Airlines indian final

A STUDY OF CHALLENGES FOR INDIAN AVIATION SECTOR

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Abstract One of the fastest growing aviation industries in the world is Indian Aviation Industry.

With the liberalization of the Indian aviation sector, a rapid revolution has undergone in Indian aviation industry. Primarily it was a government-owned industry, but now it is dominated by privately owned full service airlines and low cost carriers. Around 75% share of the domestic aviation market is shared by private airlines. Earlier only few people could afford air travel, but now it can be afforded by a large number of people as it has become much cheaper because of stiff competition.

A wide range of services related to air transport such as passenger and cargo airlines, unscheduled service operators --- private jets and helicopters, airport management, and support services like Maintenance, Repairs and Overhaul(MRO), ground handling, inflight catering, and training are being offered by Indian Aviation industry. Enormous benefit has reaped by the Aviation sector from the entry of private carriers, especially from those of the low fare ones. Still the aviation sector contributes a small part of the travel and transportation services sector in India. In the year 2006-07 about 96 million passengers travelled by airlines annually, while nearly 6 billion passengers were carried by the railways. In 2006-07 the airlines suffered losses of around USD 500 million and the situation is expected to decline in 2007-08. The reasons of these losses were high cost of operations, intense competition, and unsustainably of low fares.

Due to the increasing costs aviation industry is facing immense difficulty. India's aviation sector stands up to the crisis and races against its fastest growing global competitors.

Enhancement in affordability and connectivity add to the expected improvement in both passengers and cargo traffic. Large public and private investments which are supported by government initiatives in air travel infrastructure are expected to pour in. This project will discuss about opportunities, issues & challenges faced by Aviation industry.

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Table of Contents

1.Introduction..........................................................................................................................................................................

1.1. Objectives of the Study.................................................................................................................................................

1.2.Expected Contributions from the Study.........................................................................................................................

1.3.Limitations.....................................................................................................................................................................

2.Literature Review..................................................................................................................................................................

2.1. Types of Air Services......................................................................................................................................................

2.2.Challenges in the Indian Market.....................................................................................................................................

2.3.Regulatory Challenges....................................................................................................................................................

2.4.Benefits accruing to State carriers as they are the only domestic carriers allowed flying to the Gulf .............................................................................................................................................................................................

2.5.Capacity Constraints.......................................................................................................................................................

2.6.Mergers and Acquisitions in Aviation Sector..................................................................................................................

2.6. Cases of M&A in Aviation Sector in India......................................................................................................................

2.7.History of Collusion........................................................................................................................................................

2.8.SWOT Analysis of the Indian Aviation Industry..............................................................................................................

3.Research Methodology.........................................................................................................................................................

3.1.Research Approach........................................................................................................................................................

3.2.Data Collection Tools......................................................................................................................................................

3.3.Pilot Testing....................................................................................................................................................................

3.4.Sampling........................................................................................................................................................................

4.Data Findings and Analysis....................................................................................................................................................

5.Conclusion.............................................................................................................................................................................

6.Recommendations................................................................................................................................................................

6.1.Further Plan of Action....................................................................................................................................................

References...............................................................................................................................................................................

1. Introduction Indian civil aviation industry was started in the year 1912. It was the year when the first air flight between Karachi and Delhi was started by the Indian State Air

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Services in association with the INDIAN based Imperial Airways. JRD Tata founded the first Indian airline -Tata Airline in 1932. Nine air transport companies were carrying both air cargo and passengers at the time of independence namely Tata Airlines, Indian National Airways, Air service of India, Deccan Airways, Ambica Airways, Bharat Airways, Orient Airways and Mistry Airways. Orient Airways shifted to Pakistan after partition.

In early 1948, Government of India established a joint sector company, Air India International Ltd in association with Air India (earlier Tata Airline) with a capital of Rs 2 crore. According to Air Corporations Act, 1953 the Government nationalized nine airline companies. Indian Airlines Corporation (lAC) was established to cater to domestic air travel passengers and Air India International (AI) for international air travel passengers.

Existing airline companies transferred their assets to these two corporations. According to this Act, lAC and AI had a monopoly over the Indian skies. In 1994, Vayudoot, A third government-owned airline, which provided feeder -services between smaller cities, was merged with lAC. Indian aviation industry was dominated by these government-owned airlines till the mid-1990s.

In the year 1990, open-sky policy was adopted by the government and it allowed air taxi- operators to decide their own flight schedules, cargo and passenger fares. The monopoly of IA and AI in the air transport services were ended by Indian Government, as a part of its open sky policies in the year 1994. Monopoly was ended by repealing the Air Corporations Act of 1953 andreplacing it with the Air Corporations (Transfer of Undertaking and Repeal) Act,1994. Now Private operators were permitted to provide air transport services. By the year 1995, numerous private airlines had ventured into the aviation business and accounted for more than 10 percent of the domestic air traffic. These included Jet Airways, Sahara, NEPC Airlines, East West Airlines, ModiLuft Airlines, Jagsons Airlines, Continental Aviation, and Damania Airways. But only Jet Airways and Sahara managed to survive the competition.

By this time, Indian Airlines began to lose market share to Jet Airways and Sahara.

Today, Indian aviation industry is dominated by private airlines such as Deccan Airlines, 4

GoAir, SpiceJet etc; these include low cost carriers who have made air travel affordable.

In India, Airline industry is plagued with several problems. Reasons are high aviation turbine fuel (ATF) prices, increasing labor costs and lack of skilled labor, rapid fleet expansion, and strong price competition among the players. Infrastructure constraint is one of the major challenges facing by Indian aviation industry. If Indian aviation industry has to continue its success story, airport infrastructure needs to be upgraded. In this direction some steps have already been taken. The future prospects of Indian aviation sector look bright.

The Indian aviation industry is one of the fastest growing aviation industries in the world with private airlines accounting for more than 75 per cent of the sector of the domestic aviation market (as of 2006). The industry is growing at a compound annual growth rate (CAGR) of 18 per cent. The country has 454airports and airstrips, of which 16 are designated as international airports. Such explosive growth for a developing country like India poses numerous challenges of varied nature and of mammoth proportions. It is imperative to take stock of and chart out the way ahead for consolidation and growth for the Indian Aviation sector in an impeccable manner to ensure that the process is not mismanaged lest the aviation industry flounder.

1.1. Objectives of the Study The objectives of the study are as follows: (a) Critical Analysis of the Indian Aviation Sector. The aim would be to a contemporary analysis of the Aviation sector as on date.

This would throw light on the various players in the field which could be categorized as follows: - Public Players: viz. Indian Aviation industry: Air India, Indian Airlines and Alliance Air - Private Players: viz. Jet Airways, Air Sahara, Kingfisher Airlines, Spice, Jet, Air Deccan etc.

- Start up Players: viz. Omega Air, Magic Air, Premier Star Air and MDLR Airlines

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(b) Study Changes Brought About By the India's Economic Growth in Aviation Boom.

The new government policy and entry of new players has lead to a number of changes in the Indian Aviation scenario which was hitherto not seen. The changes brought would be studies under the following heads: (i) (ii) (iii) (iv) (v)

Consolidation in Aviation Sector Increase in Air Travel Numbers Growth in Capacity Outsourcing The Human Resources Impact

(c) Challenges for Indian Aviation Sector. There are several challenges in front of the Indian aviation industry because of the growth in the aviation sector and capacity expansion by carriers. Some of the challenges faced by the growth of the Aviation sector in India would be covered under the following sub - heads: I. II. III. IV. V. VI.

Shortage of Trained Employees Regional Connectivity Rising Fuel Prices Declining Yields Gaps In Infrastructure High Input Costs

1.2.

Expected Contributions from the Study

The study is expected to be of significant use to businesses and amateurs alike. The study would objectively bring out not only the salient points of the existing scenario of the Indian aviation sector but would also examine the challenges posed to the sector in light of the rapid growth and opening up of the Indian economy. The extensive SWOT analysis would lay threadbare the emerging pattern of the Indian Aviation sector and would bring out the strengths and weaknesses of the Indian aviation thereby pointing out steps required to cope with the enormous challenge that is posed by the Indian aviation sector which is on an explosive growth trajectory. The study would be enormously useful for small businesses and enterprises as the data/findings could be utilized in product identification and definition. It would also be useful for HR professionals as well as potential future employers and employees in the Indian Aviation sector. Students would also benefit significantly from the study as all necessary 6

information and the future prospects and opportunities in the Indian Aviation sector would be available as a snapshot which would not only be academically interesting but would also help students in giving a shape to their careers.

1.3.

Limitations

The limitations of the project would be stated explicitly. However, broadly, the study would have the following limitations: (a) Non -accessibility to classified government information/data. (b) Inability to authenticate data except from other sources serving as a cross check. (c) Latest available data would be used for the project as data for¡ the current year may either not be available or only limited data for current year might be available.

2. Literature Review The Indian Aviation Industry has been going through a turbulent phase over the past several years facing multiple headwinds – high oil prices and limited pricing power contributed by industry wide over capacity and periods of subdued demand growth.

Over the near term the challenges facing the airline operators are related to high debt burden and liquidity constraints - most operators need significant equity infusion to effect a meaningful improvement in balance sheet. Improved financial profile would also allow these players to focus on steps to improve long term viability and brand building through differentiated customer service. Over the long term the operators need to focus 7

on improving cost structure, through rationalization at all levels including mix of fleet and routes, aimed at cost efficiency. At the industry level, long term viability also requires return of pricing power through better alignment of capacity to the underlying demand growth. While in the beginning of 2008-09, the sector was impacted by sharp rise in crude oil prices, it was the decline in passenger traffic growth which led to severe underperformance during H2, 2008-09 to H1 2009-10. The operating environment improved for a brief period in 2010-11 on back of recovery in passenger traffic, industrywide capacity discipline and relatively stable fuel prices. However, elevated fuel prices over the last three quarters coupled with intense competition and unfavorable foreign exchange environment has again deteriorated the financial performance of airlines.

During this period, while the passenger traffic growth has been steady (averaging 14% in 9m 2011-12), intense competition has impacted yields and forced airlines back into losses in an inflated cost base scenario. To address the concerns surrounding the operating viability of Indian carriers, the Government on its part has recently initiated a series of measures including (a) proposal to allow foreign carriers to make strategic investments (up to 49% stake) in Indian Carriers (b) proposal to allow airlines to directly import ATF (c) lifting the freeze on international expansions of private airlines and (d) Financial assistance to the national carrier. However, these steps alone may not be adequate to address the fundamental problems affecting the industry.

While the domestic airlines have not been able to attract foreign investors (up to 49% FDI is allowed, though foreign airlines are currently not allowed any stake), foreign airlines may be interested in taking strategic stakes due to their deeper business understanding, longer investment horizons and overall longer term commitment towards the global aviation industry. Healthy passenger traffic growth on account of favorable demographics, rising disposable incomes and low air travel penetration could attract long-term strategic investments in the sector. However, in our opinion, there are two key challenges: i) aviation economics is currently not favorable in India resulting in weak financial performance of airlines and ii) Internationally, too airlines are going through period of stress which could possibly dissuade their investment plans in newer markets.

