Week 1: Overview of the Aviation Industry

PGDM (Semester 1)

For class discussion at NDIM

Service sector in India: Key Statistics

The service sector in India constitutes roughly 57% of our national wealth. i.e. about USD 1.1 Trillion Key segments include: 1. Banking and Financial Services 2. Organized Retailing 3. Education Sector 4. Health Care Sector 5. Hospitality Sector accounting for 6% of Indias GDP and this includes the contribution of the airlines business estimated at USD $ 6 Billion. 6. Independent Services
For class discussion at NDIM
2

Aviation sector
Duopolistic Market with Two aircraft manufacturers : Boeing; and Airbus Aircraft engines typically supplied by Rolls Royce General Electric; and Pratt & Whitney

Outsourcing of activities leads to cost rationalization and focus on key areas

For class discussion at NDIM

Aviation in India and Rest of the World

In terms of Air traffic, India will be the fastest growing country for air travel for the next 10 years.
India
2010-2018 2019-2028 20-Year Growth 7.3% 2010-2018

World
2019-2028 20-Year Growth 4.8% 4.7%

12.2%

6.6%

4.6%

For class discussion at NDIM

Aviation sector: Profitability factors

Profitability Drivers in aviation sector
Aviation Turbine Fuel (ATF) estimated at USD 1200/ KL constitutes 45% - 50% of total cost of operations.
(ATF prices are increasing on rupee devaluation against a basket of foreign currencies) Government allowing import of ATF prices which are much lower than domestic prices due to low tax incidence and this would provide some breather
For class discussion at NDIM
5

ATF
ATF Aviation Turbine Fuel Aviation Turbine Fuel is a specialized type of petroleum-based fuel used to power aircraft. It is generally of a higher quality than fuels used in less critical applications, such as heating or road transport ATF contains additives to reduce the risk of icing or explosion due to high temperature, among other properties.
For class discussion at NDIM
6

Aviation sector: Profitability factors

Profitability Drivers in aviation sector
Manpower and administration costs accounts for 22% of the total cost as foreign pilots and technical staff demand high salaries
Profitability hinges on seat load factor, usage of fuel efficient aircrafts, High turnaround rate, other non ticket incomes, outsourcing of key services, etc LCCs are emphasizing on reducing manpower engagement and cutting costs to the extent possible to recover profits
For class discussion at NDIM
7

Aviation sector: Concern Areas

Highly competitive industry due to entry of private players Leasing of aircrafts a preferred option but need to generate sufficient cash flows to retire debt obligations Rising fuel costs and erratic fluctuations due to crude oil prices being volatile and rupee depreciation adding to the woes Outsourcing non core activities and productivity of manpower critical for profits. Overstaffing and operations in non viable routes for national carriers create profit pressures Airlines willing to invest mainly in fuel efficient aircrafts like Boeing 737 600 (South West Airlines) A 320 (Indigo) and B 787/ 777 by JAL and AirIndia for long overseas routes
For class discussion at NDIM
8

Low Cost Carriers: Success Factors

1. Low cost implies low fares and minimum facilities and in-flight entertainment and support services 2. No Frills, ancillary revenues are important 3. Hidden charges, pay extra for not being attentive (Printing of Boarding Pass, Check in, Meals etc) 4. Operation of standardized fuel efficient aircrafts 5. High utilization of aircrafts quick turn around times 6. Short distances, high frequency 7. Avoiding overstaffing, achieving high seat load factor 8. Operate out of less busy, smaller, cheaper airports

For class discussion at NDIM

Southwest Airlines - Low Cost U.S. Carrier

Started operations in 1971, HQ-Dallas, Texas, USA pioneer in low cost air travel Easy jet & Ryan air follow Southwests strategy in Europe Worlds largest low-cost carrier. Reputed for innovative advertisements FORTUNE listed it for the 10th year as among Americas top 10 most admired corporations Peculiar features: No Assigned Seats!
No Travel Agents, can book only on its own website, saves $50 Million (Rs 300 Crore) annually Turn around time 15-25 mins, US industry Average 55 minutes Only one type of aircraft, helps train better and build operational efficiencies
For class discussion at NDIM
10

