MBA in Aviation Management: Aviation Strategy

AVIATION STRATEGY
Joana Mari Bacallo MBA1076
Professor Vicente Maraon de Pablo
An Analysis of the Strategic Situation of the Aviation Industry in India

An Overview of the Indian Aviation Industry

From the humble beginnings in 1950s the Indian aviation sector started with only nine
airlines including Indian Airlines and Air India. On the same year, the Air Corporation Act was
made and was able to nationalize all private airlines in the country. And at present time, the
aviation sector continues to assure growth as India ranked the 9th largest civil aviation market in
the world and currently 4th in domestic passenger volume of roughly 45.3 million as per the
Ministry of Statistics and Programme Implementation, Aranca Research. Over a decade ago,
there were only 225 aircrafts, with 66 million passenger handling capacity at the 50 operational
airports in India and now has reached to an increasing 735 aircrafts with 235 million passenger
handling capacity at 82 operational airports in 2010.

The Many Faces of the Indian aviation sector

According to Oxford Economics, Economic Benefits from Air Transport in India, one of
the many reasons that people and businesses use air transport, is as primary source of
connection to meet their family and friends on their holidays while delivery of goods and
materials is the main reason businesses rely heavily on it.
Air transport is only one part of the aviation industry. The airlines have other strategic
business units in order to operate, in all cases; an airline needs ground-based infrastructure and
facilities that directly serve the passenger like baggage handling, ticketing, catering and retail
among others. India caters to numerous industries involved in manufacturing, engineering and
maintenance. According to IATA, 54% are domestic travels originating from India while 23% of
scheduled passenger trips are to Asia and pacific region. There are five large airports in India

MBA in Aviation Management: Aviation Strategy

and Indira Ghandi international Airport serves to be the main hub/ airport of the country and
claims to accommodate its locals to numerous destinations for a low cost.
Aside from the 276,000 local Indians directly hired by the aviation sector, there are
841,000 jobs associated and supported through the indirect business and jobs within the
industry such as mentioned earlier on catering, delivery, maintenance and facilities. (IATA, ACI
and Oxford Economics) It was also stated on the same report that the Indian aviation sector
enhances the overall economy over INR 330billion with 0.5% of GDP giving 1.7 million jobs in
India.

Strengths of India
With the rest of the world, growth in both passenger traffic and freight will continue to
grow as tourism and trade drive the country and income increases. In terms of policies, there is
a huge participation and encouragement of private sector through public-private partnerships
(PPP) as well as allowing some relaxation in foreign direct investments. This was supported by
the

Annual estimate of international and domestic operations for 2010 based on airline

schedule published by SRSAnalyzer, where it says that there are more than 664,000 flights
make 89 million seats available to passenger annually, destined to 73 airports.
As the whole aviation sector makes up airports, airlines, air navigation and ground
services, it generates value to its consumers, passengers and shippers. Air transport has
become the first choice in India as a mode of transportation as well as in many parts of the
world.

Economic Traces of Indian Aviation

The history of the economic environment of the aviation industry a couple of years back,
was a story of recovery from the economic recession in 2010 as domestic airlines showed
significant gross sales growth of 9% in December 2011 according to a note from Aggregate data

MBA in Aviation Management: Aviation Strategy

for Listed Airlines, from Capitaline, ICRA Research. But on this years of slow recovery, the fuel
cost amount to 50% of the gross sales. The increase in ATF did not help local carriers like Air
India, (like any other Indian carriers that do not hedge fuel prices) as they were trying to cover
and preserve the Indian market share. The full service local carriers try to discriminate price to
compete with the LCCs and international carriers.
Although the Indian aviation sector has continuously faces challenges in terms of high oil
prices, stiff competition for airline operators and players as most of them face deep financial
limitations in terms of liquidity and assets, the industry has been marked as positive and
promising since the demand from the middle class population increases. In effect, the
population has higher disposable income to travel giving a boost to the economic growth of the
country. According to the ICRA Rating Feature Research, during the financial crisis of 2008
2009, the industry has been affected by the massive hike in oil price, thus the industry
underachieved as the passenger traffic declined during these period of time.
The general economic environment of the Indian aviation industry still revolves around
steep competition resulting for operators to cut prices to maintain market share, but these
players on the industry continues to operate with high fuel costs while paying a high interest in
their financial obligations, thus resulting to company loss.

