Analysis of Indian Aviation Industry (A Report)

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Amit Das, Kritika Bahadur, Prakhar Sharma, Pranjali Rai, Prashant Patni, Sumantrasarathi Datta, Suruchi Sethi

Contents TOPIC

PAGE NO.

Introduction: Industry History

3

Indian Aviation Industry: Timeline

6

News & Trends

7

Industry Analysis

8

Porter’s 5 Forces

9

5 Generic Competitive Advantages

10

SWOT Analysis: Jet v/s IndiGo

11

Jet Airways: Research & Analysis

12

Conclusion & Recommendation

16

Bibliography

17

Indian Aviation Industry  A Brief History of Time

The Indian aviation sector has undergone a turbulent phase over the past several years facing multiple issues – from sharp rise in crude oil prices (2008-09), and limited pricing power contributed by industry wide capacity and periods of subdued demand growth. The industry is now growing steadily despite the challenges of high debt burden and liquidity constraints. However, the passenger output rose from 73 million in FY 2006 to 144 million in FY 2011, according to a study by FICCI–KPMG (2012). The high growth path can be credited to the 11th Five Year Plan (2007–2012). This period saw the completion of four international airport projects through the public–private partnership (PPP) mode, and also witnessed 5 Indian carriers functioning on international routes. Air transport in India presently supports 56.6 million jobs and generates over US$ 2.2 trillion of the global gross domestic product (GDP). Air passenger traffic is also gr owing at a rapid pace, a development driven in no small part by modern infrastructure and facilities. Low cost airlines are now ruling the Indian scene.

LCC Strategies & its Benefits Categories

Remarks

Single model of aircraft Operate on secondary airport Point to Point Model Single class configuration Fewer employees per aircraft E-Ticketing Ancillary Revenues

Reduces maintenance and inventory cost Lower charges, lower turnaround time Better aircraft utilization, reduces wait time More seats/flight, so costs are spread Less employee cost. Higher productivity Reduced selling expenses by US$ 3.5/ticket On-board sales. Reduces break-even PLF

So, to sum up, the profitability of the industry has been severly impacted because of the following reasons: (i) Lower yields due to excessive competition (ii) Rising ATF prices (iii) Steep rupee depreciation (iv) Rising debt levels and interest costs “The world is focused on Indian aviation – from manufacturers, tourism boards, airlines, global businesses to individual travelers, shippers and businessme. If we can find common purpose among all stakeholders in Indian aviation, a bright future is at hand,” as per Mr Tony Tyler, Director General and CEO of International Air Transport Association (IATA).

Market Size

India is one the fastest growing aviation markets and curr ently the ninth largest civil aviation market in the world, according to Mr KN Shrivastava, India’s Civil Aviation Secretary. The sector is projected to be the third largest aviation market globally by 2020. Currently, India’s aviation market caters to 117 million domestic and 43 million international passengers. Over the next decade that market could reach 337 million domestic and 84 million international passengers. Air transport (including air freight) in the country attracted foreign direct investment (FDI) worth US$ 456.84 million in the period April 2000–July 2013, according to data released by Department of Industrial Policy and Promotion (DIPP). Key Developments and Investments

Singapore-based Tigerair has entered into an interline agreement with Spicejet, India’s second largest low-cost carrier. Tigerair is a low-cost airline in which Singapore Airlines has a 33% stake. Under this agreement, customers commuting on Spicejet’s domestic network from 14 Indian cities can connect to Tigerair’s Singapore-bound flights through the Hyderabad airport, from January 6, 2014. InterGlobe Enterprises and CAE, a Canadian civil and military aviation simulation training firm, have  jointly launched India’s largest pilot simulation training facility in Greater Noida, Uttar Pradesh. The move will cater to India’s demand for aviation training facilities. The 50–50 joint venture will set up the centre with an investment of US$ 25 million. “There is a growing need for trained pilots. This centre will help address the requirement,” said Mr Rahul Bhatia, Managing Director, I nterGlobe Enterprises Group. Mahindra Aerospace plans to make an 8-seater aircraft at its manufacturing base in Bangalore. The 8seater GA8 aircraft will have a range of over 1,100 km and will facilitate connectivity between small towns and cities, and is particularly of help to domestic tourists. “Through our utility aircraft, we will get into areas where no one has reached yet,” said Mr.Anand Mahindra, Chairman, Mahindra & Mahindra Ltd. India’s aviation ministry is looking at small and medium airports to set up centr es for maintenance, repair and overhaul (MRO) of aircrafts. Some officials see the airport at Surat as a viable option in this regard. The airport as of now has just three scheduled landing and take offs in a day, by Air India and SpiceJet. Various tests can be carried out in the day within a 1,000 feet and 5 nautical mile area. Currently, India’s MRO market is worth US$ 800 million with the likelihood of touching US$ 1.5 billion by 2020. US companies, encouraged by the growth of the India aviation sector, are keen to invest in the various fields associated with the industry, such as building new airports or security, ac cording to American officials. "Indian aviation is experiencing dramatic growth across the board, from the e mergence of new carriers to a growing middle class ready to take travel by air," said US Transportation Secretary Mr Anthony Fox.

