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Air India brought its newly-acquired Boeing 787 Dreamliner in service from September 19, 2012, with the first commercial flight slated between New Delhi and Chennai IndiGo has signed a definitive agreement for the purchase of 300 Pratt and Whitney engines. The engines will power the 150 Airbus A 320 New Engine Option (NEO) family aircraft that the airline has ordered. With a compound annual growth rate of 18%, today the Indian aviation has emerged as a huge market with a massive passenger movement in both domestic and international sectors. However, looking at the scenario in 2011, the Indian aviation industry was faced by some of the prominent challenges that hinder its projected growth. Indian aviation is facing its most uncertain phase in more than a decade reporting an estimated record loss of just over USD2 billion in the 12 months ended 31-Mar-2012. It has been estimated that airlines in India are battling with a debt of more than US$ 15 billion today, which is threatening their existence and sustainability today. Industry faced "many taxes" like those on fuel, aircraft leases, airport charges, air passenger tickets, air navigation service charges, maintenance costs, fuel throughput fees and other such charges. Regional connectivity needs to be aggressively promoted. FDI of 49% by government will help in building infrastructure, will reduce sales tax and gap in India for maintenance, repair, and operations facilities, which needs to be bridged.
Low-cost carriers market, which grew 83 percent from July 2006 to July 2012.
According to statistics from the Director General of Civil Aviation, the leader is low-cost carrier IndiGo, with 27.6 percent market share in August. Jet Airways, combined with its subsidiary JetLite, stood at second place with 25.2 percent. Low-cost Spicejet was at 18.5 percent; the legacy player, government-owned Air India, was at 18.2 percent; Go Air had 7.4 percent; and Kingfisher had 3.2 percent.
The growth of the budget airline industry in India has changed the perception that air travel is a luxury and that it is only for the upper segment of the population. Spurred by the budget players, domestic passenger traffic increased from 14.2 million in 2003, when the first low-cost carrier, Air Deccan (which later morphed into full-service Kingfisher) was started, to 60.66 million in 2011.
According to the Centre for Asia Pacific Aviation, budget airlines GoAir and SpiceJet are the best-placed to attract foreign investment. Kingfisher is struggling with debts of over $1.5 billion (Rs. 8143,50,00000), the airline owned by liquor billionaire Vijay Mallya has not posted a profit since 2005. It grounded its entire fleet on Oct. 1, after reducing it to just 11 aircraft from its peak of 67. The company owes about $600 million to creditors, lenders and suppliers, and to employees in back salary; strikes have disrupted its operations repeatedly.
The airline supply business is mainly dominated by Boeing and Airbus. For this reason, there isn't a lot of cutthroat competition among suppliers.
Availability of Substitutes
Likelihood that someone will drive or take a train to their destination and affecting airline is more for regional airlines the threat might be a little higher than international carriers. When determining this we should consider time, money, personal preference, and convenience in the air travel industry. No other product domestically competes directly with airlines in terms of cost and speed of travel. Bus services may cost less but travel speed extremely slow and tedious with many stops before your destination. Train services are generally less expensive than airplane and only have select stations. Taxis are tremendously expensive for long distance and are constricted to speed limits and road layouts. Low cost carriers are mainly aiming to compete with Indian Railway's AC segment
Competitive Rivalry
Competition among major players is extremely intense in many aspects. Switching costs are generally low, even though companies have tried to increase switching costs with the use of "frequent flyer" programs. Highly competitive industries generally earn low returns because the cost of competition is high. This can spell disaster when times get tough in the economy.
carriers are the Middle-Eastern airlines, Singapore Airlines, Lufthansa, may be British Airways, but not Cathay Pacific nor any American airline.
The Indian carriers went into a huddle not knowing how to react to major policy change by the government. Aviation analysts and experts said the move will benefit only if the sector fundamentals are changed and no foreign carrier can change that with any amount of investment. Allowing foreign airlines to invest in Indian carriers will not solve the problem. The tax structure will negatively impact aviation unless airline coming to India have a viable business model that would give a strategic advantage. Indian carriers posted a combined loss of 12,000 crore in the last financial year and airline have time and again urged the government to modify the jet fuel tax structure.
