2011

Jet Airways
Strategic Management Case Study

Section 2, Group 1
Aditya Ponugonti Aishwarya Pratap Singh Anirudh Verma Debdyuti Datta Gupta Satyaki Das (FT12 201) (FT12 202) (FT12 203) (FT12 208) (FT12 252)

9/30/2011

Table of Contents
Jet Airways The Joy of Flying ................................................................................................................ 3 About Chairman, Founder .................................................................................................................. 3 Setting up Jet Airways ......................................................................................................................... 3 Growth and Consolidation .................................................................................................................. 4 Customer Focus ...................................................................................................................................... 5 IPO Roll Out ............................................................................................................................................. 6 Jet Sahara Deal ..................................................................................................................................... 7 Low cost carrier strategy against competition ....................................................................................... 9 Fleet of Same Aircraft ......................................................................................................................... 9 Sweating its assets .............................................................................................................................. 9 No Frills ............................................................................................................................................. 10 Online booking and IVR ticketing ...................................................................................................... 10 Dynamic Pricing................................................................................................................................. 10 Advertising revenues ........................................................................................................................ 11 Introduction of Jet Konnect .............................................................................................................. 11 HR Problems and Resolution Lay off of Employees ............................................................................ 12 Reasons for Retrenchment ............................................................................................................... 12 The Debate Leading to the Reinstatement of Employees ................................................................ 13 Massive Salary Cuts Follow ............................................................................................................... 13 Indian Airlines Industry Porter Model Analysis.................................................................................. 14 Rivalry................................................................................................................................................ 14 Threat of Substitution ....................................................................................................................... 15 Threat of New Entrants ..................................................................................................................... 16 Bargaining Power of Buyers .............................................................................................................. 16 Bargaining Power of Suppliers .......................................................................................................... 16

Jet Airways The Joy of Flying

Jets operations currently run through combination of three airlines Jet, JetLite and Jet Konnect. Combined it has a market share of 25.5% and is currently the market leader. From the early 90s when airlines industry was a monopoly of Indian Airlines to the current day, where we have a number of premier as well as low cost carriers, this industry has undergone a drastic change. The biggest gainer out of this is Jet, which through the various ups and downs emerged as the market leader. The journey since its start till now has not been a smooth bump--free ride though. We try to look at some important phases and strategic decisions Jet made, which helped them achieve this feat.

About Chairman, Founder

Mr. Naresh Goyal after graduating in 1967, worked in the travel industry in the General Sales Agent (GSA) department of Lebanese International Airlines. With extensive training and exposure to international airlines, he acquired skills on all facets of the travel and aviation industry. Jet Air (Private) Limited was founded by Mr.Naresh Goyal in May 1974. Its objective back then was to represent the foreign airlines operating in India, and provide for their Sales and Marketing functions. Being a experienced and expert in various technical as well as operational and functional aspects he was involved in development of traffic patterns, route structures, operational economics and flight scheduling, all of which strengthened his holding in the travel and aviation industry.

Setting up Jet Airways

After monopoly of Indian aviation sector by Indian Airlines and Air India from 1950s to the 1990s, the Indian government opened its economy and invited private players. Through liberalization measures and others such as the Open Skies Policy, many private players entered this sector to encash on the huge future potential. It was at this time that Mr.Naresh Goyal too entered the aviation industry, with the setting up of Jet Airways (India) Private Limited in 1991. The initial investment cost in the order of $20 million was financed 60% through Tail Winds, company owned by Naresh Goyal and the remaining 40% came from Gulf Air and Kuwait Airways.

