Jet Airways - Strategy Mgmt

Jet Airways

Agenda

• About Indian Aviation Industry• Market Size, Structure, Growth &

Segmentation• Porter’s 5 Forces Model• About Jet Airways• Market Share, Size and Competition• Profitability and Ratio Analysis• SWOT Analysis

Introduction to Indian Aviation Sector

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.

Introduction to Indian Aviation Sector

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.

Indian Aviation : Market Size

Market Size

• The rapidly expanding aviation sector in India handles 2.5 billion passengers across the world in a year; moves 45 million tonnes (MT) of cargo through 920 airlines, using 4,200 airports and deploys 27,000 aircraft

• Passengers carried by domestic airlines during January 2012 was recorded at 5.33 million as against 4.94 million during the corresponding period of previous year thereby registering a growth of 8.06 per cent, according to data released by the Directorate General Civil Aviation (DGCA)

• The air transport (including air freight) in India has attracted foreign direct investment (FDI) worth US$ 429.70 million from April 2000 to December 2011, as per data released by Department of Industrial Policy and Promotion (DIPP).

• < 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Act;• 1986 Private players permitted to operate as air taxi operators• 1994 Air Corporation act repealed; Private players can operate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

Indian Aviation : Evolution

• 2003 Air Deccan starts operations as India’s 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

Indian Aviation : Evolution

Cost Structure

Fuel Cost

Employee Cost

Aircraft Maintenance

Expenses

Landing, Navigation &

Airport Charges

Other Expenses

Selling & Distribution Expenses

Cost Structure

Fuel Cost

ATF costs contributes 30-45% of overall operating costs for Full Service Carrier’s

(FSC’s) 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

Key events in the past

Year Major Milestones

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 India’s 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

2012Government allows direct ATF imports, FDI proposal for allowing foreign carriers to pick up to 49% stake under consideration

Key events in the past

1953 Nationalization of Aircraft Industry

• Assets of 9 existing companies transferred to two entities in the aviation sector controlled by the government Indian Airlines, Primarily

serving domestic sectors Air India, Primarily serving

the international sectors

• Implications Aviation became preferred

mode of transport for elite Restricted Growth of

Aviation industry High Cost Structure Underdevelopment of

infrastructure

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. Civil Aviation Requirements2. Aircraft Act, 19343. Aircraft Rules, 19374. Carriage of Dangerous Goods, 20035. National Convention6. Aeronautical Information Circulars7. Other Circulars8. Aircraft Register9. Master Minimum Equipment10. Mandatory Modifications11. Approved Firms12. Accident Summaries13. Related Rules14. Personal and Medical files of Pilots15. Bilateral Agreements with foreign countries16. Air Transport and Aircraft Statistics17. Service Books of DGCA employees

Indian Aviation – Pros

• Strong growth prospectsPassenger traffic growth has grown at a CAGR of 16% in India over the past 10 years

• Relative underpenetrated marketPenetration of air travel at <3% is significantly below benchmarks in other markets

• An opportunity to create India as an hubAn opportunity for foreign airlines to create India as their hub for international traffic between Europe and South East Asia; Additionally offer better connectivity within India with international destinations

• An opportunity to create India as an MRO centreForeign airlines could also look at leveraging on India’s low-cost arbitrage by setting up MRO facilities in India

• Low ValuationsMarket valuation of listed airlines in India has suffered due to poor performance

Indian Aviation – Cons

• Aviation economics are not favorable in IndiaHigher taxes on ATF and airport charges continue to be key headwinds for the sector; besides higher cost base, airlines in India are also mandatorily required to fly on certain unviable routes

• Inadequate InfrastructureDevelopment of airport infrastructure has not kept pace with demand, thereby resulting in delays and higher costs for airlines

• Poor financial health of most airlinesIntense competition, sharp fluctuation in ATF prices and high debt burden continue to weigh on the financial performance of Indian airlines; foreign exchange fluctuation and lack of adequate hedging mechanism (for fuel) have added to the woes

• Highly competitive & Price Sensitive traveler base

• Passengers carried by domestic airlines during January 2012 and corresponding period of previous year thereby registering a growth of 8.06%.