Indian Aviation Sectors Ball and Chain

In terms of the political environment of the country, the Government of India (GOI) has
believed to be a ball and chain in the aviation sectors progress and growth as the regulations
imposed get disproportionate, and taxations are imposed heavily, which results only to high cost
of air travel passengers and operators alike. Nonetheless, there have been some leniencies and
favorable improvements on the political aspect of the aviation sector shown over the last few
decades as industry welcomes new players like the Low Cost Carriers (LCCs), there were also
airport upgrades and reforms in terms of policies and procedures governing the aviation

MBA in Aviation Management: Aviation Strategy

industry. This growth rate was supported by the 16-19% of Compound Annual Growth Rate
(CAGR) in passenger traffic. Freight traffic also stabilized in the last two financial years when
total freight traffic grew 20% with 2.3 million tons in 2011. Domestic freight traffic rose to 10.9%
per cent CAGR and international freight traffic reached 10.4% with 64% of the total in the
financial year 2011 as well. Likewise, the effect of the growth in the aviation sector directed
higher aircraft movements with total aircraft movement recorded a CAGR of 11.7% (Domestic
Aircraft Movement increased at 12%, while international aircraft movement expanded by 10.7%)
(Airports Authority of India- AAI, Aranca Research)
Although there was significant growth rate in several areas of the industry, it is deemed
short-lived as most of the operators in the aviation sector like the airlines continuously operate
in a very expensive and competitive environment. Most of the domestic airlines are persistent to
expand and as much as they would like to. They do this through fleet expansions, affecting their
capital and overall success in their respective companies as they need to acquire more aircrafts
amidst the different factors they have to consider in the operation. On top of that, the Indian
government imposes heavy taxation on Aviation Turbine Fuel (ATF), airport charges, as well as
more labor law constraints are still present in the industry.
But as mentioned, the government has tried to pioneer some relaxation in some policies
and one of the effects of the leniencies of the government of India is the emergence of the
market of LCCs. It gives some disadvantages for some full-service carriers as it not only puts
pressure on to the Indian domestic aviation industry but it also highly affected the capital
structure of pre-existing domestic carriers. These LCCs focus on maximizing load factors and
utilize a single mode of aircraft, making it easier to maintain and reduces the inventory cost.
They only add aircrafts mainly on long term operating leases. These new entrants operate on
secondary airports, with lower charges and less turnaround time. Since there are no in-flight
services, the air fare is cheaper and the company relies on other ancillary revenues like on

MBA in Aviation Management: Aviation Strategy

board sales among others. It was the success of Air Deccan from 2003 that encouraged other
emerging LCCs in India such as Indigo, GoAir and Spicejet.

The Impact of the arrival of carriers based in the Gulf in the Indian aviation industry
India is not a wide space anymore
Although the government of India still dominates, private sector participation is inevitable
and is rising. It was in September 2012 that the Government of India cleared 51% FDI in retail
and 49% in aviation according to Times of India dated September 12, 2012 where Prime
Minister Manmohan Singh believed that it will make India a more attractive destination for
foreign investment and with such investments, it will alleviate difficult times in the sector if the
foreign players buy up to the said percentage of stake. This proposal that has now become an
agreement and is definitely a landmark in the aviation sector in India as it is expected to ease
the industry with its losses and debts.
With the entry of foreign carriers in the country, it allows good practices to come in the
aviation industry, bringing global expertise and standards and these will be coupled with the
strong growth prospect of passenger traffic growth of 16% over the last decade and can aid
India to be an established hub for international connections between Europe, South East Asia
and United States destinations. This is also a chance for India to set-up Maintenance, Repair
and Overhaul (MRO) facility and to be a centre providing low-cost arbitrage for foreign airlines
since India has only one established third-party MRO. The geographic location of India holds
favorable too as there is no MRO facility within a five hour fly zone of India, where the nearest
MRO facility on the west part is Dubai and eastside to Singapore.
One of the most important areas to receive the impact of the entry of foreign carriers will
be the consumers and the people that benefits from this venture. Not only will it provide
flexibility in international travels for passengers, the new entrants will encourage competition as

MBA in Aviation Management: Aviation Strategy

they could offer more alternatives now, as small cities will be serviced through direct flight
possibilities.
Because of increase movements, tourism will boost and India Country Report stated that
89% of the foreign visitors come to India via air, with an estimated 488 billion spent by the
foreign visitors. As a result of the boost in tourism, Indian aviation will create jobs that will entail
an estimate 350,000 new employees for the next ten years to come.

