TERM PROJECT

KINGFISHER AIRLINES - BUSINESS STRATEGY AND

MARKET ANALYSIS FOR INDIAN BUSINESS

Submitted by:MakanN

KINGFISHER AIRLINES - BUSINESS STRATEGY AND MARKET ANALYSIS FOR INDIAN BUSINESS

Aviation Sector in India – an Overview

History of Civil Aviation in India.

1. The history of civil aviation in India began in December 1912. This was with the opening of the first domestic air route between Karachi and Delhi by the Indian state Air services in collaboration with the Imperial Airways, UK, though it was a mere extension of London-Karachi flight of the latter airline. Three years later, the first Indian airline, Tata Sons Ltd., started a regular airmail service between Karachi and Madras without any patronage from the government. At the time of independence, the number of air transport companies, which were operating within and beyond the frontiers of the company, carrying both air cargo and passengers, was nine. It was reduced to eight, with Orient Airways shifting to Pakistan. These airlines were: Tata Airlines, Indian National Airways, Air Service of India, Deccan Airways, Ambica Airways, Bharat Airways and Mistry Airways.

2. In early 1948, a joint sector company, Air India International Ltd., was established by the Government of India and Air India (earlier Tata Airline) with a capital of Rs 2 crore and a fleet of three Lockheed constellation aircraft. Its first flight took off on June 8, 1948 on the Mumbai (Bombay)-London air route. At the time of its nationalisation in 1953, it was operating four weekly services between Mumbai-London and two weekly services between Mumbai and Nairobi. The joint venture was headed by JRD Tata, a visionary who had founded the first Indian airline in 1932 and had himself piloted its inaugural flight.

3. A chronological diary of major milestones is as given below:

(a) 1953: Nationalisation of Aircraft Industry. The assets of 8 existing companies were transferred to two entities in the aviation sector controlled by the Government into two companies viz. Indian Airlines, primarily serving domestic sectors, and Air India, primarily serving the international sectors. This had the following implications:

(i) Aviation became a preferred mode of transport for elite class(ii) Restricted Growth of Aviation Industry (iii) High Cost structure (iv) Underdevelopment of infrastructure

(b) 1986: Private Sector Players permitted as Air taxi operators. Jet, Air Sahara, etc. started service.

(c) 1990:The Open-sky policy came in April 1990. The policy allowed air taxi- operators to operate flights from any airport, both on a charter and a non charter basis and to decide their own flight schedules, cargo and passenger fares. The operators were, however, required to use aircraft with a minimum of 15 seats and conform to the prescribed rules.(c) 1994: Private Carriers permitted to operate scheduled services. Six operators granted license, however only Jet and Air Sahara able to service.(d) 2003: Entry of low cost carriers. Air Deccan, Spice Jet, Go Air, Indigo. This had the following implications:

(i) Aviation becomes more affordable with check fares and discount schemes.(ii) Various Operators with different business model in the industry.(iii) Huge growth in Aviation sector.

Regulatory Environment of Aviation Sector4. The regulatory environment of the Indian Aviation Industry comprises the following:

(a) Federation of Indian Airlines. Federation of Indian Airlines is a body formed by the scheduled carriers in India. FIA, as the voice of India's airline industry, works to identify and take up issues on behalf of the industry, with various regulatory authorities, government departments and other key stake-holders. The functioning of the FIA is guided by an Executive Council, comprising chiefs of each of the member airlines.

(b) Ministry of Civil Aviation. The Ministry of Civil Aviation in India is located at New Delhi. The ministry formulates national policies & programs for development & regulation of civil aviation & also prepares schemes for the growth & expansion of Civil Aviation in India. The ministry also monitors airport facilities, air traffic services & the carriage of passengers & goods by air. Under its purview are the following Attached/Autonomous organizations:

(i) Directorate General of Civil Aviation. The Directorate General of Civil Aviation (DGCA) is a principal regulatory body for the aviation industry in India. DGCA is headquartered in Delhi.(ii) Bureau of Civil Aviation Security.(iii) Indira Gandhi Rashtriya Uran Akademi set up at Fursatganj to standardize and improve the flying training facilities in the country, training pilots on fixed wing and rotary wing aircraft.(iv) Air India Ltd. & Indian Airlines Ltd, now merged under a holding company, viz. National Aviation Corporation of India Ltd (NACIL).(v) Pawan Hans Helicopters Ltd.

