Overview of Airline Industry

Overview of Airline Industry

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Overview of Airline Industry

Air travel has grown in the past decade. Travel grew strongly for both leisure and business purposes. India will have nearly 800 to 1000 airplanes by 2023, it was estimated by Airbus. In spite of growth between 30 to 50 per cent in Indian aviation industry, losses of approximately 2200 crore is estimated for the current year.

During 19991-1992, Modiluft, East West and Damania went bankrupt. Air Sahara and Jet Airways survived along with government own Indian Airlines because they had the capability to bear losses. Globalization and privatization had a major impact on aviation industry. Indian aviation industry was deregulated by the government in 1990s. As a result now 14 airlines are operating today in Indian sky. Now, collaboration with international organization and foreign direct investment are welcome to improve infrastructure and technology. Today people who can not afford high prices of Full Service Carriers (FSC) can travel by Low Cost Carriers (LCC) or budget airlines. Air Deccan was India’s first LCC started in 2003. It flies to several metro and non-metro destinations. All airlines have three major fixed costs i.e. fuel costs, financing or aircraft lease and labour cost. But LCC costs are 10 to 15 per cent lower than FSC. This is because of three reasons. Firstly, saving on distribution cost as passengers book tickets on the internet. Secondly, no frills are offered on board. Thirdly, to accommodate additional seats, catering and cabin crew space in these aircraft has been used. So these aircraft have 40 seats more than the FSC.

Political Environment

There are several limitations in aviation infrastructure in India for instance parking bays, gates to board passengers, landing slots etc are in short supply. This often leads to massive delays, cancellation and major losses in revenue for many LCCs. For upgraded infrastructure facilities, India’s civil aviation minister Praful Patel said on 15 February 2006 that Indian government defer decision on privatization of International Airport in Delhi and Mumbai. The government aims to set up joint venture to operate these airports and offered 74 per cent stakes. Foreign direct investment (FDI) can hold up to 49 per cent in this transaction, while 25 per cent must be held by private Indian companies. Remaining 26 per cent to be held by Airport Authority of India (AAI) and other government PSUs.

In an attempt to capture market share, many airlines in India are flying below their cost, thus incurs heavy losses.

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Due to overcapacity and competition, the government fear that the aviation boom now may soon go bust. Earlier, companies even before signing a lease for aircraft, used to procure licences. But now to regulate competition from September 2006 onwards a temporary moratorium is put on the new airline licences. No blanket ban will be there. But pending as well as new applications will go through high scrutiny. A plan for quarterly review of financial and operational statement of airline was introduced by ministry. It will be mandated by the federal Aviation Authority in US.

At present government is providing sops to planes which are less than an 80 seater. Under this new policy airline don’t have to pay landing charges, even route navigational charges are much lower than other aircraft. To encourage regional connectivity, government is now willing to offer some sops to airlines which fly on category two and three route.

Government has appointed a number of committees. Their main aim is to provide remedies to problems related to civil aviation industry of India. For instance, in November 2003, recommendation to develop a civil aviation roadmap was provided by Naresh Chandra Committee. Measures to increase airport and air traffic control (ATC) capacity were suggested by K Roy Paul Committee in April 2005. The MK Kaw Committee has recommended to restructure the Directorate General of Civil Aviation and to make major changes in the regulatory system in April 2006.

Economic Environment

In Indian economy, there is a robust growth of 8.9 per cent GDP, in first quarter of the current year. The aviation industry is at boom, where growth ranged between 30-50 per cent. The growth in aviation has been possible because of liberal policies in civil aviation, robust growth in tourism and exports. Few years back domestic market was dominated by three domestic carriers they were Indian Airlines (government owned), Jet Airways and Air Sahara (private players). But now there are 14 which include new players like Jagson, Air Deccan, Spice Jet, Go Air, Magic Air etc.

On 1 September 2004 new tax came into force. Indian companies which acquires an aircraft or aircraft engine on lease from foreign enterprise or a foreign country has to pay tax, which could vary from 10 per cent onwards.

