Indian Airline: Cygnus Business Consulting & Research

Cygnus Business Consulting & Research
October 2004

INDUSTRY INSIGHT

INDIAN AIRLINE
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Industry Insight Indian Airline

Cygnus Business Consulting & Research 2004 Page 2 of 19

Table of Contents
INDIAN AVIATION INDUSTRY............................................................................................ 5
CAPACITY AND DEMAND VS SUPPLY ANALYSIS......................................................12
INDUSTRY CHALLENGES.....................................................................................................13
IMPACT OF TECHNOLOGY..................................................................................................13
VALUE CHAIN............................................................................................................................14
REGULATIONS...........................................................................................................................15
MICHAEL PORTER ANALYSIS.............................................................................................16
INDUSTRY GROWTH DRIVERS ..........................................................................................16
CRITICAL SUCCESS FACTORS .............................................................................................17
INDUSTRY OUTLOOK............................................................................................................18


INDUSTRY STRUCTURE

Global Scenario
The airline industry transports passengers and goods within and across national borders on a
scheduled and non-scheduled basis. Scheduled transportation accounts for most of passenger traffic,
with charter flights representing 15 per cent of total travel output. Air transportation provides a
critically important infrastructure to the global economy.
The global airline industry is set to record a $2.8-billion profit in the year 2004 after racking up at
least $30-billion in losses since the September 11 terrorist attacks in 2001. According to International
Air Transport Association (IATA) the industry was recovering slowly but steadily from the terrorist
attacks on the United States, as well as from the impacts of the Iraq war and the Severe Acute
Respiratory Syndrome (SARS) outbreak last year. It has been observed that international passenger
traffic grew one percent in September, 2004 from a year ago, the first monthly rise since February,
2004 and this had been achieved due to robust growth in Europe and high growth in the Middle East
traffic.
Passenger traffic increased 3.6% in Europe and 19.4% in the Middle East during September,
offsetting a 3.6% decline in North America and 1.6% drop in the Asia Pacific.
Global Major Players
The major Airlines can be divided into
United States of America (USA) - American Airlines, United Airlines, Continental Airlines,
Northwest Airlines, Delta Airlines, US Airways, Southwest Airlines;
Europe - United Kingdom (UK) - British Airways, Virgin Atlantic Airways, British European,
EasyJet.
Germany - Lufthansa, TUI AG Airline Management, Thomas Cook Airlines.
France - Air France; Netherlands - KLM Royal Dutch;
Asia - India - Indian Airlines, Jet Airways, Sahara Airlines, Deccan Airways and Air India;
China - Air China and China Airlines;
Malaysia - Malaysian Airlines; Singapore - Singapore Airlines;
Middle East - Emirates, Saudi Arabian Airlines;
Australia & Oceania - Australia Qantas Airlines; New Zealand - Air New Zealand;

Current Airline rankings

Top 10 Rankings
1 Singapore Airlines 2 Emirates 3 Cathay Pacific 4 Qantas Airways 5 Thai Airways 6 British Airways
7 Qatar Airways 8 Malaysia Airlines 9 Continental Airlines 10 ANA All Nippon Airways
The best in the air:
Australasia: Qantas Airways; Asia: Singapore Airlines; Europe: British Airways; Middle East:
Emirates North America: Continental Airlines Central America: Copa Airlines South America:
TAM Brazilian Africa: South African Airways
Low-cost (worldwide): JetBlue Airways (US) Transatlantic: British Airways Transpacific: Cathay
Pacific Airways

Regional - Europe: Portugalia Airlines Regional - China: Dragon air Regional - Northern Asia:
Japan Airlines Regional - Cent. Asia/India: Sri Lankan Airlines Regional - S-E Asia: Singapore
Airlines
Source: MIT Study

About 41% is located in North America due to its wide and fragmented market, followed by Europe
with 25%, Asia/Pacific with 20%, and rest of the world closing the remaining 14%.

