Air India

SUMMER TRAINING REPORT SUBMITTED TOWARDS THE

PARTIAL FULFILLMENT OF POST GRADUATE DIPLOMA IN

BUSINESS MANAGEMENT

A REPORT ON

A STUDY OF THE INDIAN AVIATION INDUSTRY WITH SPECIAL

FOCUS ON ATF TRENDS

BY

AJAY SINGLA

NIILM CMS

Company Guide: Faculty Guide:

MR.ANIL KUMAR SINGAL MRS.HIMA BINDU KOTA

OFF. DY GERENAL MANAGER (AUDIT) FACULTY

NACIL NIILM CMS

INFORMATION SHEET

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NIILM CENTRE FOR MANAGEMENT STUDIES 1

1) Name of the company - NACIL

2) Address of the company - Registered Office at Airlines House, 113 Gurudwara Rakabganj Road, New Delhi

3) Phone No. of the company - 0124 2877 995

4) Date of internship Commencement - 1st May 2009

5) Date of internship Completion - 30th June 2009

6) Signatures & Name of the industry Guide - Mr. ANIL SINGAL

7) Designation of the industry Guide - Off. DY General Manager

8) Student’s Name - AJAY SINGLA

9) Student’s Roll Number-28048

10) Student’s E-mail ID- [email protected]

11) Student’s Mobile/ residence numbers - +91999992244




ACKNOWLEDGEMENT

This project is the outcome of sincere efforts, hard work and constant guidance of not

only me but a number of individuals. First and foremost, I would like to thank NIILM-

CMS, New Delhi for giving me the platform to work with such an emerging company in

the financial sector. I am thankful to my faculty guide Mrs Hima Bindu Kota, NIILM-

CMS for providing me help and support throughout the internship period.

I owe a debt of gratitude to my company guide Mr. Anil Singal and Mr. Vineet Gupta

who not only gave me valuable inputs about the industry but was a continuous source of

inspiration during these two months, without whom this Project was never such a great

success.

I would also take the opportunity to thank the entire staff of AIR INDIA who helped and

shared their knowledge about the industry for which I am highly grateful.

Last but not the least I would like to thank all my Faculty members, friends and family

members who have helped me directly or indirectly in the completion of the project.

Ajay Singla PGDBM 2008-2010

NIILM-CMS, New Delhi




CERTIFICATE

This is to certify that Ajay Singla student of PGDBM (FINANCE) 2008 -10

Batch NIILM-CMS has undergone summer training from 01.05.2009 to

31.06.2009 in NACIL. During his summer training he was found regular,

sincere and took keen interest in training.

We wish him success in his future endeavors.

Industry Guide

ANIL KUMAR SINGAL

OFF. DY. GENERAL MANAGER

NACIL




CERTIFICATE

This is to certify that this project work on “A STUDY OF THE INDIAN

AVIATION INDUSTRY WITH SPECIAL FOCUS ON ATF TRENDS”

is done by Ajay Singla PGDBM BATCH 2008-10 under my supervision for

partial fulfillment of PGDBM program and this report is not submitted to

any other institute/university.

During internship he successfully achieved the target assigned to him.

I wish him all the very best in all his future endeavours.

Signature

MRS. HIMA BINDU KOTA

FACULTY GUIDE




EXECUTIVE SUMMARY

Perpetual change in business has made inevitable for every business

organization to do environmental scanning, so that it may be able to cope

with the latest changes in their respective field of business & to move with

the pace of the industry. The environmental scanning makes it possible for

every organization to study their market & to exploit the available

opportunity.

The Aviation industry has changed during last five years. The market has

been a very high level of competition in the field of Aviation many new

players entered into this industry. So it becomes very difficult to aviation

companies to reduce the cost & earn good profit.

Objectives of the project:

1. To study the trend of the ATF (Aviation turbine fuel) 2. To do the ratio analysis of the company 3. To do the SWOT analysis of the company and the industry as a whole.

Industry Guide

ANIL KUMAR SINGAL

OFF. DY. GENERAL MANAGER

NACIL




TABLE OF CONTENTS

TOPICS.

INTRODUCTION

o About Aviation Industry

o History of aviation industry

o Market Forecast

COMPANY PROFILE

o Company background

o Subsidiary Companies

o Aircraft of Air India

o Organizational structure

o Corporate Vision

o Business Strategy

o Product Upgradation

o Operational Improvement

o Network & Capacity Expansion

o Strategic Relationship

Merger of Air India and Indian Airlines

Major Expenditure

ATF – The major cost

o Type of Fuel

o Monopoly of PSU’s

o ATF price movement in India

o Price Structure in India

o Expenditure of NACIL on ATF




Staff Cost

Ratio Analysis

SWOT Analysis of AIR INDIA

SWOT Analysis of AVIATION INDUSTRY

Discussion and Conclusion

BIBLOGRPHY




INDIAN AIRLINES INDUSTRY- AN OVERVIEW

Defining Aviation sector

The airlines industry comprises passenger air transportation; both scheduled

and chartered, but exclude air freight transport. Industry volumes are defined

as the total number of passengers enplaned at all airports within the country

or region. Industry value is defined as the total revenue obtained by airlines

from transporting these passengers.

The Indian airlines industry generated total revenues of $6 billion in 2006,

this representing a compound annual growth rate (CAGR) of 27.6% for the

period spanning 2002-2006.

The domestic segment was the industries most successful in 2006,

generating total passenger volumes of 36.4 million, equivalent to 90.9% of

the industry's overall volume.

The performance of the industry is forecast to accelerate, with an anticipated

CAGR of 39.3% for the five-year period 2006-2011 expected to drive the

industry to a value of $31.5 billion by the end of 2011.

Airline passenger volumes increased with a CAGR of 25.6% between 2002 -

2006, to reach a total of 40.1 million people in 2006. The industry's volume

is expected to rise to 205.2 million people by the end of 2011, this

representing a CAGR of 38.6% for the 2006-2011 period.

The international segment contributed the remaining passenger volumes of

3.7 million in 2006, equating to 9.1% of the industry's aggregate volumes.




History of Aviation Industry in India

The first commercial flight in India was made on February 18, 1911, when a

French pilot Monseigneur Piguet flew airmails from Allahabad to Naini,

covering a distance of about 10 km in as many minutes.

Tata Services became Tata Airlines and then Air-India and spread its wings

as Air-India International. The domestic aviation scene, however, was

chaotic. When the American Tenth Air Force in India disposed of its planes

at throwaway prices, 11 domestic airlines sprang up, scrambling for traffic

that could sustain only two or three. In 1953, the government nationalized

the airlines, merged them, and created Indian Airlines. For the next 25 years

JRD Tata remained

the chairman of Air-India and a director on the board of Indian Airlines.

After JRD left, voracious unions mushroomed, spawned on the pork barrel

jobs created by politicians. In 1999, A-I had 700 employees per plane; today

it has 474 whereas other airlines have 350.

For many years in India air travel was perceived to be an elitist activity. This

view arose from the “Maharajah” syndrome where, due to the prohibitive

cost of air travel, the only people who could afford it were the rich and

powerful.

In recent years, however, this image of Civil Aviation has undergone a

change and aviation is now viewed in a different light - as an essential link




not only for international travel and trade but also for providing connectivity

to different parts of the country. Aviation is, by its very nature, a critical part

of the infrastructure of the country and has important ramifications for the

development of tourism and trade, the opening up of inaccessible areas of

the country and for providing stimulus to business activity and economic

growth.