Ryan Air - European Low Cost Airline

Started operations in 1985, HQ-Dublin, Ireland CEOs maniacal focus on being the lowest cost producer
Even encouraged staff to steal stationary from hostels & banks to save costs! 25 Minutes turn around time, to get maximum aircraft utilisation Often operate from smaller, less congested airports with lower costs

Branded itself as the Bad Boy of the Aviation Industry

Often use provocative & Misleading ads that get the attention at a low cost Enormous charges for small mistakes:
70 per passenger if you forget to print your Boarding Pass in Advance 100 per passenger, if you want to check in luggage at the airport and not online

Rated among the worst in customer service almost being rude

Over 20% revenue from ancillary products (ie other than ticket sales) example print boarding pass, inflight sales, airport baggage checkin, etc

Successful despite public opinion of being mean, uncaring & money grabbing offers the Lowest price tickets 37% lower than the Easy Jet (the Second best low cost European carrier)
11

Ryan Air Lowest cost per Passenger in Europe

Ryanair Easy Jet Norwegian Air Berlin Spirit Staff Airports & Handling Route Charges Aircraft Oship & Maint. Sales & Marketing Total % vs Ryanair 5 8 6 6 8 18 6 8 15 8 13 17 14 26 8 20 16 15 16 Southwest 33 22 17

2 27 -

6 46 +67%

12 65 +137%

31 99 +262%

4 51 +86%

2 74 +170%

Cost per Passenger (excluding fuel) is lower by 67% compared to the Second Low Cost European Airline
Source: CAPA - Centre for Aviation and latest available accounts via Ryanair presentation 28 January 2013

Air Asia - Malaysian Low Cost Airline

Started operations in 1996, HQ-Kuala Lumpur, Malaysia Largest Low Cost Carrier in Asia (Both in Fleet Size & No. of Passengers) Often Awarded as Best Asian Low Cost Carrier Air-Asia India Launch Planned for October 2013 India JV Partners Include Air Asia Tata Sons Telstra Key people in Air Asia India include

To start operations soon from Southern India and expand internationally Innovative Fares (Free/999/1999 so on) and steep introductory discounts at the initial stages 13

Tony Fernandes; Group CEO for Air Asia

Ratan Tata, Chief Advisor to the Board; Chairman Emeritus -Tata Sons

Arun Bhatia Owner of Telstra; Son Married to LN Mittals only Daughter

Evolution of Aviation in India

1953 : 9 Airlines including IA & AI 1953 : Nationalization of private airlines 1994 : Private airlines allowed to operate 1995 : Jet, Sahara, Modiluft, Damania, East West 2003 : Air Deccan as Indias first LCC 2005 : KF, Spicejet, IndiGo, Go Air, Paramount 2011 : IndiGo international ; KF exits 2012 : Govt allows ATF import, FDI -49%,
For class discussion at NDIM
14

Indian Aviation Sector Current Scenario

% Market shares of Aviation players in India (By Passenger Traffic)

Indigo has the Highest Market Share

15

Indian Aviation Sector Profitability

Airline Indigo Go Air Spicejet Jet Konnect Jet Airways Estimated Net Profit (Loss) in US $ Millions (FY 2012-13) 100-110 (15) (34) (53) (87)

Kingfisher
Air India

(510)
(950)

Indigo Indias Only Profitable Airline On Time Air India with Maximum Losses among all Indian airlines survives on Government funding Kingfisher with almost half of Air India Losses - Perishes
16

The Kingfisher Story

Established in 2003 May 2005: Indian Commercial operations commence. Losses since 2005 itself USP: Best in class, luxury airline, fancy meals, top domestic in flight entertainment, focus on quality flying experience Sep 2008: International operations also started Nov 2010: Largely due to KF losses, UB Group shares at Rs 82 down from 52 week high of Rs 315 Mar 2011: Banks convert Rs 1300 crore of debt to equity at 61% premium, give little breather to KF, which continues to lose money Sep 2011: KF Discloses substantial losses to the BSE Nov 2011: Financial results disclose the company is drowning in high interest debt and losing money Nov-Dec 2011: Bank accounts frozen twice Sep 2012: Market share shrinks to 3% from 15% in 2009 Oct 2012: Flying License suspended Feb 2013: Government withdraws domestic & International flying entitlements