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Besides, foreign carriers already enjoy significant market share of profitable international routes and have wide access to Indian market through code-sharing arrangements with domestic players. Given these considerations, we believe, foreign airlines are likely to be more cautious in their investment decisions and strategies are likely to be long drawn rather than focused on short-term valuations. On the proposal to allow import of ATF, we feel that the duty differential between sales tax (averaging around 22-26% for domestic fuel uplifts) being currently paid by airlines on domestic routes and import duty (8.5%-10.0%) is an attractive proposition for airlines. However the challenges in importing, storing and transporting jet fuel will be a considerable roadblock for airlines due to OMCs monopoly on infrastructure at most Indian airports.

From the working capital standpoint too, airlines will need to deploy significant amount of resources in sourcing fuel which may not be easy given the stretched balance sheets and tight liquidity profile of most airlines.

Historically, the Indian aviation sector has been a laggard relative to its growth potential due to excessive regulations and taxations, government ownership of airlines and resulting high cost of air travel. However, this has changed rapidly over the last decade with the sector showing explosive growth supported by structural reforms, airport modernizations, entry of private airlines, adoption of low fare - no frills models and improvement in service standards. Like elsewhere in the world, air travel is been transformed into a mode of mass transportation and is gradually shedding its elitist image.

Strong passenger traffic growth aided by buoyant economy, favorable demographics, rising disposable incomes and low penetration levels India aviation industry promises huge growth potential due to large and growing middle classpopulation, favorable demographics, rapid economic growth, higher disposable incomes, rising aspirations of the middle class, and overall low penetration levels (less than 3%). The industry has grown at a 16% CAGR in passenger traffic terms over the past decade. With advent of Airlines and resultant decline in yields, passenger traffic growth which averaged 13% in the first half has increased substantially to 19% CAGR during 2006-2011. Despite strong growth, air travel penetration in India remains among the lowest in the world. In 9

fact, air travel penetration in India is less than half of that in China where people take 0.2 trips per person per year; indicating strong long term growth potential. A comparative statistic in United States, the world’s largest domestic aviation market stands at 2 trips per person per year. We expect passenger demand to remain stable and grow between 12-15% in the medium term, assuming a no major weakness in GDP growth going forward. However domestic airlines operate under high cost environment; intense competition has constrained yields; aggressive fleet expansions have impacted profitability and capital structures Despite reforms, the domestic aviation sector continues to operate under high cost environment due to high taxes on Aviation Turbine Fuel (ATF), high airport charges, significant congestion at major airports, dearth of experienced commercial pilots, inflexible labor laws and overall higher cost of capital. While most of these factors are not under direct control of airline operators, the problems have compounded due to industry-wide capacity additions, much in excess of actual demand. Intense competitive pressure from carriers (focusing on maximizing load factors) and national carrier (looking to regain lost market share) have constrained yields from rising in-sync with the elevated cost base. Besides, aggressive fleet expansions (Airliness have added aircrafts mainly on long-term operating leases; FSC’s have purchased aircrafts – debt financed, most often backed by guarantees from the Bank to leverage upon the anticipated robust growth and to support international operations have significantly impacted the capital structure and weakened the credit profile of most domestic airlines.

Low-cost model now dominating the skies; viability remains to be seen Internationally the Airlines model came into existence when the US Congress passed the Airline Deregulation Act in 1978 easing the entry of new companies into the business and giving them freedom to set their own fares and choose routes (Prior to this routes and fares were fixed by a Government Agency). This was followed by entry of carriers like Southwest, which pioneered the Airlines concept. Majority (~60-65%) of an airline cost are dependent on external factors, which can’t be managed by an Airlines. This includes the fuel cost (~40%), maintenance cost (~12%) and ownership cost (~12-15%). Airlines try to achieve a cost advantage in other ways by avoiding the in-flight services, operating from secondary airports, selling tickets through the internet, higher number of 10

seats in the aircraft, inventory reduction through use of similar aircraft and lower employees per aircraft.

The Indian aviation sector was exposed to intense competition with the advent of a lowcost airline -Air Deccan back in 2003. The success of Air Deccan spurred the entry of other Airlines like SpiceJet, Indigo, Go Air and subsequently low fare offerings from Jet airways and Kingfisher airlines. As a result, the sector which was completely dominated by full-service airlines till a decade ago is now dominated by low-cost airlines. However, longer term viability of Airlines models in India remains to be seen (Kingfisher exited the segment recently) as airport charges are same for FSCs and Airlines in India. Besides, the fuel costs forms a larger proportion of overall costs as compared to international standards due to higher central and state government levies (viability of direct ATF imports remains to be seen due to lack of supporting infrastructure) and high congestion at major airports (half an hour hovering at major airport could increase fuel costs by Rs.60, 000 to Rs. 115,000 depending on aircraft, besides impacting aircraft utilizations).

These constraints can be resolved only if there significant improvement in infrastructure such that Airlines could operate on secondary airports. Civil aviation plays an integral role in development of an economy. It helps in realizing the socio-economic objective of providing connectivity to foster travel & trade. As per ICAO’s estimates every 100 $ spent on air travel produces benefits worth 325 $ to the Economy. It generates 100 additional jobs in air transport & 610 related jobs. Indeed this was reiterated by our minister of Civil Aviation, Mr. Praful Patel who projected that 40 lakh aviation jobs would be available in the next 10 years.

Almost 35 % of exports from India & 97% foreign tourists to India arrive by Air each year. Aviation sector has undergone a major facelift in past 3-4 years. Phase I of Indian Aviation Sector (up till 1986): The legacy of Indian aviation dates back to 1912 when India’s first air mail service was started by Tata Airlines. Tata Airlines though was started as an air mail service but soon ventured in carrying scheduled passenger traffic. In 1946, Tata Airlines was renamed as Air India. In early 1948, a joint sector company, Air India International Ltd., was established by the Government of India and Air India (earlier Tata Airline) .At the time of independence the number of companies operating 11

with in and beyond frontiers of the country were 8 namely: Tata Airlines, Indian National Airways, Air service of India, Deccan Airways, Ambica Airways, Bharat Airways and Mistry Airways. The government in 1950 had set an Air Traffic Enquiry Committee to look into the problems faced by the airlines. The soaring prices of aviation fuel, mounting salary bills and disproportionately large fleets took a heavy toll of the then airlines. The financial health of companies declined despite liberal Government patronage, particularly from 1949, and an upward trend in air cargo and passenger traffic. Though the Committee found no justification for nationalization of airlines, it favored their voluntary merge. So Competition Issues in the Civil Aviation Sector Government in the wake of deteriorating financial conditions of the Airlines decided to step in and nationalize the air transport industry and accordingly, two autonomous corporations were created on August 1, 1953. In 1953, the government nationalized the airlines via. The Air Corporations Act, 1953, which gave birth to Indian Airlines and Air India. Indian Airlines was formed with the merger of eight domestic airlines to operate domestic services, while Air India International was to operate the overseas services.

The Act also gave monopoly power to Indian Airlines to operate on domestic scheduled services to the exclusion of any other operator. Air India became the only Indian carrier to operate on international routes except for some routes to the neighboring countries which were given to Indian Airlines.

Phase II (1986-2006): The second phase of Indian aviation began in the year 1986 with granting of permission to private sector players to operate as air taxi operators. The private players allowed to operate as air taxi operators included Air Sahara, Jet Airways, Damania Airways, East West Airlines, Modiluft and NEPC Airways. In 1994, government of India repealed the Air Corporation Act there by. Following this measure in 1995, govt. granted scheduled carrier status to six private air taxi operators. However, not many operators were able to continue their business and by 1997 only four operators started operations followed the deregulation continued to operate: Jet Airways; Air Sahara; Jagsons and Spicejet (previously operated as Modiluft ) .Eventually, by 1998, at least six private airlines, EastWest, Modi-Luft, NEPC, Damania, Gujarat Airways and Span Air were closed and 12

according to an estimate, the capital losses involved in these closures were to the tune of Rs 10 billion. .

Phase III: (2006 – to current) Only two private carriers survived to see the dawn of the new century. The duopoly of Jet and Sahara as private carrier was challenged in 2003 by Air Deccan whose operations in scheduled services began in August. The entry of Deccan changed the entire canvas on which the aviation sector was defined. Air Deccan gave India its first Carrier (Airlines) or no frills Airline! This marked as a turning point in the history of Indian Aviation Sector as it marked a shift from the stereo type economy fares & business fares to the era of check fares ; web fares ; APEX fares ; internet auctions ; Special discounts ; Corporate plans ; last day fares; promotional fares etc. Arrival of Deccan has bought a revolution in this sector, it changed the common man’s perception of flying by matching airline fares neck to neck with upper class railway fare. Air traffic growth since then has witnessed tremendous growth rates. T In 1994, India’s Air Corporation Act of 1953 was repealed giving private airlines the opportunity to schedule serviced flights. Following this repeal, a host of new airlines have sprung up to meet India’s need for air travel.

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India still remains significantly underpenetrated in the civil aviation sector: at present there are only 0.52 departures per 1,000 people in India and less than 2% of Indians travel by air each year. However, this creates a huge opportunity as India has 1.2 billion people and a rising and upwardly mobile middle class. Domestic passenger growth year-on-year was 17.2%,in-line with the year-to-year increase expected from a rapidly growing emerging economy with a relatively small passenger base. India’s domestic passenger growth is estimated to increase by roughly 15% per year out through 2020. This growth rate, if sustained, would put domestic air travel at over 210 million domestic passengers per year by 2020.Despite these favorable demographics, the Indian carriers have failed to translate the demand for air travel into profits. For the year ended March 2012, 5 out of the major airlines in India were loss making.

Indian Aviation Sector has witnessed tremendous growth in the recent past which is driven by sound demographic, macroeconomic, government aided reforms and market dynamics. Industry sources call it the PEST Mechanism namely P-Political; E-Economic S-Socio-Cultural; T-technological. The drivers to growth are: o Increase in Consumerism o Rising Disposable incomes o Rising Middle Class Population 14

o o o o o o

Untapped Market Increasing Business Travel Increasing Tourists Travel Entry of Carriers Increasing Competition Government Reform Measures

The mix of the above mentioned fundamentally strong favorable dynamics has positioned India’s Aviation industry in a high growth trajectory in the foreseeable future.

Worldwide, air traffic has a strong correlation with economic growth and in emerging markets like India, a rise of 1% in GDP is expected to result in a 2% increase in air traffic. Disposable income in India has gone up by 5 times in the last 2 decades and the expenditure on transportation has risen from 6% to 14% in the same period. The increase in trade activity within the nation is leading to the development of various mini metros.

This results in increased demand. It is expected that the emerging middle class along with upper middle population will grow at 40 % of the total population in 2007, creating huge demand for air-travel services.

However, the penetration level of air services in India has been very low at 20 trips /annum/thousand passengers in 2005 as against 2,300 trips/annum/thousand passengers in United States and over 60 trips per annum per thousand passengers in China. India is one of the least developed markets in the World and is among the most expensive in the world (after adjusting for purchasing power parity).

