Case Analysis of Airline Industry in India Essay

INTRODUCTION Aviation Industry plays an important role in the economic growth of anation. It not only promotes international trade but also provides an effective and fastest means of transportation across the globe. Today, in the world of globalization and cut throat competition the value of time has become more precious. The history of Indian Aviation industry lies back in the year 1912.The first domestic flight was taken between Delhi and Karachi by the Indian State Air Services. Tata Airlines started with an air mail service in the year 1912.It was renamed as Air India in 1946. There were few players at the time of independence including Tata Airlines, Indian National Airways, Deccan Airways .In 1953 ,the government nationalized the airlines via the Air Corporations Act 1953. Two separate entities came into existence Indian Airlines which was the merger of the already existing domestic Airlines and Air India International. In the year 1986, private players were granted permission to work as air taxi operators which included Air Sahara, Jet Airways, Damania Airways, East West Airlines, Modiluft and NEPC Airways. In 1995, government granted scheduled career status to six private air taxi operators. But all the players could not survive and by 2003 Jet Airways and Air Sahara continued. Air Deccan entered the market in 2003.Air Deccan gave India its first Low Cost Carrier (LCC).Later on, other players also entered the market including Kingfisher, Paramount, GoAir, and Indigo. The year 2007 was the year of merger and acquisitions –the Jet-Sahara deal, the Kingfisher-Deccan deal, Indian-Air India. Full service airlines were forced to drop fares as well though their minimum fares tended to be still higher than those offered by the â€Å"low-cost† carriers. These low fares attracted leisure travelers to fly by air. The overall growth rate of the market was about three times faster than the growth in business travelers. The proportion of business travelers on full-service carriers such as Jet Airways came down to about two-thirds. OBJECTIVE The present study aims to identify the most important factors responsible for the performance of both public as well as in private low cost airlines, to compare and contrast on the basis of collected data and to suggest some adequate measures of improvement. The three major airlines making waves, for different reasons, in the Indian airlines industry are Air India, Kingfisher and Indigo. So in this paper we try to compare and analyse the reasons behind their successes and failures. We will be comparing the above mentioned airlines on the basis of their business models, scope for expansion, management practices and current operations. We try to compare and analyse the reasons behind their successes and failures. INDIGO Indigo is the exception to the rule in the Indian Airline industry as of today,being the only profitable Airline in the financial year ending March 2012. Despite having entered the market in 2006,Indigo has rapidly climbed up the ladder to become the second largest domestic carrier. Its market share increased from 5% in the first quarter of 2007 to 10.3% in first quarter of 2008 to 15.4% in December 2008 to a whopping 27.6% in September 2012. This growth rate of Indigo is expected to continue as the Airline increases its capacity on the domestic as well as international front.In addition,it also has massive fleet orders in the pipeline to sutain future growth. IndiGo currently has 51 A320s in its fleet, with more than four times that number of aircraft on firm order with Airbus. All the planes have exactly the same configurations, having the same engines, same number of seats in one class configuration. Load factors have also been strong throughout with an average load factor of 86.3% in June 2012 when the Industry’s average was 75%. Following are some of the strategies the airline has adopted which enable it to scale to the top in a span of 6 years: 1. Low cost,single class model- It has its low cost, single class model. Indigo retained its policy of offering one class of no frills service on a single type of plane. They have set a record for using the lightest passenger seats in India which weigh only 12.8 Kgs. They have started using paint which overall weighs 50 Kgs less. Such weight savings are negligible on their own but collectively ,they have helped Indigo to cut on costs and function as a â€Å"low cost airline†. 2. Maintaining a young fleet:Indigo uses the strategy of selling and leasing its planes,thus helping the airline to constantly replace its fleet,hence preventing the need for major checks and repairs. 3. Excellent Quality of Service: Some of the reasons for the outstanding quality are as follows: a. The management and staff are hired only after the CEO meets with each of them individually. b. The airline also employs far lesser number of people as compared to other airlines. c. The airline has trained its crews to de-plane the passengers in 6 minutes and unload the baggage in 10 minutes. It regularly acheives Turn around times of around 22-25 minutes(Industry Average being much more than 30 minutes). The lesser the time taken at the airports, the more the airplane can fly and earn more 4. Reliable and On-Time Service: Indigo’s Management has tried to attract customers with more than just low fares. An important factor is its on-time performance of 94 per cent – much higher than its other rivals. For instance, to ensure that its flights depart and arrive on time in spite of the dense fog that envelops Delhi and other northern cities without fail every winter, IndiGo has one of the highest percentages of pilots who are trained to fly under such conditions. IndiGo has set up a centralized operations control center which monitors the weather, anticipates delays and provides advance information to the ground staff in case an aircraft requires some repair or maintenance while it is airborne so that the engineers are ready to rectify the problem to save time. 5. War on Costs: d. On an average, an IndiGo aircraft flies for around 12 hours a day, compared to eight to 10 hours logged by most competitors. The extra hours allow it to undertake one extra flight daily, which translates into more seats and revenue. e. To reduce its cost of holding inventory of components, IndiGo has done a tie-up with Air France under which the French airline will stock components required by Indigo. In this way, the Inventory will not be in Indigo’s Books. 