The move will benefit industry in medium to long-term as the problem of industry right now is of profitability and not investment-related. The profitability-related issues need to be addressed, which clearly cannot be done by foreign carriers as they cannot change the tax or the fare structures here. In terms of investment required in adding capacity or expansion, FDI capital will work well for Indian carriers. Bankers bet on Kalanithi Maran, the media tycoon-promoted airline SpiceJet and Wadia Grouppromoted GoAir to be the favourites for probable investors. Jet Airways and IndiGo have been saying they are not interested, but foreign carriers would be interested in them. IndiGo and Jet Airways, that already have substantial foreign ownership, may not benefit immediately from FDI. Centre for Asia Pacific Aviation says the government should rationalize the very high cost structure for airlines for FDI to become a real success. Aviation turbine fuel price tops the list of areas that need focus.
IndiGo and Jet Airways, that already have substantial foreign ownership, may not benefit immediately from FDI. Indigo has increased its fare not anymore a no frill airline.
Jet Airways and Spice Jet Ltd in talks with global carriers Abu Dhabis Ethihad Airways and Malaysias Air Asia for minority stake. Estimated transaction cost to be Rs. 2,450 crore. Both airlines have code sharing agreement and a deal could help them win market share from other players while posing stiff challenge to Emirates airline that dominates routes between India and the Middle East. A 49% stake in Spicejet would amount to Rs. 1,082 crore. Maldives government scrapped GMR groups airport project contract of Rs. 2,700 crore signed on June 28, 2010. Contract was to operate Ibrahim Nasir International Airport at Hulhule Island near capital Male. External affairs minister Salman Khurshid said it will send a very negative signal to foreign investors. The unlawful notice was on the pretext that Concession Agreement is void.
A well-managed civil aviation infrastructure and efficiently-run, competitive airlines are a must in today's globalised world. The presence of such infrastructure and airlines in India can bring down transport and communication costs, promote commercial and cultural activity, create jobs, and ultimately unify people and markets. According to the study, Emirates contributed $ 596 million to the Indian economy by way of $ 274 million in the air transport sector; $ 76 million in the petroleum and chemicals sector; $ 62 million in the manufacturing sector; $ 39 million in the trade, banking and insurance sector and $ 145 million in other sectors of the economy. The Dubai-based airlines provided direct employment to 1,045 employees and support a total of 72,323 jobs in India through its operations. At present, Indian carriers Air India, Jet Airways, IndiGo, SpiceJet and Kingfisher are permitted to operate overseas flights from India. The statistics reveal that where foreign airlines operate 1,356 weekly flights to the country, domestic ones operate less than 1,000 global services. There is a growing sentiment in the Indian civil aviation sector that if foreign players will continue operating more and more flights into India then how can local players grow and make their mark in the global industry. The stock market will benefit thereby the company and investors will also get good returns. As it can be seen that the stocks of Jet Airways and Spice Jet jumped to a 52-week high after the reports of acquisition of their stakes by foreign airlines; Abu Dhabi-based Etihad Airways is in talks with Jet Airways for takeover of its 24 per cent stake.
Delhi International Airport Limited was granted permission to increase charges for landing and parking by a staggering 346%for the next two years, making it the most expensive airport for passengers in the country. Mumbai Airport sent a proposal to industry regulator asking permission to increase tariffs by 660%.
The airports in India levy the same charges for full-service carriers and low-cost carriers, which make life hard for the low-budget business models that, have spurred passenger growth so far. Major opponent of proposal is West Bengal Chief Minister Mamata Banerjee who has 16 Lok Sabha MPs and is the second largest member of ruling UPA coaliation. In India, aviation turbine fuel (ATF) constitutes around 45-50 percent of the total operating cost of an airline as compared to the global benchmark of 20-25 percent. To expect Indian domestic carriers to remain profitable even after paying 50 percent more on ATF than their global counterparts is unfair.
International airlines have to pay nearly 15% more for refilling in India. ATF prices in Delhi were reportedly at Rs 73,711 per kilo litre almost 8 year high figure.