2.1. Types of Air Services ďƒ˜ Scheduled Air Transport Service means an air transport service undertaken between the two or more places and operated according to a published time table or with flights so regular or frequent that they constitute a recognizably systematic series. ďƒ˜ Non-Scheduled Operation includes services other than scheduled air transport service E.g. charter basis and/or non-scheduled basis. The operator is not permitted to publish time schedule and issue tickets to passengers

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 An air cargo service means air transportation of cargo and mail. Passengers are not permitted to be on these operations. It may be on scheduled or nonscheduled basis.  Players in the Market- Indian skies are housing a decent number of airlines today vis-à-vis the one man army scenario prior to 1990’s. The proud residents of Indian skies include the following: 1. Air India: India’s Legacy Carrier The history of Air India is the History of Indian Aviation. Air-India began operating in 1932 as Tata Airlines, named after J. R. D. Tata, its founder. Founded as a small, private, domestic carrier in 1932, Air-India is now government owned. It flies only International routes and has negligible presence felt while catering to the domestic traffic.

2. Indian Airlines: With nationalization of Air Transport in 1953 via Air Corporation Act, 1953, National Flag carriers : Indian and Air India were born. Indian was born from merger of 8 domestic carriers .It caters mainly to domestic routes with some presence felt in neighboring nations. Like Air India it’s a full service carrier. It has a subsidiary ‘Alliance Air’ .Its Symbol is Asoka’s Chakra. For a long spell of time, the two national carriers enjoyed sole monopoly inthe air transport segment as private carriers were barred from entering the segment as per Air Corporation Act, 1953. It was after the New Economic Policy, 1991 after which things fell in the right places and successful attempts were made to enter the segment by private players like Jet, Sahara and others. Yet another, turning point has come in the history of the Indian Aviation Sector when Air India was granted permission from the Government of India to merge with Indian Airlines, the two flag carriers of India. This Mega Merger marked the first marriage in the Indian skies which was followed by two more marriages. The name of the new airline will remain Air India, since it is known worldwide. They have been in the works of completing the merger since January 2007, after permission.

3. Jet Airways: 16

In 1993, Jet commenced its operations after the ban was lift by the government following the repeal of Air Corporation Act.1956. Jet Airways will bethe most preferred domestic Airline in India. It will be the automatic first choice carrier for the traveling public and set standards, which other competing airlines will seek to match. It is the only airline that stood the crunch of late 1990’s. Jet started its International Operations in 2004 and carries more than 7 million passengers per annum. Recently, the company made news when Naresh Goel led Jet Airways took 100 % stake in their arch old rival Air Sahara in May, 2007. This earmarked the second marriage of the season in the Indian Skies after the AI-IA deal.

4. Air Sahara: Like Jet, Sahara too began its operations in 1993 after the domestic Air Market was opened by the govt. in 1990’s. Air Sahara Limited is a leading private airline in India, owned by the diversified Sahara India Parivar group. After Jet, it was only airline that could stand the torrential winds of late 1990’s. After series of controversies Air Sahara has been taken over by Jet Airways in May, 2007. The airline is now renamed as “Jet Lite”. Jet has intensions of converting Air Sahara in sync with Airlines model to reach every segment of air travelers.

5. Air Deccan: India’s first budget carrier and now the largest flew its first carrier in 2003.Headed by Captain Gopinath, Air Deccan truly redefined the accessibility to the Indian Skies. It injected competitive spirits into the system and gave common man wings by reducing air fares which matched the first Class Railway Fares. The third wedding in skies was marked when Dr Vijay Mallya of Kingfisher Airlines picked up 26 % stake in Air Deccan.

6. Kingfisher: The Airline began its operation in May, 2005 .it’s the by far the most flamboyant airline in India, giving tough competition to Jet Airways in in-flight services. It is a major Indian luxury airline operating an extensive network to 34 destinations, with plans for regional and long-haul international services. Kingfisher Airlines, through one of its holding 17

company UB holdings Ltd has acquired 26% stake in the budget airline Air Deccan and has offered to buy further of 20% stake from the secondary market.

7. GoAir: The most colourful airline in India (comes in 6 colours) started its operations from November, 2005. It belongs to the Wadia group.

8. Indigo: The airline made heads turn when it placed the ambitious order of100 aircrafts with airbus. The carrier began its operations in August, 2006.

9. Paramount: It’s the only high value flier that India can boast of. It is the only carrier that uses 70 passengers capacitated Embraer Aircraft. The airline started operations in October 2005. It was established by Madurai-based textile company Paramount Group.

Paramount presently operates only in South India. There was news of Paramount showing interest in picking up stake in Go Air and Spicejet so as to foray into Northern India easily. However, so far dotted line has not been signed with any carrier.

10. Spicejet: SpiceJet, a reincarnation of ModiLuft marked its entry in service by offering fares priced at Rs.99 fares for the first 99 days since its inception in 2005. The carrier is giving tough competition to Railways. This airline is known to have had made the least number of mistakes.

2.2.

Challenges in the Indian Market

In spite of the robust demand for air travel, the following factors have driven the airlines into losses: 1) Inability of the Indian airlines to achieve cost parity with their global peers; 2) Imbalance between the supply and demand for aircraft in India;

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3) Lack of differentiation within the domestic carriers leading to intense competition; 4) Management decisions not to implement standard risk management practices 5) Price wars among the various players including India’s flag carrier 6) High levels of leverage of the carriers.

1) It is important that the Indian airlines achieve cost parity with the rest of the world to ensure the viability of the industry The higher costs from taxes and infrastructure bottlenecks have not been able to be passed along to customers, leading to an erosion of the Airline’s balance sheets, which in turn raises the operating costs of running their business.

For example, aviation fuel tax (AFT) is a major concern for the airlines. The Indian airlines pay almost 60% more for fuel than their counterparts in international markets.

Aviation fuel has several layers of tax. The first layer is the refinery transfer price to buy the fuel. The refiner gets an import parity add-on, which was originally designed to ensure the oil companies earned at least a specified amount. The oil marketing companies then add another layer of costs known as the ‘marking add-on’.

Next, the Indian Government applies levies on the fuel and the local states then apply a state sales tax on the fuel. The Indian states set their own sales tax rates, which range between 4% and 30%. The average sales tax is between 22% and 26%. The net result is a huge fuel expense burden for the airlines operating in India.

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Infrastructure bottlenecks also create additional costs for the airlines. For example, the re-built Mumbai airport was engineered to handle a normal annual passenger load of 29 million passengers per year. According to the Airport Authority of India, the total number of passengers handled for the 2011-12 year was 30.75 million and this is set to increase meaningfully going forward. The capacity overload becomes particularly acute during peak travel times, i.e. morning and evening rush hour.

In addition to the physical constraints of the airport there are personnel constraints in the aviation industry. India requires 2,200 qualified air traffic controllers and currently only has 1,700 Since customers consider an airline’s punctuality metric when choosing carriers, the airlines have been modifying the scheduled block hours. The times reported are often longer than the Directorate General of Civil Aviation’s standardized block flight times.

This creates havoc for the air traffic controllers, who then find that aircraft are requesting to land outside the predicted slots. These types of inefficiencies often exasperate delays. The DGCA’s enforcement of standardized block times has been most pronounced on congested airport routes, such as routes serving Mumbai. As many as 45 flights across all airlines had to rework their schedule times to flights and Kingfisher

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needed to reschedule 14 flights. GoAir and Indigo had to reschedule 7 and 4 flights respectively.

Other short haul routes such as the Chennai – Bangalore route also had a wide range of block times, by as much as 44%. According to officials, of the 7,255 flights operated at the Mumbai airport in June a total of 1,162 were delayed The leading cause of delay was airport congestion. This suggests that the real on-time punctuality metric for the Mumbai airport was around 84%. The infrastructure bottlenecks translate into higher costs for the airlines.

In addition to these regulatory and structural constraints, India also has one of the highest borrowing costs globally. According to IMF data, the cost of borrowing in India was approximately 12%. Since investors demand a risk premium to compensate them for the added risks of investing in the aviation business, so the real cost of capital is even higher. Adding additional layers of inefficiencies and taxes on top of these costs creates a challenging environment for the Indian businesses.

2) The number of aircraft in India competing for passengers has continued to outpace the rate of new passengers.

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The chart above shows the demand for aircraft, as measured by the revenue per passenger kilometer, has grown rapidly in India; however, the supply, as measured by the available seat kilometer, has grown faster than demand. Additionally, over the last decade the load factors for all domestic airline companies have remained below industry normal load factors of 80% or higher.

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The break-even load factor is the percent of seats that need to be filled at the airline yield rate to break-even. When we look at Jet Airways, we can see their break-even rate is at or above 80%, while their actual seat factor is consistently below this needed hurdle rate.

The airlines have not allowed the demand for air travel to catch up before adding new aircraft to their fleet; this in turn causes them to drop fares to increase load factors, causing the competition to do the same in an ongoing negative spiral.

3) The lack of differentiation between the domestic carriers has forced them to compete on price Following on from the point above, the airlines have shown that they are willing to price fares below their breakeven rate, compounding losses for the sector. The above chart shows that the percentage of Indian travel classified as has continued to increase from 1% in 2004 to an amazing 70% and growing as of 2011.

Price competition has accelerated as the legacy carriers and new airlines in the industry have rushed to embrace the carrier model. Hence, there are multiple airlines competing on price that have no cost advantage in this space.

4) Management has not implemented standard risk practices in the airline industry.

In 2007 the Reserve Bank of India are moved its ban on fuel hedging, yet airlines have not started hedging their fuel exposure in a meaningful way. Fuel costs are often the airlines largest cost at 40 -50% of operating costs and are notoriously unpredictable.

Since Indian airlines have not embraced hedging as a way to mitigate risk, they expose themselves to swings in commodity and foreign exchange prices, over which they have no control.

By embracing prudent risk management the airlines could structure their balance sheet to protect owners’ equity from the vagaries of the market. The hedged balance sheet removes the basis risk caused by currency exposures and fuel costs. It is important to point out that most airplane leases are payable in a foreign currency and that fuel costs 23

are typically payable in U.S. dollars. This means that the weakening Rupee increases operating costs. The current practice of the major Indian airlines is to leave these risks un-hedged.

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The chart above shows that the U.S. dollar has continued to strengthen against the Rupee over the prior year.

Simultaneously we can see that the (ATF) fuel price has continued to increase from the 2009 (relative) lows. Hence, both risks have been allowed to eat away the industry profits; weakening the airlines financial position.

5. The participants in the industry, including India’s flag carrier, are engaging in a price war Many of the private carriers boast better performance metrics, and have expanded rapidly at the expense of Air India. In an attempt to regain market share, some of the players, including Air India, have often aggressively priced tickets below their breakeven rates. Air India has relied on the fact that it is a subsidiary of the Indian Government to restructure obligations on more favorable terms, and for further equity infusions by the Indian Government. The propping up of Air India, at the expense of the Indian taxpayer, 25

enables Air India to continue its predatory pricing initiative. The net result of the Government backstop is the destabilization of the Indian airline industry, and a loss of confidence by potential investors.