Aviation turbine fuel (ATF) which ranged from 8 per cent to 24 per cent across states. ATF accounts for 45 per cent of operational costs in India, while internationally it is 20 per cent. Indian airline companies pay one of the highest ATF rates in the world. There was 15-16 per cent fall in ATF prices in last few months. Aviation minister would talk to finance and petroleum ministries to further reduce ATF taxes to encourage sector’s growth.

There is an acute shortage of manpower in aviation industry in India- which includes engineers, cabin crew and pilots. Earlier there was a stipulation of domestic airlines to have at least one Indian pilot in a cockpit. But to overcome this deficit, recently ministry has decided to discard this contract. In April 2005, only 300 people seek for pilot’s licences. Even though the number has rose to 1045 in April 2006. But still India is facing the shortage of pilots. Currently, 450 foreign pilots are working with airlines in India. These foreign pilots are paid much more than Indian counterparts. Government has proposed to open an aviation academy in Gondia to train pilots. It will be a join venture in which private parties holding a majority stake i.e. 60 per cent along with management control. Central and Maharashtra government will hold remaining 40 per cent, they will play facilitating role. Even Airbus will invest $75 million in India to set up a modern training centre for pilots. These projects will help in long way to cope with the growing shortage of pilots in India.

Social Environment

In India, before 1990s, traveling by air was considered expensive and luxury mode of transportation. After deregulation in aviation industry several new airlines come up and there was a drastic reduction in fares which was a spur for Indians to opt for air travel. India’s first low cost carrier Air Deccan began with Rs 500 per ticket offer. It was neck to neck competition with Indian railways. Soon Spicejet gave a counter offer of Rs 99 per ticket. Since then prices for airline ticket kept on reducing as a promotion strategy. People traveling on trains by first or second class AC, till now, shifted their attention to airlines. It improved their lifestyle. Even first time fliers were lured by the cheaper fares.

2006 Conde Nast Readers Travel Awards, ranked India in the fourth most attractive, satisfying and best holiday destination in the world. It stands ahead of some of the developed countries like US, France, Singapore, Thailand and South Africa. Accounts on which India was scored were mainly growing air connectivity, hospitality facilities which included hotels and quality spa. One of the reasons for this brilliant performance is enthusiasm campaign ‘Incredible India’ started by government for marketing India to world. Growing air link has contributed to a large extend to make India more accessible than what it was few years ago. According to Conde Nast traveller UK publisher India has a potential to attract more traveller in next few years.

Private equity players and venture capitalists find aviation sector a dicey bet. They hesitate to invest in this sector. Although they prefer to take huge risk and are willing to invest in other sectors like telecom and technology. As after long-time period, the returns on these two sectors are huge as compared to aviation sector. According to Damera of travelguru, worldwide the ROC (return on capital) of pharma industry is 55 per cent. For IT sector it is 35 per cent, but for airlines it stands only at 3 per cent. On the other hand, for financier lenders it is a safe zone because lease of aircraft stands as collateral. In case of defaults, laws concerning recovery are tight.

Technological Environment

Airports Authority of India in collaboration with Indian Space Research Organization (ISRO) is developing a new satellite-based navigation called Gagan. The project is likely to be operational by 2008. Only three countries including the United States has similar Satellite-based system. It is one of the latest technology in the world. It will enhance safety of flights. By direct routing between destinations and allowing precision approaches to all airports it will increase efficiency. Thick fog in winter regularly disrupted flights to or from New Delhi. By improving communication between traffic control and pilots this new project will make it possible to land planes in such tough weather conditions.

India is still far behind in e-ticketing. The International Air Transport Association (IATA) has set a goal to stop printing the 350 million paper tickets (that are used today) and to achieve 100 per cent e-ticketing by the end of 2007. 30 per cent global e-ticketing penetration was their target by the end of 2005 and they have passed 33 per cent. Nearly 30 per cent in Asia Pacific but it is just 5.4 per cent in India.