Come May5, 1993 Jet started its flight operations with a fleet of four leased Boeing 737-300 aircrafts and 24 daily flights serving 12 destinations. The first flights were from Mumbai (Bombay) to Delhi and Madras and ten other destinations. One of the key decisions of this time was the type of aircraft Jet used for operations. While competitors such as Damania, East West and ModiLuft who also started their operations at the same time opted for the older Boeing 737-200s, Jet chose newer 737-300s, whose lease costs were at least 40% higher. Four planes(about three years old) were leased from Ansett Airlines. Although the 737-300s were more expensive to lease they were more fuel efficient (consumed 8% less fuel) and were cheaper to maintain. The young fleet also helped to attract customers.

Growth and Consolidation

While Jet was not the first private airlines operator of India, this distinction went to EastWest Airlines, Jet was the second largest airlines operator - revenue wise out of the many privately owned airlines. As is a well-known fact that sustainability is as important as the initial entrance into any industry and a precursor to growth. Here too we find that by 1997, five of the seven private airlines that were launched were out of business. Jet was the only privately owned airline that was profitable. Of the many start-up airlines after deregulation, Jet Airways was one of the very few survivors. Jet Airways reported healthy profits of $11mn in 1997 and placed an order for 10 Boeing 737s with a view to expand and grow. In the same year, Indian government banned foreign ownership in Indias airlines and Jet had to buy out the shareholdings of Kuwait Airways and Gulf Air.

Customer Focus
Jet Airways has a market share of 25.4%. It has grown to this from 6.6% in 1993-94. The growth was primarily because of the focus on customer service. Jet Airways could become the most popular airlines in India because of its superior customer service. It started its operation with new Boeing 737-300s which were fuel-efficient and cheaper to maintain. It took the aircrafts on lease. Flight crew training and operations was cheaper because they had only one type of aircraft the 737--in its fleet. All these also lead to better aircraft utilisation. They also focus on lean structure to improve their operations.

IPO Roll Out

Jet Airways to fund its international expansion plan and to pay-off outstanding debts entered capital market with initial public offering (IPO) in the year 2005. The company offered 17,266,801 (1.72 crore shares) equity shares of Rs 10 each as per the Red Herring Prospectus filed by Jet Airways with Securities and Exchange Board of India (SEBI). The company launched a book-building process between February 18 and February 24 to decide the cash price of the stock. The book building process was undertaken by Deutche Bank, HSBC, UBS, Citigroup, DSP Merrill Lynch and Kotak. The price brand was between Rs 950 and Rs 1,125. The price was fixed at RS 1100. In the first day itself the company received 7.32 crore bids. A huge number of bids (69.93%) were from Foreign Institutional Investors (FIIs). Rest were from Mutual Funds and Insurance Companies. The shares were then listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).

Jet Sahara Deal

Jet Airways in 2006 announced its decision to acquire Air Sahara, which was the 3rd largest airline company at that time, for US$ 500mn (Rs 2000 crore). This received a mixed reaction in the market. While Sahara was making loses and constantly losing market share, the reasons for the buyout were quite evident. These were - market share, infrastructure and landing rights, staff, international routes. Sahara had started losing market share since the emergence of many rival airlines. It was the infrastructure and landing rights held by Sahara that Jet was more interested in. With the emergence of new low cost carriers meant there was stiff competition for infrastructure rights such as parking, hangar bays etc. and since airports had little or no space to expand any further, there was going to be stiff competition for the same. It held true for the landing rights as well. What this deal could do for Jet was that it would avoid all this competition, and at the same time, the increase in the number of flights and the geographies covered, thereby increasing the overall market share for Jet. The deal was a big opportunity for Jet to expand quickly and equip itself well to handle the growing competition in the sector. Another dimension to the deal was the positioning of both the carriers. While Sahara was also looked upon as a services airline, Jet was seen more as a business carrier. This takeover would expand the target segment of the ever-increasing customer base and position Jet well in the market. However, this was not seen in good light by some of the new entrants like - GoAir, IndiGo, Air Deccan and Kingfisher. Immediately after the announcement they started talks and formed an alliance - Indian Airline Operators' Association (IAOA). They feared that if the deal was completed, Jet would be in a very dominant position, having more than 50% market share. Moreover, Jet would also have control over the limited infrastructure at most domestic airports. Some members in the parliament also opposed the deal, as it could lead to the creation of monopoly in the industry. Naresh Goyal defended this well and said that after all due diligence, this deal would lead to economies of scale, improve revenues and lead to less fragmentation of the industry. The deal received principal approval from the Civil Aviation Ministry but fell through over disagreement between Naresh Goyal and the Air Sahara board. Following this, both parties filed lawsuits seeking damages. However a second round of negotiations started in 2007. And after obtaining clearances from the Monopolies and Restrictive Trade Practices Commission (MRTPC), the deal was finally settled on Apr 12, 2007, a long 16 month battle was over with Jet Airways agreeing to pay Rs1450 crore ($340