Region Number of
airlines
Number of
aircrafts
North America 37 4 122
Europe 90 2 445
Asia/Pacific 44 1 475
Latin America 41 657
P.R. China 20 425
Africa 28 318
Middle East 11 235
Source: MIT Study, 2001-02

INDIAN AVIATION INDUSTRY

Indian Aviation Industry
The story of Indian aviation industry dates back when Nevill Vincent, a former RAF pilot came to
India from Britain in 1929 on a brainstorming tour to survey a number of possible routes. It was
through providence that he met JRD Tata, the first Indian to secure an A-license within the shortest
number of hours. Vincent worked out a scheme, secured JRD's approval and together they presented
it to Mr. Peterson, the director of Tata Sons also JRD's mentor. Sir Dorab Tata, the then chairman of
Tata Sons, pleasantly surprised all by giving the scheme his okay. So they went ahead and drew plans
for the operation for the first flight from Karachi to Mumbai with a single stopover at Ahmedabad.
They asked for a guarantee from the government for a year for the sum of Rs100,000. This, however,
was turned down. Another scheme was prepared with different guarantee money at intervals.
Guarantee asked was Rs 50,000 for the first year, Rs25, 000 for the second year and no guarantee at
all from the third year onwards which was rejected too. The team then tried a third time by offering
to donate an air service to the Government of India with no strings attached. The Government
finally agreed and thus was born Tata Airlines that later became Air India.

On 28th May 1953, consequent to the coming into force of the Air Corporations Act, 1953, the
Government of India nationalized the airlines industry. In accordance with this Act, the two air
corporations, viz. Indian Airlines Corporation and Air India International, were established and the
assets of all the then existing airline companies (nine) were transferred to the two new Corporations.
The operation of scheduled air transport services was under the monopoly of these two
Corporations and the Act prohibited any person other than the Corporations or their associates to
operate any scheduled air transport services from, to, or across India.

However, after 40 years, in 1994, the wheel had turned a full circle as the Air Corporation Act, 1953
was repealed with effect from 1st March 1994. That ended the monopoly of the Corporations on
scheduled air transport services. Air transport in India is now open to any carrier who fulfills the
statutory requirements for operation of scheduled services.

In terms of size, the Indian aviation industry's turnover was approximately Rs. 40 billion in Financial
Year 99 and up to 14 million passengers traveled using its services in Financial Year 99.The aviation
industry plays an indispensable role in the growth and efficiency of an economy. The sector acts as
an economic catalyst by opening up new market opportunities, moving products and services with
speed and efficiency. Therefore, international trade and commerce relies heavily on the aviation
sector. The contribution of the aviation sector in India is especially significant taking into account
that it only forms a small part of the transportation industry. The sector facilitates international trade,
tourism, and foreign direct investment thereby enabling the growth of the economy and making it
internationally competitive.


Indian Industry
Indian aviation industry till early 90s was more of
a state owned airlines with Indian Airlines (IA) and
its subsidiary Alliance Air (AA) plying to domestic
air travel needs and the national carrier Air India
(AI) catering to the international air travel needs.
But since liberalization in the 90s and Indian
governments open sky policy many new players
entered the scene both domestically and
internationally. On domestic front the notable
names were JET, Archana Airlines, East West,
NEPC, Modiluft, Sahara Airlines and Pawan Hans
Helicopter services, while on the international
front the notable names were British Airways,
Lufthansa, Scandinavian Airlines, Alitalia,
Emirates, Kuwait Airways, and Singapore Airlines. In the domestic scene only Jet and Sahara have
remained as prominent private players leaving beside the rest of the contingent.
Major Players
In the Indian aviation industry the major notable players are the state owned Air India (AI) and
Indian Airlines (IA), Sahara groups Sahara Airlines and Jet Airways. While all the above names are
broadly referred as Scheduled air lines, but due to nature of owner ship by the government IA & AI
and Alliance Air are called National Carriers while the Jet and Sahara are referred as Private
scheduled operators. The national carriers stand out in terms of their sheer size in number of
aircrafts.
Financial summary
The overall position of the players in the aviation industry is not healthy in terms of profitability. For
the year ending March 2002 except for Jet all the other major players were in Red.