(vi) Airport Authority of India.

(c) Civil Aviation Policy. The mission of Civil Aviation Policy is to maintain a competitive civil aviation environment which ensures safety and security in accordance with international standards, promotes efficient, cost-effective and orderly growth of air transport and contributes to social and economic development of the country. The strategic objectives are as follows:

(i) Trade, tourism and overall economic activity and growth is encouraged. (ii) Safe, efficient, reliable and widespread quality air transport services are provided  at reasonable prices.(iii) Effective systems are put in place for timely crisis and disaster management, including investigation of incidents/accidents

(d) Open Skies Agreement. India and the United States signed a landmark agreement, permitting any number of airlines to operate any number of flights to any point in each other's territory. The agreement will enhance passenger and cargo services between the countries, decrease airfares and accompany innovations and new partnerships in the aviation industry.

5. Sector structure/Market size. The Indian aviation industry is one of the fastest growing aviation industries in the world, with a growth rate of 18 per cent per annum. 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. India has jumped to 9th position in 2009 in world's aviation market from 12th in 2006. India has 454 airports and airstrips. Of these, 16 are designed international airports. The scheduled domestic air services are now available from 82 airports.

6. Potential for Growth.The Indian Civil Aviation market grew at a compound annual growth rate (CAGR) of 18 per cent, and was worth US$ 5.6 billion in 2008. 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 by 2010.By 2020, Indian airports are expected to handle more than 100 million passengers including 60 million domestic passengers and around 3.4 million tonnes of cargo per annum.

7. Airport Infrastructure. Airport infrastructure is being developed at a fast pace to cope up with the growth of air transport operations. A simultaneous operation from parallel runways having facilities for category 3B level operations has now become a reality. Ground based communication, navigation and surveillance facilities are now being replaced by satellite based facilities. India is developing its new satellite based navigation system Gagan, which will enable precision approaches at all airports in India. The following are the salient developments:

a) Mumbai and Delhi airports have already been privatised and are being upgraded at an estimated investment of US$ 4 billion over 2006-16. b) Greenfield airports developed by private consortia at Bangalore and Hyderabad are now operational involving a total investment of over 800 million USD.c) A second greenfield airport being planned at Navi Mumbai is going to be developed using public-private partnership (PPP) mode at an estimated cost of US$ 2.5 billion. d) 35 other city airports are proposed to be upgraded. The city side development will be undertaken through PPP mode.e) Over the next five years, AAI has planned a massive investment of US$ 3.07 billion—43 per cent of which will be for the three metro airports in Kolkata, Chennai and Trivandrum, and the rest will go into upgrading other non-metro airports and modernising the existing aeronautical facilities.

8. Aviation Investment Policy. The major policies supporting infrastructure which are now in place are as given below.

a) 100 per cent FDI under automatic route is permissible for greenfield airports.b) For existing airports, Foreign equity up to 100 per cent is permitted through automatic approvals and up to 100 per cent through special permission (from FIPB, Ministry of Finance).c) Private developers allowed to setup captive airstrips and general airports 150 km away from an existing airport.d) 100 per cent tax exemption for airport projects for a period of 10 years.e) 49 per cent FDI is permissible in domestic air transport services under the automatic route, but not by foreign airline companies. Foreign institutional investors might have shareholdings more than the limited 49% in the domestic sector. 100 per cent equity ownership by Non-Resident Indians (NRIs) is permitted.f) 74 per cent FDI is permissible in cargo and non-scheduled airlines.g) The Indian government plans to set up an Airport Economic Regulatory Authority to provide a level playing field to all players.

