Aviation Industry :An Introduction The inception of the modern Aviation Industry was with the human lighter-than-air

flight on November 21, 1783, in a hot air balloon designed by the Montgolfier brothers. From 17th century to the current generation world has seen a horde of change in this aspirational dream of man. The Aviation sector provides transportation services for passengers as well as cargo through scheduled air routes. Other major components of the civil aviation sector include: Air traffic control- The primary purpose of ATC systems worldwide is to separate and Sequence aircraft to prevent collisions. Helicopter and private charter services- Air charter is the business of renting an entire aircraft. Air charter companies focus on individual private aircraft, urgent or timesensitive cargo, and air ambulance. Express delivery service- Delivers packages and freight Airport management- In India the Airports Authority of India (AAI) manages most of the airports. The main functions of AAI include construction & management of passenger/cargo terminals, Provision of Communication, Navigation and Surveillance, provision of air traffic services, provision of passenger facilities and related amenities at its terminals thereby ensuring safe and secure operations of aircraft. Indian Aviation Industry The Indian Aviation industry spread its wings when TATA Services flew the first flight owned by the Indian organisation in out aerospace in 1953.It went on to become Airlines and then AirIndia and spread its wings as Air-India International. India's domestic aviation market has tripled in the past five years, according to a latest report of the International Air Transport Association (IATA). Indian aviation industry is the 9th largest in the world. a) Basic Statistics: The Airport Authority of India (AAI) has the responsibility of managing around 11 International, 94 domestic and 24 civil enclaves in the country. Major cities like Delhi and Mumbai account for 50% of the air traffic alone.

b) Growth: Inspite of the fear in investments in this sector it has shown a decent growth rate of 12% per annum. International passenger segment contributes to 7 % of this growth. c) Indian Bilateral Treaties: For the growth of its aviation industry India has signed bilateral treaties with 180 different countries. It has 38 million seats available and the capacity which the industry generally operates on is 19 million . d) Privatisation: India threw open its gates to the Privatisation of airports by undertaking the work of Three Greenfield airports at Kochi, Hyderabad and Bangalore with major shareholding of private sector. Some projects have been allowed 100 % foreign equity. e) Air Traffic: It has been a tremendous increase of 27 % in the aircraft movement handled in 2011 as compared to that of 2007. There foreign airlines like Air Canada, Polar Air Cargo, Qatar Airways (Freighter), Turkish Airways, Air Slovakia started to operate many smaller planes with effect from October 2003 which contributed to the rise in air traffic. The introduction to many LCCs is also a major factor. MAJOR PLAYERS The key players in the Indian civil aviation Industry are: Jet Airways-JetLite Kingfisher Airlines IndiGo National Aviation Company of India Limited (Air India) Spice Jet Go Air

Source: DGCA As can be clearly seen form the pie chart, IndiGo is the market leader in terms of the market share. Lets look at each of these players in greater detail. Jet Airways Overview Jet Airways operates over 400 flights daily to 76 destinations across India and to international destinations including London Heathrow, Kuala Lumpur, Singapore, Colombo and Kathmandu. The company took over Air Sahara in April 2007. The merged company (including JetLite, as the renamed Air Sahara is now called) retains a second rank market position of 26.6%. Jets plans for the future include launching routes to North America and Canada, alongside Africa and the Gulf. A new Gulf route was launched in January 2008, with routes to San Francisco also introduced in Q108. In April 2010, the airline launched a direct South Africa route. Following a code-share agreement with American Airlines in 2007, further agreements were reached with Air Canada and United Airlines, implemented in 2008. In expectation of a more difficult operating environment in 2009-2010, Jet Airways put its expansion plans on hold,