6. Additionally trained pilots: According to the latest figures released by the civil aviation ministry and the Directorate General of Civil Aviation, nearly 38 per cent of IndiGo’s pilots are CAT III compliant or are able to fly under low visibility. Even full service airline Jet has only 22 per cent of its pilots trained to fly under fog. Indigo has realized well in time that to sustain in this competitive industry, it needs to deliver on its promise and it seems to be doing so pretty well, especially in the domestic front. Kingfisher: Air DeccanLaunch: August 2003Low, variable fare, no frills. Only Economy Class. Mix of metro and cross-country destinations.Was acquired by Kingfisher and later renamed Kingfisher Red| Kingfisher AirlinesLaunch: May 2005Current Fleet: 94Variable fare, all frills. Single Kingfisher class. Premium in-flight service. Only metro destinations.| Collapse of Kingfisher Airlines â€Å"Kingfisher! King of good times† is seeing its worst time in recent months. All the ‘service with glamour’ provided by Vijay Mallya is not looking so glamorous at the closed ticket counters. Several flights have been cancelled and Government is swinging between the idea of shutting down or not shutting down the service. The losses incurred by the kingfisher are around 7000 crores. Revenue department is also blaming the airlines for tax evasion of another 2000 crores. His shares tumbled around 19 percent at BSE. There are numerous reasons for the present condition of the kingfisher airlines: Every big business needs an expert team of CEO and other officers look into the day to day activities. But here the scenario was different. Mallya kept this business under his direct control and this was one of his biggest blunders. This caused a major mismanagement and confusion among the employees. Administration of India’s second largest aircraft service was going down the lane. Mallya group continuously blamed Government for the dismal performance of airlines. To balance all this, they started cutting the salaries and perks of their staffs. They didn’t get their salaries on time due to which they refused to come back on job. Sometimes they also vented their anger and misbehaved with the passengers adding fuel to the fire. Another reason for its collapse is the takeover of Air Deccan in 550 crore acquisition. There were mixed reactions, some saying that it can be a disaster and some saying it to be a wonder. Kingfisher owned around 26 percent stake. Major advantage was that engineering and aircraft cost decreased due to almost same routes. But Kingfisher incurred losses of Air Deccan also. That’s when Vijay Mallya tried his luck and gave birth to a new low cost carrier ‘Kingfisher Red’. It was awarded death sentence in few years although low cost carriers were at its best. He provided goody bags and air hostesses provided a beautiful sight with their 24*7 ‘Pan Am† smiles. So customers started choosing Kingfisher Red over its mother brand because of same facilities with cheap prices. Kingfisher Airlines started incurring losses as it was typecasted as mainly the aircraft for the riches. Mallya started decreasing business class seats and routes to compensate the losses. Again when Mallya was already in turmoil, he tried another shot to ruin himself. He did not cared about his domestic flights and started the service on the international routes where competition was even higher with better facilities. This again provided him with losses. To compensate for these losses Mallya took loans from banks including SBI and many private banks with share from its UB group as collateral. It even collateralized its brand name ‘Kingfisher’. Now the group is asking for some time and easier interest rates that may help it to recover. But with rigid attitude of banks, it’s looking like a no win situation for Mallya group. Tax authorities have already frozen its bank account for the nonpayment of dues. Now only time will tell that what will be the future of this ‘once most stylish and attractive’ aircraft carrier. AIR INDIA Air India is considered to be India’s National Flag carrier. On October 15 1932, J.R.D Tata took from Karachi in a tiny light single- engine flight to Mumbai. It was known as Tata Airlines during those days. In the year 1946, it was renamed as Air India .In 2007, it was merged with Indian Airlines .The official name of the registered airline is National Aviation Company of India (NACIL) .However Air India was retained as the brand name for NACIL as it was well known at home and abroad. Air India Crisis 1. Merger and its Outcome Though operating in one of the fastest growing airline market in the world, both Air India and Indian Airlines were suffering losses before the merger in April, 2007. The former is plagued by the ills of bloated workforce and ageing fleet, the later a largely domestic operation that has been ceded market steadily to nimbler privately owned rivals for the past decade. Thus, in an attempt to revive them, the Government of India decided to merge the two entities and a new enterprise called National Aviation Company of India (NACIL) was formed. After the merger, in the first year of its operation was planned to focus on the workforce beginning with a management team of 400 people. The plan was eventually to split the carrier into five strategic units: Passenger, cargo, ground handling, MRO and low-cost airline. Five CEO would be heading the units and would report to one group chairman and MD. But as it turns out, the managers of the two carriers have little independence. They have to wait for Ministry of Aviation approval for taking not only major decision like buying new aircraft but also on routine business issues like new routes. According to Kapil Kaul, CEO of the Centre for Asia Pacific Aviation’s India, the government will ultimately privatize the carrier. But the ground picture was different. The management did not take any step to help in the process of privatization rather it was busy smoothing the ruffled feathers of the unions. Most of the wage agreements and seniority issues were cleared before the merger. But most of the issues were not resolved by the Air India management, which led to pilot strike and huge losses. 