9. Major Investments. During 2007-08, various companies have shown an interest in the Indian aviation industry. Investment in airport infrastructure was over US$ 5 billion in 2008 and will go up US$ 9 billion by 2013, of which close to US$ 6.8 billion is expected to come through public private partnerships (PPP) model, according to a study by research firm Frost & Sullivan. The major firms investing are as given below:

a) Tata Advanced System Limited (TAS), to set up a US$ 113.63 million helicopter manufacturing unit at the Aerospace Special Economic Zone (SEZ) in Adhibatla village near the Hyderabad international airport.b) Global Vectra Helicopters, to invest US$ 130 million during the next two years to increase its fleet strength as well as consolidate its operations.c) GMR Infrastructure to invest US$ 151 million corporate jet market in India, and US$ 60 million for a proposed JV with aircraft component manufacturers such as Honeywell and Safran to set up a components assembly plant in the country.d) Changi Airports International has picked up a 26 per cent stake for US$ 20 million in Bengal Aerotropolis Pvt Ltd (BAPL).

10. Road Ahead.a) Passenger traffic is projected to grow at a CAGR of over 15 per cent in the next 5 years.b) The Ministry of Civil Aviation, envisages creating infrastructure to handle 280 million passengers by 2020.c) Investment opportunities of US$ 110 billion envisaged up to 2020 with US$ 80 billion in new aircraft and US$ 30 billion in development of airport infrastructure.d) Associated areas such as maintenance, repair and overhaul (MRO) and training offer high investment potential. A report by Ernst & Young says the MRO category in the aviation sector can absorb up to US$ 120 billion worth of investments by 2020.e) Aerospace major Boeing forecasts that the Indian market will require 1,000 commercial jets in the next 20 years, which will represent over 3 per cent of Boeing Commercial Airplanes’ forecasted market worldwide. This makes India a US$ 100 billion market in 20 years.

11. Challenges for the aviation sector

a) Rising fuel prices.b) Employee shortagec) Regional connectivityd) Gaps in infrastructuree) High input costs

Overview of Domestic Airlines Market

12. India at present has twelve competing airlines in the domestic market as against a single government owned airline in 1991. According to McKinsey Quarterly (2005) the Indian aircraft market is the world’s second largest commercial aircraft market. On-time performance and service levels have risen dramatically and fares have dropped. The players in the current airline market include airlines like Indigo, Go Air, Spicejet and Kingfisher Red (Air Deccan) with low-cost, low-fare and no frills along with premium airlines like Kingfisher and Jet Airways, in addition to the ‘National Carrier’ – Air India. Competition has brought in some price advantages to travellers and has converted many railway passengers to airline travellers. Because of proliferated number of players in the airline industry, airlines may enjoy new business opportunities along with high competitive threats.

Key Players in Indian Aviation Industry

13. Air India is the national flag carrier airline of India with a network of passenger and cargo services worldwide. It is the merger of the erstwhile state-owned airlines in the country, Air India and Indian Airlines now known as National Aviation Corporation of India Ltd (NACIL). Air India has 44 world-wide destinations. The airline has been profitable in most years since its inception, but is facing an acute resource crunch these days. The Airline has approached the Govt for a ‘bail-out’ package.

14. Other Airlines on Domestic Routes

a) SpiceJet is a low-cost airline. Their marketing theme "offering low 'everyday spicey fares' and great guest services to price conscious travellers". Their aim is to compete with the Indian Railways passengers travelling in AC coaches.b) Air Deccan (Kingfisher Red) is an airline based in Bangalore, India. It was India's first low-cost carrier. Air Deccan grew rapidly since it first started air operations in 2003, and despite its almost disastrous maiden inaugural flight (which caught fire), it continued to grow. The growing Indian economy and the increasing number of middle-class people in India has greatly helped its growth. The Airline changed its brand name to ‘Kingfisher Red’ after association with the Kingfisher Airline.c) GoAir The People’s Airline, a low cost carrier promoted by The Wadia Group is a domestic budget airline based in Mumbai, India established in June 2004. It’s a relatively small player as compared to other low cost airlines. d) Kingfisher Airlines is an airline based in Bangalore, India. Services started on 9 May 2005, following the lease of 4 Airbus A320