Growth of Industry

Growth of Industry

Domestic airlines flew 3.67 million passengers in August 2009—an 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.

Factors impacting the growth

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

Factors Impacting the Growth

2. Aviation Services in India - Liberalization of the Sector- Modernization of the Non-Metro Airports- Rising Share of Low cost Carriers- Fleet Expansion by Airlines Service - Service Expansions by State Owned Carriers- Development of MRO Market in India - The Indian Government Opens Up New International Routes- Establishment of New Airports and Restructuring of Old

Airports- EU-India Civil Aviation Project

Market Demand / Equilibrium

Market Demand / Equilibrium

• The Cournot model assumes that each firm takes the output of the other firm as given. If Indian Airlines output is assumed to stay the same, Jet will maximize profits by setting MR=MC. The result is shown. In the Cournot framework the equilibrium is at the intersection of the two reaction functions. These are just the profit-maximizing conditions rearranged.

• 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 Cournot-Nash 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.

Indian Aviation – A Differentiated Oligopoly

Explanation of Aviation Oligopoly curve

• 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.

Porter’s 5 Forces Model

Indian Aviation : Porter’s 5 forces

Threat of New Entrants : If FDI is cleared then lot of foreign airlines will enter into Indian Aviation.

Bargaining Power of Suppliers : The Jet Fuel , Food & Beverage Suppliers etc have strong Bargaining Power in this sector.

Bargaining Power of Customers : Since passengers have got the choice to select best price between low cost and full service carrier , passengers have a strong bargaining power.

Substitutes:Other modes of transportation such Hi- Speed Trains , Luxury Buses are substituting for Air travel.

Intensity of Competition : All the players are focused and competing strongly on grounds of

differentiation and low cost.

Indian Aviation : Attractive or Unattractive ?

• 4/5 forces of Porter’s 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.

Indian Aviation – Demand & Supply

• Indian carriers seat factor: Dec-2010 V/s Dec-2011

: Indian Aviation: Segment Analysis

• What are the components• Size of Each Segment• Growth of Each Segment• Segment Changes

Aviation Sector : Components

Indian Aviation : Components

• Full Service Carriers :Full Services airlines as the name defines provide all types of facilities which make the journey comfortable and hassle free. In full service airline you will get various varieties of foods. They provide menu of local as well as international cuisines which a passenger can opt according to his own taste.

• Low Cost Carriers Low cost airline don't provide many options. They provide packed food, snacks which you have to purchase from the airlines.

Size of each segment

Business Class Vs Economy Class

• Although the occasion of use indicates that maximum usage is for business, the flight class graph indicates that the proportion travelled by business class is very small in comparison to that travelled by economy class.

• This indicates that most business travellers are flying Economy class as well.

• Further, the second important occasion of usage is for emergencies and time-critical travels.

Components of Full Service Carriers

Future of Aviation Industry– Key Facts

• India is poised to be among the top five aviation nations in the world in the next 10 years.

• The Indian Aviation Industry is exploring opportunities to improve connectivity and is also looking at enhancing the number of Indian carriers to various countries.

• It is predicted that in the next 10 years domestic air traffic will touch around 160-180 million passengers a year & international traffic will exceed 80 million passengers a year.

Future of Aviation Industry - Challenges

• Aviation policy does not allow foreign airlines to pick up stake in Indian carriers.

• Centre for Asia Pacific Aviation has forecast a record $2.5-3 billion loss for all Indian airlines in 2012

• ATF prices in India are 30 to 40 per cent more than the prices in the international market

• Carriers are now permitted for import of aviation turbine fuel directly but most of the carriers do not have the expensive infrastructure needed to import and store the fuel

• The civil aviation space facing troubles due to lack of consistent profitability as Crude prices have been rallying following the global economic downturn.

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

Jet Airways is the largest Indian Airline.

It operates over 400 flights daily to 76 destinations worldwide.

Jet Airways bought Air Sahara for INR14.5 billion (US$340 million). Air Sahara was renamed JetLite, and was marketed between a low-cost carrier and a full service airline.