Until less than a decade ago, all aspects of aviation were firmly controlled

by the Government. In the early fifties, all airlines operating in the country

were merged into either Indian Airlines or Air India and, by virtue of the Air

Corporations Act, 1953; this monopoly was perpetuated for the next forty

years. The Directorate General of Civil Aviation controlled every aspect of

flying

including granting flying licenses, pilots, certifying aircrafts for flight and

issuing all rules and procedures governing Indian airports and airspace.

Finally, the Airports Authority of India was entrusted with the responsibility

of managing all national and international air ports and administering every

aspect of air transport operation through the Air Traffic Control. With the

opening up of the Indian economy in the early

Nineties, aviation saw some important changes. Most importantly, the Air

Corporation Act was repealed to end the monopoly of the public sector and

private airlines were reintroduced.




Market Volume

The Indian airlines industry grew by 41.4% in 2006 to reach a volume

of 40.1 million passengers. The compound annual growth rate of the

industry volume in the period 2002-2006 was 25.6%.




Market value of the aviation sector

MARKET FORECASTS

1. Market value forecasts

In 2011, the Indian airlines industry is forecast to have a value of

$31.5 billion, an increase of 425.2% since 2006. The compound annual

growth rate of the industry in the period 2006-2011 is predicted to be 39.3%.




2. Market Volume Forecasts

In 2011, the Indian airlines industry is forecast to have a volume of 205.2

million passengers, an increase of 411.8% since 2006. The compound

annual growth rate of the industr y volume in the period 2006-2011 is

predicted to be 38.6%. Estimated domestic passenger segment growth is at

12% per annum. Anticipated growth for International passenger segment is

7% while the growth for International Cargo is likely to grow at a

healthy rate of




AIR INDIA

History of Air India

Air India is India’s national Airline. Air India’s history can be traced to

October 15, 1932. On this day J.R.D. Tata, the father of Civil Aviation in

India and founder of Air India, took off from Drigh Road Airport, Karachi,

in a tiny, light single-engine de Havilland Puss Moth on his flight to

Mumbai via Ahmedabad.

Air India was earlier known as Tata Airlines. At the time of its

commencement, Tata Airlines consisted of one Puss Moth, one Leopard

Moth, one palm-thatched shed, one whole time pilot, one part-time engineer,

and two apprentice-mechanics. Tata Airlines was converted into a Public

Company under the name of Air India in August 1946.

On March 8, 1948, Air India International Limited was formed to start Air

India’s international operations. On June 8, 1948, Air India started its

international services with a weekly flight from Mumbai to London via

Cairo and Geneva with a Lockheed Constellation aircraft.

In early 1950s due to deteriorating financial condition of various airlines, the

Government decided to nationalize air transport. On August 1, 1953 two

autonomous corporations were created. Indian Airlines was formed with the




merger of eight domestic airlines to operate domestic services, while Air

India International was established to operate the overseas services. The

word 'International' was dropped in 1962. With effect from March 1, 1994,

the airline has been functioning as Air India Limited.

Air India's worldwide network today covers 44 destinations by operating

services with its own aircraft and through code-shared flights. Important

destinations covered by Air India are Bangkok, Hong Kong, Jakarta, Kuala

Lumpur, Osaka, Singapore, Tokyo, Seoul, Dar-es-Salam, Nairobi, Frankfurt,

London, Paris, Birmingham, Abu Dhabi, Al Ain, Bahrain, Dammam, Doha,

Dubai, Jeddah, Muscat, Riyadh, Kuwait, Los Angeles, Chicago, Newark,

New York, and Toronto.

Air India’s fleet consists of 38 aircrafts. These include 12 Boeing 747-400, 1

Boeing 747-400 COMBI, 2 Boeing 747-300 COMBI, 19 Airbus 310-300,

and 4 Boeing 777-200




Incorporation

• Established in 1953 under Air Corporations Act

• Became Public Limited Company in 1994

• Registered Office : New Delhi

• Head Office : Mumbai

• Authorized Capital : Rs 500.00 Crores

• Paid-up Capital : Rs 153.84 Crores

Subsidiary Companies

Air India has the following Subsidiary Companies with an Authorized /

Paid-up Capital (in Rs. Crores) as under

Authorised Paid-up

(a) Hotel Corporation of India 41.00

40.00

(b) Air India Charters Ltd. 30.00

30.00

(c) Air India Air Transport Services Ltd. 100.00

0.05

(d) Air India Engineering Services Ltd. 10.00

0.05




Subsidiary Companies

HCI

Hotel Corporation of India Ltd

Centaur Hotels at Juhu, Mumbai Airport and Rajgir Sold

Centaur Hotel at Delhi, Chefair-New Delhi and Chefair-Mumbai

Under Disinvestment

AICL

Air India Charters Ltd

New Airline Air India Express set-up under AICL

All AI Express operations carried out on B-737-800 with a current

fleet strength of 12.

AIATSL

Air India Air Transport Services Ltd

Incorporated in June 2003

Set up to undertake ground handling & other allied activities

Being operationalized at all domestic airports




AIESL

Air India Engineering Services Ltd

Incorporated to undertake engineering and other allied activities

To be operationalized

Cabinet approval required




AIRCRAFT OF AIR INDIA

The total aircraft on order are 111 (68 from Boeing and 43 from Airbus).

Aircraft on order include eight B777-200LRs, 15 B777-300ERs, 27 B787

Dreamliners, 18 B737-800s, 19 A319s, 20 A321s and four A320s. Of the

111 aircraft ordered, 24 Boeing (five B777-200LRs, five B777-300ERs, 15

B737-800s) and 21 Airbus (12 A321s and nine A319s) have been in the fleet

so far.

Aircraft Total

Airbus A 310 8

Airbus A 319 15

Airbus A 320 43

Airbus A 321 12

Airbus A 330 2

Boeing 737-800 22

Boeing 747 6

Boeing 737 5

Boeing 777 14

Airbus A 310 Freighters 4

Boeing 737 Freighters 6

ATR* 7

CRJ 700 3

Total 147




ORGANIZATION STRUCTURE

9

Organization StructureOrganization StructureChairman & Managing Director

Chief Vigilance Officer

Director-

Engineering

Director-Finance

Director-Personnel

Director-Commercial*

ED - Engineering

ED - Engine Overhaul

ED- Operations

ED - Finance

ED –Materials Mgmt.

ED – IT

ED – Inflight Services

ED – HRD

ED - Medical Services

ED - Commercial

ED - Public Relations**

ED - Security

ED - Ground Services

ED -Northern Region

ED – Internal Audit

ED - Planning & Intl’ Relations

ED –Air Safety

ED - Corporate Affairs

ED - Properties & Facilities **

ED - Training *

ED –Co-ordination

Company Secretary* Yet to be appointed** Presently in charge in the grade of GM.