Etihad-Jet Airways partnership sealed

Some people believe that the future of Indian aviation industry must be with an Indian
operator and Rahul Bhatia, Co-chairman of Indigo Airlines supposed so. He thinks that the
sector will struggle if government will allow such policies and let a big portion of foreign
influence into the countrys aviation industry.
Etihad Airways from United Arab Emirates (UAE) bought 24% stake from and local
player Jet Airways for $379 M resulting to the Abu Dhabi- based national carrier 24% of the
share capital of the Indian airline. One of Jet Airways representative and promoters Naresh
Goyal with Etihad Airways CEO James Hogan made the alliance public and that Jet Airways
27.26 M shares amounting to 754.74 a piece.
Along with the deal are three pairs of Heathrow slot. The foreign player paid for the
premium of 31.7 %. The first effect of the agreement is cheaper fuel will now become accessible
since it will be coming from the UAE. This gives Jet Airways in a position to become a strong
competitor of the national airline, Air India as well as one of Etihad Airways competitors in UAE,
Emirates Airline.
In an interview in Profit NDTV last 2012, Jitendra Bhagava, former Executive Director of
Air India stated that this particular deal between Etihad Airways and Jet Airways is very one
sided and favors a lot for the foreign entrant. He claims this agreement will never be in the
interest of Indian aviation sector but of the profits and growth of the two airlines in partnership.

MBA in Aviation Management: Aviation Strategy

In the interview, he clamors that the Indian government is ironic in funding Air India, while on
the side, allowing other foreign carriers to meddle into the industry. He also believes that this
will not stop on India-UAE sectors and will eventually cover a much larger scale. Mr.

Bhagava

strongly affirms of a national aviation industry policy in order to build transparency and
accountability. This policy making body will be very pertinent in defining policies governing the
aviation sector.
On the other hand, Amber Dubey, Partner and Head Aviation KPMG focuses on the
good advantages this partnership will bring the country in the long run and not only for the
benefit of Jet Airways although it is obviously going to lead the company into higher margins.
In effect, this stability, in the long term effect will continue to create more jobs for the
locals through other parts of the aviation sector as well as the auxiliary effects of tourism in the
country.
Indian identity is lost
Although some favor the agreement and entry of Gulf carriers in the country, there are
apparent factors that abound which are not in favor of the investments. One of the top reasons
is the threat of relocating the hub to the foreign carriers base in the future as Etihad Airways will
have a huge influence in changing Jet Airways hub. This is not far to realize as GCC airports
are predicted to be unavoidable. A study published for the Airport Show and Global Airport
Leaders Forum last May 6-8 stated Gulf airports will handle 250 M passengers in 2020 making
Dubai the busiest airport in two years time and the Gulf-based carriers Emirates, Qatar and
Etihad will handle four times their capacity. More so, the passenger traffic increased at an
annual rate of 10 % between 2002 and 2010 as well as 200% increase in the inter-regional
passenger traffic over the last 10 years.
As what ICRA Ltd Feature Research, March 2012 affirms in their research, aviation
economics are not favorable in India because aside from a capital intensive industry, there are
higher taxes on fuel. In addition to the growing demand, airlines will struggle mostly in handling

MBA in Aviation Management: Aviation Strategy

a much higher cost environment. Such as when delays happen (since there is inadequate
airport infrastructure). Not only that, competition imposes travelers to be sensitive with price as
well as foreign exchange fluctuations. Local players like Air India and Indigo will greatly feel the
effects since these local airlines are building combined market share of international and
domestic market.
India existed with FDI before, and these foreign carriers currently have a major share in
the international routes through code share partnerships. According to DGCA, Company filings,
ICRA Research, the foreign carriers have at least 65% market share in international traffic with
27% of total passenger traffic with domestic and international traffic combined.