National Carriers
Fleet
strength*
Air India 29
Indian Airlines 44
Alliance Air 11
IC&CD 55
Private Scheduled
Airlines
JET 38
Sahara 10
(*As on March 2001)
Source: DGCA
Financial performance for the year 2001-02 (Rs in millions)
National Carriers
Private Scheduled
Airlines
Air India Indian Airlines Alliance Air JET Sahara
Operating Revenue 47513.60 37699.10 5035.20 25331.80 4877.10
Operating Expenses 48058.60 39905.60 5601.80 24992.00 5637.40
Operating
profits/(losses) (545.30) (2206.50) (566.60) 339.80 (760.30)
Source: dgca.nic.in

Industry Structure
Unlike in the US the structure of Indian aviation
industry is more or less flat and uncomplicated
due to lower penetration of Aviation services as
well as existence of less number of players in the
industry. Indian industry structure can broadly
classified on the basis of geographies served by
the airline services .While the on the
international level Air India is the biggest player
apart from other foreign players like British
airways and Lufthansa etc .On the domestic
front it is more of triangular affair between state
owned Indian Airlines, Jet airways and Sahara .

Capacities and Market shares
As capacity of the private carriers has grown, so has their market share. In 2002-03, for instance, the
market share of Jet Airways was higher than its capacity share in comparison to IA's market and
capacity shares. Even Sahara,
which had a market share of
around 5-7% for years, has
now garnered over 13%
(Sahara has recently
announced further expansion
plans). Sahara may emerge as
the strong contender as
second biggest domestic
carrier after Jet Airways.
While IA's capacity has been
going down gradually, private
airlines have been adding
capacity at a frantic pace.
During 1998-2003, they
almost doubled their
capacity. Jet Airways
increased capacity by 63% from 5,183 million available seat km (askm) in 1998-99 to 8,468 million askm
in 2002-03. Sahara Airlines went from 1,095 million askm in 1998-99 to 2,811 million askm in
2002-03, an increase of 156%. In contrast, IA's capacity actually fell from 9,636 million askm in 1998-
99 to 9,563 million as km in 2002-03. In other words, at the end of 2002-03, total private capacity
(11,279 million as km) exceeded by 1,716 million askm from IAs.
Airport Infrastructure
There are 450 airports in the country including those managed by Defense Services, State
Governments and private parties. Of these, 120 airports are managed by Airports Authority of India
(AAI) including twelve international airports. The Airports Authority of India was formed in 1995 by
merging International Airports Authority of India and National Airports Authority to accelerate the
integrated development, expansion and modernization of the operational, terminal and cargo
facilities at the international and domestic airports and also at civil enclaves. It controls and manages
the entire Indian airspace extending even beyond the territorial limits of the country.
0%
20%
40%
60%
80%
100%
1998-99 1999-00 2000-01 2001-02 2002-03
Capacity shares
Indian Airlines Sahara Jet
Source: dgca.nic.in
0%
20%
40%
60%
80%
100%
1998-99 1999-00 2000-01 2001-02 2002-03
Market shares
Indian Airlines Sahara Jet
Source: Economic Times

Recent trends
During the period April-February 2002-03, both domestic and international passengers flown
increased. Domestic passengers flown were up by 9% as compared to a decline of 6% recorded in
the previous year. International passengers flown increased by 15% as against a 3% fall registered in
the previous year. Domestic aircraft movement increased by 12% with a passenger load factor of
56.7%. International aircraft km flown was up by 14%, with a passenger load factor of 73.8%.In
February 2003, domestic passengers flown rose substantially by 13% to 11.83 lakh as compared to a
decline of 6% registered in the previous year. However, domestic passenger flown during the month
was lower as compared to those flown in the preceding four months.
Domestic aircraft km flown increased by 9%, lower than a 15% growth recorded in February 2002.
The passenger load factor during the month was 58.6%. This was higher as compared to 54.6%
growth clocked in the previous year. During February 2003, international passengers flown increased
by 22% as compared to 19% growth recorded in February 2002. However, international passengers
flown in February 2003 were lower than in the preceding five months. The passenger load factor was
76.9% as compared to 70.9% recorded in February 2002. Aircraft km flown increased by 15% as
against an 18% increase witnessed in the previous year.