Corporate Vision

Vision

To be among top five Asian airlines in terms of Yield,

Profitability, Productivity, Size and Quality

Mission

Focus on customer satisfaction

Grow with emphasis on sustained profitability

Provide exciting and satisfying work environment to retain and

develop employees committed to Corporate Vision

Focus on social responsibility – environment & community

Objectives

Achieve unit revenue, unit cost, profitability, productivity and

service level targets, based on benchmarked parameters




Business Strategy

A Multi-pronged approach

Capacity & Network Expansion – to increase market share & garner

competitive strength

Achieve dominance in core markets (USA/UK/Gulf/SEA)

Increase market access through strategic alliances

Product Upgradation:

Deploy modern aircraft with state-of-art passenger amenities

Operate customer friendly schedules with increased network

connectivity

Operations Improvement – to reduce unit costs through

Increased asset (aircraft & manpower) productivity

Out-sourcing/hiving-off of non-core activities to subsidiaries

Technology upgradation

Benchmarking & adoption of “Best Practices”




Product Upgradation

Customer Friendly Schedules Planned

High frequency services with standardized arrival/departures

Network Connectivity

Single aircraft services from source markets

Expanded hub and spoke with own aircraft and from IC, Jet,

Sahara

Customer Service

Plans to match global standards of customer service through

benchmarking, training & adoption of new technologies

Improvements with New Aircraft

Product Improvements

New/Fresh Interior

State of the art Seats/IFE

Better on time performance

Business Class pitch of 76”

Other Benefits

Better Aircraft utilization

Lower Fuel Consumption

Lower Maintenance Expenditure




Operations Improvement

Increased manpower productivity

Comprehensive HR Policy with focus on

Motivation, Training & Development, Multi-skilling, Scientific

job description & objective performance appraisal

Special dispensations obtained from DGCA

Operating Crew – Increased Flight Time Limits

Settlement to be reached with pilots

Cabin Crew - Executive crew to fly as per DGCA time-off

regulations

Computerization of Operating/Cabin crew scheduling

Out-sourcing/Hiving-off Non-Core activities

Activities already out-sourced

– Printing Press

– Crew/Employee Transport

Potential for out-sourcing

– Medical Services

– Payroll/Revenue Accounting

– Canteen

– Civil Works

Hiving off to subsidiaries

– Maintenance




– Ground Handling

– Information Technology

– Security

– Cargo

Technology Upgradation – IT Projects

Revenue Management – PROS implemented

Ticketing Time-Limit software implemented

Direct connect with GDS’s

Integrated computerization system for MMD

Disposal of surplus/redundant inventory

Implementation of Unit Load Device management system

Disaster recovery site at remote location

Air India Express IT Infrastructure

Data Mart for CRS sales data

Ramp Assistance Billing System for GSD/Finance

Online Financial Information System (FINESS)




Network & Capacity Expansion

Identified need for

Non-Stop Operations to New York – to commence effective

April/May 2007

Services to 12 New Destinations

San Francisco, Washington, Houston, Manchester, Beijing,

Taipei, Sydney, Lagos, Mauritius and South Africa

Increased frequencies on existing routes

New airline subsidiary for distinctive brand positioning

– Air India to offer “premium product” in long/medium-

haul markets

– Air India Express to offer “value for money product” in

price-sensitive Gulf/Middle-East/South-East Asia

markets

Availability of aircraft, pilots and slots could be a constraint

Plan may have to be modified based on developments




Strategic Relationships

• Strategic Alliance with Lufthansa (LH)

MOU signed in August 2003

Joint capacity plan till 2007

– Additional frequencies

– AI : 22 (18 via Frankfurt to USA) - LH: 15

• LH to provide AI commercially viable slots at Frankfurt

• 19 slot pairs provided till winter 2004 (in exchange for 4 additional

frequencies)

• Reciprocal World-wide Free Flow Code Share & FFP Cooperation

under implementation

• Special Prorate Agreement implemented in November 2003

• Cooperation in IT/MRO/Cargo being pursued

• Air India developing relationship with other Star Alliance partners –

United Airlines & Air Canada

Joint Marketing

Special Prorate Agreement

Reciprocal code share

FFP cooperation

• Will pursue FFP cooperation with other domestic airlines in India to

generate incremental revenue streams

• Will continue existing code shares with existing 14 airline partners &

pursue such relationships with other airlines

• May also consider becoming a full-fledged member of a global

alliance in the future




Awards and Recognitions

• Air India was conferred the ‘Best West Bound Airline from India’

award at the Galileo Express Travel and Tourism awards 2005

function held in Mumbai on 7 December 2005.

• The ‘Most preferred Brand’ Award in the international airlines

category by CNBC AWAAZ, a leading Hindi business television

channel, was presented to Air India at the AWAAZ consumer

awards 2006 function held in New Delhi on 18 July 2006.

• ‘Reader’s Digest Trusted Brand Gold’ Award was presented to Air

India at a function held in Mumbai on 18 May 2006.




Amalgamation of Air India Limited and Indian Airlines

Limited with National Aviation Company of India Limited

The Government of India, on 1 March 2007, approved the merger of Air

India and Indian Airlines. Consequent to the above, a new Company viz

National Aviation Company of India Limited (NACIL) was incorporated

under the Companies Act, 1956 on 30 March 2007 with its Registered Office

at Airlines House, 113 Gurudwara Rakabganj Road, New Delhi. The

Certificate to Commence Business was obtained on 14 May 2007.

Presently, the Board of NACIL consists of:

Shri Raghu Menon, Addl Secretary & Financial Advisor, Ministry of

Civil Aviation

Shri R K Singh, Jt Secretary, Ministry of Civil Aviation

Shri Rajiv Bansal, Director, Ministry of Civil Aviation

The Scheme of Amalgamation of Air India Limited and Indian Airlines

Limited with National Aviation Company of India Limited was approved by

the Board of Directors of all the three Companies.

Thereafter, the Meetings of Secured and Unsecured Creditors of Air India

and Indian Airlines were held in New Delhi on 28 June 2007, in which the

Scheme of Amalgamation was approved by the Creditors. The final hearing

of the merger petition was held on 31 July 2007 wherein the last date for

submissions of objections was fixed on 8 August 2007 and the Order of the




Ministry of Corporate Affairs is awaited.

The Authorized and Paid-Up Share Capital of the merged entity will be

Rs.1500,05,00,000/- and Rs.145,00,00,000/-, respectively.

It has been decided that post merger, the new entity will be known as “Air

India” while “Maharaja” will be retained as its mascot. The logo of the new

airline will be a red coloured flying swan with the “Konark Chakra” in

orange placed inside it. The flying swan has been morphed from Air India’s

characteristic logo “The Centaur” whereas the “Konark Chakra” was

reminiscent of Indian’s logo. The Corporate Office of NACIL will be at

Mumbai.

The Government has approved the appointment of Shri V Thulasidas and Dr

V Trivedi as Chairman & Managing Director and Joint Managing Director,

respectively, of the merged entity, with effect from the date of merger.




MAJOR EXPENDITURE

1) ATF (AVIATION TURBINE FUEL):- Almost 40% of the

total revenue.

2) SALARY:- Almost 20% of the total revenue.

ATF (AVIATION TURBINE FUEL)

Aviation fuel is a specialized type of petroleum-based fuel used to power

aircraft. It is generally of a higher quality than fuels used in less critical

applications such as heating or road transport, and often contains additives to

reduce the risk of icing or explosion due to high temperatures, amongst other

properties.

Most aviation fuels available for aircraft are kinds of petroleum spirit used in

engines with spark plugs i.e. piston engines and Wankel rotaries or fuel for

jet turbine engines which is also used in diesel aircraft engines. Alcohol,

alcohol mixtures and other alternative fuels may be used experimentally but

are not generally available.




TYPE OF AVIATION TURBINE FUEL

1) Duty Paid Fuel: - It is a type of fuel which is used for the operation with

in India like a flight from Delhi to Mumbai. This type of fuel is expensive

then the foreign fuel because it includes the sales taxes according to state

wise and also the exice duty which will affect to increase the price of ATF.

2) Bonded Fuel: - It is a type of fuel which is used for the operations outside

the India in this case fueling is done in India only and flight is moving

outside the India like a flight from Delhi to Bangkok. The bonded price

applicable for international flights ex-India is higher than the ATF price in

the international markets.