million). The deal gave Jet a combined domestic market share of about 38%. On Apr 16, 2007 Jet Airways renamed Air Sahara as JetLite. And the takeover was officially completed on 20 April with Jet making the balance payment.

Low cost carrier strategy against competition

After Jet Airways acquired Air Sahara in April 2007 and it decided to run it as a 100 per cent subsidiary under the brand name of Jetlite. At the time of merger, it was also decided that JetLite would be positioned as a value carrier between a full service airline and a low cost carrier which will compete with the likes of Air Deccan, Indigo, and Spice Jet to increase the market share. In order to compete JetLite had fewer frills with economy class details. At the same time, frequent fliers scheme was extended to JetLite. In order to provide its services as a value carrier, JetLite stove to cut down its costs in every possible way. Jet Airways adopted following strategies to compete further in this segment:

Fleet of Same Aircraft

JetLite operated a fleet of 24 aircraft, which includes 17 Boeing 737 series and 7 Canadian Regional Jets 200 Series. Since JetLite used only 2 types of aircrafts compared to 4-5 types of aircrafts used by full-service airlines, it saved maintenance costs. Using similar aircrafts ensured interchange ability of crews, furnishings and spares parts, and resulted in major costs savings for JetLite. Moreover, bulk purchases of spares were made which resulted in economies of scale. Similar types of aircraft also meat reduced training requirements for the pilots as they had to only learn to operate a single type of plane which further brings down the costs.

Sweating its assets

Compared to other full-service airlines, JetLite drew maximum out of its assets. Even if the utilization of aircraft by jet airways and kingfisher is discounted considering the fact that they fly international also, even then JetLites utilization was much higher than full service airlines. That resulted in significant cost savings as fixed costs are incurred whether the planes are flying or not. So it was better to fly more and earn revenue than keeping your aircraft idle. Furthermore, the average fleet age of JetLite is 6.5 years. Though it didnt have the youngest aircraft in the industry, still the fleet was not very old when compared to that of Air India. Having a relatively young fleet means efficient engines, which translates into fuel savings for the airlines. Since air turbine fuel (ATF) is a major cost component, having fuel efficient engines results in significant cost savings.

No Frills
JetLite followed a no-frills policy to keep its costs to bare minimum. This meant that it does not offer any complementary services offered by other full-service airlines. Complimentary services include multi-cuisine food, airport lounges, magazines, entertainment, etc. Airlines that serve food on flight incurred not only the basic cost of food but also the cost of oven, microwave, preheated food cabins and serving trolleys. Not serving food on-board minimized these costs. Moreover, the aircraft became lighter as a result of offloading of heating appliances which increased the fuel efficiency of the aircraft. On an average, about 130 kg to 150 kg of the basic aircraft weight was shed which resulted in a saving of 15% to 20% on operating costs annually per aircraft. JetLite had a fixed menu of very few items which are served only when ordered by the passenger. This reduced costs associated with food, appliances, heating and serving (stewards and stewardess) thus, resulted in major costs savings. Other special services like airport lounges, coach services, on-board entertainment, etc. were a substantial part of an airlines cost structure. Since JetLite didnt provide any of these services, it didnt incur any of these costs and passes its savings to the passengers in the form of low prices.