The growth of Passenger traffic and air cargo in India in the recent past also been manifold although
there are not many irregular or drastic shifts in the trends, but more or less the trends reflect a stable
pattern. The table below shows statistics regarding growth in passenger and cargo traffic handled by
airports in India which is increasing, reflecting an overall year on year growth.

Regulation-FDI in the Indian Aviation industry
With the submission of the report by the Naresh Chandra committee, Indian Government appointed
a panel to look into the Indian civil aviation industry. There is much expectation being built up
regarding this industry in terms of FDI (Foreign Direct Investments) in the domestic airlines. The
committee suggested the government to hike the limits of FDI up to 49% and 100% in helicopter
services and allowing domestic carriers such as Jet airways and Sahara to ply on all existing unused
international routes of Indian airlines as an extension of the open sky policy. The Open-sky policy
which came in April 1990, allowed air taxi- operators to operate flights from any airport, both on
charter and non charter basis and to decide their own flight schedules, cargo and passenger fares. The
operators were, however, required to use aircraft with a minimum of 15 seats and conform to the
prescribed rules. In 1990, the private air taxi-operators carried 15,000 passengers. This number
increased to 4.1 lakh in 1992, 29.2 lakh in 1993, 36 lakh in 1994 and 48.9 lakh in 1995. While in 1996,
private air taxi operators carried 49.08 lakh passengers which amounted to a 41.14 per cent share in
the domestic air passenger traffic. Seven operators viz NEPC Airlines, Skyline NEPC, Jet Air,
Archana Airways, Sahara India Airlines, Modiluft and East West Airlines acquired the status of
scheduled airlines. Most of these have closed down now.

Growth in Passenger and Cargo Traffic in Indian Aviation Industry
Years Passenger (in 000's) Freight (in' 000' Tonnes)
International Domestic International Domestic
1999-2000 12252 26083 532 268
2000-2001 12939 29567 528 334
2001-02 12628 32947 550 371
2003(Jan-Oct) 12935 24797 552.19 292.55
Source: DGCA, Airports Authority of India

The committees recommendation of allowing 49% FDI has drawn flank from the political circles as
A-I and IA have not been flying a large number of international routes allotted to them. Saddled with
an old, ageing fleet, and denied the opportunity to acquire, despite repeated requests, new aircraft for
more than a decade, they have been forced to run sub-optimal services. Apart from the above factors
the delay and prolonging of disinvestment in the sector has not created much interest in the sector.
Although the government has allowed the private airlines to fly to all SAARC nations but still that
remains to be seen as such moves would led the industry to which direction. Now that could be the
new beginning.

9/11 and Aviation industry
Nothing hit the global aviation industry ever like the events aftermath the 9/11(September 11
th
2001)
terrorists attacks on the US. The event which completely turned the Global economies and
industries upside down had serious repercussions on the aviation industry too. As many as 400,000
jobs were lost in the aftermath of September 11 according to a study by the International Labour
Organisation. Passenger numbers have fallen leading to route cuts and widespread layoffs. The jobs
cut by various airline companies were huge.

Still appreciable numbers of travelers are avoiding airplanes, either out of fear or because of the
hassle factor of increased security and the uncertainty of passenger processing times at the airport.
For the airlines, the new security procedures have increased operating costs and induced more
security-related flight disruptions and delays.

Future of Aviation industry
As per the leading airplane manufacturer, Boeing, China will be an upcoming growth area in the
world considering the fact china will require nearly 2400 new jet airplanes worth $197 billion over
next 20 years. Chinese's airlines are expected to add 1,960 new airplanes to serve domestic markets
including Hong Kong and Macau apart from 440 new airplanes to provide international service.