In August 2008 Jet Airways announced its plans to completely integrate JetLite into Jet Airways.

About Jet Airways

Details InformationFounded 1 April 1992

Commenced operations 5 May 1993

Frequent-flyer program Jet Privilege

Airport lounge Jet Lounge

Subsidiaries Jet Lite

Fleet size 101 (+49 Orders)

Destinations 76

Company slogan The Joy of Flying

Parent company Tailwinds Limited

Headquarters Mumbai, India

Revenue Rs. 145,225.80 million (US$2,897.25 million) (2010-11)

Profit Rs.858.40 million (US$-17.13 million)

Key people Naresh Goyal, Founder & Chairman , Nikos Kardassis, CEOAli Ghandour, Director

Jet Airways – History

• Jet Airways was incorporated as an air taxi operator on 1 April 1992• It started commercial operations on 5 May 1993 with a fleet of four leased

Boeing 737-300 aircraft.• In January 1994 a change in the law enabled Jet Airways to apply for

scheduled airline status, which was granted on 4 January 1995.• It began international operations from Chennai to Colombo in March 2004• The company is listed on the Bombay Stock Exchange, but 80% of its stock is

controlled by Naresh Goyal (through his ownership of Jet’s parent company, Tailwinds)

• It has 10,017 employees .• Naresh Goyal – who already owned Jetair (Private) Limited, which provided

sales and marketing for foreign airlines in India – set up Jet Airways as a full-service scheduled airline to compete against state-owned Indian Airlines.

• Indian Airlines had enjoyed a monopoly in the domestic market between 1953, when all major Indian air transport providers were nationalized under the Air Corporations Act (1953), and January 1994, when the Air Corporations Act was repealed, following which Jet Airways received scheduled airline status

Jet Airways: Mergers & Acquisitions

• In January 2006 Jet Airways announced that it would buy Air Sahara for US$500 million in an all-cash deal, making it the biggest takeover in Indian aviation history.

• On 12 April 2007 Jet Airways agreed to buy out Air Sahara for INR14.5 billion (US$340 million). Air Sahara was renamed JetLite, and was marketed between a low-cost carrier and a full service airline.

• In August 2008 Jet Airways announced its plans to completely integrate JetLite into Jet Airways.

Jet Airways: Key Strategies

• Keep operations and growth in line with expected Indian economy growth which is around 7% – 8% per annum

• Manage risk & short term crisis on account of any global financial risks

• Manage short term spike in crude oil prices. • Minimize passing the fuel price fluctuation to customers.• Network expansion will be around the key focus specially Gulf

and Middle east

Jet Airways: Key Strategies

• 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.

Impact/Results – Key Strategies

• Operating Highlights






• Financial Highlights


• Financial Highlights

Market Share

Revenue

Jet Airways Kingfisher IndiGo SpiceJet0

2000

4000

6000

8000

10000

12000

14000

1600014523

6496

39462961

Revenue of Top Airlines - 2011 Revenue

Rev

enu

e in

IN

R C

rore

Net Profit/Loss

Kingfisher Jet Airways SpiceJet IndiGo

-1200

-1000

-800

-600

-400

-200

0

200

400

600

800

-1027

-86

101

650

Net Profit/Loss of Top Airlines - 2011

Profi

t/Lo

ss in

INR

Cror

e

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.

Jet Airways Subsidiaries : JetLite

JetLite

• JetLite was a wholly owned subsidiary of Jet Airways.

• It was established as Sahara Airlines on 20 September 1991 and began operations on 3 December 1993 with two Boeing 737-200 aircraft.

• Initially services were primarily concentrated in the northern sectors of India, keeping Delhi as its base, and then operations were extended to cover all the country.

• Sahara Airlines was rebranded as Air Sahara on 2 October 2000. On 12 April 2007 Jet Airways took over Air Sahara and on 16 April 2007 Air Sahara was renamed as JetLite.

• JetLite operated a fleet of mixed owned–leased Boeing 737 Next Generation aircraft and Bombardier CRJ-200ER. JetLite ceased operations on 25 March, 2012 after merger with Jet Konnect.