2. Disparity among pilots During the time of merger it was promised by the management that both Air India and Indian Airlines pilots would receive same amount of compensation. But in reality pilots of erstwhile Indian Airlines were angry for not getting the same pay as their colleagues of Air-India for doing identical job and working in the same organization. 3. Unplanned Cargo Operation It was decided during the merger a separate division handling cargo would be formed. Thus Indian Airlines limited (IAL) signed an agreement with M/S Aeronautical Engineers Inc, Miami, US, in 2006, to convert five B737 aircraft into freighter aircraft for retail courier service at a cost Rs 41 cr. All five aircraft are now grounded. Even when they were leased out to private players in 2007 and 2009, it resulted in a loss of over Rs 29 cr. This startling revelation came after the Comptroller and Auditor General (CAG) scrutinised the National Aviation Company of India Ltd (NACIL) accounts. This shows clearly the management has plans to lift Air India’s image and recover it losses. Due to improper execution it always resulted in huge losses. 4. Reasons for increasing losses and debts Around July 2011, the cumulative loss and debt burden of state-owned airlines stood around whopping Rs 67,270 crore. Its debt burden stood at Rs 46,950 crore – Rs 20,185 crore worth of aircraft loans, Rs 22,165 crore working capital loans and over-dues of Rs 4,600 crore. The national carrier has to repay a whopping Rs 20,415 crore worth of loans before the end of this fiscal year. High aviation oil prices, rise in wages and competition from other airlines are causing state-run Air India to incur Rs 600 crore monthly, as income is around Rs 1,100 crore and expenses at Rs 1,700 crore. Besides, the Government is paying interest on working capital and procurement of aircrafts. 5. The series of government infusion Against the backdrop of the state-owned airline’s massive cumulative loss and debt burden of about Rs 67,000 crore in July 2011, the Group of Ministers(GoM) headed by Finance Minister Pranab Mukherjee granted approval for the Rs 1,200 crore equity infusion. The GoM has also granted approval for payment of Rs 532 crore for operating VVIP and rescue flights for the government and formation of strategic business units for ground handling. The Government on July 18th released Rs 265 crore to Air India to partially clear the interest burden to banks. Air India has borrowed loans from a consortium of 22 banks led by SBI. Bank of Baroda, Punjab National Bank and Bank of India are the three biggest lender of the airline. Central Bank and HDFC are the other key lenders. Air India has defaulted interest due on the working capital debt which is Rs 22,100 crore. 6. Routes Discrepancies The CAG report in May complains that Air India kept various routes operational despite suffering heavy losses: â€Å"Despite its critical financial position, the national carrier continued with routes which were rendering cash losses in domestic and international sectors.† The report refers to the India-US sector where Air India operated 10 international routes during 2005-09. By 2008-09, these routes were incurring losses. One route of Chennai to Bangkok with 95% passenger load capacity was cancelled and Thai Airways got the major pie of this shocking decision. Air India has not been able to inform the ministry and pilots why such a decision was taken. Another profitable route in the Middle East was reduced to just one flight a week. Conclusion Almost all the airlines in India are facing financial difficulties. There are couple of factors that account for this. One factor is the inability of the airlines to reduce costs, and the other is the â€Å"irrational† pricing that set in after the advent of LCCs.. They have chased market share, i.e., revenue maximization and forced the incumbents to match their low prices. They have been successful in taking the market share from the Full Service Carriers (FSCs). While revenue maximization may seem like a good short term strategy to enter the market, sooner or later, the LCCs have to be become profitable. These depressing financial conditions can lead only to two types of outcomes for the airlines—either some of them go bust in a market shake-out or they merge/get acquired by other airlines or business groups. 2007 became a landmark year in the industry because of the major consolidations that took place during the year. The airlines’ plans to expand capacity and replace ageing fleet aggressively should enable them to meet this growing demand more efficiently. But in the near term, they have to face significant challenges such as: 1. Realizing the benefits of the consolidations. 2. Realigning their competitive strategies to become profitable. 3. Pursuing aggressive cost reduction. 4. The availability of capital. 5. Constraints due to poor infrastructure for aviation in India. BIBLIOGRAPHY For the purpose of this paper, assistance has been taken from * EBSCO database for different research papers on LCC models and Information about Indian Airline Industry * Aceanalyser to get the Net Sales of different brands year wise * Euro monitor to get information about the background of the company competitive strategies * Different Airlines websites for the information * DGCA site for the growth about Indian Aviation Industry and the market shares of different players * Newspapers and Magazines to look into the advertising strategies of different brands * www.livemint.com * www.theindusview.com * http://www.centreforaviation.com * www.airfleets.net * http://www.indiainternalflights.com