The market share amongst the Indian carriers remains fragmented, and continues to realign amongst the players. The long-term secular growth of aviation in India should allow a handful of players to grow and thrive.

The most recent market share report from the Directorate General of Civil Aviation shows that IndiGo has 27%, Jet Airways has 20%, and both Air India and Spice jet have 18% on domestic routes. Kingfisher has accelerated their flight cuts and reduced capacity to deal with challenges on their balance sheet. Hence Kingfisher has dropped from first place last year down to last place at only 3%in the rankings. Kingfisher has been particularly hard hit. Kingfisher had expanded rapidly after a merger with Air Deccan (a airline) in 2007, followed by an expansion in their aircraft order book of A380’s. As India’s aviation woes began to accelerate, Kingfisher took on a heavy debt load, which essentially funded losses incurred while gaining market share.

6) The Indian airlines tend to have a high level of financial leverage

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The financial leverage appears, both on and off their balance sheets. The use of the sale and leaseback method for acquiring planes is common globally, but Indian airlines have generally followed this route without regard to a sensible structuring of the capital stack.

A sale and leaseback is the selling of an aircraft to a third party who then leases the plane back to the company. The leasing company earns a return for taking the market risk of the aircraft as well as providing the leasing service to the company. This method is perfectly prudent when the goal of the airline is to maintain their financial flexibility, or manage other risks associated with heavy capital investments. For example, in Jet Airway’s fourth quarter 2012 earning results conference call, KG Vishwanath pointed out that Jet Airways was planning on selling 10 -12 airplanes in 2013; the sale would be structured as a sale leaseback to try to raise USD $200million. Management’s reasoning for selling these assets into the sale and leaseback structure was to pay down expensive Indian debt. However given their Auditors statement that Jet Airways did not have the ability to raise cash; it is possible that the temptation for management to use these proceeds for operating needs will likely happen. Given the dire losses being taken in the Indian aviation industry it is important to scrutinize if the airlines are turning to the sale and leaseback method as an earnings/loss smoothing mechanism at the shareholders expense. Next we will summarize the success factors implemented by carriers worldwide; this will give an overview of how carriers create a competitive advantage. Understanding these success factors will create a baseline to then turn our attention to analyzing the Indian carriers.

The domestic airlines industry is facing significant operating (slowing growth, rising fuel costs) and non-operating (interest costs, rupee depreciation) challenges as evident in the quarterly performance trends of listed airline companies.

Sales Growth: After a strong rebound in 2010, the pax growth has been moderating over the last few quarters due to moderating economic growth and weak industrial activity. Besides, severe competitive pressure from domestic Airlines players (rapidly gaining market share) and Air India (trying to maintain market share) have resulted in 27

price wars (at times be pricing), lowered yields and moderated sales growth for the airlines. Even on international routes, the yields have remained weak due to weaker economic conditions and severe competition from global airlines. Rising ATF Prices & Steep Rupee Depreciation: The airlines industry had been severely impacted by the significant increase in ATF prices (up 57% in last 18 months) as Indian Carriers do not hedge fuel prices and have exhibited limited ability to charge fuel surcharges due to irrational and undisciplined pricing dictated by competition rather than costs / demand.

Besides, the steep rupee depreciation (~18.7% depreciation in CY11, although partly reversed through 7.3% YTD appreciation in CY12) acts double whammy as apart from fuel costs, substantial portion of other operating costs like lease rentals, maintenance, expat salaries and a portion of sales commissions are USD-linked or USD denominated. Profit Margins: With combined impact of 1) moderating pax growth 2) lower yields due to excessive competitive 3) rising ATF prices 4) steep rupee depreciation and 5) rising debt levels and interest costs, the profitability margins of the airlines industry have been severely impacted. As per Centre for Asia Pacific Aviation (CAPA), Indian carriers could be posting staggering losses of $2.5 billion (~Rs 12,500 crore) in 2011-12, worse than the losses of 2008-09 when traffic was declining and crude oil prices spiked to $150 per barrel.

Overall, the industry has been marred by cost inefficiencies and is bearing the brunt of aggressive price cuts, rising costs, expensive jet fuel, a weaker rupee, high interest payments and hence mounting losses. The government support required to bailout the loss making Air India has increased substantially; while the leading private players like Kingfisher Airlines, Jet Airways and SpiceJet are making significant losses. With Banks unwilling to enhance their exposure to the industry, recast their loans or pick up equity stakes without viable business plans, industry needs to come out with strong equity infusion plans. Hence, the government is mulling allowing foreign carriers to pick strategic stakes in domestic airlines to help them stay afloat in these difficult times, besides bringing global expertise and best industry practices over the medium term.

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2.3.

Regulatory Challenges

Competition Act, 2002 prohibits associations or enterprises to enter into an agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause anappreciable adverse effect on competition within India. The central theme of the competition act, 2002 is to prohibit: i. Anti-competitive agreements ii. Abuse of dominance iii. Regulation of M&A The Indian aviation sector has its own competition related issues that need to address.

Some need to be addressed by the ministry where as some must be evaluated by the competition authorities. The Indian aviation sector in a nutshell is plagued with the following issues: 1. Regulatory Barriers 2. Scarcity of slots 3. Cartelization 4. Regulation of M&A Now we shall be addressing each issue separately and analyzing the competition related matters with the same. One of the most important considerations in front of the Commissions across the world when evaluating cases from Competition angle is to consider the possibility of new entry.

The Competition Authorities may not interfere in a case even if an existing incumbent is making super normal profits by abusing his dominant position. Reason being the possibility of new entry which would erode the incumbency benefit and bring prices back to the normal level. However, problem may arise in those cases where the incumbency benefits cannot be checked by possibility of new entry. This is indeed the problem with the Airline Industry. There isn’t free entry in this industry. New entry is curtailed owing to 29

the regulatory barriers & capacity constraints (namely slot allocation-competition in vertically related markets) & hence an important source of competition is & will be lost.

First, we will focus on Regulatory Barriers. Though the Domestic Air travel Policy is reasonable and liberal. But there are several issues which may require some reconsideration. These are stipulation about minimum fleet size and minimum equity capital for new entrants and route dispersal guidelines as mentioned below.

The key features of present domestic air transport policy are: 1. Private sector is allowed to operate scheduled and non-scheduled services.

2.. The scheduled operators are required to follow route dispersal guidelines - an administrative mechanism that was aimed at extending air transport services to regions/routes that is not necessarily commercially viable where by each domestic carrier is suppose to deploy some fixed % of its capacity on class II & III Routes.

3. Operators are required to have a stipulated level of fleet size and subscribed equity capital. For example, scheduled operators should have five aircraft (by outright purchase or lease) and a minimum subscribed capital of Rs. 10 crores. (Rs. 30 crores if operators have an aircraft of maximum take-off mass exceeding 40,000 kg.).

4. Foreign equity participation up to 49 per cent and investment by Non-Indian Residents (NRIs), Overseas Corporate Bodies (OCBs) up to 100% is allowed. The representation of the foreign investing institution/entity on the Board of Directors of the company shall not exceed one-third of the total.

5. Foreign airlines are not permitted to pick up equity. Foreign financial institutions and other entities who seek to hold equity in the domestic air transport sectorshall not have foreign airlines as their share holders.

6. Open skies policy for cargo services.

7. As regards safety and security arrangements, the operators must ensure compliance with relevant regulatory requirements stipulated respectively by the Director General of Civil Aviation (DGCA) and the Bureau ofCivil Aviation Security (BCAS).

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8. A domestic carrier must have flown for at least 5 years before entering the International Skies.

1. Min Capital Requirements & Fleet Size The government’s announcement of minimum equity requirement & fleet size is essentially considered to be obstructive. According to the Naresh Chandra Committee Report, 2003 such requirements and analysis may be better left to the investors including their bankers, financial institutions, and financial analysts or a regulator.

2. Route Dispersal Guidelines: Likewise, to safeguard the interest of remote and backward areas, in 1994 the government issued ‘route dispersal guidelines’ for scheduled services operations on domestic routes. Under these guidelines, anyone who operated services on specified trunk routes will have to provide a minimum proportion of such services on non-trunk routes and remote and backward areas. These guidelines are mandatory.

These guidelines have taken their tolls on the profitability and viability of airlines & making the airline business unattractive. The route dispersal guidelines may be inadvertently hindering the emergence of specialized airlines with appropriate aircraft to cater to regional and short-haul feeder routes. This is because given that the larger airlines are bound by the route dispersal guidelines to operate a specified percentage of their deployed capacity on Category II & III routes (regardless of viability of such operations) they can (potentially) undercut the specialized airlines on these routes.

Recently, government announced its desire to develop Specialized Regional airlines. In face of the current regulation, the route dispersal guidelines will definitely hurt the regional as well as large carriers. The implicit subsidy is indirect and not transparent and therefore not appropriate from general economic point of view. From a long-term point of view, there should be a clear policy on subsidizing air transport services on these routes by reimbursing the carriers from a Universal Fund Scheme (just like we have it for Telecom Sector). Or another way of preserving profitability & as well the objective of access to the remote locations is by allowing major carriers to focus on

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trunk routes of their choice and enable specialized carriers to service such feeder airlines.

Minimum Requirement of Domestic Flying for 5 Years & Min fleet of 20 aircrafts is a must for seeking permission to fly internationally.

This policy regulation is highly discriminative and is leading to a near duopoly situation in terms of the number of domestic players allowed to serve the International Skies.

International flights are a major attraction for the nascent domestic players owing to their high profitability on these routes. Under the current policy regime only Jet/Sahara and AI/IA are now allowed to serve internationally, as they are the only two players who meet these criteria. However, the nascent players who began their operations in 2003 have given these incumbents a tough competition in terms of service, route networks, and market shares. They too have been able to match the incumbent’s standards & that the reason why the incumbents could not help prevents their slipping market share. But these Incumbents seem to enjoy an unrivalled position as they are the only domestic carriers flying internationally. What further adds salts to the wounds of the new players is that government is allowing other new international players with fleet size and experience which is far less than the Indian Regulation to fly in & out of the country.

Hence, the current policy regulation is highly discriminative and is undoubtedly favoring the incumbents. The scenario has become graver now as the domestic players in the international skies have been reduced to two players as compared to four players prior to the merger of Jet – Sahara 2.4.

Benefits accruing to State carriers as they are the only domestic carriers allowed flying to the Gulf

The existing policy framework bars the domestic carriers other than the national carriers from entering the Gulf Routes. The Gulf Routes are an important source of revenue as they have maximum number of passengers traveling to these routes as shown below

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According to unofficial estimates, the state carrier AI pulls out around 40 % of their earnings from these Gulf Routes. The national carriers are dominant players on these sectors & are enjoying monopoly gains and are depriving other carriers from an important source of revenue. However, some socialists who are favoring the current reservation argue that the provision of exclusive right to the national carriers will help the carriers cross subsidize their operations to the routes which are unviable but have to be served as they are the country’s national carriers. However, this subsidization argument is depriving other industry players from an important source of revenue.