High airport fee is another area of concern for domestic carriers. In April 2012, Delhi International Airport Limited (DIAL) hiked airport fees by almost 344 per cent drawing flak from various quarters including international airlines. It has increased the burden on air travelers. The cascading effect of the move in recent months is net decline in passenger traffic. In August, the passenger traffic has declined by three percent on month-on-month basis. Earlier, it had declined by 11.8 percent and 5.6 percent in July and June respectively. Financial year (2011-12), Jet Airways, Indias largest carrier by market value, reported a loss of Rs 1,236 crores. The Kingfishers losses stood at Rs 2,328 crores while Spicejet posted a loss of Rs 605 crores. Jet, Kingfisher and Spicejets balance sheets are highly leveraged with debt of Rs 13,500 crore, Rs 7,057 crore, Rs 860 crore respectively. International airlines do not have faith or interest to invest in sinking domestic players.
Financial situation of international carriers doesnt inspire faith in India. In the last reported financial year, major international airlines posted losses Qantas (USD 253 million), Lufthansa (13 million Euros), Air France-KLM (809 million Euros). However, airlines like Singapore, Air China, and Emirates saw decline in their profits by 69 percent, 43 percent, 72 percent respectively to 269 million dollars, 1121 million dollars, 409 million dollars respectively on yearly basis. Weak currency: Further depreciation of the Rupee, which has already fallen more than 20% in the last 12 months, thereby pushing up the price of dollar-denominated costs such as fuel, aircraft leases, maintenance and offshore interest obligations. Service tax: The extension of the service tax regime on economy class airfares from a fixed amount to an ad valorem percentage will increase the absolute level of the impost on most sectors.
Economical environment
The aviation industry in India has to overcome several challenges before a turnaround happens, since capital infusion can seldom be a solution to a weak business model. Unless oil prices come down, FDI in airlines is not really going to make a difference to airlines basic profitability. The basic profitability will only improve once the oil prices come down. The companies are at the maximum load factor. FDI in aviation may bring in much-needed long-term financial and strategic capital and expertise, the aviation industry has to overcome high fuel costs, stiff competition and its capital-intensive nature with high fixed costs. Currently, national sales tax average is 25-30 per cent on ATF, which is a major burden for Indian carriers as fuel costs account for over 45-50 per cent of costs.
If aviation turbine fuel is categorised as a declared good, it would reduce sales tax from an average of 24% to 4% and have substantial positive impact on airline financials.
Airlines industry is capital-intensive, with high fixed costs for aircraft acquisition, leasing and maintenance. Additional costs incurred on training pilots, technical support staff and crew members are also fixed.
Social Environment
Fdi in Aviation will increase job opportunities which will improve peoples lifestyle. As there will be competition customer will save money and time in travel. Fdi will lead to development in infrastructure i.e. more airports and also areas near it that will lead to overall country development. Their will be more inter connecting flights and rediuction in parking, landing etc problems faced due to less no. of airports. Due to competition there is a chance that domestic airlines not able to deal in tough competition and may shut down its operations. Passengers will be more dependent on one or two airlines which might charge high prices due to monopoly. People might to be happy with the nature of job in airline sector especially who are post graduates doing baggage handling, ticketer, air hostess, steward etc.
Technological Environment
As per the recent CAPA-SITA report, Indian aviation is likely to witness some key technologies being deployed, which are expected to have a positive impact on the businesses and operations in future There has been sufficient progress in technology at the PPP (PublicPrivate Partnerships) airports since 2010. Technologies for passenger experience enhancement such as self-service kiosks, information exchange via mobile and social networking along with FIDS (Flight Information Display System) have gained importance during the period. At present PPP airports are planning to extend self-service kiosks for the purpose of lost baggage and transfers. In the last two years, four out of five PPP airports established a social media presence. Currently social networking is being used primarily for customer relationship handling, though further plans include promotion of services and flight updates. Airports Authority of India (AAI) is considering investment in solutions such as virtualization, self service kiosks, FIDS, ERP, and RFID. AAI plans to implement Baggage Reconliation Solution (BRS) at its major airports within two years. It is considering limited implementation of biometrics to enhance security.