3) Foreign Fuel: - It is a type of fuel which is used for the operation outside

India in this case the fueling is done in the foreign station only and flight is

coming from abroad to India like a flight is coming from New York to

Delhi. This is the cheapest type of fuel among all of the fuels.




Last few years have once again clearly highlighted the highly cyclical nature

of the Aviation industry worldwide. ATF consumption has roughly doubled

from 2002 to 2007

Until April 2001 ATF prices in India were determined by Government

through an Administered Price Mechanism (APM).

This was based on a system of cross-subsidy – for socio-

economic reasons prices of some petroleum products such as

kerosene and diesel were “subsidized” by setting higher prices for

ATF.

In April 2001, the APM was dismantled and the Oil Companies

given freedom to price ATF based on input costs and world

market prices.

Thereafter ATF prices in India have fluctuated widely depending on

movements in world prices.

Despite withdrawal of APM and linkage of ATF pricing with

international market prices, price of ATF in India continues to be

much higher than the prices prevailing worldwide.

Despite being competitors with possibly differing input and refining

costs, the three Government owned oil companies effectively work as

a cartel; prices charged by the three oil companies are identical




Monopoly of PSU Oil companies:

A major reason for high price even after deregulation of ATF price, is the

monopoly of the 3 state owned Oil companies. Because of limited number of

suppliers there has hardly been any effective choice for the airline industry,

with the 3 state owned oil companies fixing the ATF price on a mutually

agreed common formula between them.

The government has granted marketing rights to some companies in the oil

sector like Reliance, Essar , ONGC etc. None of these companies however,

could start supply of ATF as they were not allotted space by the Airport

Authority. Recently Reliance has been allotted land at 25 airports in India;

and is moving towards setting up Aviation Fuelling stations at some of these

airports.

It is hoped that the resultant competition will bring about a reduction in the

unreasonable ATF price levels prevalent in India.

ATF supplied by Indian oil companies is basically from imported

Crude refined by them. There is no direct import of ATF.

Import Duty on Crude is 10% whilst on ATF is 20%.

Oil Companies, however, follow an import parity principle and levy a

20% add-on to the Refinery Transfer Price.

Apart from the import parity principle, the Oil Companies also

include a 16%-49% add-on towards marketing margin and




contingencies on the Refinery Transfer Price after the addition of the

import parity add-on.

The add-on varies between the various cities.

On this, the Central Government levies an Excise Duty of 8%.

On the resultant price, the various State Government levy local Sales

Taxes ranging from 4% to 39%: which on an average works out to

25% countrywide.

The Government levies thus works out to an add-on of 35%.

A T F

Refined ATF

Refinery Transfer Price(RTP)

ATF Price

ATF Price to airlines

Add-on of 20% - Import parity

Marketing margin add on 21%

Government levies of 35% - 8% Central

Sales Tax plus 25% State Sales Tax

Nearly double the world-price




Thus, Domestic carriers in India pay nearly double the prices vis-à-

vis elsewhere in the world.

ATF Expenses: Constitute around 40% of the total operating costs for

domestic Indian carriers.

ATF upliftment at metros during 2007-08

0

2000

4000

6000

8000

10000

12000

14000

April2007-2008

June Aug Oct Dec Feb

Months

Qu

an

tity

(K

L) Delhi

Mumbai

Kolkata

Chennai

Bangalore

Hyderabad




The three Governments owned oil companies viz. Indian Oil

Corporation, Hindustan Petroleum and Bharat Petroleum jointly fix

prices. Also,

Airlines cannot source supply of ATF from any other supplier.

Airlines are offered common terms by the three suppliers, with

no competition amongst themselves.

Government still has a role in determining the applicable prices

even though APM has been abolished.

The infrastructure – Hydrants & Storage facilities– are owned by Oil

Companies, who are unwilling to share these facilities with private

suppliers e.g. Reliance who as a result export the ATF they produce.

Direct import of ATF by Indian carriers is not permitted.

Common carrier principle not applicable for infrastructure facilities.

Indian carriers are also not permitted to hedge ATF prices – Air India

is permitted to hedge to a limited extent on Fuel uplifted outside India.

Worldwide, airlines have derived significant financial benefits by

hedging ATF.

ATF is the most important constituent of the operating cost of airlines

in India.

For successful operations of domestic airlines in India, it is imperative

that ATF costs / prices be brought down to international levels.




Policy makers and aviation specialists have recognized the distortions

created in economics of Indian civil aviation industry because of

current high prices of ATF and present pricing policy

A Committee appointed by the Government to review the Indian civil

aviation scenario and make recommendations about future civil

aviation policy has made several recommendations about ATF in its

report.

ATF price movement in India after deregulation (Rs./KL)

Year Duty paid Bonded

Average 2001-02 18800 14350

Average 2002-03 19900 16700

Average 2003-04 21000 17800

Average 2004-05 27500 22500

Average 2005-06 35200 26100

Average 2006-07 40500 30500

Average 2007-08 42900 31000

Average 2008-09 49250 38800

01.08.08 (All time high) 74600 53780

01.05.2009 (Current price) 34400 24500




0

10000

20000

30000

40000

50000

60000

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

Duty Paid

Bonded




Movement of ATF in last 2 years

Year 2008-2009 2007-2008

MONTH

Duty

Paid Bonded Foreign

Duty

Paid Bonded Foreign

APRIL 56000 43400 36000 37800 29050 23500

MAY 61150 47350 39200 39150 31750 25100

JUNE(Upto 4th) 72400 52500 41700 38400 31350 25400

JUNE(From 5th) 69300 50300 41700 38400 31350 25400

JULY 72600 52700 46800 39650 31700 25875

AUGUST 74600 54200 47450 41000 33100 26700

SEPTEMBER 63000 47050 39200 40050 31900 25950

OCTOBER 59750 44100 36550 41750 33600 27600

NOVEMBER (1-3) 50100 38050 29500 43450 35050 29350

NOVEMBER (4-

15) 47950 36250 29500 43450 35050 31100

NOVEMBER (16-

30) 42200 36250 29500 43450 35050 32850

DECEMBER (1-15) 39650 30750 24800 49750 39350 31500

DECEMBER (16-

31) 35300 30750 24800 49750 39350 33250

JANUARY 47700 37850 32000

FEBRUARY 46900 37250 31350

MARCH 49400 38750 32750




AT F R AT E S D U R IN G 2 0 0 7-0 8 & 2 0 08 -0 9

0

1 0 0 0 0

2 0 0 0 0

3 0 0 0 0

4 0 0 0 0

5 0 0 0 0

6 0 0 0 0

7 0 0 0 0

8 0 0 0 0

M O N T H S

Rs

/ K

l

2 0 0 8 -2 0 0 9 D u ty P a id 2 0 0 8 -2 0 0 9 B o n d e d

2 0 0 8 -2 0 0 9 F o r e ig n 2 0 0 7 -2 0 0 8 D u ty P a id

2 0 0 7 -2 0 0 8 Bo n d e d 2 0 0 7 -2 0 0 8 F o r e ig n

This chart shows the comparative price fluctuation of ATF in last 2

years2007-08 and 2008-09. The highest Domestic ATF price during these 2

years is Rs 74600 per KL in august 2008 which is almost 82% high then the

last year price of Rs 41000. and the highest Bonded ATF prices during last 2

years is Rs 54200 per KL in august 2008 which is almost 64% high then the

last year price of Rs 33100 per KL and the highest international ATF prices

during last 2 years is Rs 47450 per KL in august 2008 which is almost 78%




high then the last year price of Rs 26700 per KL. But as the year move

further the ATF price of year 2008 start decreasing and in the month of the

December 2008 the ATF price is much lowers then the last year ATF prices.