Government Initiatives

The Cabinet Committee on Economic Affairs (CCEA) has given the approval to Abu Dhabi-based Etihad Airways for buying a stake in Jet Airways. The Rs 2,058-crore (US$ 332.77 million) deal is the largest FDI in Indian aviation. Etihad will hold 24% equity in Jet Airways, Jet Airways will own 51%, and the rest will be floating shares. Tata Group's proposal to set up a full service airline in collaboration with Singapore Airlines has been given the green signal by the Foreign Investment Promotion Board (FIPB). The US$ 100 million venture will see Tata Group hold a 51% stake in the Tata SIA Airlines with an investment of US$ 51 million; Singapore Airlines will have a stake of 49% with an initial investment of US$ 49 million. Road Ahead

The potential of the Indian aviation industry is enormous. The market already has about 150 million travelers passing through its airports, with the capacity to grow further. By 2020, traffic at Indian airports is projected to touch 450 million. Furthermore, India’s aviation industry supports about 0.5% of the Indian GDP and close to 1.7 million high-productivity jobs. The annual value added by an employee in air transport services in the country is nearly 10 times greater than the Indian average. Exchange Rate Used: INR 1 = US$ 0.01616 as on December 24, 2013 While the domestic airlines have not been able to attract foreign investors (up to 49% FDI is allowed, though foreign airlines are currently not allowed any stake), foreign airlines may be interested in taking strategic stakes due to their deeper business understanding, longer investment horizons and overall longer term commitment towards the global aviation industry. Healthy passenger traffic gr owth on account of favorable demographics, rising disposable incomes and low air travel penetration could attract long-term strategic investments in the sector. Foreign airlines are likely to be more cautious in their investment decisions and strategies are likely to be long drawn rather than focused on short-term valuations. On the proposal to allow import of ATF, we feel that the duty differential between sales tax (averaging around 22-26% for domestic fuel uplifts) being currently paid by airlines on domestic routes and import duty (8.5%-10.0%) is an attr active proposition for airlines. However the challenges in importing, storing and transporting jet fuel will be a considerable roadblock for airlines due to OMCs monopoly on infrastructure at most I ndian airports. From the working capital standpoint too, airlines will need to deploy significant amount of resources in sourcing fuel which may not be easy given the stretched balance sheets and tight liquidity profile of most airlines. References: Media Reports, Press Releases, Press Information Bureau, D epartment of Industrial Policy and Promotion (DIPP), Directorate General of Civil Aviation (DGCA)

Indian Aviation Industry: Timeline Year

Before 1953 1953 1986 1994 1995 1997 2001 2003 2005 2007 2010 2011

2012

Major Milestones Nine Airlines existed including Indian Airlines & Air India Nationalization of all private airlines through Air Corporations Act; Private players permitted to operate as air taxi operators Air Corporation act repealed; Private players can operate schedule services Jet, Sahara, Modiluft, Damania, East West granted scheduled carrier status 4 out of 6 operators shut down; Jet & Sahara continue Aviation Turbine Fuel (ATF) prices decontrolled Air Deccan starts operations as India’s first LCC Kingfisher, SpiceJet, Indigo, Go Air, Paramount start operations Industry consolidates; Jet acquired Sahara; Kingfisher acquired Air Deccan SpiceJet starts international operations Indigo starts international operations, Kingfisher exits LCC segment Government allows direct ATF imports, FDI proposal for allowing foreign carriers to pick up to 49% stake under consideration