postponing delivery of some new aircraft and grounding others in order to save costs. The airline sacked 1,900 of its 13,200 employees in October 2009. Key Statistics Total Revenue (Mar12): INR 14,815.91Crores Fleet: 101 Aircrafts + 48 orders Average age of fleet: 5.1 Years Established: 1993 Key Personnel Chair: Naresh Goyal CEO: Wolfgang Prock-Schauer COO: Dale Moss Kingfisher Airlines Overview Currently Kingfisher Airlines has a domestic market share of around 3.4%. The airline used to carry more than 11 million passengers across domestic and international sectors till 2 years ago but now its share has reduced drastically. It has been flying low these days. The airlines current debt levels stand at Rs 7000 cr. It has been making consistent losses since the last 10 quarters. Its losses doubled last quarter to Rs 444 cr, on a year-on-year basis. Kingfisher is not in good health from 2011. The trouble began in November 2011. In January this year, the airline submitted revised its schedule to DGCA, and salary payments to pilots were stopped. In February, the Income Tax Department froze KFAs bank accounts for non-payment of service tax dues. On February 21, the airline submitted a fresh plan to DGCA. However, in March, it faced IATA suspension and protest from pilots began. Over 60 pilots have resigned in last one year.

Key Statistics Fleet: 68 Aircrafts Reported Profit (Loss) : Rs -2,328.01crores Average age of fleet: 4 Years Established: 2003 Key Personnel Chairman and CEO: Dr. Vijay Mallya Vice Chairman and Non- Executive Director: Capt. G.R. Gopinath National Aviation Company of India Limited (Air India) Overview National Aviation Company of India Ltd (NACIL) was formed from a merger of Air India and Indian Airlines in 2007 but was renamed as Air India Limited on October 26, 2010. In April 2005, Air India launched Air India Express, a subsidiary airline servicing the Gulf region. After an initial launch involving three Boeing 737-800 aircraft and 42 flights per week, the company is now operating 73 flights weekly. In February 2011, the government agreed to inject US$267mn more into the struggling airline. The carrier is also considering renaming several of its constituent companies and relocating them in an attempt to improve operational finances. Air India has stated that it will rename its parent company NACIL to Air India. Its regional low-cost service, Air India Express, could be renamed as India Hopper, and relocated from Mumbai to Thiruvananthapuram. As most of the carriers customers are from Kerala, this relocation is intended to reduce costs and improve staff efficiency.[1] Local Statistics Fleet: 141 aircrafts

Employees: 15,007 Established: 1932 Key Personnel Chair/Managing Director: Rohit Nanadan Director of Finance: S Chandrasekhar IndiGo Overview IndiGo currently occupies a market share of 27.0% and is currently the largest player in domestic civil aviation segment. This is a considerably achievement on the part of the airlines considering the fact that it has just completed 6 years of its existence. IndiGo operates to 26 destinations in India with 259 flights each day. It obtained a license to operate international flights after completing five years of domestic operations. On 22 August 2011, it was announced that the airline planned to begin international services on 1 September, initially on the New DelhiDubai route, but over the following weeks expanding to serve Dubai, Bangkok, Singapore and Muscat from New Delhi and Mumbai. Key Statistics The company has not yet been listed. IndiGo earned gross profits of the order of INR 650 crores in the year ending Mar11. Most aviation analysts and industry experts say IndiGo's rising profits are due to its sale and lease back income. Sale and lease back is a process where airlines sell aircraft to a leasing firm which then leases aircraft back to the original owner, helping the airlines to save on capital expenditure and improve balance sheet. Key Personnel Managing Director: Rahul Bhatia CEO: Bruce Ashby

President: Aditya Ghosh Aviation Industry and Indian Economy Around a decade back, only two airlines were operating and both were state owned. In last 10-12 years, India has witnessed an annual growth of around 8%. Major factors related to Aviation industry that affected Indian economy are: Increased number of domestic airlines Low cost airlines Increase in Indian business travelers to different countries Increased number of incoming tourists and business enterprises

