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Agenda
About Indian Aviation Industry Market Size, Structure, Growth & Segmentation Porters 5 Forces Model About Jet Airways Market Share, Size and Competition Profitability and Ratio Analysis SWOT Analysis
Sector structure/Market size The Indian aviation industry is one of the fastest growing aviation industries in the world
The government's open sky policy has led to many overseas players entering the market and the industry has been growing both in terms of players and number of aircrafts
Today, private airlines account for around 75 per cent share of the domestic aviation market.
India is the 9th largest aviation market in the world. According to the Ministry of Civil Aviation, around 29.8 million passengers travelled to/from India during 2008, an increase of 30 per cent on previous year It is predicted that international passengers will grow up to 50 million by 2015 Further, due to enhanced opportunities and international connectivity -Today, 87 foreign airlines fly to and from India and five Indian carriers fly to and fro from 40 countries.
< 1953 Nine Airlines existed including Indian Airlines & Air India 1953 Nationalization of all private airlines through Air Corporations Act; 1986 Private players permitted to operate as air taxi operators 1994 Air Corporation act repealed; Private players can operate schedule services 1995 Jet, Sahara, Modiluft, Damania, East West granted scheduled carrier status 1997 4 out of 6 operators shut down; Jet & Sahara continue 2001 Aviation Turbine Fuel (ATF) prices decontrolled
2003 Air Deccan starts operations as Indias first LCC 2005 Kingfisher, SpiceJet, Indigo, Go Air, Paramount start operations 2007 Industry consolidates; Jet acquired Sahara; Kingfisher acquired Air Deccan 2010 SpiceJet starts international operations 2011 Indigo starts international operations, Kingfisher exits LCC segment 2012 Government allows direct ATF imports, FDI proposal for allowing foreign carriers to pick up to 49% stake under consideration
Cost Structure
Fuel Cost
Employee Cost
Other Expenses
Cost Structure
Fuel Cost ATF costs contributes 30-45% of overall operating costs for Full Service Carriers (FSCs) 40-55% for Low cost carriers (LCCs) Domestic ATF prices are linked to fluctuation in crude oil prices and movement in INR vs. $ High central and state levies translates into a 60-70% higher ATF prices in India over the global average Significant congestion at major domestic airports increases fuel costs considerably
Cost Structure
Employee Aggressive expansion in the Airline industry Dearth of experienced pilots Foreign pilots command higher salaries Payments made in foreign currency
Cost Structure
Aircraft Maintenance Costs Developing Aviation industry Imported components Lead times inventory Shortage of Skill in Aircraft maintenance Landing Navigation and Airport charges Cost of Technology
1986: Private Sector Players permitted as Air taxi operators. Jet, Air Sahara, etc started service. 1994: Private Carriers permitted to operate scheduled services. Six operators granted license, however only Jet and Air Sahara able to service. 2003: Entry of low carriers. Air Deccan, Spice Jet, Go Air, Indigo. Implications Aviation is now affordable with check fares and discount schemes. Various Operators with different business model. Huge growth foreseen in Aviation
Regulators
Federation of Indian Airlines The Directorate General of Civil Aviation Ministry of Civil Aviation Airport Authority of India The Airport Authority of India Act 1994 Civil Aviation Policy Liberalization of Entitlements Open Skies Agreement between India and the US
Key Regulations
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. Civil Aviation Requirements Aircraft Act, 1934 Aircraft Rules, 1937 Carriage of Dangerous Goods, 2003 National Convention Aeronautical Information Circulars Other Circulars Aircraft Register Master Minimum Equipment Mandatory Modifications Approved Firms Accident Summaries Related Rules Personal and Medical files of Pilots Bilateral Agreements with foreign countries Air Transport and Aircraft Statistics Service Books of DGCA employees
Growth of Industry
Passengers carried by domestic airlines during January 2012 and corresponding period of previous year thereby registering a growth of 8.06%.