Regional jets and single-aisle airplanes could account for 87% of the airplanes delivered to serve the
domestic market. More than 560 intermediate-sizes, twin-aisle airplanes could be delivered to serve
both domestic and international markets. It is estimates that by 2022, Chinese carriers will be flying
more than 2,850 passenger and cargo airplanes, making China's fleet the largest outside the United
States. In fact, China's commercial jet fleet will increase four times in size over the next twenty years.
The above projections by Boeing keep in the fact the need for new airplanes at a 7.1 percent annual
increase due to growth in air travel in China from 2003 to 2022 as compared to the world average of
5.1 percent. The growth estimates for Chinese domestic air travel growth is pegged at 8.4%, while the
same for North America, Asia-Pacific and Europe are estimated at 5.0%, 4.9% and 5.4% respectively.
China's 20-year Gross Domestic Product (GDP) forecast is 6.2 percent - the highest in the world.

While in the case of India, at present over 40% of India's
exports and imports, by value, are carried by air and 95% of
foreign tourists arrive into India by air making the tourism
industry the third largest foreign exchange earner.
According to NCAER estimates foreign exchange
transactions worth US$22.5 billion annually is directly
facilitated by civil aviation, while another US$96 billion are
moderately facilitated by civil aviation services.

However for continued growth adequate international aviation facilities need to be provided at the
gateway airports without which all the components of international trade and commerce would be
(in Rs crores )
2000-01 1885
2001-02 1486
2002-03 (BE) 2521
2002-03 (RE) 2039
2003-04 (BE) 1779
Source: capitaline 2000
BE: Budgetary Estimates

affected. A report published by CII and NCAER also establishes that growth in air transport is
closely inter-linked with growth in the Gross Domestic Product both internationally and nationally.

For a percent increase in India's GDP, domestic passengers are expected to increase by 1%, for
international passengers this sensitivity is about 1.3%. Recently government has announced certain
measures to boost the domestic airlines industry. It has reduced the excise duty on air turbine fuel
(ATF) and abolished the 15 % inland air travel tax (IATT).These measures are expected to lower the
domestic air travel cost by around 20%. The Plan outlay in 2003-04 for the civil aviation sector is Rs
1,779 crore. This is lower than the Rs 2,521 crore budgeted in 2002-03 and the revised estimates of
Rs 2,039 crore. Of the total allocation in 2003-04, Rs 52.9 crore is budgetary support.
Over the next decade international and domestic air traffic are expected to grow from the present
levels of 42 million to about 90 million. International air cargo exports from India are expected to
rise from 0.7 million tonnes per annum (TPA) to 2.4 million TPA while domestic cargo will rise from
300,000 TPA to over 1 million TPA. Both Boeing and Airbus Industries expect that with the low
penetration in India, aviation services would grow faster than in most countries and ahead of India's
GDP growth. Projections made by Airbus Industries indicates that over the next two decades the
Revenue Passenger Kilometer (RPK) carried annually would treble from 25 to over 70 billion RPK -
an average growth rate of 5.3% per year as against the estimated 5% growth rate for world traffic
during the same period.
Recent trends
During the period April-February 2002-03, both domestic and international passengers flown
increased. Domestic passengers flown were up by 9% as compared to a decline of 6% recorded in
the previous year. International passengers flown increased by 15% as against a 3% fall registered in
the previous year. Domestic aircraft movement increased by 12% with a passenger load factor of
56.7%. International aircraft km flown was up by 14%, with a passenger load factor of 73.8%.
In February 2003, domestic passengers flown rose substantially by 13% to 11.83 lakh as compared to
a decline of 6% registered in the previous year. However, domestic passenger flown during the
month was lower as compared to those flown in the preceding four months. Domestic aircraft km
flown increased by 9%, lower
than a 15% growth recorded in
February 2002. The passenger
load factor during the month
was 58.6%. This was higher as
compared to a 54.6% growth
clocked in the previous year.
During February 2003,
international passengers
flown increased by 22% as
compared to 19% growth
recorded in February 2002.
However, international
passengers flown in February
2003 were lower than in the
preceding five months. The
passenger load factor was 76.9% as compared to 70.9% recorded in February 2002. Aircraft km
flown increased by 15% as against an 18% increase witnessed in the previous year.
Source: Airlines Gate