Online booking and IVR ticketing

JetLite allowed customer to book tickets both online and by an Interactive Voice Response (IVR) system. This eliminated the need for commissions payable to middlemen. Internet booking also obviated the need of ticketing agents and additional workers, thus cutting down the wage bill. Moreover, the paperwork associated with transactions was considerably reduced. All this helped in bringing down the cost of transactions resulting in lower ticket prices.

Dynamic Pricing
JetLite tried to sell maximum number of tickets through dynamic pricing. The tickets were priced according to the availability and demand of tickets. In airline industry, the marginal cost of flying an additional customer is very low. Thus, JetLite tried to maximize its revenue by selling the maximum number of tickets possible. It earned its revenues not only from the sale of tickets but also from the sale of food items and any other service for which it charged over and above the price of the ticket.

Advertising revenues
JetLite enhanced its ancillary revenues by opening itself to advertising. The airline planned to offer the fuselage, the exterior of the aircraft body, and in-flight space for advertising. It is expected to generate revenues worth Rs 50-60 lakh a month from the move.

Introduction of Jet Konnect

In order to enter the low cost segment Jet Airways took over Air Sahara and which led to the assets of Air Sahara under the brand Jet Lite. Soon after the take-over, there were some legal hassles regarding the deal. Then during the slowdown, when air travel demand reduced drastically, and the flights were operating with abysmally low seat utilisation, Jet Airways wanted to shift some aircraft to its low fare operation. However, due to the legal hassles with Jet Lite, it could not do so. Thus it led to the launch of Jet Konnect the low-cost brand of India-based Jet Airways. It was launched on 8 May 2009, and shares the same airline designation as Jet Airways. The rationale for launching Jet Airways Konnect was to close down loss-making routes and divert the planes to more profitable routes with higher passenger load factors. Jet already runs a low-cost airline named JetLite. According to Jet Airways, the decision to launch a low-cost brand instead of expanding the existing JetLite was taken to avoid the regulatory delays associated with moving excess aircraft and assets from Jet Airways to JetLite, which have separate operating codes. Jet Konnect offers a no frills flight where meals and other refreshments have to be purchased on board. To identify if the flight is a full service or Konnect the flight numbers for Konnect are in the series 9W 2000-2999. Jet Airways plan to merge JetLite brand into Jet Konnect in the future.

HR Problems and Resolution Lay off of Employees

In October 2008, Jet Airways (India) Limited (Jet), one of India's leading domestic airlines, decided to lay off more than 1,000 employees to streamline its operations.5 The retrenchment was the second phase of its trimming operations. The first phase, which took place a day earlier, saw the airline showing the door to 850 cabin crew members6. The second phase of retrenchment included employees from all operations - cabin crew, pilots, ground staff, airport services staff, and employees from management departments. The sudden decision not only took the employees by surprise but also caused alarm in the Indian aviation sector. Amidst great furrow and opposition by various organizations and political parties, Naresh Goyal (Goyal), chairman of Jet, reinstated the employees a day later amidst great emotional drama. He was quoted as saying he had been appalled by the retrenchments of his employees, which he claimed, he had come to know only through media reports. He added that he would "not be able to live as long as he lives" with the tough decision his management had taken and clarified that he was taking back the employees as they were "family to him and as head of the family he would take care of them."7 A month later - in November 2008, Jet announced that it would consider serious salary cuts for its staff to handle the aviation crisis. While many industry analysts were surprised by the turn of events that had led to the reinstatement of the sacked employees, they opined that Jet had been forced to take drastic decisions such as laying off employees or initiating pay cuts because of the turbulent phase through which the aviation industry was passing.