Growth of Industry
Domestic airlines flew 3.67 million passengers in August 2009an increase of 25 per cent. The Centre for Asia Pacific Aviation (CAPA) forecasted that domestic traffic will increase by 25 per cent to 30 per cent till 2010 and international traffic growth by 15 per cent, taking the total market to more than 100 million passengers . The government plans to invest US$ 9 billion to modernise existing airports . The government is also planning to develop around 300 unused airstrips.
Growth of Industry
India ranks fourth after US, China and Japan in terms of domestic passengers volume. The number of domestic flights grew by 69 per cent from 2005 to 2008. The domestic aviation sector is expected to grow at a rate of 9-10 per cent to reach a level of 150-180 million passengers by 2020.
The industry witnessed an annual growth of 12.8 per cent during the last 5 years in the international cargo handled at all Indian airports. The airports handled a total of 1020.9 thousand metric tones of international cargo in 2006-07.
Further, there has been an increase in tourist charter flights to India in 2008 with around 686 flights bringing 150,000 tourists. Also, there has been an increase in non-scheduled operator permits 99 in 2008 as against 66 in 2007.
1.
Demand for Air Travel Growing Purchasing Powder of the Middle class Lower Air fares Tourism in India Growing Outbound Travel in India Growth Potential
The revenue of both a competitive firm and of a monopolist depends only on the firm's own output: for a competitive firm we assume that the firm's output does not affect the price, and for a monopolist there are no other firms in the market. For a duopolist, however, revenue depends on both its own output and the other firm's output We conclude that the firms' outputs and the price are different in CournotNash equilibrium than they are in a competitive equilibrium. As the demand curve slopes down, price exceeds marginal cost, so that, as for a monopoly, the total output produced by the firms is less than the competitive output. An implication is that, as for a monopoly, the Nash equilibrium outcome in a Cournot duopoly is not Pareto efficient.
Each seller in an imperfectly competitive market faces a negatively sloped demand curve for his product, permitting him some control of the price of his product. In an oligopoly, a few firms produce the same product, while in monopolistic competition, many firms produce differentiated but similar products. In a differentiated oligopoly, a few firms produce products different enough for each firm to have its own downward sloping demand curve. As with a perfectly competitive firm or a monopoly, the differentiated oligopoly firm produces at a profit maximizing level of output where marginal cost equals marginal revenue. The firm finds the price it will charge customers at the profit maximizing level of output (Qm) from the demand curve, and sets price to Pm. As we can see, the firm is earning economic profits since price exceeds average total cost at the profit maximizing level of output.
4/5 forces of Porters Model are strong in the aviation industry i.e. Bargaining Power of Suppliers , Bargaining Power of Customers , Substitutes and Intensity of competition are strong . Hence we can conclude that Indian Aviation sector is highly unattractive to compete.
What are the components Size of Each Segment Growth of Each Segment Segment Changes
Top Players
IndiGo
IndiGo is a private, low-cost Airline started in 2006. IndiGo has the second largest share in India's domestic air travel market, only behind Jet Airways. It has established itself as one of India's leading airlines using its model of efficient, low-cost operations and by attracting customers with low fares. IndiGo has grown faster than any other low cost carrier in the world.
Air India
Air India is the flag carrier airline of India. It is part of the Government of India owned Air India Limited (AIL). Air India has the third largest share in India's domestic air travel market. Following its merger with Indian Airlines, Air India has faced multiple problems, including escalating financial losses. In last 5 years, Air India's domestic market share declined from 20% to 14%. In early 2012, the Indian government granted a bailout package of Rs300 billion.
SpiceJet
SpiceJet is a low-cost airline. In 3 years of operation, it became India's second-largest low-cost airline in terms of market share. One of the few airlines to register profit in 2011. With a fleet size of over 40 flights and 34 destinations in India.
Kingfisher Airlines
Kingfisher Airlines Limited has the lowest market share currently among the top players.
Until it was hit by severe financial crisis in late 2011, Kingfisher Airlines had the second largest share in India's domestic air travel market. After acquiring Air Deccan, Kingfisher suffered a loss of over 1,000 Crore for three consecutive years. By early 2012, the airline accumulated losses of over 7,000 Crore. The fleet size got drastically reduced from 64 to only 22.