Role of Aviation Industry in GDP: The Role of Aviation Industry in India GDP in the past few years has been phenomenal in all respects. The Aviation Industry in India is the most rapidly growing aviation sector of the world. With the rise in the economy of the country and followed by the liberalization in the aviation sector, the Aviation Industry in India went through a complete transformation in the recent period. The rapidly expanding aviation sector in India handles about a staggering 2.5 billion passengers across the world in a year; moves 45 million tonnes (MT) of cargo through 920 airlines using 4,200 airports and deploys 27,000 aircraft. Today, 87 foreign airlines fly to and from India and five Indian carriers fly to and fro across 40 countries in the world Aviation sector currently contributing Rs 33,000 crore or 0.5 per cent of India's GDP and supporting 1.7 million jobs in the country, besides creating much-needed critical assets. The study, conducted by Oxford Economics for the International Air Transport Association (IATA) recently, says aviation not only provided significant economic benefits to the Indian economy and the citizens, but also critical assets on which modern globalized businesses depend. Aviation contributed Rs 87,500 crore as taxes and social security. This contribution is likely to increase further, as the sector recovers following a number of difficult years where many firms suffered losses.

The sector's economic footprint in India estimated that a further Rs 16,900 crore worth of government revenue was raised via taxation through indirect and induced channels. But this does not include the domestic aviation fuel taxes which are estimated to be in the range of Rs 1,500-2,000 crore, it said.

The sector also contributed Rs 14,700 crore through its direct output and Rs 10,700 crore indirectly through the supply chain. In addition, it contributed another Rs 58,200 crore in "catalytic" benefits through tourism, which raised its overall contribution to Rs 91,200 crore or 1.5 per cent of GDP.

Future Estimations: The aviation industry is set to double its contribution to the country's gross domestic product (GDP) over the next five years as economic growth and rising disposable incomes encourage Indians to spend more on travel, experts say. Commercial aviation, which is worth between $10 billion and $12 billion, contributed less than 1% to the country's GDP in the past five years. With a potential $80-100 billion investment opportunity, aviation industry's contribution to GDP may double in the next 5-7 years "By 2030, the commercial aviation industry is expected to be worth $350 billion, thus contributing 5% to India's GDP," Experts say growth of the aviation industry is crucial for the economic growth as it has a multiplier effect on jobs creation. India is expected to invest $14 billion in 300-350 new aircraft over the next five years, according. According to an industry thumb-rule, 250-300 employees are required per aircraft, if that many aircraft are going to come to India, you can simply multiply and see the number of jobs that the industry will add. Then there will be outsourced jobs in catering, ground handling and related areas. The multiplier effect is just too obvious." "By 2030, the commercial aviation industry is expected to be worth $350 billion, thus contributing 5% to India's GDP,"

Factors influencing Industry Growth Rising income levels The aviation market in India consists of leisure travelers, business-related travelers and corporate travelers. Leisure and business related traffic tends to be more price-elastic. Corporate travelers, who fly at the expense of their employer or client, have historically formed the majority of the domestic air travel market in India. However, with increasing income levels and the emergence of flexible fare schemes and low-cost carriers, a shift is likely in the travel habits of middle to high-income leisure travelers and business travelers paying their own travel costs from premium class travel in trains to air travel. Growth in tourism The Indian tourism market has been growing at a significant pace over the last few years, with the government giving impetus to the industry through various schemes and organized events. Foreign Tourist Arrivals (FTA) during the Month of March 2012 was 6.23 lakh as compared to FTAs of 5.50lakh during the month of March 2011 and 5.12 lakh in March 2010. This shows a growing market for aviation sector. Plans & Policies The government has also played a major role in the growth of the civil aviation sector through the following policies and initiatives: The Government's open sky policy has attracted many foreign players to enter the market and the industry is growing in terms of number of players and the aircrafts. Government of India allows 100 per cent foreign direct investment (FDI) for green field airports, via the automatic route. Moreover, foreign investment up to 74 per cent is permissible through direct approvals while special permissions are required for 100 per cent investment Private investors are allowed to set up general airports and captive airstrips while maintaining a distance of 150kms from the existing ones. Complete tax exemption is also granted for 10 years