For class discussion at NDIM

17

Jet Etihad Deal

Etihad to invest Rs 2058 crores in Jet for 24% stake, premium of over 20% Values Jet at Rs 8500 + crores Naresh Goyal owns 51% stake in Jet FIPB yet to clear the proposal. Main issues to be considered Who has Effective Control and What is the Ownership Structure
Need to convince the regulator Eithads control is in line with its 24% stake

Deal signed within 2 days after an agreement between India & Abu Dhabi assigned ~37,000 additional seats to Etihad Did Jet-Etihad know what the Government was planning and are the two deals linked? GOM initially approves the deal, PMO retracts SEBI yet to accord final clearance Deal being reviewed

For class discussion at NDIM

18

Current Policies in Indian Aviation

FDI upto 49% is allowed in Indian Airlines In July 2013 a proposal to raise the FDI limit from 49% to 74% was rejected Up to 100% of NRI investment is allowed by the means of automatic approvals pertaining to the domestic air transport services Proposal to allow airlines to directly import ATF Discussion on Lifting the freeze on international expansions of private airlines Current you can not fly internationally unless you operate for 5 years and have 20 aircrafts

For class discussion at NDIM

19

FDI & FII

FDI is an investment that a parent company makes in a foreign country. FII is an investment made by an investor in the markets of a foreign nation. FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit that easily. Foreign Direct Investment targets a specific enterprise. The FII increasing capital availability in general. The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor

For class discussion at NDIM

20

FIPB
The Foreign Investment Promotion Board (FIPB) is a national agency of Government of India, with the remit to consider and recommend FDI which does not come under the automatic route. It provides a single window clearance for proposals on FDI in India.

For class discussion at NDIM

21

Aviation in India
FIPB: Foreign Investment Promotion Board to approve projects which are not under the automatic route FDI Automatic: This is permitted for certain categories of services in Aviation sector FDI requiring FIPB Nod: FDI norms specify that the FIPB nod is mandatory for certain categories of services, whereas approval of SEBI is mandatory for all Joint venture projects
For class discussion at NDIM
22

Aviation in India: Benefits of FDI

More Capital Infusion for fund starved airlines Enhanced market access for carriers Better consumer choice Adding to government revenue earnings Supporting Growth of hospitality sector Transfer of technology and best practices Scope for more employment
For class discussion at NDIM
23

Aviation in India: Limitations of FDI

Heightened Competition and price wars Industry consolidation is inevitable Spate of mergers and acquisitions Scope for cartelization Severe operational challenges for airlines/ carriers Few Survivors and consumer choice gets limited as market is dominated by select few Large scale lay offs and unemployment

For class discussion at NDIM

24

Aviation in India

For class discussion at NDIM

25

Aviation in India

For class discussion at NDIM

26

Aviation in India
Recent Govt. initiatives & Investments: PPP mode for mega projects & operations viz Green field airports Operation of some selected airports To invest Rs 20000 crores for New international airports in Bhubaneswar & Imphal; and 50 low cost domestic airports

For class discussion at NDIM

27

Indian Travel Websites

Started around 2006-07 ie a time when Indian skies were buzzing with airlines, more were expected Airline commissions have fallen from 5% to 2% in the last 4 years, expected to decline further
Airlines losing money are looking to cut costs & commissions Airlines started to woo customers directly on their websites Example: Online bookings for Southwest Airlines are only on its own website

Future for these sites seems to be with Online Hotel Bookings

5 Domestic Airlines Vs 45,000+ Premium Hotels in India itself Only 500 Branded hotels, rest are fragmented, opportunity for a booking website to add value to customers Commissions with Hotels typically 5 times higher than airlines Already 75% of hotel sales are online

60-70% of Current revenue of Yatra.com & Cleartrip.com is from Ticket sales Ticket & Hotel sales expected to generate 50:50 revenue in 18 months
Source: Economic Times June 30-July 06, 2013 28

Aviation Industry: Key Takeaways

Understanding the dynamics of the aviation sector Assessing the factors determining profitability Assessing the global and Indian market trends Understanding the operational/ Business Models of Low Cost carriers Vs Full Service Carriers Identifying success stories for select airlines abroad and in India Examining the reasons behind failure and bankruptcy of key airlines Awareness of new initiatives by Government of India and thrust on FDI Identifying the benefits of FDI for all stakeholders and the implications for the airline industry

For class discussion at NDIM

29

THANK YOU

For class discussion at NDIM

30