Jet Airways
Information
1 April 1992 5 May 1993 Jet Privilege Jet Lounge Jet Lite
Fleet size
Destinations Company slogan Parent company Headquarters Revenue Profit Key people
Focus on improving service, reliability and on time performance Focus to be the best in no frills sector. Measures to negate effect of unprecedented increase in prices of fuel Maintain its leadership position in the Indian aviation industry Improve On-time performance it was 88.4% for Jet Airways for the financial year 2010-11 Explore the potential for sustained growth in Indian passenger traffic because of low penetration in the medium to long term.
Market Share
Revenue
Revenue
6496
Jet Airways
Kingfisher
IndiGo
SpiceJet
Net Profit/Loss
400 200 0 Kingfisher -200 -400 -600 -800 -1000 -1027 -1200 Jet Airways -86 SpiceJet IndiGo 101
Current Scenario
In October 2008 Jet Airways and rival Kingfisher Airlines announced an alliance which primarily includes an agreement on code-sharing on both domestic and international flights, joint fuel management to reduce expenses, common ground handling, joint utilization of crew and sharing of similar frequent flier programs. On 8 May 2009 Jet Airways launched its low-cost brand, Jet Konnect. The decision to launch a new brand instead of expanding the JetLite network was taken after considering the regulatory delays involved in transferring aircraft from Jet Airways to JetLite, as the two have different operator codes. The brand was launched on sectors that had 50% or less load factor with the aim of increasing it to 70% and above. Jet officials said that the brand would cease to exist once the demand for the regular Jet Airways increases. According to a PTI report, for the third quarter of 2010, Jet Airways (Jet+JetLite) had a market share of 26.9% in terms of passengers carried, thus making it a market leader in India.
Premire: The Premire features 40-inch extra-wide seats with a personal Widescreen LCD attached to each seat. The Premire cabin is configured in a 2-2 abreast pattern.
Economy Class: Jet Airways Economy class on its Boeing 737 Next Generation features 30-inch seat pitch with personal Widescreen LCD behind each seat. Jet Airways was the World's first airline to introduce in-flight entertainment systems on the Boeing 737 aircraft. The Economy class cabin is configured in a 3-3 abreast pattern on the Boeing 737 Next Generation and 2-2 abreast pattern on the ATR 72-500.
A lucrative industry is always a target for investors looking at investment. One of the foremost factors in consideration while looking at the attractiveness of an industry is the threat of new entrants. In the airlines industry, this was a major threat a few years ago. The airlines operating in he industry were limited and the industry had few players like Indian Airlines and Jet Airways. However, as the industry had scope for accommodating more players many players joined the fray. The airlines industry however comes with its fair share of barriers. The investment in the airlines is very huge and acts as a major barrier to entry. Bundled with it were different permits for running an airline company from the civil aviation company and FDI limits. Factors that can limit the threat of new entrants are known as barriers to entry. Some examples include: Existing loyalty to major brands Incentives for using a particular buyer (such as frequent shopper programs) High fixed costs Scarcity of resources High costs of switching companies Government restrictions or legislation
This is how much pressure suppliers can place on a business. If one supplier has a large enough impact to affect a company's margins and volumes, then it holds substantial power. In the airlines company there is certain amount of bargaining power the suppliers have. Firstly, suppliers in the form of aircraft builders, who very often exceed the time limits. Adding to it are suppliers of oil who hold the key to running of the airlines. Here are a few other reasons that suppliers might have power There are very few suppliers of a particular product There are no substitutes Switching to another (competitive) product is very costly The product is extremely important to buyers - can't do without it The supplying industry has a higher profitability than the buying industry