Under penetrated market Despite recent growth in air passenger traffic, India continues to have relatively high under penetration of air services. For a country with a billion plus population, this amounts to an average Indian making 0.03 trips per annum which is one of the lowest in the world, compared to an average of 2.02 trips per person per year in the United States for the same period. Consequently, there is a high level of potential demand, which may be generated as the Indian economy grows and air travel becomes more affordable for a larger population Events in the Recent Past The advanced Boeing 787 Dreamliner was added to the fleet of Air India on Sep 8th 2012, ending an over four-year wait of the struggling national carrier. Dreamliner will start flying on domestic routes from September 19th 2012. The first flight will be on the DelhiChennai route. The flight tests on the first Tata-made S-92 cabin have progressed satisfactorily in Aug 2012, and the helicopter is now being customized for supply to Lider Aviacao of Brazil. The Sikorsky S-92 is a large, twin-engine helicopter that can be used for both civil and military purposes with a first Made-in-India airframe. GAGAN Final System Acceptance Test (FSAT) was successfully completed on 16th17th July 2012. GAGAN (GPS Aided Geo Augmented Navigation) is a prestigious project jointly undertaken by Airports Authority of India and ISRO in accordance with ICAOs strategic plan to achieve smooth transition to Satellite based Navigation and seamless Air traffic management across the continents. The Airports Authority of India (AAI) has won The Jane's Award for 2012, an international award in recognition of its excellence in the air traffic control industry The Airports Authority of India (AAI) has initiated the process of implementing a ground-based augmentation system (GBAS) for flight navigation to upgrade air traffic management in the country with the support of the Federal Aviation Administration (FAA). GBAS is a critical safety system that uses Global Positioning System (GPS) for

efficient and safe navigation to aid landings, take-offs and surface operations within its area of coverage. The Bengaluru International Airport, along with Chatrapati Shivaji International Airport, Mumbai, has been presented with certificates in recognition of their achievements under the various levels of Airport Carbon Accreditation by Airports Council International (ACI). Bengaluru airport, which is the busiest in South India, has been given a certificate for carbon reduction. Mumbai airport on the other hand has been awarded the certificate for mapping carbon emissions Impact of Union Budget 2012-13 The airline industry was facing a financial crisis and the high operating costs of the sector was "largely attributable" to the jet fuel cost. To reduce the cost of Aviation Turbine Fuel (ATF), Government has permitted direct import of ATF by Indian carriers, as actual users. External Commercial Borrowings (ECBs) for working capital requirements of the airline industry is permitted for a period of one year, subject to a total ceiling of USD one billion. Withholding tax on interest payments on ECB to be reduced to 5% from 20% for three years. This addresses the immediate financing concerns of the civil aviation sector suffering from a major capital scarcity. A proposal to allow foreign airlines to participate up to 49 percent equity of an airline company, operating scheduled or non-scheduled services, is under active consideration of the government India has the potential to establish itself as a hub for third-party Maintenance, Repair and Overhaul (MRO) of civilian aircraft. To realize this potential, spare part of aircraft, new and retreaded tyres and testing equipment would be fully exempted from basic customs duty and countervailing duty. Service tax has been raised to 12% from 10%. This excess tax may be transferred on the charges to be incurred by the consumers.

While the central plan outlay for Civil Aviation Ministry in 2012-13 is estimated at Rs.7293crore, a demand for plan allocation of Rs.4000crore to Air India in the next financial year has also been proposed in the budget.

As a sop to Indians travelling abroad, he also proposed to raise the duty-free baggage allowance, which was last revised in 2004, from Rs.25000 to Rs.35000 and for children of up to 10 years from Rs.12000 to Rs.15000.