Jet Airways Subsidiaries : Jet Konnect

Jet Konnect• Jet Konnect is 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. It operates a mixed fleet of ATR 72-500s and Boeing 737-800s.

• 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 ran 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 merged the JetLite brand into Jet Konnect on 25 March 2012.

Jet Airways : Services

Destinations :• Jet Airways serves 52 domestic destinations and 24 international destinations, a

total of 76 in 19 countries across southern Africa, Asia, Europe and North America. Short-haul destinations are served using Boeing 737 Next Generation.

Domestic & international short haul :

Première:• The Première features 40-inch extra-wide seats with a personal Widescreen LCD

attached to each seat. The Première 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.

Jet Airways : Services

International long haul flights:First Class: First class is available on all Boeing 777-300ER aircraft. All seats convert to a fully flat

bed, similar to Singapore Airlines first class seat but much smaller. It was the second airline in the world to have private suites. All seats in First

have a 23-inch widescreen LCD monitor with audio-video on-demand systems (AVOD), BOSE noise cancelling headphones, in seat power supply, and USB ports etc.

Jet Airways is the first Indian airline to offer fully enclosed suites on its aircraft; each suite has a closable door, making for a private compartment

Première :Première on board the Boeing 777-300ER Première (Business Class) on the Airbus A330-200 and Boeing 777-300ER international

fleet has a fully flat bed with AVOD entertainment. Seats are configured in a herringbone pattern (1-2-1 on the Boeing 777-300ER, and 1-1-1

on the Airbus A330-200), with each seat offering direct access to the aisle. Première seats on the A330-200s leased from ILFC are configured differently in a 2-2-2

non-herringbone pattern. Each Première Seat has a 15.4-inch flat screen LCD TV with AVOD. USB ports and in-seat laptop power are provided. All seats are standard recliner business-class seats with a few newer aircraft with electronic recline and massager.

Threat of New Entrants

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

Bargaining Power of Suppliers

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

Bargaining Power of Buyers

• 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.

Jet Airways Versus Competitors

Profitability & Ratio Analysis

Sales Turnover Comparison

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Mar '07 Mar '08 Mar '09 Mar '10 Mar '11

Sales Turnover (crores)

Jet Airways

Kingfisher Airlines

Spicejet

Income Comparison

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000


Total Income (crores)

Jet Airways

Kingfisher Airlines

Spicejet

Expenses Comparison

0

2,000

4,000

6,000

8,000

10,000

12,000


Total Expenses (crores)

Jet Airways

Kingfisher Airlines

Spicejet

Profit / Loss Comparison

-2,000 -1,500 -1,000 -500 0 500

Mar '07

Mar '08

Mar '09

Mar '10

Mar '11

Reported Net Profit (crores)

Spicejet

Kingfisher Airlines

Jet Airways

Investment Valuation Ratios

Profitability Ratios

Liquidity & Solvency Ratios

Debt Coverage Ratios

Management Efficiency Ratios

Critical Success Factors

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: Unique Business Model

• 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.

Factors for Sustainable Business Model

A. Presence in domestic as well as international marketB. Presence in the FSC and LCC segmentC. Varied fleet size and typeD. Leasing out owned fleet to capitalize on the demand-supply

mismatch

A. Presence in domestic as well as international market The domestic passenger traffic has witnessed a 16.5% CAGR in FY06-FY11

to 54 mn trips. Similar growth trend expected in the future considering a) rising GDP over

the next five years with a 2.2x multiplier effect, b) improving infrastructure with new airports and expansion of existing airports, and c) rising per capita income in India and comparatively lower rise in ticket prices ,hence improving the affordability of Indian travelers.

With a 16.5% CAGR in FY11-FY15E the domestic passenger traffic is expected to grow to 99 mn trips.

Ability to reshuffle part of its fleet across geographies : Its presence in the international and domestic markets has enabled the company to re-shuffle its fleet to international skies based on the seasonal demand and vice versa.