This how much pressure customers can place on a business. If one customer has a large enough impact to affect a company's margins and volumes, then the customer hold substantial power. Predominantly, in the airlines industry, it has been seen that the civil aviation ministry has been in favour of the customer and buyers thus have reasonable power. While most airlines companies are running with wafer thin margins, it is pretty difficult for companies to increase prices as the capacity utilization will be seriously affected. Here are a few reasons that customers might have power: Small number of buyers Purchases large volumes Switching to another (competitive) airline is simple The airline is not extremely important to buyers; they can do without the same brand for a period of time Customers are price sensitive
Availability of Substitutes
Availability of Substitutes What is the likelihood that someone will switch to a competitive product or service? If the cost of switching is low, then this poses a serious threat. Most airline companies have similar facilities and are listed on website such as makemytrip.com, yatra.com where customers choose from the cheapest available tickets. This shows that the customer has a lot of options and would not mind shifting to a new service. Here are a few factors that can affect the threat of substitutes:-n The main issue is the similarity of substitutes. All low cost airlines have similar facilities. If substitutes are similar, it can be viewed in the same light as a new entrants
Intensive Competition
Competitive Rivalry This describes the intensity of competition between existing firms in an industry. Highly competitive industries generally earn low returns because the cost of competition is high . The competition in the airline industry is cutthroat and each player is trying to gain an upper-hand based on non price factors. A highly competitive market might result from: Many players of about the same size; there is no dominant firm Little differentiation between competitors products and services A mature industry with very little growth; companies can only grow by stealing customers away from company.
10,000 8,000
6,000 4,000 2,000 0 Mar '07 Mar '08 Mar '09 Mar '10 Mar '11
Jet Airways
Kingfisher Airlines Spicejet
Income Comparison
Expenses Comparison
2,000
0 Mar '07 Mar '08 Mar '09 Mar '10 Mar '11
Kingfisher Airlines
Jet Airways
-2,000
-1,500
-1,000
-500
500
Profitability Ratios
Support investments Strong growth prospects Relative underpenetrated market Opportunity to create India as an hub Opportunity to create India as an MRO centre Low Valuations
Not Favor investments Aviations economics are not favorable in India Inadequate Infrastructure Poor financial health of most airlines Highly competitive & Price sensitive traveler base
Jet Airways India Ltd (Jet) is best placed to capture the 16.5% CAGR in domestic passenger traffic and 15.5% CAGR in international passenger traffic in FY11-FY15E. Jet offers a host of benefits due to flexible business model such as Dominant market share in both the domestic (~26%) and international market (~36%) allowing it to reshuffle part of its fleet depending on the seasonality in demand Presence in the FSC (Jet Airways) and LCC segments (JetLite and Jet Konnect) which enables to successfully divert part of its fleet based on the demand supply scenario, and hence maintain the yields and load factors Varied fleet type (Boeing and ATR), size (capacity of 777s is 312 while that of ATR is 65) and ownership making pilot poaching difficult, accommodating demand across sectors easier and leasing out owned fleet to capitalize on the demand-supply mismatch.
A. Presence in domestic as well as international market B. Presence in the FSC and LCC segment C. Varied fleet size and type D. Leasing out owned fleet to capitalize on the demand-supply mismatch
Size 10 5 4
This feature of Jet Airways considered to be one of its strongest edges over competitors and make it best poised in times of industry slowdown.
Jet Airways is currently the second largest international operator in India. The companys international business accounts for 46% of its consolidated passenger revenues in FY11 and 57% of its consolidated ASKM With a strong presence in the international business the company has been able to aid growth of the domestic traffic as well due to synergies like a) the international passengers acting as a ready customer base to its domestic segment b) creating a diversified passenger traffic leading to demand throughout the year c) stability of its business model Such synergies have ensured that the profitability of international operations remains significantly higher than domestic business. The EBITDAR margins too for the international business in FY11 were 24% as compared to 15% in the domestic business. The international business passenger revenue and EBITDAR is expected to record 17.3% and 11.2% CAGR respectively in FY11-14E led by 12% CAGR in RPKM, 7.3% CAGR in passenger yields and 21.7% CAGR in fuel cost over the next three years.