Reasons for Retrenchment

The growing challenges in the Indian aviation industry were the main reason for the layoffs at Jet, according to the company and other industry analysts. Turbulent Times for the Indian Aviation Industry - The Indian aviation industry was one of the fastest growing aviation industries in the world. The Air Corporations (Transfer of Undertakings and Repeal) Act 1994 opened the Indian skies up to private operators. Apart from government-owned airlines, the aviation industry was flooded with private operators and low cost carriers...

The Debate Leading to the Reinstatement of Employees

Jet received criticism from several quarters for retrenching its employees. Many of its employees protested against the decision to oust them without prior notice. Most of them had paid substantial amounts to receive training at major Aviation Training institutes. This criticism led to reinstatement of the employees within a span of two days

Massive Salary Cuts Follow

In the last week of November 2008, Jet decided on a 20% cut in the salaries of its pilots, engineers, and some other staff. The company planned a 5 percent to 10 percent cut in the salary of top officials who drew a salary above Rs. 75,000

Indian Airlines Industry Porter Model Analysis

Figure 1: Porter Model Analysis

Rivalry
The major players in the Airline industry, India are as follow: Business Airlines o o o Kingfisher Class Jet Airways Air India

Budget Airlines o o o o Go Air IndiGo Jet Lite Kingfisher Red

Spicejet

Though there are several Rivals in the Indian Aviation industry, there is differentiation in terms of service provided: Budget airlines - no-frills, transportation service providers only Full service airlines caters to those passengers who want to travel with the best of service, attention without scrimping on money There is rivalry among the budget and business class airlines internally as well as between themselves. Some efforts to retain market share take place through: Pricing strategy Services provided Destinations covered

Threat of Substitution
Major substitutes for Airlines would be other modes of travel: Trains Ships Buses Taxis Other Airlines

Major factors that decide mode of transport: Cost Distance Time Comfort desired

Per se, Cost is the primary driver for selecting among the service providers. The other factors then come in the order mentioned above. Services are differentiated among the different airlines budget or full blown. Pricing among the same category, budget or full blown are on equal footing. Customer loyalty is taken care of by features such as frequent flyer discounts.

Threat of New Entrants

There are barriers to entry in terms of the huge capital investment (planes, licenses, strategic alliances). There are barriers to exit as well, as the available infrastructure, equipment have to find viable customers to be disposed off. Sunk cost in the industry is high, another high exit barrier.

Bargaining Power of Buyers

Switching cost for buyers / flyers is negligible. There is nothing in place that holds the buyer (flyer) from changing over from one airline to the next. Buyers are highly price sensitive. Also, the experience / service level they are exposed to is important. Customer satisfaction levels for service provided is an area Airlines take seriously. For the buyer, locations covered by the airlines are one constraint which they cant impact. Also, buyers influence on prices is non-existent.

Bargaining Power of Suppliers

Fuel / Fuel prices are a major part of the total running cost for an airline. Maintenance / engineers are the next biggest cost. Marketing / licensing also contribute to cost. Forward integration by Suppliers (Pilots / Fuel Companies / Caterers & the like) is not feasible. At the same time, it is difficult for an Airline to backward integrate into these areas, as their core competency would get diluted in these activities. Low cost carrier strategy against competition

Reference
http://www.jetairways.com/EN/IN/AboutUs/ChairmanProfile.aspx http://www.fundinguniverse.com/company-histories/Jet-Airways-India-Private-Limited-CompanyHistory.html http://www.makemytrip.com/flights/jet_airways-history.html http://en.wikipedia.org/wiki/Jet_Airways http://en.wikipedia.org/wiki/Naresh_Goyal http://economictimes.indiatimes.com/jet-airways-%28india%29-ltd/infocompanyhistory/companyid-4374.cms http://articles.economictimes.indiatimes.com/2006-03-28/news/27440993_1_transfer-of-airportinfrastructure-mrtpc-probe-restrictive-trade-practices-commission http://www.financialexpress.com/news/jetsahara-deal-finally-clinched/196368/