Consumers are also worse off as they have no choice in terms of carrier or any substitute mode of transport.

2.5.

Capacity Constraints

Going by simple rule of demand & supply, if demand for one good is rising then supply correspondingly is increased to match the demand. However, this is not possible for the

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Aviation sector as capacity cannot be augmented in response to demand. Airports have a fixed capacity and in terms of their ability to handle traffic. In absence of alternate airports, the major metropolitan airports are becoming congested and are constrained in terms of capacity. Now this may act as a barrier to entry for new entrants as there is acute shortage of slots, ground handling and others. This might act as an entry barrier in the current regime where slots’ allocation is based upon grand fathered rights Slots are rights to take off or land at particular time of the time. The issue of slots is important as the existent carriers may shoo away competition by taking advantage of the capacity constrained airports.

Level of Congestion at Major Cities As seen above, the current capacity is struggling to keep pace with the current demand at the major metropolitan airports. The allocations of slots are a prime issue in front of the new entrant as it will decides its profitability. The passenger load factors are highest on the metropolitan routes like Delhi-Mumbai at peak times. As we earlier defined that the relevant market is the travel from city of Origin to the destination city at a particular time on a particular day. Route & time are important factors governing the profitability of this sector. E.g. Delhi-Mumbai sector is the most congested sector with maximum passenger load registered for morning and evening slots.

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Capacity constraint benefits the Incumbents more than the late entrants as they are able to occupy airport infrastructure on a first come first serve basis. We go a step ahead to dwell on this issue: Say I take a route, which is Delhi-Mumbai. It is the most populous and the most crowded route. Reason being, Mumbai is the commercial and the financial hub of the nation where as Delhi Grand Fathered Rights are rights issued on first come first Serve Basis. is the national capital. Millions of passengers shuttle everyday between Delhi and Mumbai. Most of them for business purposes while some for leisure purposes, the ratio being 65:35. I have deliberately chosen Delhi- Mumbai Route as over half of India’s 33 million passengers’ traffic per annum is generated from this route.

Now carriers try & target the business class more than the leisure class as their responsiveness to price changes (5-10%-SSNIP Test) is negligible. The relevant market as defined earlier is Origin & Destination Wise City Pair Market that is serving a particular market at a particular time. Time is money and carriers understand this very well, that is why carriers like IA and Jet have strategically timed flights to fit the schedules of the business class. E.g. IA has occupied prime slots and timed its flights at strategic timings such as 7AM; 8AM; 9AM; 10AM; 11AM; 12AM; 1AM, 5PM, 6PM, 7PM, 8PM, 9PM.Similar is the case for Jet. 2.6.

Mergers and Acquisitions in Aviation Sector

Aviation sector M&A’s are regulated by the provisions of the Companies Act, 1956, as amended (‘Companies Act’) 1. Securities and Exchange Board of India Act, 1992 (‘SEBI Act’) and the guidelines, rules and regulations framed there under specifically the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, as amended, (‘Takeover Code’) 2. Other legislations governing commercial transactions

eg:

Independent

Regulator’s approval.

3. The Competition Act, 2002 (‘Competition Act’) that has been enacted but is not yet fully enforced, contains provisions for governing competition issues relating to mergers and acquisitions.

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The Takeover Code requires an acquirer of shares which (taken together with his existing shares or voting rights) would entitle him to more than five per cent of the shares or voting rights in the target company, to make disclosures to the target company and to the stock exchanges where the shares of the target company are listed.

The acquirer(s) is also required to make a public announcement in case he acquires shares or voting rights (taken together with his existing shares of voting rights) that would entitle him to fifteen per cent or more of the voting rights in the target company.

The Takeover Code also restricts consolidation of holdings and indirect acquisition of control over the target company without making a public announcement. Takeover Code applies only to listed companies.

Sections 391 to 396 of the Companies Act embody the law relating to mergers, amalgamations and reconstruction of companies. Under the said provisions the merging companies have to approach the appropriate High Courts (amended to National Company Tribunal by the Companies (Second Amendment) Act, 2002 but not enforced as yet) for convening a meeting of the shareholders. The shareholders have to pass the scheme of merger by a three-fourth majority. The scheme is also required to be approved by the High Court. Section 396 also empowers the central government to recommend mergers or amalgamations of companies in the national interest.

The Companies Act also provides restrictions on acquisition or transfer of shares. These restrictions however apply only to a ‘dominant undertaking’, the term being defined under the Monopolies and Restrictive Trade Practices Act, 1969 (‘MRTP Act’) to mean an undertaking having a market share of at least twenty five per cent. Section 108A of the Companies Act requires prior approval from the central government for acquisition of shares exceeding 25 per cent (taken together with any existing shareholding in the target company)of the total paid-up capital of a public company or a private company that is a subsidiary of a public company. Section 108B requires a body corporate or a group of bodies corporate under the same management and holding 10 per cent or more of equity shares of a company to notify the central government of any transfer of 36

equity shares. Also, any transfer of equity shares by a body corporate or bodies corporate holding 10 per cent or more of the equity capital of a foreign company requires prior approval of the central government before transferring such shares to an Indian citizen or a company established in India. The central government has the power to restrict acquisition or transfers that may result in change in the controlling interest in the company and which is prejudicial to the interest of the company orto the public interest.

The Competition Act contains provisions for regulation of acquisitions, takeover mergers etc. of enterprises. Section 5 of the Competition Act , 2002 has laid down some benchmarks standards on whose satisfaction ,the Commission will invoke an enquiry into the proposed Mergers seeking to check whether it has any anti-competitive effects or not. No person or enterprise shall enter into a combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination shall be void.

Section 5 of Competition Act, 2002: The acquisition of one or more enterprises by one or more persons or merger or amalgamation of enterprises shall be a combination of such enterprises and persons or enterprises, if— (a) any acquisition where— (i) the parties to the acquisition, being the acquirer and the enterprise, whose control, shares, voting rights or assets have been acquired or are being acquired jointly have,— (a) either, in india, the assets of the value of more than rupees one thousand crores or turnover more than rupees three thousand crores; or (b) in india or outside india, in aggregate, the assets of the value of more than five hundred million us dollars or turnover more than fifteen hundred million us dollars; or

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(ii) the group, to which the enterprise whose control, shares, assets or voting rights have been acquired or are being acquired, would belong after the acquisition, jointly have or would jointly have,—

(a) either in india, the assets of the value of more than rupees four thousand crores or turnover more thanrupees twelve thousand crores; or (b) in india or outside india, in aggregate, the assets of the value of more than two billion us dollarsor turnover more than six billion us dollars; or (b) acquiring of control by a person over an enterprise when such person has already direct or indirect control over another enterprise engaged in production, distribution or trading of a similar or identical or substitutable goods or provision of a similar or identical or substitutable service, if— (i) the enterprise over which control has been acquired along with the enterprise over which the acquirer already has direct or indirectcontrol jointly have,— (a) either in india, the assets of the value of more than rupees one thousand crores or turnover more than rupees three thousand crores; or (b) in india or outside india, in aggregate, the assets of the value of more than five hundred million us dollars or turnover more than fifteen hundred million us dollars; or (ii) the group, to which enterprise whose control has been acquired, or is being acquired, would belong after the acquisition, jointly have or would jointly have,— (a) either in india, the assets of the value of more than rupees four thousand crores or turnover more than rupees twelve thousand crores; or (b) in india or outside india, in aggregate, the assets of the value of more than two billion us dollars or turnover more than six billion us dollars; or (c) any merger or amalgamation in which—

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(i) the enterprise remaining after merger or the enterprise created as a result of the amalgamation, as the case may be, have,— (a) either in india, the assets of the value of more than rupees one thousand crores or turnover more than rupees, three thousand crores; or (b) in india or outside india, in aggregate, the assets of the value of more than five hundred million us dollars or turnover more than fifteen hundred million us dollars; or (ii) the group, to which the enterprise remaining after the merger or the enterprise created as a result of the amalgamation, would belong after the merger or the amalgamation, as the case may be, have or would have,— (a) either in india, the assets of the value of more than rupees four-thousand crores or turnover more thanrupees twelve thousand crores; or (b) In India or outside India, the assets of the value of more than two billion us dollars or turnover more than six billion us dollars. However, the competition act has not been enforced as yet. The competition commission of India (‘cci’) established under the provisions of the competition act will regulate mergers and has the power to reverse a merger or acquisition if it is of the opinion that a merger or acquisition will haven likely to have an appreciable adverse effect on competition in India.

2.6. Cases of M&A in Aviation Sector in India 1. The Jet-Sahara Mega Merger: On 20 th April , 2007 Jet acquired 100% stake in Air Sahara 15 months after signing the original purchase agreement. Jet purchased its arch rival for INR 14.5 billion (3500 USD Million) which is 35 % less than the price agreed in 2006. The ultimate consummation of Sahara represented the conclusion of the arbitration exercise that has been going on since July, 2006. Jet has announced its going to re brand Sahara as “Jetlite” which would operate as a value carrier. The new entity would offer reduced frills but would be over and above Airlines in terms of service .They together account for a market share of 28% as on May.2007 which is sharply in contrast to their market share in Jan, 2006

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which was more than 45% reflecting increase in competition and fragmentation since then.

2. The Air Deccan-Kingfisher Merger: The merger between the pioneer Airlines and liquor baron was announced on 31st May, 2007 as the United Brewies, picked up 26% stake in Air Deccan and propose to buy another 20 % via an open offer. The deal UB group paid a whopping INR 550 Crore to pick up a 26% stake in the Airlines.

3. The Air India-Indian Merger: The two state run carriers entered into a merger in April, 2007 in a bid to consolidate and optimize the use of the assets of the two public sector airlines. The will help the two airlines to synergize their operations.

Cartelization “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices�.

(Adam Smith, The Wealth of Nations, 1776) A cartelization is a group of formerly independent producers whose goal is to increase their collective profits by means of price fixing, limiting supply, or other restrictive practices. Cartels typically control selling prices, but some are organized to control the prices of purchased inputs. Cartels are prohibited by antitrust laws in most countries; however, they continue to exist nationally and internationally, openly and secretly, formally and informally. It may be guilty of abusing said monopoly in other ways. Cartels usually occur in oligopolies, where there are a small number of sellers and usually involve homogeneous products.

As per section 3 of the Competition Act, 2002 any agreement which causes or is likely to cause, appreciable adverse effects on competition in markets in India is prohibited.

Any such agreements will be void.