News & Trends February 17, 2014 Vijayawada-based airline Air Costa has announced that it has signed an order with B razil-based Embraer for 50 Embraer Jets E2s for an estimated value of US$ 2.94 billion based on 2014 list prices. Embraer S.A is the world's largest manufacturer of commercial jets up to 130 seats. February 9, 2014 New Delhi was aghast last month when the US Federal Aviation Administration downgraded India's flight safety rating, expressing lack of confidence in the domestic regulatory oversight of India's burgeoning airline industry. The downgrade means Indian carriers cannot launch new flights to the US, or have code-share deals with American partners. December 23, 2013 Jet Airways (India) Ltd has entered into a fresh aircraft leasing arrangement with Turkish Airlines for its Airbus 330-200 wide bodied jets. Jet will lease out three of its idle A330s to the Turkish carrier for six years. If the company is successful in an outright sale of these aircraft, its debt portfolio will shrink by $200 million, the airline's chief financial officer Ravishankar Gopalakrishnan had said then. Debt at the country’s second largest airline was at $1.9 billion as on September 30, 2013. October 4, 2013 The Cabinet Committee on Economic Affairs on Thursday approved the Rs 2,05 8-crore deal by Abu Dhabi-based Etihad Airways to buy a stake in Jet Airways. Post the deal, Naresh Goyal will hold 51 per cent equity, while Etihad will have 24 per cent in Jet Airways. The remaining 25 per cent is with the public, which includes financial institutions and banks. The new board will have 12 members, with four nominated by Jet and two by Etihad, while the remaining six will be independent directors. Naresh Goyal will be the first Chairman of the board. September 20, 2013 The Tata Group has knocked on the government's doors to set up a second airline in India, this time a full-service carrier in partnership with Singapore Airlines. The Tatas will own 51% of the joint venture, with Singapore Airlines holding the remainder. They plan to jointly invest $100 million initially. April 24, 2013 India's Jet Airways has agreed to sell a 24% stake to Etihad Airways, a deal that will help the Gulf airline feed more Indian passengers into its global network. The Rs20.6bn ($380m) deal marks the first foreign investment in an existing Indian airline since New Delhi's decision to allow 49% FDP in aviation sector. The price of aviation turbine fuel (ATF) remained stabilized at a high level, accounting for 45-50 per cent of Indian carriers' total costs, compared to 30 per cent for major global airlines. Giving a big boost to air connectivity in Tier-II and III cities, government cleared a wide-ranging policy aimed at creating international and regional aviation hubs in the country.

Michael Porter’s Five Forces Threat of New Entrants: Low •

Due to a saturated market

•

Very high cost of entry

•

Brand image of current players

•

Difficulties in permits & licences

Supplier Power: Low •

Due to absence of cutthroat competition

Buyer Power: Medium to High •

Switching cost is very low

•

Rise in number of budget airlines

Substitutes: Low to Moderate •

Can use bus or train but time money and personal preference is also needed

Intra-industry Rivalry: High •

Compete on the basis of prices, technology, customer services, etc.

Generic Competitive Strategies Low Cost Leadership Indigo is the domestic leader in low cost segment as it focuses only on ‘no frill’ services. Jet, immediately behind Indigo, is a strong player in the domestic market with its key strength being punctuality which really clicks with the customers and has helped it become one of the most profitable airlines. Jet has a well maintained trained staff. It has employees working in multiple roles and single passenger classes. Jet is able to maintain profits by sales and leaseback strategy. The new deal struck with Turkish Airlines will reduced its debt by about US$200 million. Hence, it allows them to maintain low airfares even if the fuel prices go up as they are making profit through this.

Differentiation Jet Airways operate over 400 flights daily to 76 destinations worldwide. It has constantly been working on creating differentiated products and services to stay ahead in a competitive and challenging environment. Within India, Jet Airways operates Economy and Première (Business Class). For some of its international flights, Jet Airways offers wide body services consisting of three classes of service, viz: First Class, Première and Economy cabins. It not only provides its services in domestic and international market but also gives customized goods for its different customers viz Jet Konnect, Jet Spark, Jet Kids, Jet Mobile and Jet Boutique. Jet Konnect is the low-cost brand of Jet Airways. Jet is a ‘no frill’ aircraft service and is specially launched for the customers seeking seamless travel, value-for-money and low-fares making it identified in the domestic segment also. Jet Konnect service operates on key domestic routes, it links seven major metros - Mumbai, Delhi, Chennai, Bengaluru, Hyderabad, Ahmedabad and Kolkata – with several destinations across India. The Jet-Etihad deal gave Jet Airways a big opportunity to expand its footprint in the international market. It helped them to be more competitive in domestic as well as in international market. In essence Jet Airways adopted the differentiation strategy in a way that: 1. It has penetration in a broader market. 2. It provides best services. 3. It caters to all classes of society be it economy or business class.