In December 2008 the domestic ATF prices is 35300 which is almost 41%

lower then the last year price of Rs 49750 per KL and the bonded ATF price

is 30750 which is almost 28% lower then the last year price of Rs 39350 per

KL and the international fuel price is Rs 24800 per KL in December 2008

which is almost 34% lower then the last year fuel price i.e. Rs 33250 per

KL. Indian carriers bought ATF at Rs 37,800 / kl in April 07, while

international carriers paid only Rs 21,800 / kl in Singapore, which is about

73% higher

ATF price structure in India

ATF for domestic flights is subject to Excise Duty @ 8%

- Annual impact - Rs.93 cr. p.a.

- Estimated impact for the aviation industry incl. private

airlines

- Rs.269 cr. p.a.

High Sales Tax on ATF in India

- Average Rate - 25%

- Highest

- Gujarat - 30%

- Tamil Nadu / Bihar - 29%

- Kerala - 29.0375%




- Madhya Pradesh - 28.75%

- Lowest

- Port Blair - Nil

- Sales tax Impact for NACIL - Rs. 286 cr. p.a.

- Estimated impact for the aviation industry incl. private

airlines

- Rs. 2754 cr. p.a,

ATF a major cost

ATF is a major cost component of NACIL.

High ATF price in India

The ATF prices in India are substantially higher than its price in

international markets.

Even the bonded price applicable for international flights ex-India is

higher than the ATF price in the international markets. Priced 65%

higher in India on an average, compared to international benchmarks




Average ATF prices in India (As on 1st May’ 2009)

(Rs./Kl)

Domestic flights 34400

International flights (Ex-India) 24500

ATF prices in international market 20500

As would be seen from above, the ATF price in India is Rs. 34400 per

Kilolitre i.e. about 68% higher compared to international price of

Rs.20500 per kilolitre. Even the bonded ATF price in India is Rs.

24500 per Kilolitre i.e. about 20% higher compared to international

ATF price.

Despite, deregulation of ATF price since, 1st April, 2002, there has

been no major reduction in ATF price as PSU oil companies continue

to enjoy virtual monopoly for ATF supply in India. There is almost

cartelization amongst PSU oil companies whereby they fix common

ATF price as per some non-transparent formula applied by them.




The fuel cost of NACIL including Alliance Air has gone up

manifold over the years as indicated below:

Year (Rs.Crores)

1999-00 1568

2002-03 2271

2003-04 2588

2004-05 3944

2005-06 5446

2006-07 6331

2007-08 7309

2008-09 (Budget estimates assuming 2007-08 av. price) 7700

2009-10 (Budget estimates assuming Feb’09/Mar’09 price) 5291

2009-10 (Revised estimates based on current price) 5300

Total expenditure on ATF

0100020003000400050006000700080009000

1999-00

2002--03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

Total expenditure on ATF




From above, it would be seen that ATF cost for the

combined network of NACIL has already gone up for the

current year i.e. 2009-10 by Rs. 572 cr. over and above the

budgeted cost.

Need for ATF price rationalization (Suggestions)

Abolition of Excise Duty.

Need for reduction in sales tax on ATF.

- ATF may be categorized as ‘Declared Goods’ in Central Sales

Tax Act to limit maximum rate of sales tax to 2%

- Initially, ATF sold to turbo-prop aircraft was categorized as

‘Declared Goods’ under Central Sales Tax Act since 2001 and

the same was extended to cover all small aircrafts with

maximum take off mass of less than 40000 Kgs in 2007.

- Some State Governments have reservations about loss of

revenue if they reduce sales tax rate on ATF. However, it may

be mentioned that their sales tax collection on ATF may just be

a fractional percentage of their total sales tax collection and

therefore, financial impact of sales tax reduction on ATF would

be negligible.

- On the other hand, reduction in ATF price would contribute

significantly to their economic, regional & tourism growth




- ATF for domestic flights be made available at the same rate

(i.e. bonded price) as applicable for international flights.

- There is a need to fix ATF price by PSU Oil companies in a

transparent competitive manner

Reduction in ATF price is necessary to provide level playing field to

domestic airlines vis-à-vis foreign airlines getting unfair advantage as they

obtain fuel at lower price in their country. A reduction in ATF cost would be

a major factor for domestic airlines in significantly improving their

competitiveness by lowering cost of operations and provide the necessary

financial stability. A booming domestic aviation industry should be seen as a

necessary infrastructural requirement to ultimately boost the economy,

tourism and all round regional development in the country. An FIA estimate

indicates that a reduction in ATF price by 60% (to bring it closer to

international benchmarks) has an impact of lowering airline operational

losses by 25%.




Fuel Prices and Lack of Efficiencies Causing Airlines’ Losses

According to Research, airline companies in India would continue to incur

losses even if crude oil prices decline significantly if they do not quickly

undertake a revenue augmentation exercise in conjunction with cost

reduction measures and efficiency improvement initiatives.

The sharp increase in crude oil prices in the first half of 2008 has led to a

corresponding rise in the price of aviation turbine fuel (ATF) for all airline

companies, due to which they are expected to post heavy losses. Fuel cost as

a percentage of total operating costs has increased by 300-600 basis points.

Research has analyzed the movement in breakeven ticket prices of domestic

carriers at various prices of crude oil and at varying load factors and

concluded that a structural increase in ticket prices is required in the near

term.




STAFF COST:

A staff cost constitutes nearly 20% of Air India's total cost. Currently, the

carrier runs an annual wage bill of over Rs.3,000 crore. AI is also looking at

improving productivity of employees, elimination of restrictive work

practices and reducing wasteful expenditure. The national carrier has around

31,000 employees. The airline was now targeting a reduction in employee

cost to the tune of Rs 500 crore per annum.

The following efforts were made to reduce the staff cost:

- Freezing of external recruitment in non-operational categories;

- Freezing of vacancies and abolition 781 vacant posts;

- Reduction in staff strength in India through a rolling back of the retirement

age from 60 to 58 years;

- Implementation of Schemes such as Shorter Working Week(SWW) and

Leave Without Pay(LWP);

- Redeployment of staff from non-operational to operational areas;

- Reduction in temporary postings and duty tours abroad;

- Retrenchment of staff at foreign stations through Voluntary Retirement

Schemes.




RATIO ANALYSIS

(As balance sheet available of year 2005-06)

Short Term Solvency Ratio

Current Ratio= 1.28

The current ratio of AIR INDIA meets the bare minimum of 1.33, which is

considered by banks as the minimum acceptable level for providing working

capital finance. The ratio indicates that the company not enjoys a better

financial health and would not be able to meet its immediate debts. A ratio

under 1 suggests that the company would be unable to pay its debts if they

come due at that point. While this shows the company is not in good

financial health, it does not necessarily mean it would go bankrupt- as there

are many ways to access financing. AIR INDIA dealings consists a major of

Letter of Credits and bill of Exchanges. Apart from this the policy of AIR

INDIA to issue the ticket only on cash basis has helped AIR INDIA in

maintaining this ratio.

Liquid Ratio= 1.09

The liquid ratio of the company is more than the preferred limit of 1. This is

mainly because of the cash transactions which AIR INDIA does. The quick

ratio is more conservative than the current ratio, a more well-known

liquidity measure, because it excludes inventory from current assets.

.




Working Capital Ratio=0.08

The working capital ratio is an indicator of the efficiency of a company's

management of stocks, debtors and creditors. If the working capital ratio is

0.2, this means the company needs 8p of working capital for every Rs1 of

annual sales. If annual sales increase by Rs1,00,000 of then the company

will have to invest Rs8,000 in working capital to be able to meet this. A

working capital ratio of less than 1 indicates negative working capital.