The presence in the international segment has helped improve the block hours for the company as well improve revenues with a higher revenue per RPKM (yield) seen from the international business.


B. Presence in the FSC and LCC segment JA is the best bet in the Indian aviation space, to capture the robust growth

in the domestic passenger traffic due to its presence in both the LCC and FSC segment.

It caters to the lower end of the spectrum with its brands, Jet Konnect and JetLite, and to the premium end with its own brand-name, Jet Airways.

This enables the company to provide a range of ticket prices and is able to cater to premium and economy travelers.

The presence in the LCC segment allows it to capture the relatively strong growth in the domestic skies and also leads to improvement in blended load factors. On the other hand the FSC segment has helped Jet maintain its yields.

Diverting part of its fleet under the FSC/LCC model : It has a vast fleet of 119 aircrafts (19 Jet Lite and 100 Jet Airways ) and has a competitive advantage due to operations under FSC and LCC models which enables it to divert part of its fleet under the LCC/ FSC model depending on the economic scenario.

Such flexibility places Jet in a better scenario than its competitors and hence JA is able to capture a greater share of wallet spend during good time as well as maintain its PLF during lean seasons


C. Varied fleet size and type Jet Airways (standalone) currently has a fleet of 100 aircraft (12 Boeing 777

series, 12 Airbus A330-200, 56 Boeing 737 series and 20 ATR 72-500 turboprops).

Its fleet also comprises of 19 aircraft (10 Boeing 737-700 series and 9 Boeing 737-80- series) under its fully owned subsidiary Jet Lite (previously Air-Sahara).

Due to the difference in fleet (Boeing for Jet and Airbus for Kingfisher and Indigo) poaching of pilots becomes difficult and hence the attrition rate is

maintained. Moreover, a varied fleet size (capacity of Boeing 777s is 312 seats while that of

ATR is 65 seats) helps to accommodate demand across sectors. This has led to JA being able to constantly maintain and improve its load

factors. The move has also led to better utilization of its fleet as per the needs of the sector and the cyclical and seasonal demand .

JET AIRWAYS Type Size Capacity Boeing 737-700 11 118Boeing 737-800 43 160Boeing 737-900 2 138ATR 72-500 20 65Airbus 330-200 12 235Boeing 777-300 12 312

JET LITE Type Size CapacitBoeing 737-700 10 145Boeing 737-800 5 186Boeing 737-800W 4 186


D. Leasing out owned fleet to capitalize on the demand-supply mismatch

With a fleet mix of owned (42) and leased (58) aircraft Jet is able to capitalise on the demand supply mismatch and earn additional revenues.

Such flexibility gives Jet a strong competitive advantage in terms of its ability to withstand a downturn in the economy and also makes it best placed to capture a growth opportunity during times of revival or during festive seasons.

Moreover, since 42 of the total 100 aircraft are owned while the remaining 58 are leased, Jet is able to generate the highest EBITDA margins in the industry as lease rentals are low.

Due to presence of owned fleet the company was able to reduce the downturn effect with revenues straight away positively impacting the EBITDA.

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.


Focus on International Segment – Key Driver for Profitability

Jet Airways is currently the second largest international operator in India. The company’s 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.

Improving Domestic Business : High Operational Efficiency

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 risingby 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 company’s 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.

Merger of JetLite and Jet Konnect to boost LCC segment growth

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 beenin 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 intensiveThe 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 economyAny 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 factorsThere are many external factors which can affect profitability, which include bad weather conditions, terrorist activities, country and state policies and others

Merger of JetLite and Jet Konnect to boost LCC segment growth

Key Risks

Fuel costs beyond airlines’ controlAviation turbine fuel (ATF) prices account for 40-45% of an airline’s 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 regulationsCurrently, 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 stagnatingAny 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 fluctuationsA stronger dollar may affect Jet’s profitability, as a large part of the company’s 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.

SWOT – Jet Airways

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 ReddyDeepak SharmaShaik Mohammad AliShubha Brota RahaSnigdha SmithahasiniSujoy DalalSushma Gowda

Documents

Jet Airways - Strategy Mgmt