Challenges faced by the Aviation industry in India Following are some of the major problems being faced by the Indian aviation industry: Infrastructure impediments: There is an imbalance between the pace at which the aviation industry in India is growing & the pace at which the infrastructure is being developed to support that growth. Due to limited terminal capacity, air traffic congestion takes place at the parking bays and at runways which results in delay in flight takeoffs/landings and passenger clearances. Rising fuel costs: At current prices (with Brent crude at about USD115), jet fuel prices are close to the tipping point for airline profitability and, while limited fuel surcharges may hold, it is doubtful the market is sufficiently resilient to absorb much more in the way of higher fares. Availability of aircrafts: Availability of aircrafts, both by purchase or lease, is another key issue that limits growth of Indian airline industry. Indians carriers would have to compete with Chinese, European and American LCC which are the fastest growing airlines in world for aircrafts. Shortage of skilled workforce: Aggressive expansion plans of airlines have led to a huge shortage of pilots, in-flight crew, technicians and ground staff. Airlines are facing severe attrition problems. This has resulted in sharp increase in staff costs due to increased in-flight crew salaries as their retention has become increasingly difficult. To discourage poaching, Ministry of Civil Aviation and all airlines have unanimously decided to make it mandatory for pilots to give notice to airlines before leaving.

High Airport Taxes: The term airport taxes are all the charges, costs and taxes recovered through the air ticket. Rising airport taxes are also posing a problem to the industry. Also, airport costs are not analogous to the facilities being provided at the airports.

Intense Competition on prices: The airlines get into pricing wars due to aggressive competition among them & provide cheap tickets to the customers. This is causing them to incur huge losses.

Excess Capacity: One of the longstanding problems of aircrafts in India is excess capacity. These days there are too many planes fly with many empty seats. The airlines got into pricing wars, customers got used to cheap fares, and too many planes kept sucking money out of the companies.

Group III Restrictions: These restrictions mandate airlines to deploy on Category II routes i.e. in north east which are non-profitable routes.

Prominent Sectors in Civil Aviation

Premium Carriers
Reasonable Margins, Loyal Customers, Superior Product and reputation, economies of scale

Low Margins, under pressure by LCC, Spread business model,low differentiation, Moderate Growth

Standard Carriers

High Margins, Simple business Model, High Growth, High Volume

Low Cost Carriers

Porter Analysis Threat of New Entrants Moderate to High ENTRY BARRIER Cost StructureFuel Cost 30-45 % of operating expenses Fluctuations in Currency Fluctuations & Crude Oil Employee CostMaintenance Specialised skills Airport Charges

High Pilot Charges

Infrastructure

Aggressive ExpansionPoaching

High Cost

Congestion

Pilot Licensing Issues

Inventory

Turn around time

High Central & state levies

EXIT BARRIER Ownership of specialised Assets?

OTHER FACTORS FDI-foreign equity participation? Brand name

High level of fixed operating costs Variable costAlmost Negligible

recognition and incentives? Costs to access bank loans and credit?

Power of Suppliers- High SUPPLIER POWER Supplier Fuel Services Labor Airports Power High High High High

Aircraft Manufacturers

High High

Power of Buyers-Moderate to High BUYER POWER Buyer Passenger Corporate Point to Point Tourism Power High Low Low Moderate

Availability of Substitutes- High SUBSTITUTES Factors Cost of Switching Online ticketing Parity Substitutability Impact High High High High

Competitive Rivalry - High COMPETITION Cost of Competition Switching Costs Returns Competition High Low Low Intense

Conclusion from Porters Framework of Strategic Analysis

 4 out of 5 forces are strong in the aviation industry i.e. Bargaining Power of Buyers, Bargaining Power of Suppliers, Substitutes and Competitive Rivalry Considering the current government policies & political scenario we can conclude that Indian Aviation Sector at present is highly unattractive to compete in terms of profitability however future prospects are bright due to unpenetrated market and ever increasing domestic passenger traffic A low cost carrier model with High margins, high growth with simple business model will suit the current socio-economic conditions to compete with profitability SWOT ANALYSIS Low Cost Carriers Vis a Vis Others OPPORTUNITY Growth Market in Airline Ind for low fare travel THREATS Competition from existing Airlines Surface Transport

Low Budget Model

Strong Operating Strategy STRENGTH Cost Efficiency Proper Route Policy WEAKNE Cusomer SS Service + + + + + + + + +

Less Aircraft Fleet Ticket Prices & Services + _ + + _ _ _ _ _ _