Fixed Assets Turnover Ratio=2.61297956

Fixed asset turnover is the ratio of sales (on the Profit and loss account) to

the value of fixed assets (on the balance sheet). It indicates how well the

business is using its fixed assets to generate sales. Generally speaking, the

higher the ratio, the better, because a high ratio indicates the business has

less money tied up in fixed assets for each rupees of sales revenue. A

declining ratio may indicate that the business is over-invested in fixed assets.

However, financial analysts claim that such a ratio is inconclusive:

companies do not generally cite or reference these figures. The fixed assed

turnover ratio of AIR INDIA has been on the lower side. That means it

shows that the company has been not effective in using the investment in

fixed assets to generate revenue. There is no exact number that determines

whether a company is doing a good job of generating revenue from its

investment in fixed assets. This makes it important to compare the most

recent ratio to both the historical levels of the company along with peer




company and/or industry averages. But due to lack of availability of data this

could not be done.

Operating Ratio=104.52%

It is a ratio that shows the efficiency of a company's management by

comparing operating expense to net sales. The smaller the ratio, the greater

the organization's ability to generate profit if revenues decreases. An

operating ratio ranging between 75% and 80% is generally considered as

standard. This ratio is considered to be a yardstick of operating efficiency

but it should be used cautiously because it may be affected by a number of

uncontrollable factors beyond the control of the firm. Moreover, in some

firms, non-operating expenses from a substantial part of the total expenses

and in such cases operating ratio may give misleading results. Operating

ratio actually means how much is being spend to earn a rupee. Hence, the

lower the ratio, the better it is.

An operating ratio of 104.52% means Rs 104.52 is being spent to earn a

rupee. So it is not a good figure for AIR INDIA. Precautions are to be taken

to reduce the operating ratio. One way to combat the effects of a business

recession is to work harder by selling ticket and reduce the other overhead

expenses. That's fine, and it's certainly important to maximize every business

opportunity during a slump. It's much easier to reduce these expenses 10

percent through more effective management




Operating profit & expenditure analysis

(in

crores)

Years Operating revenue

Operating expenses

Operating profit

2006 8439 9870 -1431 2005 8833 9233 -400 2004 7588 7538 50 2003 6146 6113 33 2002 5275 5465 -190 2001 4751 4805 -54 2000 4927 4924 3 1999 4448 4372 76 1998 4135 4139 -4 1997 3837 4029 -192 1996 3533 3945 -412




-2000

0

2000

4000

6000

8000

10000

12000

2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996

Opeating revenue

Operating expenses

Operating profit

Gross Profit Ratio=1.06

The Gross Profit Ratio of AIR INDIA has been just 1.06, mainly because of

the fewer profit margins. The only way it can improve its GP Ratio is by

increasing its trading margin, or by decreasing its cost of expenditure. Incase

of AIR INDIA increasing of trading margin is not possible because of the

severe competition they face. Hence they should try to reduce there cost of

Expenses.

Debt Equity Ratio = 23.67

A high debt/equity ratio generally means that a company has been

aggressive in financing its growth with debt. This can result in volatile

earnings as a result of the additional interest expense. If a lot of debt is used




to finance increased operations (high debt to equity), the company could

potentially generate more earnings than it would have without this outside

financing. If this were to increase earnings by a greater amount than the debt

cost (interest), then the shareholders benefit as more earnings are being

spread among the same amount of shareholders. However, the cost of this

debt financing may outweigh the return that the company generates on the

debt through investment and business activities and become too much for the

company to handle. This can lead to bankruptcy, which would leave

shareholders with nothing.

Revenue passenger carried

A statistical unit in the airline industry; one fare-paying passenger carried

one mile. A revenue passenger kilometre (RPK) is a measure of the volume

of passengers carried by an airline. A revenue passenger-kilometre is flown

when a revenue passenger is carried one kilometre. A passenger for whose

transportation an air carrier receives commercial remuneration is called a

revenue passenger. This excludes passengers travelling under fares available

only to airline employees and babies and children who do not have a seat of

their own. The RPK of an airline is the sum of the products obtained by

multiplying the number of revenue passengers carried on each flight stage by

the stage distance - it is the total number of kilometres travelled by all

passengers.





0500000

100000015000002000000250000030000003500000400000045000005000000

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07


Passenger load factor

The passenger load factor (PLF) of an airline, sometimes simply called the

load factor, is a measure of how much of an airline's passenger carrying

capacity is used. It is passenger-kilometres flown as a percentage of seat-

kilometres available. This is a measure of capacity utilisation. As airlines

frequently have heavy fixed costs and are capital intensive, the efficiency

with which assets are used is crucially important.

This is an important efficiency measure, but it does not consider the pricing

and the profitability at which the capacity is sold. It also implicitly assumes

that the airline's fleet is fully utilised in terms of the number of kilometres

flown.





58

60

62

64

66

68

70

72

74

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07





SWOT ANALYSIS OF AIR INDIA

Air India is the leading airlines in the India. Air India is based on

domestic enplaned passengers and scheduled domestic departures. Air

India has shown a strong performance in revenues in 2008. Strong

operating performance lends financial stability to the company which

could be leveraged to seek more growth avenues of growth in future.

However, the rising prices of aviation turbine fuel could adversely affect

Air India operating margins.

Strengths

Operational performance

Air India registered a strong operational performance for fiscal 2008-09.

The company recorded revenues of Rs 15000 Crore during the fiscal

year, an increase of 70% over 2005-06. During fiscal year 2008, the

company’s revenue growth was driven by increase in passenger segment

revenue and merger with Indian airlines. The increase in passenger

revenues primarily was due to an increase in capacity, and an increase in

load factor. In addition the revenue growth is backed by growth in freight

and cargo revenues, which was a result of higher rates charged. This

growth was also partly driven by improved efficiency in the company’s

operations. Strong operating performance lends financial stability to the

company which could be leveraged to seek more growth avenues in the

future.




Market leadership

Air India is the leading airlines in the India. The airline has been ranked

the top in India’s domestic airline (in terms of number of passengers) by

the bureau of transportation statistics (BTS) in 2005. Air India newly

orders about 68 from Boeing and 43 from Airbus. Air India dominates

the markets it serves, ranking first in market share in India. Its strong

market position is driven not just by consistent delivery of low fares but

also due to reliable service, frequent and convenient flights, comfortable

cabins, in-flight experience, frequent flyer programs, hassle-free airports,

and friendly customer service. Strong market position gives the company

the advantage of scale and helps it in strengthening its brand image.

Weaknesses

High dependence on passenger revenues

Passenger revenues accounted for major part of the Air India total

revenue. Cargo services allow airlines to generate additional revenues

from existing passenger flights. In addition, cargo revenues are usually

counter-cyclical to passenger revenues and have lower demand elasticity

than passenger business, which allows airlines to pass on fuel price hikes

to customers. Small cargo business exposes Air India to the demand

fluctuations in passenger business.




Lower load factor

Though the overall operating performance has been steady, Air India

passenger load factor of 63.2%, which was the company’s record, lags

the industry average of 75% in 2006-07.The load factor difference is

even greater when compared to other low fares carriers such as Air

Deccan. The company’s load factor is decreasing year by year, in 2005-

06 load factor is 66.2% which is more than present load factor. Air India

load factor is likely to be low because of the much higher frequency

operated on each route. Lower load factor could decrease the company’s

margins.

