2014; and is expected to increase at 7.0% year on year for the period 2014-2023E.
Increase in number of business travels:
India has the advantage of being one of the fastest growing nation.
The multiple emergence of business hubs such as Bengaluru(IT), Mumbai(Finance),
Chennai(IT), Delhi(IT, Manufacturing).

The higher aircraft movement is aided by rise in trade:

The freight movement is benefitted by the growing trade:
The exports in India increased at a CAGR of 11.50% for the period 2008-14
Whereas imports have grown at a CAGR of 10.20%
The growth in trade is a good sign for airlines industry, since it forms about 30% of the total trade by value.

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Strategic policies helping this industry grow:

Greater focus on infrastructure:
Greater airport infrastructure investments of up to USD 11.5 billion according to the
Twelfth Five Year Plan, 2012-17
Initiatives by the Ministry of Civil Aviation of greater annual planned outlay of about USD
1.6 billion, for infrastructure development.
Open Sky Policy, Liberalization:
Since the airline sector is seeing more private participation, six airports are being developed under the PPP model.
60% traffic in the airports is currently being handled under the PPP model, and the rest by AAI.
More bilateral agreements with foreign countries, leads to more traffic rights.
FDI encouragement:
For Greenfield projects, under automatic route, there’s 100% FDI.
With an approval from FIPB, the existing airports can also go for 100% FDI.
For foreign carriers, there is already an existing approval of 49% FDI

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Duties and Taxes:
For a period of 10 years, airport projects are allowed for 100% tax exemption.
The MRO, Manufacture Repair and Overhaul service providers enjoy complete exemption from countervailing duties and customs.

Budgetary Support:
The Finance Minister had pledged budgetary support of USD 58.3 million, to help AAI develop airports located in the North eastern regions.
The DGCA, aviation regulator, allocated USD 12.5 million for development plans.
Union Budget, FY15, Finance Minister conveyed about the under construction airports at
Agartala, Imphal, Shillong, Dibrugarh, Guwahati, Silchar and Dimapur.
Plans to build 200 new airports (low cost) by next 20 years to improve tier II and tier III cities connectivity.

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Top two players Analysis:

Parent Company
Category
Slogan/Tagline
USP
Segment
Target Group
Positioning
Strength

Weakness

Opportunity

Threats

Indigo
InterGlobe Enterprises
Domestic
Go IndiGo

SpiceJet
SpiceJet
Domestic
Flying for everyone; Get More
When You Fly
Low Price

On Time Performance, Lowest Price
STP
Cost sensitive passengers
Cost sensitive passengers
Middle Class / Lower Middle Class
Middle Class / Lower Middle Class
Low Cost No Frills
Low Cost No Frills
SWOT Analysis
1. Largest low cost carrier in
1. Considerable backing India, strong backing from from promoters. promoters. 2. Growth of LCC segment in
2. Only profit making LCC.
India.
3. Greatest market share.
3. Among the largest low
4. Brand value boosted, cost carriers in India. expansion to international
4. Reach of about 46 Indian markets. destinations.
5. Better brand recall; good
5. Good market presence; advertising and marketing
Branding and advertising. strategies. 1. Not on too many routes.
1. Low market share.
2. Needs to establish on
2. No international international destinations. presence; Limited destinations. 1. Opening up international
1. More middle class taking routes. to the skies.
2. Largest market share among
2. Spread to popular routes
LCCs.
and destinations.
3. More middle class taking to the
3. International tie-ups. skies. 1. New LCCs; more competition.
1. Strong competition.
2. Labor costs on the rise; and
2. Fuel costs. fluctuating fuel costs.

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References: http://businesstoday.intoday.in/story/indigo-slashes-airfares-price-war/1/196586.html http://www.spicejet.com/
FICCI KPMG Aviation Report 2014
Indian Aviation industry, ICRA report http://industryoutlook.cmie.com/ http://www.aai.aero/public_notices/aaisite_test/main_new.jsp http://www.india-aviation.in/pages/view/38/an_overview.html http://articles.economictimes.indiatimes.com/2015-01-09/news/57884068_1_mro-work-airindia-air-works

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