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Any agreement entered into between enterprises or associations of enterprises or persons or associations of persons or between any person and enterprise or practice carried on, or decision taken by, any association of enterprises or association of persons, including cartels, engaged in identical or similar trade of goods or provision of services shall be presumed to be anti-competitive if they — a.) directly or indirectly determines purchase or sale prices; When the parties enter into collusion, they draw out various tacit agreements. One such agreement is to fix sales price or fix purchase price depending upon whether the agreement is drawn from sellers’ side or buyers’ side. b.) limits or controls production, supply, markets, technical development, investment or provision of services; The second kind of agreement is where by the production, supply is deliberately constrained to justify the artificial raise in prices & be able to charge an exorbitant amount from the consumers. c.) shares the market or source of production or provision of services by way of allocation of geographical area of market, or type of goods or services, or number of customers in the market or any other similar way; Here, the colluding parties divide the entire market amongst themselves based upon geographical area, types of goods and services, or number of customers in the market & others. d.) directly or indirectly results in bid rigging or collusive bidding; "Bid rigging" means any agreement, between enterprises or persons engaged in identical or similar production or trading of goods or provision of services, which has the effect of eliminating or reducing competition for bids or adversely affecting or manipulating the process for bidding.

Collusive bidding or bid rigging may be of different kinds, namely, agreements to submit identical bids, agreements as to who shall submit the lowest bid, agreements for 41

submission of cover bids (voluntary inflatory bids), agreements to bid against each other agreements on common norms to calculate prices or terms of bids , agreements to squeeze out outside bidders , agreements designating bid winners in advance on a rotational basis , or on a geographical or customer allocation basis . Inherent in some of these agreements, is a compensation system to unsuccessful bidders by dividing a certain percentage of profits of successful bidders.

2.7.

History of Collusion

It has long been posited that when firms face each other in a large number of markets they may complete less vigorously by allowing each other more or less exclusive spheres of influence. Put another way, the number of markets in which firms meet is a factor influencing the likelihood of oligopolistic coordination or “tacit collusion�.

The FIA-Federation of Indian Airlines, a conglomerate of top honchos of domestic airlines met in 2005 to form a federation that will provide a common platform to debate industry issues and lobby the government and hammer out solutions. To their misfortune, at their first meeting they were discussing about pricing issues, which timely was bought to the notice by CCI, and hence the very first step towards Cartelization was aborted.

Moreover, that time the industry was scattered into many players so chances of deviations were very high. In today’s scenario, chances of Cartelization and its materialization are quite high as post consolidation with less number of players tacit collusion is more chase able and deviation is less unlikely. So CCI must keep an eye on such tendencies. Moreover, chances of coordination in prices might become even higher if the Proposed Alliance between AI and Jet materializes. It is highly recommended that the Commission scrutinizes the proposal & its prospective pros and cons before the two are allowed to sign on the dotted line.

It is in this regard, that the Commission has identified some conditions conducive for Cartelization. Cartels usually function in secrecy. The member of a cartel by and large seeks to camouflage their activities to avoid detection by commission. If there is 42

effective competition in the markets, cartels would find it difficult to be formed & sustained.

Some of the conditions conducive to formation of cartels by the Commission are: 1. High concentration 2. High entry & exit barriers 3. Homogeneity of products 4. Similar production costs 5. Excess capacity 6. High dependence of consumers on the product 2.8.

SWOT Analysis of the Indian Aviation Industry

SWOT means the strengths, weakness, threats and opportunities. This is one of the essential requirements of any organization and the foundation for understanding the industry of that particular organization. The continuous volatile environment of the aviation industry has been analysed with respect the extended marketing mix ( product, price, place, promotion, process, people and physical evidence). While individual airlines each analyze and make decisions based on their own situations, there are overall industry similarities that all airlines face, with each endeavoring to maximize strengths and opportunities while minimizing weaknesses and threats.

STRENGTHS 

A major strength of any airline is the product itself (air travel). Despite downturns, over time air travel continues to grow, not only due to population growth, but also due to an increased propensity to fly.



The entry of low-cost carriers pioneered by Air Deccan helped greatly reduce the costs involved in flying. This helped attract consumers for whom air travel was only a dream. Now a number of low-cost airlines are operating in India, namely 43

Go Airways, Spice Jet, and Kingfisher Air, and they have a major share of the Indian aviation industry. 

Indian labour costs are an advantage, at $30-35 per man-hour. This compares with $55-60 in South-East Asia and Middle East and even higher in the USA and India.



The change in lifestyle of people and growth in the disposable income has resulted in an increase in leisure travelers for the past few years; 5 years back 85% were business travelers.

WEAKNESS 

All the major players in the aviation industry focus on particular regions rather than focusing on India as a country. For example Air Deccan focuses exclusively on south Indian market while Go Air focuses on southern and western India.



The unplanned location of airport and the lack of proper infrastructure facilities at the airport. Though the government has tied up with private companies such as GMR and has upgraded airports such Delhi and Bangalore but still there is a long way to go.



Airlines have a high "spoilage" rate compared to most other industries. Once a flight leaves the gate, an empty seat is lost and non-revenue producing.

OPPORTUNITIES 

Government allows 100% FDI via the automatic route for the green field airports.

Also, foreign investment up to 74% is permissible through direct approvals while special permissions are required for 100% investment. Private investors are allowed to establish general airports and captive airstrips while keeping a distance of 150 km from the existing ones. About 49% FDI is allowed for investment in domestic airlines via the automatic route. However, this option is 44

not available for foreign airline corporations. Complete equity ownership is granted to NRIs (Non Resident Indians). Foreign direct investment up to 74% is allowed for non-scheduled and cargo airlines. Thus, all these policies promote foreign investment in this industry. 

Investment opportunities of US$ 110 billion are being envisaged up to 2020 with US$ 80 billion towards new aircraft and US$ 30 billion towards the development of airport infrastructure, according to the Investment Commission of India.



Technology advances can result in cost savings, from more fuel efficient aircraft to more automated processes on the ground. Technology can also result in increased revenue due to customer-friendly service enhancements like in-flight Internet access and other value-added products for which a customer will pay extra.

THREATS 

One of the basic weaknesses in the aviation industry is the fuel costs which are 70% higher than International standards. The fuel bill is 40% of operating cost.

Aviation Turbine Fuel (ATF) prices in India is around Rs. 37,800 per kilo litre against Rs.21, 800 in the Average International Markets. Also 20% of the Operational Budget is spent on training pilots. Furthermore, landing and parking charges are 78% higher than the international average.



There is a shortage of skilled manpower which includes pilots, cabin crew and ground staff. Also there is high attrition rate among the skilled manpower within the aviation industry.

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3. Research Methodology As per Collis and Hussey (2005) research is a systematic technique by which the data could be collected, examined and deduced so as to understand the incidence about which the researcher is a lot fascinated. .The procedure of procuring an answer to certain question in a methodical way is called the research methodology. It comprises of the several stages and processes that are used by the scholars to investigate the theme of the study and the scopes related to it.

Any person who is occupied with certain exploration or research has to be familiar and assertive with the investigation techniques and processes as well as the procedures to do the research. The research methodology blends the investigation techniques and processes along with the motives and the causes that are reason for the use of these processes.

Every research methodology has 3 standards. The standard can be defined as a means of collective group of entire norms, sense and ideas that describes the methodology of the study. The 3 standards of the study as talked over are: 1. Quantitative 2. Qualitative 3. Mixed research Quantitative research Quantitative data here implies the quantifiable extents and measures. It is valid for problems or difficulties that can be characterized or revealed by a particular computable measure. Its features are: ďƒ˜ The human conduct engaged in the research is constant and can be projected.

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 The technique is based on inference from the genuine information that are quantifiable entities.  The emphasis of the research is founded on quantifiable entities that are employed to recognize any theoretical incidence.  The character of the research is objective type.  The aims of this study are to define and describe a specific method and forecast the results.  The data gathering process is founded on exact and strict techniques of quantity.  The outcomes can be comprehended generally.  Data study is founded on numerical methods.

Qualitative research The qualitative research has been discovered from the societal science and it is related to the social conduct of the individuals.

The present research is done mostly on the grounds of gathering of both the quantitative and qualitative information.

3.1.

Research Approach

The approach that has been employed in the current research is the procedural approach that was put forward by the Collis and Hussy (2009) in which the qualitative as well as the quantitative approach have been employed. Hence these methods give an authorization also that was not granted by Gill and Johnson (2002). In the current research the researcher has employed the primary as well as secondary technique to look for the information 3.2.

Data Collection Tools

The data could be grouped in two elementary kinds:  Primary data  Secondary data This research project is an ‘Evaluative Research’ which helps in the process of assessment of the success and failure of the management plans and policies (Veal, 2006). This was achieved by adoption of both primary and secondary research techniques.

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Primary Data The data which is gathered for the study during research under process is termed as primary data. The primary data can be gathered by three ways: 1. Observation 2. Questionnaire 3. Interview Primary research techniques include questionnaire based interviews of the industry specialists and customers; eight in depth interviews were conducted both face to face and over telephone from the managers who work in different airlines in India Secondary Data The data which is gathered for some definite cause and has been provided and can be pulled out from the archives of the corporation and from its journals is termed as Secondary data. The secondary research includes the literature review, industry reports and explorative case studies.

3.3.

Pilot Testing

For the purpose of this research, a “split halves� technique of piloting (Walliman, 2005) was considered, whereby two small groups of respondents were asked to fill in the questionnaires and their results were compared in order to ensure if the questions were understood by them in the same manner. This technique was very helpful, as it enabled to clarify some concepts and gaining valuable feedback on the data yielding capability of the questionnaires that were used. Customer service analysis was also conducted through survey from the traveling to numerous destinations on carriers both in summer (June and July) and Christmas (December) times of 2012. 100 questionnaires were distributed to the respondents, but 65 questionnaires were properly filled up by the respondents which were used for further data analysis.

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3.4.

Sampling

University students living at Mumbai and travel frequently on airlines were also included on this survey. 78% of the respondents were Indian, and 28% were from other countries particularly from and they are in between 22 to 35 years old.

Sample Collection Reasons for selection of the sample size and the mode of communication in order to generate responses on the individual customer profile. As a large number of data has been collected through interview and questionnaire survey, data are also analyzed on a deductive manner based upon the importance and significance of achieving the research objectives. At the end, some recommendations and suggestions are given for further sustainability and growth of airlines. airlines industry has been subject to a number of legislations and regulations. Wensveen (2007) emphasizes on the establishment of IATA in 1965 and deregulation in this process. Deregulation being the most prominent one, was introduced to provide an international market for all the airlines, as that would help in global development, enable the customers to choose from a wide range of options and also increased efficiency as non performers will not be fit enough to survive on the global level (Dunn, 2009; Iatrou and Oretti, 2007).

Deregulation on the domestic front helped the Airlines to emerge and prosper. The revolution pioneered in the India by Ryanair showed growth consistently. Airlines struggled to gain grounds in other parts owing to regulated markets, rising fuel cost, reducing passenger load factors, slow paced regional economic growth, lack of ability to create a distinctive competitive image, bankruptcy, reducing profit margins (Hardy, 2009). With airlines then started to grow, Virgin Blue in Australia, Gol in Brazil, Tiger Air in Singapore and Air Asia in Malaysia (Alloway, 2008). In the mean while, was already saturated with number of Airliness, the number of passengers travelling on Airlines increased from 3 million in 1994 to 100 million passengers in 2004 (Doganis, 2006).