Opportunities

Growing demand for low cost airlines

In mature markets demand for air travel is increasingly being driven by

ticket price and consumer confidence. A survey by the US Commerce

Department shows that ticket price is the number one criterion for

passengers when selecting a flight, well ahead of the availability of a

non-stop service. As markets have progressively matured, the GDP

elasticity of air travel demand has declined. In the US for example, a 1%

growth in GDP will typically result in a 1.2% growth in domestic air

travel, compared with a growth of almost 2% in air travel some 20 years

ago.




Growth in freight business

The Indian economy is one of the fastest growing in the world, but the

boom is not without its stops, starts, and bottlenecks, all of which also

make themselves felt in the country’s freight transport sector. Air India

had also launched a major cargo incentive scheme for cargo agents of Air

India and erstwhile Indian on the entire network. The scheme, which

generated enormous response, entitled top producing agents of each

region to become eligible for an all-inclusive incentive trip on Star

Cruise.

In January 2008, Air India registered a growth of 6.4% whereas industry

showed negative growth of 12% compared to September 2007. In the

month of March 2008, industry grew by 24.8% over January 2008

carriage whereas Air India cargo showed an increase of 43.4%. Strong

economic and foreign trade growth is underpinning the freight upturn.

Expanding passenger traffic in Asia Pacific

The demand for air travel to the Asia Pacific is rising driven by increased

economic activity in emerging Asian countries such as China and India.

Traffic is projected to grow at 7% in China and India combined, above

the world average of 5%. Further, the share of Asia Pacific region in

world passenger traffic (revenue passenger kilometers) is forecast to rise

from 25% in 2003 to 31% in 2023. Against this backdrop, Air India is




well positioned to benefit with its increasing emphasis on Asia-Pacific

operations.

Threats

Increasing aviation turbine fuel prices

The price of aviation turbine fuel (ATF) has soared to record highs in the

past few years and continues to hold at that level. Last few years have

once again clearly highlighted the highly cyclical nature of the Aviation

industry worldwide. ATF consumption has roughly doubled from 2002 to

2007

The ATF prices in India are substantially higher than its price in

international markets. Aircraft fuel is a major contributor to Air India

operating expenses.

Moreover, the bonded price applicable for international flights ex-India is

higher than the ATF price in the international markets. Priced 65% higher

in India on an average, compared to international benchmarks. Therefore,

this will need stronger revenue growth and greater cost controls in other

areas to overcome the increase in fuel prices.




High interest rates

The past few years have seen Central Banks impose higher interest rates

to check inflation and the over heating of regional economies. The

Reserve Bank of India has led the way raising interest rates. Inflation

fears in the India may see another raise in the short-term.

According to Economics times, the India real GDP growth is 9.20% in

2007 to 9.00% in 2008 and this downward trend is also seen in 2009.

This in turn could depress consumer spending and offset some of the

positive trends in the India for the company.

Year GDP, constant price Percentage

Change

2003 6.88% 50.54%

2004 7.89% 14.99%

2005 9.13% 15.79%

2006 9.75% 6.75%

2007 9.21% -5.47%

2008 7.90% -14.25%




GDP real Growth Rate

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

2003 2004 2005 2006 2007 2008

GDP real Growth Rate

Intensifying competition

AIR INDIA is now competing against more credible low cost carriers

such as Spice jet, Go air, Indigo Airline, and Jetlite etc. Indigo Airlines

remains Air India strongest competitor because of its competitive cost

structure, strong brand name and ambitious growth plans over the next

seven years. Air India also faces increased competition from Air Deccan

low-fares subsidiary, Song. Moreover, major legacy airlines have been

focusing on restructuring costs, which has improved their

competitiveness. With costs restructured, the legacy airlines are

becoming more formidable competitors in terms of increasing capacity,

matching prices and leveraging their frequent flier programs. Increasing

competition could adversely affect the company’s margins.




SWOT Analysis of Aviation Industry

Strengths

Liberal Environment: India's airlines operate in a liberal environment in

both the domestic and international spheres. With three major airline

groups and four smaller carriers all operating domestic routes, there is no

shortage of competition, although this factor combined with excess

capacity has tended to depress yields. Nevertheless, carriers are free to

operate any domestic routes without seeking permission from the

government, and without restriction on pricing. One condition that

airlines find onerous however, is the requirement to operate a proportion

of ASKs to remote and underdeveloped regions of the country.

On the international front, the Indian government has pursued an

increasingly liberal approach to bilateral air services agreements with key

overseas markets, resulting in greater access for foreign carriers.

Emirates for example, the largest foreign carrier by capacity into India,

will operate 185 weekly frequencies to ten cities across the country by

the end of 2009. India's carriers have a combined international capacity

share of just over 36% but face strong competition from foreign carriers,

both full service and low cost.

Modern Fleet: In light of the fact that much of the growth in Indian

aviation has occurred in the last five years, the country's airlines operate a




relatively young and modern fleet, ensuring a high quality passenger

experience, improved safety and good operational reliability.

High Quality: India's airlines offer a good quality product in each of the

operating models in existence. Jet Airways and Kingfisher Airlines are

competitive in terms of their in-flight service against the leading carriers

in the world. Kingfisher for example is one just half a dozen global

carriers such as Singapore Airlines and Cathay Pacific, with a Skytrax

5 star rating. In fact it could be argued that the full service product on

domestic routes is excessive for the sector lengths involved and results in

a higher cost structure, which the passenger does not necessarily see

value in paying for. The LCC’s too, by and large, offer a comfortable,

efficient and reliable service. Until a couple of years ago, Air Deccan

was one carrier that had developed a reputation for poor on-time

performance, flight cancellations and overbooking, however since being

acquired by Kingfisher, most of these operational issues appear to have

been resolved.

Economic Growth: Economic growth has historically been the primary

driver of air traffic, and the relationship has generally been even stronger

in developing countries. Between 2004 and 2007, India enjoyed four

years averaging 9% per annum GDP growth. This slowed to 6.5% in

2008, however against the background of a global economic recession,

this was a creditable performance. The increased business confidence

following the general election result in May 2009 has eased concerns that

growth may slow further. The stock market has soared 25% in the last




month and the outlook for growth and consumption has improved, which

is a positive for the aviation industry.

Political Stability: The re-election of the Congress Party, with a stronger

majority is expected to allow the new administration to push ahead with

further economic reforms, which had to date been blocked by coalition

partners. The prospect of a government which has the ability to last its

full term and pursue its agenda is extremely encouraging. In addition,

Minister Praful Patel, who was the architect of the dramatic

transformation of the aviation sector, has retained the portfolio, which

brings experience and stability to the aviation industry.

Weaknesses

Airport Infrastructure: The rapid growth in air traffic over the last few

years exposed the deficiencies of airport infrastructure across the country.

After decades of neglect, many of India's airports were forced to operate

well above design capacity. The resulting congestion in the terminals and

on the runways delivered a poor experience for the passenger and a

costly, inefficient operating environment for the airlines. However,

although a weakness today, it is also fair to say that it is becoming less

so, as the airport modernisation program starts to deliver results, with

new airports in Bangalore and Hyderabad, and improving facilities at

Delhi and Mumbai. The upgrade of non-metro airports remains behind

schedule so it may be another 3-4 years before we see good quality

facilities across the country, but there are tangible signs of improvement.




Airways Infrastructure: Although congestion on the ground is

relatively visible, another current area of weakness is the limited

investment that has taken place in improving infrastructure for air traffic

management. This too results in expensive aircraft holding patterns,

indirect flight paths and sub-optimal use of runways.

National Carrier: The state-owned carrier, Air India, is in a dire

situation. The carrier is estimated to have posted losses of close to USD1

billion in 2008/09, and morale within the bloated workforce is at a low.

