Indian Airline Industry & Key Performance Metrics

The airlines industry consists of passenger air transportation, both scheduled and chartered, but excludes air freight transport. Industry volume and Industry value are two important parameters which are used as important parameters for the Airline Industry. Airline Industry volume is defined as the total number of revenue passengers at all airports within the country or region, excluding transit passengers. A passenger from whom an air carrier receives commercial remuneration for their transporataion is called a revenue passenger. Industry value is defined as the total revenue obtained by airlines from transporting these passengers. Airline Industry analysis The Indian airlines industry had grown in double digits (greater than 20%) in recent years, but this growth faltered marginally in 2012 due to global recession. The industry's volume is expected to rise to 114.4 million passengers by the end of 2018. The Indian airlines industry had total revenues of Rs. 941,034.6 million in 2013. India airlines industry value: $ million, 2009–13

India airlines industry volume: million passengers, 2009–13

Key performance Indicators Available Seat Kilometers (ASK) A measure of an airplane's carrying capacity available to generate revenue. Available seat Kilometers refers to how many kilometers are actually available for purchase on an airline. ASKs are calculated by multiplying the available seats for a given plane by the number of kilometers that plane will be flying for a given flight. Revenue passenger kilometres (RPK) RPK is a measure of sales volume of passenger traffic. RPKs are calculated by multiplying the number of revenue passengers by the distance traveled. Yield It is basically total revenue per revenue passenger kilometer. It is obtained by dividing total passenger revenue by revenue passenger kilometer (RPK). Load Factor A measure of production compared to capacity. RPK divided by ASK gives us the load factor. Revenue per Available Seat Kilometer (R/ASK) This is considered as the best basic measure to evaluate the performance of the airline industry. It is derived by multiplying load factor with yield. It gives us the revenue we generate per increment of capacity.

Norms & Regulations The airline industry is subject to a lot of environmental protection regulations such as aircraft emissions of greenhouse gases, use of environmentally polluting substances and their disposal, and energy usage at major offices. Airline companies catering to international routes must operate in accordance to guidelines stipulated by International Air Transport Association (IATA). A violation of specific laws and regulations by the company could result in the imposition of fines and penalties.

Comparative Positioning of Air India and Jet Airways As shown in the perception map below, Air India and Jet Airways are considered to be high cost, high quality segment of Indian airline industry. Both of them offer full range of services – both Domestic and International. If we ignore the low-cost airline segment, Jet Airways is the only competitor for Air India in the high-cost, high-quality market segment. Perception Map - Marketline

Forces driving competition in the airlines industry in India

Despite having large number of potential buyer, buyer power is high because of high price sensitivity of Indian customers as product differentiation tends to be minimal, with almost no switching cost. New arrival of budget airlines and opening up of airline industry to international low-cost carriers like Air Asia might further increase the already existing price wars. Also in the high-end segment, there is a likely possibility of Tata-Singapore airlines Joint venture. So, new threat of new entrants is high. Fluctuating and increasing fuel prices were making it difficult for airlines companies to reduce operation cost, but the recent slump of oil prices will help them improve their operating margins.

Net income (loss) 10,000.00 0.00 2009 -10,000.00

2010

2011

2012

2013

2012

2013

-20,000.00 -30,000.00 Air India Rs. in million

Jet Airways

-40,000.00 -50,000.00 -60,000.00 -70,000.00 -80,000.00 -90,000.00

Revenue 200,000.00 180,000.00 160,000.00 140,000.00

Rs. in millions

120,000.00 Air India 100,000.00

Jet Airways

80,000.00 60,000.00 40,000.00 20,000.00 0.00 2009

2010

2011

If we look at the revenue graph, the revenue of Jet Airways and Air India are comparable but there is a big deviation in net income (even though both have been running in losses for past three years). The major reason for this huge difference is the high operating costs of Indian Airlines. Consider the P&L statement for FY’13 (taken from Capitaline). FY ’13 P&L Statement excerpts- All figures in Rs. Crores (Capitaline) Total Revenue EXPENDITURE : Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Administration Expenses Miscellaneous Expenses Total Expenditure Operating Profit

Air India 18,213 .79 % reven ue 0 0 13,426. 91 73 3,254.7 3 18 169.97 1 1,213.5 4 7 0 0 20,021 .28 1,807.4 9

Jet Airways 18,232. 52 % revenu e 0 0 7,007.66

38

1,544.24 3,821.57

8 21

3,451.21 847.79 16,672. 47

19 6

1,560.05

Even though fuel is the major contributor to the cost for both the companies, the percentage of costs is much higher in case of Air India (73% compared to 38%). Proper maintenance of aircrafts, reduction in pilferage losses and hedging of ATF must be followed to reduce Fuel cost. Also the employee cost for Air India is 18% compared to 8% for Jet Airways, the reason being Air India has a higher employee-aircraft ratio (221). Selling and Administration expenses is almost nil for Air India. Being a state-owned firm, Air India has near zero administration expenses. Moreover, it has been allotted preferred departure times (usually mornings) and good Flight taxi bays. Other manufacturing expenses are also lower for Air India, but this cannot exactly be taken as a good sign as it may mean that Jet Airways is investing in spares and maintenance of equipment to improve the operational effectiveness.