aircraft. It initially operates only on domestic routes. The airline promises to suit the needs of air travellers and to provide reasonable air fares. e) IndiGo Airlines is a new and a private domestic airline based in India. IndiGo placed an order for 100 Airbus A320 aircraft during the 2005 Paris Air Show. The total order was worth US $6 billion; one of the highest by any domestic carrier during the show. The low-fare carrier has started operations from 04 Aug 06.f) Jet Airways a “regular” airline which offers normal economy and business class seats. Jet Airways, along with Air Sahara, is the only airline which survived the dismal period of 1990s when many private airlines in India were forced to close down. Jet Airways is an airline based in India serving domestic and international routes. The airline operates over 300 flights to 43 destinations across the. Air Sahara has now merged with Jet Airways and changed the brand name to Jetlite.

15. Market Share. The market shares of the Major Airlines (First quarter 2009) are as given in the pie chart below:

(a) Kingfisher: 26.08 %(b) Jet Airways:16.72 %(c) Jetlite: 7.39 %(d) Air India: 17.66 %(e) Indigo: 13.75 %(f) Spicejet: 11.72 %(g) Go Air: 4.29 %(h) Paramount: 2.27 %

General Segmentation Trends: The Airline Industry16. Most airlines use a very traditional segmentation strategy, dividing passengers into Business travellers and Economy travellers (mostly leisure travellers). The common strategy is to squeeze as much profit as possible from Business class passengers who are attracted by superior services and corresponding high prices and, at the same time, to try and fill the rest of the seats and ensure growth by attracting Economy class passengers with lower fares.

17. Business Passengers. They are crucial for the profitability of airlines. With less spare time and more cash in their pockets, they agree to pay a premium price for a premium service. Today business passengers account for approximately 48% of passengers, and these 48% contribute 66% of airlines' revenue. The premium prices they pay provide wider and more comfortable seats, better choice of meals and seats, luxurious lounges.

18. Airlines can choose from a multitude of premium services to offer to business travellers. Some of these extras range from seats equipped with faxes and telephones, to gambling machines, showers, massage services and suit ironing services in the recently introduced arrival lounges. Business passengers believe it is worth extra money if they can save time and arrive looking fresh for an important meeting. Business passengers will avoid transit flights even if a longer flight could save them money. But amongst

other perks, flexible reservation services are probably the most important to them. Reservations for business trips are often made just a couple of days in advance. A no penalty cancellation policy is also very important to business passengers.

19. It is observed that the best way to reach business travellers is through printed advertising. Many airlines design special promotional programs that target corporate bookers and meeting planners, who are responsible for business trips reservations. Frequent flyer programs are an added bonus for business passengers.

20 Leisure Travellers. They represent a totally different market. The most important consideration for most of them is the price. The lower the airfare, the more people will fly the respective airline. By and large, with the exception of wealthy travellers, this segment will not pay extra for premium services and will agree to change several planes during their trip if this option costs less than a direct flight.

21. Despite lower margins provided by this segment, leisure travellers are very important to the bottom line of airlines. Part of the reason is that technological progress in the area of tele-conferencing and increased use of the internet for business communications is expected to reduce the number of business travellers. Thus, airlines are counting on the leisure segment to provide further growth.

22. The tough issue in airline marketing management is how airlines can benefit from the growth opportunities in the leisure segment without losing immediate profit opportunities in the business segment. By improving services and reducing prices for economy class passengers, airlines risk that some business passengers will switch to economy class. Since business class passengers are not many, a company relying mostly on business travellers will often end up flying half-empty planes, losing the potential revenue generated by lower priced economy seats.

23. On the other hand, few airlines catering solely to economy class passengers can be successful because a low fare carrier must fill the entire plane if it is to generate revenue from its low-margin operations. Thus the airline tries to sell the economy seats at a cheaper price early, while keeping enough seats reserved for business travellers, who usually book at the last minute. Keeping just the right amount of business seats reserved is important: selling too few economy seats in advance may result in a less-than-full plane while selling too many economy seats may result in a full plane, but with insufficient revenue to gain a profit.