AAI is evaluating server virtualisation along with the deployment of CUTE at 13 airports in the first phase and 25 airports in the second phase of implementation. Airport Operation Command Centre (AOCC) is planned to be implemented at 10 airports within the next two years.
Key drivers for IT implementation for airlines are obtaining operational efficiency and bringing about enhancement of customer experience coupled with cost reductions. Mobility solutions are emerging as a key IT investment area for the future with 90 per cent of respondents planning some form of implementation in the next one-two years.
Virtualisation, cloud computing and multiple applications of social networking are being considered actively. Furthermore, technology implementation for cargo operations will witness the deployment of RFID and bar coding solutions. This will be supported by applications for automating processes. FDI will bring capital for the development and changes in airline due to newer and better latest technologies.
Legal Environment
FDI in aviation will improve the safety, legal compliance aspects and corporate governance of the sector.
Government regulation
Government can benefit from FDI as it will release fraction of economic burden like in case of Air India Limited, government owned aviation industry is continuously suffering huge losses and government had to grant lump sum bailout package to Air India along with Rs. 300 billion of subsidies thus it lead to increase in inflation that increased rate of price rise and common people suffered loss of their purchasing power. In 2008, management of Jet Airways rolled back from its decision to layoff 1900 employs because of governmental interventions, there was doubt that government offered some bailout for Jet Airways.
12 months ago CAPAs forecast for Indian domestic traffic in FY2011/12 was for growth of 17%, the actual outcome was 15.1%, with the lower growth accounted for by the downsizing by Kingfisher. CAPA(Centre for Asia Pacific Aviation) estimates this which would result in capacity growth of 7-8% in a best case scenario.
Much will depend upon the impact of oil prices and other input costs on airfares. The regulator has already approved a 334% increase in airport charges at Delhi Airport, with Mumbai expected to be allowed to raise fees by an even higher amount of up to 500%.
Additional levies is likely to have the impact of increasing Delhi-Mumbai airfares by 15-20% which will have a negative impact on traffic. Increased airport charges are expected to be progressively introduced at other airports such as Chennai and Kolkata to fund the modernisation programmes. Government needs to allow international airlines to participate in the foreign direct investment that will help in reduction of sales tax which is required to be paid by the airlines. More sophisticated technology in ground handling and flight operations will follow. More competition is likely to result in more competitive fares and better product and services and better international connectivity. Indigo and Jet have expressed reservations that allowing global players in will lead to cartelisation and takeovers of Indian carriers.
The tax structure will negatively impact aviation unless airline coming to India have a viable business model that would give a strategic advantage. The move will benefit the industry in a medium to long-term as the problem of the industry right now is of profitability and not investmentrelated. For the healthy functioning of the sector, government needs to monitor predatory pricing. Co-relation needs to be established between airport charges and airport performance towards airlines and a viable solution needs to be worked out in consultation with Reserve Bank of India for those Airlines in need of financial restructuring.
Conclusions
FDI in Aviation sector is a good sign with not so-good intentions and it will create further economic bubble and will provide chances for government to create more socialistic programs which will further increase more fiscal deficit and national debt. Weak balance sheets, increasing costs, regulatory uncertainty, sluggish Indian economy and difficult global environment will continue to pile pressure on airlines, especially poorer performing carriers. There is possibility that oil prices could rise substantially with effect from Jul-2012 should the European Union proceed with plans to introduce an barrier on oil supplies from Iran. Further depreciation of the Rupee,(already fallen more than 20% in the last 12 months), is pushing up the price of dollar-denominated costs such as fuel, aircraft leases, maintenance and offshore interest obligations. The extension of the service tax regime on economy class airfares from a fixed amount to an ad valorem percentage will increase the absolute level of the impost on most sectors. FDI might be important and helpful to reduce financial deficit and might lead to growth in GDP but it cant pull economy towards growth on its own. Fdi will improve capital structure of airlines which have viable business models. There is need to pull from other side like infrastructure, getting public confidence, confidence to domestic players that FDI will bring revenues and not close their business and customer will always be the king spoilt with many choices at great price and comfort level. Equity infusion will lead to stronger strategic and operational ties with foreign partners that may improve credit profile of domestic airlines but lack of majority equity control in addition to specific board constitution is a concern.