Service Industry(Airlines)

7/29/2019 Service Industry(Airlines)

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What is service

Services involve a direct interaction betweenproducers and consumers, whether its face toface (as in retailing, personal services, health

care, or live entertainment), or more remotely (asin the case of Internet access or television

broadcasting)

The service sector includes education, finance,

communications, health care, utilities, wholesaleand retail trade, and transportation.


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Indian owned Airlines Companies

Air India

Jet Airways

Kingfisher

Indigo

Spice Jet


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Introduction

Indian Aviation Industry is one of the fastestgrowing markets in the world. The AirportAuthority of India (AAI) manages a total of 127

airports in the country, which include13 international airports, 7 custom airports, 80domestic airports and 28 civil enclaves. There areover 1091 registered aircrafts in the country. The

genesis of civil aviation in India goes back toDecember 1912 when the first domestic air routebetween Karachi and Delhi became operational


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Types of Players

In 1990s, aviation industry in India saw someimportant changes. The Air Corporations Act wasabolished to end the monopoly of the public

sector and private airlines were introduced. The indian aviation industry comprises of three

types of players:

Full cost carriers

Low cost carriers (LCC)

Other start-up airlines


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Challenges Faced by Aviation Industry

Employee Shortage

Regional Connectivity

Rising Fuel Prices Gaps in Infrastructure

High Inputs Costs


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Future Growth

India is expected to be amongst the top five nations inthe world in the next 10 years in the aviation sector.

India is the 9th largest civil aviation market in the

world.

Domestic air traffic will touch 160-180 million

passengers a year, in the next 10 years and international

traffic will exceed 80 million passengers a year.

The Indira Gandhi International Airport (IGI) in NewDelhi, India, has been ranked the second-best airport in

the world for 2011 by the Airports Council

International


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Market Size

The rapidly expanding aviation sector in India handles2.5 billion passengers across the world in a year; moves45 million tonnes (MT) of cargo through 920 airlines,using 4,200 airports and deploys 27,000 aircraft. Today,

87 foreign airlines fly to and from India and five Indiancarriers fly to and fro from 40 countries.

Passengers carried by domestic airlines during January2012 was recorded at 5.33 million as against 4.94

million during the corresponding period of previousyear thereby registering a growth of 8.06 per centaccording to DCGA.


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Initiatives

The first 100 per cent private airport in the

country is likely to become operational in

Karaikal, an enclave of Puducherry in Andhra

Pradesh, in another 24 months The new domestic terminal building at Biju

Patnayak Airport at Bhubaneswar, which is likely

to be completed by August 2012, will cater to 800passengers from the existing capacity of 500 of

the present terminal building.


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contd

The Joy Alukkas Group, the Kerala-based gold jewelleryretail chain, plans to invest Rs 100 crore (US$ 20.04million) in its aviation wing by next year to provideexclusive air charter services to various destinations acrossIndia and abroad and helicopter tours within Kochi.

The Group would also launch its helicopter services by theend of March 2012.

The Turkish Airlines is planning to expand its operations inIndia by 2012. "India is a very important market for us and

we need to fly to at least five cities there," according toTemel Kotil, CEO, Turkish Airlines.


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Largest Airline in India

Jet Airways is the largest Indian airline based out

of Mumbai.

It operates over 400 flights daily to 76

destinations worldwide

Its main hub is Mumbai with secondary hubs at

Delhi, Cochin, Chennai, Ahmedabad, Bengaluru,

and Kolkata Jet Airways is owned by Naresh Goyal.


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Low Cost Airline

Indigo is a private low cost airline based in Gurgaon.

Since commencing operations in August 2006, it has

established itself as one of India's leading airlines using

its model of efficient, low-cost operations and byattracting customers with low fares.

Indigo has the second largest share in India's domestic

air travel market

As of October 2011 it is the only airline in India

making profit.

It is one of the fastest growing low cost carrier.


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SWOT ANALYSIS OF INDIGO

Segment - Cost Conscious Passengers Target group - Lower Middle Class / Middle Class

Strengths - Strong backing Promoters, Only LCC to make

consistent profits (Low Cost Carrier)

Weakness - Not on too many routes

Opportunities - Largest Market share among LCCs in

Indian Market, Opening up of International Skies, Middle

Class taking to the skies

Threats - Plenty of new LCCs to compete with , Rising

Labour costs, Rising Fuel Costs

CompetitorsGoAir, Spice Jet, Kingfisher Red,

JetKonnect


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Various Costing involved

Service costing is that part of operation costing

which is used in all organisation who provide

services instead of producing of goods.