Airlines in India exceed by 50% of the market share on some intra European routes, as compared to 8% by Airlines on some Intra Asia routes (Benson, 2008). Airlines carried more than 1/3 of the schedule passengers (Airbus, 2009). This growth is also a clear symptom about the price conscious customer’s willingness to travel in a Airlines over 49

the legacy carriers. With low costs and profitable returns, these Airlines have forced the legacy carriers to rethink their pricing, positioning and distribution strategies.

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4. Data Findings and Analysis In order to generate a firsthand feedback on the airlines industry and the strategies adopted by the several companies in the industry, detailed questionnaire and unstructured interviews were used. 100 Questionnaires were distributed to several industry specialists as mentioned in the research methodology. However only 65 respondents replied back leading to a response rate of 65%. This research also intended to obtain the views and opinions of aviation industry professionals’ in India to arrive at an unbiased conclusion.

Description of carriers Initially, respondents were asked to describe the airline industry in one of the mentioned options they most agreed to. An equal ranking to all the options were expected in the beginning; however the questionnaire revealed a different rating. 51.6%, 50% 53.1% 56.3% and 37.5 % of the respondents described them as expensive, value for money, economical, affordable, for masses and not for classes respectively. This is consistent with the theory, whereby airlines tend to keep their costs low and economical due to their value chain advantages and target the mass population using a broad cost based approach (Mitchell and Mills, 2009).

However 30.2% of the respondents contradict and disagree on the fact that airlines are low in quality. In fact such a technique is used by several airlines to differentiate them from the other leading competitors. As mentioned by Ramchander Bishnoi, “Kingfisher Red- carrier a subsidiary of Kingfisher Airlines in spite of being a carrier tries to provide quality service as compared to its competitors like Spicejet and Indigo on the same routes in order to attract more customers”.

Strategies to survive in the current recession in order to grow in the future The respondents were asked to share their opinion on which would be the most effective way for the airlines to survive in times of such global recession. Of the total respondents, 57.1% stated that airlines should stick to their model with a focus on ancillary revenue. In light of this, Woodburn (2008) mentions how a customer who initially brought 01 pence ticket and ended up paying £61.84 for the same ticket.

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According to Pran Dasan, Manager at Kuwait Airways and Diego Giannone, Strategic Planning Analysts at Alitalia, “Ancillary revenue account for 20% of the airlines revenue and is expected to rise, so airlines should continue to focus to ensure revenue growth, in fact airlines should look for new areas for generating additional ancillary revenue” This clearly indicates the relevance of focusing on ancillary revenue maximization.

However, 42.9% of respondents considered an extension of the target market to include corporate travelers as an effective option. It is equally important to consider the fact, that in order to attract this segment, airlines need to re-think on their Customer Relationship Management (CRM) strategies. This is also emphasized by 40.5% of the respondents who considered CRM as an effective technique. In agreement to this, Sahana Goswami, a freelancer states “Airlines’ need to focus most on customers. Too many now focus on under-cutting service and quality and seeking increased revenue from ancillary products. Ultimately the customer is king and they will eventually vote with their feet (choosing another airline when they feel they are not getting the service they deserve). If certain Airlines’ are not careful they could cause the bubble to burst as a time will come when passengers start to seek quality over points and the low service that comes with them”.

This is also indicated by the 33.3% of the respondents who consider outsourcing as an effective tool. However, 5 of the respondents believe, outsourcing would be more beneficial to airlines if: a) A need based outsourcing is adopted rather than a paid service, as this will help airlines to reduce costs in times of low demand; b) Outsourcing is continued with structured contracts with several suppliers, it will enable them make the most of it from the contracts.

Changes to the Airlines model to attract new customers and aid sustainability On questioning the respondents about the models and changes to the models, 51.2% of the respondents believe Airlines should continue with their model but with attractive cheap fares and maximizing consumer touch points. These respondents believe that such a change could benefit in more than one ways. Such as a) Help the Airlines’ to maximise its customer base; b) Demand pricing in comparison to uniform pricing would 52

help the Airlines and the customers gain in times of high demand and low demand; c) Facilitates ease of purchase and accessibility to the consumers; d) Help the Airlines to communicate to its customers quickly and effectively. Such a set up of mass consumer touch points however, would be very contrary to the low cost’s direct business model and add up to the costs thereby increasing these operating cost and accordingly the fares. Respondents accounting to 46.3% of the total believe that lean and mean approach to staffing would be an effective strategy. Such an approach would enable the airlines to cut down its cost and thereby pass on the to the customers.

On the contrary, two of the respondents also believe that such an approach would only place more pressure on the staff to perform better. This would affect the employee’s performance leading to lower productivity and falling profits. 34.1% of the respondents believe that long haul with model. This is a very effective strategy and would be profitable only if the Airlines focus is on high density routes to maximize returns and with a careful selection and implementation process. In response, 39% of the respondents did agree with Delfmann et al, (2005) studies on airlines, whereby airlines would lose their competitive advantage, add up to their costs and would be unable to switch to a FSC model and should continue to operate with their original business model and restrain from moving into full service airlines sector. Respondents suggest that the current scenario where many FSC’s in the first place are degrading their own to compete with airlines and setting up their own subsidiaries, a move towards a complete transformation would be the least effective change in the business model to ensure sustainability.

Ensure repeat business Retaining old customers is as important as attracting new customers towards the company’s services (Westcott, 2005). Respondents were asked to mention three ways in which they believe airlines could retain their customers and ensure repeat business.

Respondents wanted Airliness to provide these services mentioned herewith in order of importance – 1) good customer service through a wide range of operations; 2) low and Competitive pricing; 3) on time performance and wider networks; 4) loyalty Programs; 5) increase frequency; 6) provision of attractive offers and deals. These points indicate that 53

Airliness should focus on meeting the Industry Success and Survival factors. A small number of respondents suggested an option to consider alliance with network carriers.

Therefore, the domestic front Airliness could target international customers for the country, who want to travel on domestic routes of the same country at low costs.

This point was also agreed by Gaurav Agrawal, who stated that Mango – Airlines subsidiary of South African Airways would fly South African Airways passengers into remote domestic cities where South African Airways does not fly to.

Breakdown of ancillary revenue’s contribution to revenue and profitability 53.7% of the respondents suggest that the Airliness should focus on hotels and car rentals and 43.9% on city breaks to generate more ancillary revenue. 41.5% respondents have considered advertising on exterior and interior of fuselage as an effective means of enabling Airlines to earn additional revenue. Taking into consideration the Airlines model, 41.5% of the respondents feel for Airlines business model which is purely a no frills services ala carte services such as baggage charges, charges for online credit card transactions would act as a good source of additional income. 39.1% have suggested onboard entertainment and merchandise.

Market and environmental factors affecting sustainability Respondents were asked to rate environmental factors and also mention the rationale behind such a rating. 63.4% of the total respondents mentioned availability of the capital and overcapacity in short haul routes as the factors having the most powerful impact on sustainability. With regards to overcapacity, it is believed to be a factor as it tends to increase price war and competition thereby leading to losses of all the players involved.

Availability of easy access to capital could be a problem in a highly capital intensive industry- airline industry, especially in times of financial crunch. Rising oil prices was considered having a powerful impact by 61.0% of the respondents. Respondents believe oil price hikes reduces the ability of the airlines to differentiate on the cost front.

However, as one respondent suggested rising oil prices could not be manipulated by any of the players, hence an option would be look for new routes and at fares. One of the respondents suggested use of an alternative fuel, which will help in reduce the 54

pollution and thereby the environmental impacts. On an average 54% of the respondents considered lack of basic airport infrastructure, political interference and lack of awareness of the Airlines model as the main factors affecting growth and sustainability.

For respondents consider lack of basic airport infrastructure to have a powerful impact because of the lack of availability of space in the urban areas due to industrial and residential growth. So Airlines tend to move to rural areas, whereby there is a shortage of easily accessibility which in the end affects the connectivity factor most commonly related to airlines. Respondents believe that several airports currently in poor state, if developed and used by Airliness could be a means of re establishing them as important business centers. E.g.: Kanpur Chakeri airport at Kanpur, Uttar Pradesh .Political interference as per respondents would be a problem when government begins to favors one national carrier more than the other airlines and political policies restricting entry in a new route or targeting a new market (Taneja, 1989). Respondents see alliance and mergers by network carriers as an opportunity for Airliness. This creates an opportunity as it would increase competition in the international arena and not domestic frontwhereby Airliness operate on a large scale.

Trend analysis Respondents were asked to list down three important trends in the Airlines industry and how are they affecting the industry? All the 65 respondents suggested several trends in terms of costing, model evolution and competition in the market. Cost has been defined as the major trends in uncontrolled speculation in oil market, development of price sensitivity amongst the customer in the market, regulation cost, suppliers cost, airport cost and other hidden costs that drive for higher cost structure of the airlines (Wensveen, 2007). Evolution of the model refers that Airlines model extension on long haul routes with and/or without meeting passenger requirements and maximum focus on ancillary revenues leads to the invention of new ancillaries, such an increased focus is driving customers (Woodburn, 2008). Airlines are also facing higher competition, as 55

there are numbers of players in the market in a price war, (Dunn, 2009). Respondents overall felt that the industry is matured and the need arises for a selection of smart networks by Airlines.

As the current industry trends will have an impact on the future, respondents (both passengers and industry specialists) listed several trends which would be affecting the industry in ten years time. These are – a) Power transfer to consumers through the invention of several distribution channels; b) Hike in Oil and Fuel prices; c) Demand of High levels of Customer Service; d) Chances of a recession thereby leading to dynamic economic changes; e) Competition from Indian Railways leading to less demand; f) Overcapacity in routes leading to saturation; g) Competition with big airlines on the international routes for airlines on the long haul routes; h) Closure of certain Airlines due to several reasons mentioned throughout the literature review for e.g.: high operating costs, lack of government support; i) alliances and further evolution of the business model to cater to customer needs; j) Alliances amongst the big carriers leading to less players and creating more opportunities for Airlines; k) Lack of ability to sustain the advantage; l) Environmental impacts leading to protests from green activists; m) Tourism traffic trends affecting demand for air travel for e.g.: Virtual tourism; n) Elimination of the line of distinctiveness between Airlines and FSC, a form of convergence; o) Dominance by several leaders driving the small players out of the market; p) Increased protests from green activists leading to adoption of environmentally safe, new technology and fuel efficient aircrafts; q) Falling yields; r) Increased competition; s) Ability to motivate and maximise employee productivity with low salaries; t) FSC transformation into Airlines; u) Changing consumer behavior; v) Falling supply of capital, cabin crew and adequate infrastructure; w) Ability to maintain competitively structure; x) Use of wider body aircrafts for Airlines once demand builds up.

Reasons for selection of Airlines: Customer satisfaction analysis Respondents were asked to list down the various reasons why they chose a particular carrier in comparison to another.

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Reasons for choosing Airlines over other Airlines.

68% of the respondents consider cost as the main reason for selecting particular Airlines followed by value for money (47%), airport accessibility (46%), convenient flight schedules (42%), and booking convenience (41%). Before proceeding to analyze these figures, it would be worthwhile to also consider the reasons why customers prefer carriers over other full cost carriers.