SWOT Analysis: Jet v/s IndiGo JET AIRWAYS Strength •

•

• • •

Eating the 2nd largest pie in the domestic aviation sector Amongst the youngest fleets in the world Presence in every segment Rising Seat Factor Biggest Indian carrier in terms of network

Weakness •

Highest debt in the industry

•

Brand confusion

•

Facing challenges from the regulatory authorities for its Rs.2058cr deal with Etihad

•

Mounting losses on the balance sheet (worst ever quarterly loss in Q2 FY2014)

•

Competition from budget airlines in domestic market

Opportunity •

•

•

• •

Increasing capacity of LCC (Low Cost Carrier) Expanding wings in international zone (minority equity investment by Etihad will increase growth) Indian aviation sector fast growing Government Support initiative To reduce debt through leasing agreement with Turkish Airlines

Threat • • •

Depreciating Rupee Fluctuating ATF Price Entry of new players (Air Asia) with backing of established domestic companies (Tata)

Indigo Airlines Strength • • •

• •

•

• •

Continuous innovation Tie up with hotels Excellent marketing and advertising strategies Strong backing of promoters Only Least Cost Carrier to make continuous profits High brand awareness & brand equity Cost leadership High efficient management

Weakness •

•

•

•

•

Opportunity • •

• • •

Freight market Increase in domestic route and hubs Expansion in international routes Chartered flights Middle class taking to the skies

Scope of product differentiation is very less Not present in many domestic routes Limited presence in international market. No presence in domestic cargo market Services are short lived as these can be easily imitated

Threat • • • • • • •

Rising ATF Prices Increasing ompetition Economic slowdown Poaching Government interventions Scarcity of trained pilots Rising labour costs

Jet Airways (India): Research & Analysis STP Strategy Segmenting

Passengers prefer comfort. According to the Trip Advisor survey that was conducted, 38.6% people (the most) people voted Jet as providing the best level of Seat Comfort. Targeting

The Corporate and upper middle class have been Jet’s target customers. Positioning

Given their already established presence in the European market, Jet Airways have positioned themselves as a premium brand and customers who like quality prefer Jet to other brands. We observed ‘Jet Airways’ with a view to identify the best practices of excellence and the best customer service policies. The basic objective was to use them as a model for the others. The study also included mapping of the competitors of other indian airlines, especially in the private sector, across India on various service dimensions. The consensus forecast amongst 6 polled investment analysts covering Jet Airways (India) Limited advises as of February 22, 2014 that the company will outperform the market. (Source: markets.ft.com)

Key Financials Analysis Year on year Jet Airways (India) Ltd grew revenues 13.72% from 170.67bn to 194.09bn while net income improved from a loss of 14.20bn to a smaller loss of 7.80bn. Year on year, their growth in earnings per share (EPS), excluding extraordinary items, increased by 45.09%. In 2013, Jet increased its cash reserves by 103.29%, or 738.60m. The company earned 18.80bn from its operations for a Cash Flow Margin of 9.69%. In addition the company generated 16.73bn cash from investing, though they paid out 34.80bn more in financing than they received. Jet Airways had revenues for the full year 2013 of 178.1383bn. This was 7.59% above 2012 results. Jet uses a little or no debt in its capital structure, and reported annual 2013 losses of -79.05 per share on May 24, 2013. Jet Airways have a median target of 279.00, with a high estimate of 481.00 and a low estimate of 206.00. The median estimate represents a 27.19% increase from the last price of 219.35.

Key Areas of Improvement Passenger Cancellation Rate: Jet Airways’ CR is above the industry average and only 4th best in India.

Cancellation Rate (Industry: 0.5%) Indigo GoAir JetLite Cancellation Rate (Industry: 0.5%)

Jet Air India SpiceJet 0

0.2

0.4

0.6

0.8

1

Passenger Complaints Ratio: The number of passenger complaints per 1000 passengers for Jet was 1.4,

which was again above the industry average of 1.3. It was significantly higher than the industry best of 0.4 and just worse than its nearest rival’s (Indigo: 1.3).

Passenger Complaints (Industry: 1.3) Indigo GoAir JetLite Passenger Complaints (Industry: 1.3)

Jet Air India SpiceJet 0

0.5

1

1.5

2

On-Time Performance: In transportation, schedule adherence or on-time performance refers to the

level of success of the service remaining on the published schedule. Jet’s cumulative OTP was 91.8%, which was just lower than the industry best of 95% of that of Indigo.

On-Time Performance (OTP) Indigo GoAir JetLite On-Time Performance (OTP)

Jet Air India SpiceJet 80

85

90

95

100

Plan of action

1) Analyzing service quality, customer satisfaction and loyalty of a full service airlines company such as Jet Airways 2) Testing hypothesis on the influence of ‘service quality’ and ‘customer satisfaction’ on customer loyalty of other full service airlines company in India. For instance, Unit of observation can be 160 passengers of ten profitable domestic routes of any other full service airlines company, in comparison to Jet Airways. 3) Design of research can be non-experimental, descriptive and explanatory survey. Sampling technique can be convenience sampling, and method of analysis is structural equation modeling (SEM).