The Potential scenarios for the future of Indian Aviation

Although there are numerous factors that impose massive challenges in Indian aviation
sector, financial constraints accounts the majority. Fuel is still going to be the first on the list as
per the Federation of Indian Airlines; it is going to remain the largest operating cost of the
airlines accounting to 40%. Because of high operating costs and steep competition, the airlines
could not charge for additional seat fares and extra luggage fee among others.
Local airlines will become the second option as compared to the new entrant and these
small players will continue to struggle as the will have a tough time making profit out of the
expansion of the competitors. Air India for instance has too much capacity and will have the
difficulty to raise tariffs as well has make profit in their expansion programs. According to the
Center for Asia Pacific Aviation (CAPA), Indias Aviation Sector, 70% of Air India is actually on
debt despite the fact that government decides on their strategic advances.
One of the possible scenarios that have already been happening to some of the local
airlines now is the strategy of expansion as a counter move as they will buy new aircrafts on
debt to compete and align themselves with the competitors. This is an aggressive and effective

MBA in Aviation Management: Aviation Strategy

move if managed with discipline. However, they will do this without knowledge of trends and
cause and effect. Therefore, airlines will overlook the high costs, ending into more debts.
Most of the high profiles in Indian aviation are the first ones who worry about India losing
its identity as a hub, they local airlines decides to stick with the structural issue that they have
been using since, which is the Hub and Spoke model where it is widely used in metro cities.
These traditional airlines do not agree in the probability that their current strategy could be
mixed with point-to-point strategy where the airlines could utilize the aircraft as seat occupancy
gets higher, and small towns in Indian provinces could be serviced, therefore will increase
passenger, freight traffic as well as aircraft movement.
Michael Porters Five Forces Framework mentioned that one of the forces to competitive
rivalry is the threat of Potential Entrants. Having access to supply, capital and distribution
channels give the Etihad-Jet partnership a strong competitive advantage in the Indian
subcontinent as well as to other airlines serving the same routes. Because Etihad is an
established airline and they have entered the Indian aviation industry with ease when the
government allowed 49% for the aviation sector, the values attached to this airline is as
important. This framework will exactly be used and utilized by other Gulf carriers or other
entrants if India will not stabilize on their policies in the aviation industry.

Sustaining Policies, Inducing Results

Since there is a trend and a continuous growth in demand for more people traveling by
air, locals and international tourists are more likely to visit and do business in and out of India.
There would be substantial and continuous growth in the future, particularly in external trade
making it inviting for the GOI to focus more on infrastructure of airports and air transport
facilities. This expensive endeavor will be requiring an immense funding but will be essential in
the sustainability of the aviation industry as a whole.

MBA in Aviation Management: Aviation Strategy

This growing demand also calls for the government to increase liberalization and Open
Sky Policy, as well as encourage FDI to increase investments. Increasing the public-private
sector participation will support large development projects making returns favorable in general.
In fact these policy supports has greatly contributed the airports sector of the Indian aviation
industry since some developments has already started such as the approval of the
establishment of Greenfield airports under public-private partnership last 2008. The next year
after the Airport Economic Regulatory Authority was formed as a new regulatory body to
increase traffic rights under bilateral agreements with foreign countries. In addition to the
aforementioned, there will be a 100% tax exemption for airport projects for a period of 10 years
and airport developers are allowed to charge passenger development fees.
The economic path of the aviation industry is as important however the structural issue
in the government of India and the policies created for and that surround the aviation sector will
be decisive in the long term. Tourism industry is directly proportional with the growth of the
aviation sector and with the growth, the country benefits and the new wave of labor will have to
undergo training to acquire skills and knowledge that are of international standards in order to
surpass expectations required to keep afloat with the competition. The GOI should consider
intensive preparation for the workforce that will be serving the tourist market for the next decade
and train them not only how to attract tourists to visit the country, provide accommodation,
utilize travel and tour promotions but to sustain that passenger and business movements in and
out of the country for the next years. On the other hand, should airline operators focus on
managing cost arrangements, they will be in an efficient position where they could afford
mixture of strategies such as combining fleet and routes, providing alternatives to the
consumers.
Lastly, if the GOI will not provide a clear plan of financial approach to their national
airline, Air India, it will continuously suffer with loans (currently Rs 67,520 crore, ICRA Ltd
Research) and Indian skies will eventually be dominated by foreign carriers.

MBA in Aviation Management: Aviation Strategy

References:
Publications
ICRA Limited, ICRA rating Feature, Through Turbulent Times, FDI Relaxation alone, not a
game changer March 2012
www. Iata.org/publications/ceo-brief 2012/pages/india.aspx
Oxford Economics: Economic Benefits from Air transport in India, Oxford 2011
News articles from:
profit.ndtv.com
thenational.ae
thehindubusinessline.com
thetimesofindia.indiatimes.com
theeconomictimes.com