All airlines need maintenance for their aircrafts, engine, and airframe components. In India only Air India and Indian Airlines have in-house maintenance facility, but at time even they, like other carriers have to send their aircraft abroad for maintenance. Recently, Airbus in partnership with Hindustan Aeronautics (HAL) has given a commitment to set up a $100 million maintenance, repair and overhaul (MRO) facility at Nashik. Even Boeing has announced to set up a $100 million MRO facility in central India, Nagpur. The technology to be used in this facility is tailored specifically to cater Indian market. It will enhance profitability for airlines as maintenance cost will reduce. Boeing’s MRO project will be on stream by 2008. To emerge as MRO new entrants have to address limitation like aviation regulatory practices, heavy tax structure and lack of real estate at many airports. But low manpower cost is the major advantage for any MRO new entrants i.e. about 60 per cent cheaper than in US or Western Europe.

Conclusion

Looking at the current scenario not a single Indian airline is generating profits. This is the early sign of grief, which might lead to the repeat of 1991 situation. That time, few airlines went bankrupt due to heavy losses and there inability to bear them. In the attempt to capture market share airlines are offering tariff below their cost. Till now, Government doesn’t impose any regulation on tariff cut. They left this matter totally on the airlines to decide. So airlines should adopt some other strategies to capture market share and to make themselves profitable organizations.

The two leading aircraft manufacturers, Airbus and Boeing have intense competition to have share in Indian market. Both are looking forward to invest for MRO facility in India. Although Indian Aviation industry is booming, but there are several limitations like lack of training facilities, improper infrastructure, technology etc. Government’s support and more FDI, these limitations will be eradicated in the coming years.

Bibliography

Newspaper Reference

Badarinath, K.A and Choudhury,G (2006) ‘India rising: GDP goes up to 8.9 p.c.’, Hindustan Times, 30 September, p.1

Business Standard (2006) ‘Airbus, HAL to partner for $100m Nashik facility’, Business Standard, New Delhi, 3 October, p.4.

Business Standard (2006) ‘Airline may face entry barriers’, Business Standard, New Delhi, 29 September, p.1.

Guha, R and Jayaswal, R (2006) ‘Lalu set to clip airlines’ wings, cut AC fare 30%’, The Economic Times, New Delhi, 25 September, p.1.

Jayaswal, R (2006) ‘Airports upgrade gets wide berth’, The Economic Times, New Delhi, 7 October, p.11.

Padmakshan, M (2006) ‘Kingfisher flies into red with Rs 240- cr loss’, The Economic Times, New Delhi, 28 September, p.4.

Subramaniam, G (2006) ‘Airline may’ve to go slow’, The Economic Times, New Delhi, 28 September, p.1.

The Economic Times (2006) ‘Aviation losses’, The Economic Times, New Delhi, 29 September, p.14.

The Economic Times (2006) ‘Civil aviation growth to pump up MRO business, The Economic Times, New Delhi, 25 September, p.5.

The Economic Times (2006) ‘Is the Indian aviation boom threatened?’, The Economic Times, New Delhi, 26 September, p.15.

The Economic Times (2006) ‘No airlines to fly for some time: Patel’, The Economic Times, New Delhi, 29 September, p.1.

The Economic Times (2006) ‘There’s fear of bubble’, The Economic Times, New Delhi, 28 September, p.10.

Times of India (2006) ‘India aims to be top holiday spot’, Times of India, 7 September, p.22.

Times of India (2006) ‘India ranked world’s 4th best holiday haven’, Times of India, 7 September, p.1.

Verma, S and Subramaniam, G (2006) ‘Pvt hands to train pilots, cabin crew’, The Economic Times, 7 October, p.6.

Internet Reference

































Journal

Sheth, H et al, (2006) ‘Bottomline Blues’, Business India, 24 september, p.p 46-52
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