For calculating the price of each service, it is verynecessary to collect all the expenses relating to

that services.


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Examples of Service Costing

Salary

Insurance

License Fees

Interest on Capital

Repairs

Depreciation

Petrol Expenses (ATF)


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Airline Operating Expense

The price of buying the airplanes.

Hiring qualified pilots to fly the planes is anothermajor cost.

First officers and other crew members make less,but still represent a major cost.

Fuel costs not only take a huge chunk out of anairline's revenue.

Maintenance costs,

Fees paid to airports,


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contd

Fees paid to the government,

The cost of food served to passengers,

The cost of running computer systems to track

bookings.

Fees and percentages paid to travel agents and

Web sites, pilot training.

Other incidental costs all add to operating

expenses


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Example

For example, long flights cost the airline

proportionally more money -- that's because

they're in the air for a long while and burn a lot of

fuel -- but the passengers still only pay for asingle ticket. Empty seats represent an additional

cost. The plane has to make the trip for the paying

passengers, but if not all of the tickets were sold,

the airline is not making the maximum possible

profit on that flight.


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Cost


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Explanation

The above graph can be explained as follows.

They include flight operations (fuel, pilots)

Maintenance (parts and labour)

Station expenses (handling passengers, luggage andfreight at terminals)

Promotion (advertising, reservations and travel agentcommissions; 80% of all ticket sales are done throughtravel agents)

Passenger services (food and entertainment) Administration, equipment depreciation and

amortization and transport related (delivery trucks).


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Operating Expenses

Globally, labour accounts for 35% of the

operating costs of the airline industry, which

represents about 75% of all non-fixed costs.

Fuel comes in second with 10-12% andcommissions to travel agents account for 6%

(down from 10% in 1995).

Eg: Fuel Cost of Jet Airways increased by 38.6%to Rs 436670 in 2011 from Rs 315165 in 2010.


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How to cut Airlines Cost

Fuel hedging

Use only one kind of plane ( No separate Training

required by pilots, Maintenance and Repairs)

Cheap Airport Fees.

Direct to the Destination.

Direct Ticket Sales.


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Hedging

It's a gamble against the future price of jet fuel. If

an airline thinks that the cost of fuel is going to

rise in the future, they can sign contracts locking

in the current price for months or even years. Iffuel prices double in 12 months, the airline would

be buying fuel at last year's cheaper rate.

However, if prices drop, the airline is stuck

paying their "locked in" higher rate.


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Typical Cost Sheet

a) Fixed costs:

Garage Rent

Insurance

Vehicle Tax

Interest on Capital

b) Maintenance Costs

Tyre and Tubes

Repairs

Overhaulings

c) Operating Costs

Petrol

Engine oil

Lubricating oil

Wages of Operators


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Jet Airways Operating Expenses

Decrease in Insurance costs is due to reduced rate negotiated for the year


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Consolidated P & L A/c


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Recommendations

Schedule O

Staff Welfare Expense has increased drastically

from Rs 5580 to 8223. And expenses including

salary, wages, bonus increased from Rs 127940 to137162.

Aircraft fuel Expenses from Rs 3,75,839 to Rs

5,16,734. If Fuel Hedging would have been used it would

have reduced the cost up to a certain expenses.


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contd

Schedule P :

Selling & Distribution Expenses

Commission to travel agents increased from Rs

63645 to Rs 84287.

It would have been reduced if the company

directly sells its own tickets.

Maintain more tie up with corporate clients.


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contd

Schedule Q:

Consumption of stores and spares increased from Rs11316 to Rs 14409.

It would have been reduced if more one type of planewould have been used.

Loss on scrapping of Aircraft parts increased from Rs43 to Rs 1843.

Repairs and Maintenance which include leasedpremises and others.

Cost of others increased from Rs 3044 to Rs 4028.


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contd

Schedule R:

Interest and finance charges includes interest on

fixed loan and others.

Cost of others increased from Rs 11511 to Rs

24460

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Service Industry(Airlines)