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Reasons for choosing Airlines over another FSC.80% of the respondents consider cost as the main reason, followed by airport accessibility (56%), convenient flight schedules (51%), and value for money (49%) over choosing another FSC. Both of the above these analyses clearly indicate that cost is the main success factor for winning customers both from other Airlines and FSC’s. Airlines should continue to sustain their advantage in order to keep attracting more customers. Booking convenience percentage points towards the various considerations discussed in the earlier section, whereby Airlines need to ensure ease and comfort in booking procedures. On an average 47-49% of respondents did mention value for money as a main reason. It is equally important to consider the various perceptions of value for money as listed below by different respondents "When I am paying for a flight ticket to Mumbai at the price of a bus or coach from Mumbai to Delhi, I think I get value for my money!"

"Value for money for me is when I get a cheap flight ticket at a convenient time to my destination”“Reasonable price, good services with whopping baggage allowance” Ancillary services, although a major revenue earning factor for the Airlines, it is the least important factor for choosing particular Airlines. This indicates that Airlines need to market and promote their ancillary effectively and efficiently to be a captivating factor for the customers and to be able to earn additional revenue. Convenient flight schedules were considered by 44%-51% of the respondents as a main factor. This could be seen from the fact when respondents were asked to mention their stated flight departure time and the preferred time of departure on their latest flight.

On an average, all the respondents preferred their flight timings +/-1-2 hours in comparison to the stated timings of departure. This indicates increasing frequency on certain routes could help the Airlines to generate maximum yield and capacity on each flight and meet the consumer expectations. 33-40% of the respondents consider brand name and reputation of the company also before choosing a Airlines. This also indicates the factor that was mentioned by our analysts as brand management as factor for ensuring repeat business. As emphasized by Westcott (2005), the reputation of a 58

company affects the way in which its stakeholders- customers, company investors and general public perceive them. A company’s brilliant innovative ideas and strategies will not fall in place without a good reputation.

75% of the respondents paid for their own travel; however 13% of the respondents traveled through the company’s arrangements. This shows that there is an increasing number of corporate organizations who consider travel on Airlines as a means of cost cutting for business trips and events in times of recession. A co-relation with the above mentioned reasons could be found in the next question, whereby respondents were asked to agree/disagree with options closely related to their purpose of travel on Airlines.

Purpose of travel 45% and 44% of the respondents prefer to travel on Airlines for leisure and tourism and for visiting friends and relatives respectively. It is very important for Airlines to retain these customers as their level of satisfaction is low (as seen in the ratings) and due to their frequent travel plans. Only 37% of the respondents travel on Airlines for study programmes. Although no reasoning mentioned, this could be increased with the help of invention of innovative student promotions.

Only 14% of the respondents travel for business purpose on Airlines. This shows the increasing number of corporate traveling on Airlines and is in sync with the responses whereby companies pay for business trips. However this small number could also be 59

due to the lack of response from the business clients. This research also intended to identify the cost and benefit associated with the travel on Airlines. However such an analysis could not be performed due to the lack of ideal sampling size at the Airport.

However, the analysis which covered Bangladesh, India and Europe majorly did provide some insight.

All the respondents traveled on an average between 30 hrs and 2.5 hours for travel from their point of work or house to the airport for the Airlines flight to their destination.

Similarly respondents travel the same amount of time for their travel from the airport to their point of destination. The respondents traveled by car, cab, tube, bus to reach the airport. The respondents in Australia spend on an average between 23.63 % and 60% of their ticket cost on transportation to and from the airport for a flight on the Airlines.

The respondents from India spend on an average between 6% and 30% of their ticket cost for the transportation, with majority of them falling in the range of 9-15%.

Respondents from the India spend about 13.33%-75% of their ticket cost on the transportation. The high cost in Australia may be attributed due to availability of the numerous airports spread across the country (Iatrou and Oretti, 2007). However in India due to the infrastructural issues, the airports are located not far from the city and the ones located amount to only a handful leading to a expenditure. This leads to a further discussion. Respondents were asked if they would be motivated to travel on Airlines in case of provision of the transportation to and from the airport.

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This is a clear opportunity for airlines to generate additional revenue through providing airport transfer services for its passengers at a reduced cost. Since the study focuses on testing the levels of satisfaction derived by traveling on Airlines, the researcher defines customer satisfaction as the different levels of service quality performances, which meet with the customers’ expectations. A glance at the factors responsible for travel on Airlines does give us these different levels of service quality which meet up with customer satisfaction.

Future of Airlines

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Respondents were asked to describe their own perception on Future of Airlines

51% of the respondents believe Airlines are a good concept and should continue to progress in the future. Airlines have a very unique business model targeted at the mass customer segment enabling travel (Hardy, 2009). 16% of the respondents believe Airlines are no different from other transport mediums and they charge the same.

Another 12% of the respondents were not sure about the Airlines services and how different are these Airlines from other transport.

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5. Conclusion The research data generated from industry analysts and customer survey reveals the facts that cheap fares are the main reasons for the success and survival of Airlines in comparison with other Airlines. However, Airlines are definitely not low in quality of service. Branding and seamless customer services are important factor for an Airlines 63

sustainability whose main focus is on cost reduction at all times (Hardy, 2009). Focus on unbundled model and need based outsourcing would be the ideal ways to overcome recession. An alliance with network carriers is beneficial to Airlines as they facilitate travel at for international passengers travelling on domestic routes in all countries worldwide with a rise in market share for Airlines. Although ancillary revenues contribute mostly to Airlines, there is a need to promote them effectively in order to ensure revenue maximization and to influence the consumer’s purchase decision, as evident from the customer analysis; Airlines should also focus on identifying new sources of ancillary revenue for instance airport transfer facilities. Unpredictable market forces could not be fought with; however exemption of government regulations and political interference could ease out the anxiety of Airlines. The research also provided insight on the long haul as a profitable model. However the ideal successful model would be the short haul with mass consumer touch points. Customers who travelled on Airlines ranked the Airlines a three star in terms of satisfaction indicating a low- medium level of satisfaction and travelled majorly due to the availability of cheap fares. This is in sync with the interview panelists who stated that Airlines have made travel affordable, but need to focus on CRM. Future scenario analysis: The research also throws light on the future scenario in terms of opportunities for Airlines to grow and prosper along with some challenges. Sale of mobile phones around the world is expected to rise from 3.2 billion to 5 billion in 2012 and more than 90% of passengers travel with their mobile phone (Woodburn, 2008). This indeed creates an opportunity for airlines to look towards provision of mobile services- mobile check in, e ticket information etc. (Davies, 2008).

Estimated Rise in World population and Economic Growth Rate would boost the travel demand factor. Asia- Pacific: In 2012 alone there were 120 million internet users in India which was later expected to grow at a rate of 10% every year.

This creates an opportunity for carriers to widen their consumer base at a minimum increase in distribution expenses. However on the other hand, internet creates transparency, which gives powers to buyers and thereby limits the company’s and the agent’s power. (Delfmann et al., 2005).In Asia Pacific, in 2008 mere 30 operators lead to a 19% increase in traffic as compared to 2007. Of this 68% of the rise in traffic was attributed to a handful of operators. This indicates the large market which still remains 64

unestablished and provides scope for new entrants. As stated by the interviewee panelists from India, India is a sustainable market for Airlines but there is a need for efforts on communication on part of the airlines and participation from government in the form of infrastructural support. According to Airbus traffic forecast, Indian markets would witness a positive growth; in agreement Gaurav Agrawal listed several opportunities like IPL 2013 as the biggest opportunity for Airlines to increase their revenue and market share: From the analysis of the industry life cycle and the macro environment forces; it seems that Indian market players need a process innovation rather than a product innovation due to its maturity stage. However Indian market would witness a consolidation stage with a handful of leading airlines.

6. Recommendations Airlines could benefit from these opportunities only if they develop their capabilities and competencies by fulfilling the future success and survival factors. This research would also recommend Airlines to follow a strategy, either reinvigorate their differentiation strategy or innovate to gain a first mover advantage. The former recommends going back to the basic factors which have been the reason for the success. This strategy would enable the Airlines to improve their existing core competencies for example: 65

Spicejet’s core competencies lie in its ability to serve variety of destinations at low fares and with a high frequency rate. The implementation of this strategy would utilize the existing resources without any disruption to the organization structure and culture. Any further improvements due to the implementation of this strategy in terms of services could also be incorporated in the company’s prevailing value chain. The later however involves in identifying and implementing trends than competitors for instance, in countries like India where most of the students plan to pursue their studies, the number stands high, new Airlines could target them with tie-ups with universities and halls of residence for promotional offers for students from that particular university or halls of residence.

Another technique would be whereby Airlines tie-up with government agencies of least popular destinations.

This would benefit the government of the country by promoting its inbound tourism and the Airlines in the way of half or a certain proportion of its operational cost borne by the government agencies if agreed by the government agencies.

6.1.

Further Plan of Action

This research work intends to communicate a summary of the report and the research analysis data to all the Airlines in India. 51% of the respondents who feel that Airlines make flying cheaper and should exist as a means of communication and thus this would benefit the consumers and the airlines such as a) Enable the Airlines to identify the main causes for low level of satisfaction amongst the customers in India; b) It would enable the Airlines in India to change the mental outlook of customers for low online transactions; c) Identify the various sources of ancillary revenue for instance provision of airport transfers, as derived from the customer analysis; d) Set up innovative student promotional offers for student customers as they extensively use Airlines owing to their budget control issues.

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References  Indian Civil Aviation Industry: Road Map for Growth by ASSOCHAM in association with Ernst-Young, 2007. Background Note for the Economic Editor’s Conference Organized by PIB on 16-18th Nov. 2005 On Latest developments& policy initiatives relating to the Ministry of Civil Aviation.  Aviation Analyst, Asia Pacific;CAPA Journal. Issue: 77; May, 2007.  Indian Aviation – A good Investment by Andrew Miller, CAPA Consulting; Aviation & tourism Summit, 2007.

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 Chicago Beyond Open Skies, European Commission Paper, Dec 5-7, 1999.

"Global Airline Industry Competition and Service Adequacy in an Open Market Environment" Presentation by Mr J.F.PONS, Deputy Director-General DG Competition European Commission.  European Air Law Association: 11th Annual Conference Recent developments in European air transport law and policy Lisbon, Friday 5 November 1999 Panel discussion "Current issues arising with airline alliances" Presentation by Mr. Joos Stragier Deputy Head of Unit DG Competition European Commission  International Aviation Alliances, Market Turmoil and the future of Airline Competition”, Statement of R. Hewitt Pate, Deputy Assistant Attorney General; Anti-Trust Division, DOJ.  Airline Code-share Alliances and their Competitive Effects By Philip G. Gayle Kansas State University September 8, 2006 in Journal of Law and Economics.  Antitrust for Airlines Remarks by J. Bruce McDonald Deputy Assistant Attorney General Antitrust Division U.S. Department of Justice.  Regulation (EEC) No 4064/89 Merger Procedure Case No COMP/M.3280 -Air France / KLM.  A.Y. Chitale

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