A Study of Kingfisher Airlines

24. Introduction to UB group UB group based in Bangalore, is a conglomerate of different companies with a major focus on the brewery (beer) and alcoholic beverages industry. The company markets most of its beer under the Kingfisher brand. The group is headed by Dr Vijay Mallya. The UB Group was founded by a Scotsman, Thomas Leishman in 1857. Kingfisher, the Group's most visible and profitable brand, made a modest entry in the sixties. During the 1950's and 60's, the company expanded greatly by acquiring other breweries. First was the addition of McDowell as one of the Group subsidiaries, a move which helped United Breweries to extend its portfolio to wines and spirits business. Strategically, the Group moved into agro-based industries and medicines when Mallya acquired Kissan products and formed a long-term relationship with Hoechst AG of Germany to create the Indian pharmaceutical company now known as Aventis Pharma, the Indian subsidiary of the global pharma major Sanofi-Aventis. The UB Group’s Brewing Entity - called United Breweries Limited (UBL) - has also assumed undisputed market leadership with a national market share in excess of 50%. Through a process of aggressive acquisition and market penetration, The UB Group today controls 60% of the total manufacturing capacity for Beer in India.

25. Kingfisher Airlines Kingfisher Airline is a private airline based in Bangalore, India. The airline is owned by the United Beverages Group. Kingfisher Airlines started its operations on 09 May 05 with a fleet of 4 Airbus A320 aircrafts. The major destinations covered by Kingfisher Airlines on domestic routes are Bangalore, Mumbai, Delhi, Goa, Chennai, Hyderabad, Ahmedabad, Cochin, Guwahati, Kolkata, Pune, Agartala, Dibrugarh, Mangalore and Jaipur.

26. It is a major Indian luxury airline operating 218 flights a day and has an extensive network to 37 destinations, with plans for regional and long-haul international services. It has announced plans to start flights to the USA with Airbus A380 aircraft. Its main bases are Bangalore International Airport, Bangalore, Chhatrapati Shivaji International Airport, Mumbai and Indira Gandhi International Airport, Delhi, with a hub at Sardar Vallabhbhai Patel International Airport, Ahmedabad. Kingfisher Airlines, through one of its holding companies United Breweries Group, has acquired 26% stake in the budget airline Air Deccan and has option to buy further of 20% stake from the secondary market.

27. Kingfisher is one of only 6 airlines in the world to have a 5 star rating from Skytrax, along with Asian Airlines, Malaysia Airlines, Qatar Airways, Singapore Airlines and Cathay Pacific Airways. In a short span of time Kingfisher Airline has carved a niche for itself. The airline offers several unique services to its customers. These include personal valet at the airport to assist in baggage handling and boarding, exclusive lounges with private space, accompanied with refreshments and music at the airport, audio and

video on-demand, with extra-wide personalized screens in the aircraft, sleeperette seats with extendable footrests, and three-course gourmet cuisine.

28. The following are the major attributes of the Airline:

(a) Vision: “The Kingfisher Airlines family will consistently deliver a safe, value-based and enjoyable travel experience to all our guests.”(b) Safety: This is an overriding value. In this line of business, there is no compromise.(c) Service: In hospitality business customer satisfaction is very important and building trust, goodwill and loyalty of customers is at prime focus.(d) Happiness: Kingfisher seeks to build an organisation with people who choose to be happy, and will endeavour to influence their guests and co-workers to be happy too. (e) Teamwork: Kingfisher believes that “We will succeed or fail as a team. Each one of us must respect our colleagues regardless of their rank, and we must work together to ensure our mutual success”.(f) Accountability: Every employee in Kingfisher will be held accountable for the successful execution of their duties, commitments and obligations, and they will strive to lead by an example.

29. Product: Premium class seats(a) Sleeperette seats with extendable footrests. 48" seat pitch and a 125° recline. Fully-adjustable headrests. (b) Laptop and mobile phone chargers in each seat. (c) Comfortable pillows and snug blankets.

