Aviation in India (Rev Ppt 2)

8/22/2019 Aviation in India (Rev Ppt 2)

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Week 1:

Overview of the

Aviation Industry

PGDM (Semester 1)

1For class discussion at NDIM


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Service sector in India: Key Statistics

The service sector in India constitutes roughly 57% of ournational wealth. i.e. about USD 1.1 Trillion

Key segments include:

1. Banking and Financial Services

2. Organized Retailing3. Education Sector

4. Health Care Sector

5. Hospitality Sector accounting for 6% ofIndias GDP

and this includes the contribution of the airlinesbusiness estimated at USD $ 6 Billion.

6. Independent Services

For class discussion at NDIM 2


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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



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Aviation in India and Rest of the World

In terms of Air traffic, India will be the fastestgrowing country for air travel for the next 10 years.


India

2010-2018 2019-2028 20-Year

Growth

World

2010-2018 2019-2028 20-Year

Growth12.2% 6.6% 7.3% 4.6% 4.8% 4.7%


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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 muchlower than domestic prices due to low tax incidence and this

would provide some breather



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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 fuelsused in less critical applications, such asheating or road transport

ATF contains additives to reduce the risk oficing or explosion due to high temperature,among other properties.

http://en.wikipedia.org/wiki/Petroleumhttp://en.wikipedia.org/wiki/Fuelhttp://en.wikipedia.org/wiki/Aircrafthttp://en.wikipedia.org/wiki/Heatinghttp://en.wikipedia.org/wiki/Road_transporthttp://en.wikipedia.org/wiki/Road_transporthttp://en.wikipedia.org/wiki/Heatinghttp://en.wikipedia.org/wiki/Aircrafthttp://en.wikipedia.org/wiki/Fuelhttp://en.wikipedia.org/wiki/Petroleum


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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



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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



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Low Cost Carriers: Success Factors

1. Low cost implies low fares and minimum facilities andin-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 factor8. Operate out of less busy, smaller, cheaper airports



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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 10thyear as among Americas top 10 mostadmired 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



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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


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Ryan Air Lowest cost per Passenger in Europe

Ryanair Easy Jet Norwegian Air Berlin Spirit Southwest

Staff 5 8 15 14 16 33

Airports & Handling 8 18 8 26 15 22

Route Charges 6 6 13 8 - -

Aircraft Oship &Maint.

6 8 17 20 16 17

Sales & Marketing 2 6 12 31 4 2

Total 27 46 65 99 51 74

% vs Ryanair - +67% +137% +262% +86% +170%

Source: CAPA - Centre for Aviation and latest available accounts via Ryanair presentation 28 January 2013

Cost per Passenger (excluding fuel) is lower by 67% compared to the

Second Low Cost European Airline


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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

Ratan Tata, Chief Advisor to the Board;

Chairman Emeritus -Tata Sons

Tony Fernandes;

Group CEO for Air Asia

Arun Bhatia Owner of Telstra;

Son Married to LN Mittals only Daughter


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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%,



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Indian Aviation Sector Current Scenario

Indigo has the Highest Market Share15

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


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Airline Estimated Net Profit (Loss) in

US $ Millions (FY 2012-13)Indigo 100-110

Go Air (15)

Spicejet (34)

Jet Konnect (53)

Jet Airways (87)

Kingfisher (510)

Air India (950)

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Indian Aviation Sector Profitability

IndigoIndias 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


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The Kingfisher Story


Established in 2003

May 2005: Indian Commercial operations commence. Losses since 2005 itselfUSP: Best in class, luxury airline, fancy meals, top domestic in flightentertainment, 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 52week 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 interestdebt and losing money

Nov-Dec 2011: Bank accounts frozen twice

Sep 2012: Market share shrinks to 3% from 15% in 2009Oct 2012: Flying License suspended

Feb 2013: Government withdraws domestic & International flying entitlements


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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 & AbuDhabi assigned ~37,000 additional seats to Etihad

Did Jet-Etihad know what the Government was planning and are thetwo deals linked?

GOM initially approves the deal, PMO retracts

SEBI yet to accord final clearance

Deal being reviewed



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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


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FDI & FII

FDI is an investment that a parent company makes in aforeign country.

FII is an investment made by an investor in the marketsof a foreign nation.

FII can enter the stock market easily and also withdrawfrom 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 bemore stable than Foreign Institutional Investor



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FIPB

The Foreign Investment Promotion Board(FIPB) is a national agency ofGovernment

of India, with the remit to consider and

recommend FDI which does not comeunder the automatic route.

It provides a single window clearance for

proposals on FDI in India.

http://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/wiki/Foreign_direct_investmenthttp://en.wikipedia.org/wiki/Foreign_direct_investmenthttp://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/wiki/Government_of_India


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Aviation in India


FIPB: Foreign Investment Promotion Board to

approve projects which are not under theautomatic route

FDI Automatic: This is permitted for certaincategories of services in Aviation sector

FDI requiring FIPB Nod: FDI norms specify thatthe FIPB nod is mandatory for certain categoriesof services, whereas approval of SEBI ismandatory for all Joint venture projects


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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



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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 asmarket is dominated by select few

Large scale lay offs and unemployment



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Aviation in India



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Aviation in India



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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



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Indian Travel Websites

Source: Economic Times June 30-July 06, 201328

Started around 2006-07 ie a time when Indian skies were buzzing withairlines, 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
http://www.google.co.in/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&docid=9antSBtWDXAPxM&tbnid=G-RwuBFr-oeBsM:&ved=0CAUQjRw&url=http://www.gsfindia.com/sponsor/goibibo/goibibo/&ei=SWfYUaycKsnArAep54CQDw&psig=AFQjCNGSj5fPc7LvyP4TSfnA9gt87rj3-Q&ust=1373223100251652http://www.watblog.com/wp-content/uploads/2008/12/cleartrip-yatra-travelguru-makemytrip.jpghttp://www.google.co.in/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&docid=FAbyLLgDlu_JxM&tbnid=pLs1hfFF45eC7M:&ved=0CAUQjRw&url=http://www.business-standard.com/article/companies/makemytrip-posts-q4-net-profit-of-3-7-mn-111051200204_1.html&ei=D2bYUfP8JoWtrAed0oGIDw&bvm=bv.48705608,d.bmk&psig=AFQjCNFwksRkDmoRwP7b8NhB55Q9lmLe4g&ust=1373222643611637http://www.google.co.in/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&docid=enVP5dj15tkKvM&tbnid=ptzg-zmC58eZYM:&ved=0CAUQjRw&url=http://www.bigcouponshop.com/blog/cleartrip-coupons-the-best-deal-for-your-vacation.aspx&ei=uWXYUfL7HIzprQe38oDYBQ&bvm=bv.48705608,d.bmk&psig=AFQjCNFDK3KYwCMAAAHyW3Pp0WS_k9XvAg&ust=1373222688734602


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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



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THANK YOU


Documents

Aviation in India (Rev Ppt 2)