Descriptive Research Results

a) Service quality performance of Jet Airways is 88% (of which, reliability is 88%, responsiveness is 86%, assurance 87%, empathy is 90%, tangibility is 91%). b) Satisfaction Index of Jet Airways is 80.15% (in which service quality 86%, product quality 80 %, price is 85%, personal factor is 65%, situational factor is 79.58 %);

Explanatory Research Results

a) Simultaneously, service quality and customer satisfaction significantly influenced customer loyalty, i.e. (R² = 0, 8115%) where R is customer loyalty and is expressed as a percentage of satisfaction levels. b) Partially, service quality significantly influenced customer loyalty (R² = 0,0729), and customer satisfaction significantly influenced customer loyalty (R² = 0,5183). According to the hypothesis tested, the influence of service quality on customer loyalty is lower than the inlfluence of customer satisfaction on customer loyalty. Based on descriptive and explanatory research findings, we found that Jet Airways is an example of excellence in performance.

Corporate Social Responsibility Jet Airways, along with various NGOs and corporate partners organizes Flights of Fantasy each year under which underprivileged children are flown on special Green Flights. Also, in addition, Jet launched Magic Box concept for donations with the NGO Save The Children. Through these donations, it helped victims of the earthquakes in Gujarat and J&K, and those affected by the tsunami in 2004. Further, Jet organizes various other activities like donation camps. Jet is the first airline to introduce eco-friendly napkin cords on Premiere Class.

 Awards th

Customer & Brand Loyalty in Domestic, Commercial Airline Sector  at the 5  Loyalty Awards, 2012. Best in Aviation at the NDTV Profit Business Leadership Awards, 201 1. Best Overall in Entertainment  at the Avion Awards 2010.

Conclusion The government last year allowed foreign airlines to invest up to 49% in Indian carriers in a major demonstration of its reformist credentials. The reform measure was greeted soon after by a couple of high-profile investment proposals — the Tata-AirAsia low-cost airline proposal and the JetEtihad deal. The Tata and Singapore Airlines deal has been fantastic news for passengers because the new venture will bring down fares and break the cartel that is driving up prices. It is also great news for the economy because any new airline venture will look to connect untapped routes. Airports at Chennai, Lucknow, Kolkata, Ahmedabad, Guwahati and Jaipur, identified for privatisation in the current financial year, are likely to see fresh investments of Rs 4,250 crore from selected private concessionaires. Air Costa’s deal with Embraer is a crucial one. E-Jets have proven their ability to stimulate traffic and sustain airline profitability while providing affordable and comfortable air travel to people in emerging markets. The domestic Indian market is developing in a similar way with both the current E-Jets and of course the E2s.

Recommendation •

Most operators need significant equity infusion to effect a meaningful improvement in their balance sheets. Jet are on the path towards achieving that. Jet’s equity infusion of Rs.2658cr, almost as much as their market capitalization will double their Market Cap Post Equity Infusion to Rs.5425cr.

•

Improved financial profile would also allow the players to focus on steps to improve long term viability and brand building through differentiated customer service. Jet are trying to improve their heavy debt problem by engaging in efforts like leasing agreements. They need to streamline process.

•

Over the long term, the operators need to focus on improving cost structure, through rationalization at all levels including mix of fleet (apart from Jet) and routes, aimed at cost efficiency.

•

At the industry level, long term viability also requires return of pricing power through better alignment of capacity to the underlying demand growth.

Bibliography We have referred to the following web pages to acquire secondary data and follow recent news and current trends: iata.org  jetairways.com interglobe.com civilaviation.gov.in flightstats.com dgca.nic.in moneycontrol.com circ.in ibef.org economictimes.indiatimes.com timesofindia.indiatimes.com network.airfinancejournal.com ficci.com cii.in online.wsj.com indianaviationnews.com info.shine.com atag.org wikiinvest.com icra.in en.wikipedia.org markets.ft.com

We have also referred to the following articles and news publications for other relevant information: Media Reports, Press Releases, Press Information Bureau, Department of Industrial Policy and Promotion (DIPP), Directorate General of Civil Aviation (DGCA) Porter, M. (2011) “What Is Strategy?” On Strategy, Harvard Business School Publishing Corporation Varian, Hal R. (2007) “Competitor and Market Power” The Economics of Information Technology: An Introduction, Cambridge University Press ICRA Research The Hindu Business Line The Times of India The Economic Times Business Standard