30. Price: Initially Kingfisher airlines did not differentiate between business class and economy class. But eventually they decreased the prices of business class and called those seats as premium seats. Fares were very average as it had to target middle class as well as premium class people. The introduction of Kingfisher Red services have given the airline a ‘Low-Cost’ option to compete with other ‘No-frills’ airlines. It is important to note that the Kingfisher Red serves complementary meals on board, thereby increasing the perception of ‘More Value for Money’ for the passengers.

31. Promotion: Various promotional strategies have been adopted by Kingfisher airlines like the following:

(a) The 'Power Flyer' a consumer incentive offer targeted at the corporate traveller

(b) Passengers are offered in flight entertainment options and contests like ‘Kingfisher Flying Face of the Month' and attractive discounts of branded merchandise.(c) Offer in-flight silent auctions for lifestyle products and in-flight sales of dry packaged food and beverages. (d) The marketing department showcased the airlines as ‘The new flying experience’.(e) Kingfisher Airlines has announced special fares for all personnel serving in the Indian Armed Forces, the Union Government, State governments, and employees of all public sector units in the country. The immediate families of these personnel are also eligible for these concessions.(f) The company has just launched Kingfisher First, which is a print campaign to promote its first class service. It is a personalized campaign, which has Vijay Mallya, signing off by saying, "I have created a product which is better than what I would have created for myself."

SWOT ANALYSIS

32. A SWOT analysis carried out on the Airline reveals the following:

(a) Strengths:(i) Strong Brand value & Reputation in the minds of customers.(ii) Quality of the service.(iii) First airline to have new fleet of airbuses.

(b) Weaknessess:(i) High Ticket prices.(ii) Still not a profit-making organization.

(c) Opportunities:(i) The expanding tourism Industry.(ii) Untapped Air cargo market.(iii) Under penetrated Domestic Market.

(d) Threats:(i) Competitors.(ii) Fuel Price Hike.(iii) Economic Slowdown/Recession.(iv) Alienation of Government passengers. The Government servants travelling on Official Duty have to use Air-India only.(v) Tourism Saturation.(vi) Declining Promotions and sponsorship.

33. MARKETING STRATEGIES(a) Kingfisher Airlines is the first carrier in the country to offer live in-flight entertainment.(b) Kingfisher Airlines Ltd and Dish TV have joined hands to provide live in-flight entertainment on Kingfisher aircraft.(c) The service would enable airline’s customers to book air travel ticket after securing ‘ngpay’ application on their GPRS-enabled mobile handsets.(d) On the promotional front, Kingfisher has signed up the latest diva of Bollywood Ms.Deepika Padukone as the Brand Ambassador.(e) Ambush advertising as shown in the strategic placement of own advertisement hoardings vis-à-vis those of Jet Airways, as shown in the picture below.

33. Union with Air Deccan. Kingfisher Airlines, through one of its holding companies UB holdings Ltd, has acquired 26% stake in the budget airline Air Deccan and has option to buy further of 20% stake from the secondary market. Air Deccan is now known as “Kingfisher Red”. The main aim behind the union is to optimise the operations of the two airlines by working closely together to exploit the significant synergies that exist in the areas of operations and maintenance, ground handling, vastly increased connectivity, feeder services, distribution penetration etc. The Kingfisher-Air Deccan group is one of the largest domestic airline with a fleet of 71 aircraft including 41 Airbus aircraft and 30 ATR aircraft. This combined airline powerhouse covers all segments of air travel from low fares to premium fares and offer the maximum number of 537 daily flights covering the single

largest network in India connecting 69 cities whilst taking advantage of unparalleled synergy benefits arising from a common fleet of aircraft.

34. The market leadership of Kingfisher Airlines is evident from the present market share as indicated in the chart below:

References:1. Indian Brand equity Foundation website, www.ibef.com.2. Assam times, Community Newspaper3. Business section of website Maps of India.com.4. En.wikipedia.org/wiki/Airline#Airline_personnel5. www.indianchild.com/india_civil_aviation.html6 Kingfisherblog.wordpress.comhttp7. www.iloveindia.com/economy-of-india8. www.bangaloreaviation.com