With no clear direction, management instability at the top and continuing

issues with the integration of Air India and Indian Airlines, the carrier is

in need of radical restructuring. It is imperative that the government

develops a turnaround strategy for Air India as an urgent priority.

Deep Pockets: Over the last three years, India's carriers have

accumulated billions of dollars in losses and debt. Ironically, a

characteristic that would normally be considered a strength - namely deep

pockets - has resulted in carriers remaining afloat that would perhaps in

other circumstances have failed. With the backing of either the

government or large corporations, several carriers have been able to

access funding that they might have been denied on a strictly commercial

basis as standalone airlines. As a result of the intense competition which

has been perpetuated, airlines have struggled to raise fares to break even

levels.




High Cost Structure: India's airlines operate in a relatively high cost

environment, primarily due to the punitive taxation structure. The

greatest impact is felt in the area of sales taxation on fuel, which can

increase the cost to 60% above the international benchmark. The

limitations of airport infrastructure also increase costs due to the fact that

carriers are unable to schedule fast turnarounds, resulting in reduced

aircraft utilisation. In addition, the fact that high quality ancillary services

such as MRO and training are not currently available in India, means that

aircraft and personnel have to be sent overseas.

Skilled Resources: Domestic air traffic in India tripled in the five years

to 2008, while international passengers doubled. This rate of growth far

outstripped the capacity to develop skilled technical and management

personnel. The gap was partly addressed by employing expatriates,

particularly as pilots, and by learning on the fly. This means there is a

lack of in-depth experience and knowledge at all levels. Furthermore,

there is an absence of high quality training infrastructure in-country to

deliver the resources to support future growth. This lack of personnel

affects the government as well and the FAA has expressed its concern at

the shortage of qualified safety inspectors within the Directorate General

of Civil Aviation (DGCA). India has been put on notice that unless this

issue is addressed, it may be relegated to a Category II nation, which

would mean that Indian carriers would not be permitted to increase

services to the US.




Opportunities

Market Growth: Despite the rapid expansion of recent years, India has

only just scratched the surface of the potential for the aviation sector.

Trips per capita remain low even by the standards of other developing

countries. China's domestic market is more than four times the size of

India's 40 million passengers. Even, Australia, a country with a

population of just 21 million, compared with India's 1.1 billion, has a

market 25% larger. Similarly on the international front, less than 1% of

Indians travel overseas each year. Inbound visitor nunbers at 5.4 million

in 2008 for the entire country, were less than for Dubai or Singapore. It is

not difficult to see the expansion potential from such a low base as

economic growth continues apace.

Geographic Location: India is ideally positioned as a major aviation hub

at the crossroads between Europe, the Middle East and Asia Pacific. The

fact that aviation was a neglected sector for so long has allowed airports

such as Dubai and Singapore to effectively establish themselves as

offshore hubs for Indian passengers, and they now have a significant

head start. However, as India's airports improve, and its airlines receive

international awards for their service, there may be an opportunity to

leverage its huge home market to compete with these longer established

hubs.

Lower Costs, Higher Quality: India has already managed to develop a

dynamic aviation sector despite, and not because of, its environment. The




improvements in airport and airspace infrastructure, the development of

indigenous training and maintenance facilities and the potential for fiscal

reform, all point to the potential for Indian aviation to increasingly

operate in a lower cost, higher quality and more efficient manner. This

could in due course lead to an opportunity for India to develop as a global

outsourcing hub in areas such as aerospace manufacturing, MRO and

training.

Threats

Middle East Aviation: The carriers of the Gulf are aggressively

expanding in India, with high frequencies from multiple destinations to

their hubs, from where passengers can access extensive global networks.

The ability for a passenger for example to travel one-stop from

Ahmedabad to Hamburg, or multiple daily frequencies from Mumbai to

London, connecting at an attractive hub, is a strength which Indian

carriers simply cannot match at present. It will take time and the question

is how far ahead will the Middle East carriers be by that stage.

Terrorism: India has seen frequent terrorist activity in recent years. The

country has shown great resilience in bouncing back after each attack;

however inbound international traffic in particular is sensitive to such

events. Similarly the potential for India to develop as a global traffic and

services hub is contingent upon it being seen as a safe and attractive

destination.




DISCUSSION

Cash-strapped Air India-Indian Airlines has sought an immediate loan of

about Rs 10,000 crore from the government along with an annual equity

infusion of Rs 2,500-3,000 crore for the next four to five years, which

will be linked to the induction of new aircraft into its fleet. In all, the

tottering airline projected a requirement of almost Rs 20,000 crore,

roughly the size of Delhi state's annual budget, over the next five years.

Aviation minister Praful Patel told that the initial equity infusion would

be kept low and would be limited to Rs 2,000-2,500 crore. The

government may make only a partial contribution. The balance will be

raised from the market via the IPO route at a later date. AI is also learnt

to be looking at an immediate soft loan of about Rs 10,000 crore from the

government. The airline currently has an equity base of Rs 145 crore. The

merged airline, National Aviation Company of India Ltd (NACIL),

accumulated losses of Rs 7,200 crore till March 2009. The AI-IA

combine is to receive 111 new aircraft worth $11 billion (list price) to

replace decades-old planes in its fleet. Until now, 51 new planes worth $4

billion have joined the fleet. But the slowdown, which has hit all airlines,

has affected the already struggling AI particularly badly and it needs a

massive cash infusion to stay in the skies.

However, it was made abundantly clear to NACIL that any financial help

from the government will come, if and only if, NACIL is able to

convince it about two things — it has a plan, and more importantly, that




it can implement it. Also, any assistance from the government would

have to be matched by an aggressive cost reduction, including a drastic

cut on salaries, and a better revenue management by NACIL and that it

must come up with a concrete cost reduction proposal.

On the salary front, AI and IA give their 31,000-odd employees

performance-linked incentives (PLI), which comprises almost 60-80% of

their overall pay package at senior levels. NACIL has an annual wage bill

of Rs 3,100 crore for its 31,000 employees, with PLI accounting for

almost half the salary expense. Now, AI is trying to cut the PLI but

reaching an agreement with unions could be more difficult than pruning

some staff through leave without pay or VRS routes.

The idea is to save money on lease dole outs and, instead, use that for

paying for the new planes that would also be very fuel efficient unlike the

old rented ATF guzzlers. But getting the companies to take the planes

back is going to be a huge challenge. A leased Boeing 777, for instance,

has a monthly rental of $9 lakhs. The airline also told the panel that it

needed new aircraft to phase out the old ones in its fleet in order to

compete.




Other remedial costs measures taken to improve operating results include:-

- Focus on cost reduction and rationalization of costs in major areas of

Company's functioning;

- closing down uneconomical offices and the down sizing of foreign offices;

- More economical hotel accommodation for operating and Cabin crew;

- Introduction of measures of all stations in India and abroad to curtail use of

hotels for staff on duty tours by encouraging them to return to the base the

same day;

- A cut of 10% in daily outstation allowance payable at all foreign stations

and 25% at Indian stations;

- Reduction of meal wastage and the rationalization of catering on board;

- Curtailment of Cash Publicity Budget;

- Curtailment of overtime, temporary posting and a substantial reduction in

costs in respect of controllable heads viz. Communication, Printing and

Stationery, General Charges etc;

- Outsourcing of staff transport and redeployment of drivers to operational

areas.




BIBLOGRPHY

www.airindia.co.in

www.wikipedia.org

http://search.ebscohost.com

Business India

Economics Times

I M Pandey



Air India

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Transcript of Air India