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8/22/2019 Aviation in India (Rev Ppt 2)
1/30
Week 1:
Overview of the
Aviation Industry
PGDM (Semester 1)
1For class discussion at NDIM
8/22/2019 Aviation in India (Rev Ppt 2)
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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
8/22/2019 Aviation in India (Rev Ppt 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
For class discussion at NDIM 3
8/22/2019 Aviation in India (Rev Ppt 2)
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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.
For class discussion at NDIM 4
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
For class discussion at NDIM 5
8/22/2019 Aviation in India (Rev Ppt 2)
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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.
For class discussion at NDIM 6
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/Petroleum8/22/2019 Aviation in India (Rev Ppt 2)
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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
For class discussion at NDIM 7
8/22/2019 Aviation in India (Rev Ppt 2)
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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
For class discussion at NDIM 8
8/22/2019 Aviation in India (Rev Ppt 2)
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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
For class discussion at NDIM 9
8/22/2019 Aviation in India (Rev Ppt 2)
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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
For class discussion at NDIM 10
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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
8/22/2019 Aviation in India (Rev Ppt 2)
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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%,
For class discussion at NDIM 14
8/22/2019 Aviation in India (Rev Ppt 2)
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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)
8/22/2019 Aviation in India (Rev Ppt 2)
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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)
16
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
8/22/2019 Aviation in India (Rev Ppt 2)
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The Kingfisher Story
For class discussion at NDIM 17
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
8/22/2019 Aviation in India (Rev Ppt 2)
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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
For class discussion at NDIM 18
8/22/2019 Aviation in India (Rev Ppt 2)
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Current Policies in Indian Aviation
For class discussion at NDIM 19
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
8/22/2019 Aviation in India (Rev Ppt 2)
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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
For class discussion at NDIM 20
8/22/2019 Aviation in India (Rev Ppt 2)
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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.
For class discussion at NDIM 21
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_India8/22/2019 Aviation in India (Rev Ppt 2)
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Aviation in India
For class discussion at NDIM 22
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
8/22/2019 Aviation in India (Rev Ppt 2)
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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
For class discussion at NDIM 23
8/22/2019 Aviation in India (Rev Ppt 2)
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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
For class discussion at NDIM 24
8/22/2019 Aviation in India (Rev Ppt 2)
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Aviation in India
For class discussion at NDIM 25
8/22/2019 Aviation in India (Rev Ppt 2)
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Aviation in India
For class discussion at NDIM 26
8/22/2019 Aviation in India (Rev Ppt 2)
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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
For class discussion at NDIM 27
8/22/2019 Aviation in India (Rev Ppt 2)
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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=13732226887346028/22/2019 Aviation in India (Rev Ppt 2)
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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
For class discussion at NDIM 29
8/22/2019 Aviation in India (Rev Ppt 2)
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THANK YOU
For class discussion at NDIM 30