The improvement in operations is clearly highlighted by the rise in PLF to 75.1% in FY11 as compared to 71.6% in FY10 even as the ASKM rose by 17.5% in FY11. Even in Q2FY12 the domestic business has seen load factors rise to 72.1% from 71.4% in Q2FY11 as the ASKM grew by 7% Y-o-Y. The yields have also seen a rise in the current fiscal with revenue/RPKM rising by 10% in Q1FY12 and 1% Q2FY12. The operational efficiencies have resulted in a better financial standing with the EBITDAR margins having improved from 15% in FY10 to 18% in FY11 and an EBITDA margins rising to of 7.8% in FY11 as compared to EBITDA margin of 3% in FY10 and an EBITDA loss in FY09. The company has successfully managed to improve its operational efficiency over the years with a rise in block hours per aircraft and in passengers carried despite the reduction in ASKM. This has helped improve efficiencies and reduce costs. With refurbished seats and better food, the preference for the airline has increased and the 9W code has been put on all Jet Lite aircraft to enable it to sell its seats through the GDS system, helping it to achieve ~25% of its traffic from the companys international network. The EBITDA loss has reduced to `762 mn in FY11 as compared to an EBITDA loss of `1.01 bn in FY10 as a result of the cost per ASKM falling to `1.65 in FY11 from `1.67 in FY10.
The company plans to merge its two LCC JetLite and Jet Konnect and operate under the brand name of the latter. The move to arrest losses and compete with other low-cost airlines had been in the management's mind for some time, but the decision has been taken now. Though no formal date has been announced regarding the re-branding exercise we expect the move to be positive for the company. The higher brand perception for Jet Konnect as compared to JetLite, higher operating efficiencies by the former, tie-up synergies and improved connectivity are some of the benefits that the company would witness with the re-branding and merger of JetLite. The revenues expected to witness 10.0% CAGR in FY11-13E driven by 4.2% CAGR in RPKM and a 5.8% CAGR In passenger yields in the same period. However, with a rise in fuel cost of 15.4% CAGR in the same period, the profitability of this division will remain under pressure and the EBITDAR will witness 0.9% CAGR decline in FY11-FY14E.
Highly fixed-cost intensive The airline industry is highly fixed-cost intensive with lease rentals, maintenance and employee costs remaining fixed. Any reduction in passenger traffic can adversely affect the profitability. Downturn in the economy Any downturn in the economy could lead to relatively low passenger traffic growth, which could have a negative impact on load factors, and could eventually have a negative impact on profitability. External factors There are many external factors which can affect profitability, which include bad weather conditions, terrorist activities, country and state policies and others
Key Risks
Fuel costs beyond airlines control Aviation turbine fuel (ATF) prices account for 40-45% of an airlines total revenues. A sharp increase in the ATF prices have dented margins and led to losses across the industry. Any further price rise could result in a significant net loss and hence erosion of net worth for the company. Change in landing and navigation charge regulations Currently, aircraft with less than 80 seat capacity are exempt from airport landing and navigation charges. Jet Airways has 20 ATR aircraft, with a seat configuration below 80. As these aircraft qualify for exemptions, any change in these policies could lead to higher taxes and so affect future earnings. Yields stagnating Any sharp increase in competitive intensity (in times of low passenger traffic or excess expansion by airlines) could adversely affect the load factors and passenger yields, reducing margins. Rates and currency fluctuations A stronger dollar may affect Jets profitability, as a large part of the companys costs are dollar denominated, like lease rentals, ATF cost and maintenance costs. In addition, a major portion of their debt is dollar denominated; hence, a stronger dollar could hit earnings.
STRENGTHS: Strong presence & good name in the Indian Aviation market WEAKNESSES: Too many players in the no frill category OPPORTUNITIES: Consolidations in the industry & low market penetration THREATS: Ongoing economic weakness & Fuel prices
Akshith Reddy Deepak Sharma Shaik Mohammad Ali Shubha Brota Raha Snigdha Smithahasini Sujoy Dalal Sushma Gowda