Indian Major Players and market shares
As capacity of the private carriers has grown, so has their market share. In 2002-03, for instance, the
market share of Jet Airways was higher than its capacity share and IA's market share (See 'Capacity
hares' and 'Market shares'). Even Sahara, which was for years had a market share of around 5-7%, has
now grown that to over 13% (Sahara has
recently announced further expansion plans).
Eventually, IA insiders think Sahara will emerge
as the second biggest domestic carrier after Jet
Airways.
The battle for market share is one that will only
get bloodier. Air Deccan, took off amidst
various hiccups in August last year. But in less
than seven months, it has already notched a 1
per cent share of the total 14.78 million
domestic scheduled airline passenger markets.
At the same time, reflecting the growing
competition, IAs share has dropped to 39.3 per
cent from 41.8 per cent in the previous year. IA
along with its subsidiary Alliance Air flew 5.8
million passengers in 2003-04. The problem of IA is capacity constraint and compulsion of deploying
significant capacity on non- profitable routes. The share of market leader Jet Airways has also
down from 48.4 per cent in 2002-03 to 46.7 per cent in 2003-04. Air Sahara remains number three
with a 13 per cent market share.

Market Share of Major Airlines in India
6
1
.
2
5
6
5
0
.
9
4
9
.
7
4
1
.
8
3
9
.
3
3
3
.
7
3
8
.
5
4
2
.
4
4
3
.
9
4
8
.
4
4
6
.
7
5
.
2
5
.
5
6
.
8
6
.
4
1
3
.
3
1
3
0
10
20
30
40
50
60
70
1998-99 1999-00 2000-01 2001-02 2002-03 2003-04
%

S
h
a
r
e
Indian Airlines Jet Airways Air Sahara
Source: Economic Times

CAPACITY AND DEMAND VS SUPPLY ANALYSIS

While IA's capacity has been going down gradually,
private airlines have been adding capacity at a
frantic pace. During 1998-2003, they almost
doubled their capacity. Jet Airways increased
capacity by 63% from 5,183 million available seat
km (askm) in 1998-99 to 8,468 million askm in
2002-03. Sahara Airlines went from 1,095 million
askm in 1998-99 to 2,811 million askm in 2002-03,
an increase of 156%. In contrast, IA's capacity
actually fell from 9,636 million askm in 1998-99 to
9,563 million as km in 2002-03. In other words, at the end of 2002-03, total private capacity (11,279
million as km) exceeded that offered by Indian Airlines by 1,716 million askm.

The Karnataka market, more appropriately Bangalore (as it accounts for over 85% of this
movement), has grown rapidly since 2002. In 2002, official statistics say the state clocked air ticket
billings of Rs 602 crore, which rose to Rs 737 crore in 2003.

In the first seven months of this calendar, the market has notched Rs 568 crore of air ticket business
which going by booking trends for the rest of the year suggest a grand total of Rs 950-1,000 crore, an
impressive 35% jump.

The corporate movement accounts for 65% of its traffic, followed by SMEs and VFR (visiting
friends and relatives) group with 10% share each. Students, labour and holidaymakers account for
5% each.

Indian skies presently have seven scheduled domestic carriers. These include Air-India, Indian
Airlines, Alliance Air, Jet Airways, Air Sahara, Air Deccan and Blue Dart Aviation (in scheduled
cargo services). Both A-I and IA also fly abroad. Pawan Hans, Bharat Hotels, Escorts, EIH (The
Oberoi group), Taj Air, Jagson, Mesco, Tata Tea, UB Air and United Helicharters are amongst 37
non-scheduled airlines in the country.
Source: dgca.co.in

INDUSTRY CHALLENGES

There is a sea change in Indian skies. Many industries go through evolutionary changes. In India too,
the opening up of the economy and global impact have propelled a series of shifts in various sectors.
The aviation industry has also over the years seen a number of changes propelled by a changing
policy regime and disasters that shook the whole world

Disasters
The airline industry was faced with the terrorist attacks of 11 September 2001, which resulted in the
increased security measures, the wars in Afghanistan and Iraq, and the latest blow is the outbreak of
the SARS virus. Each of these events affected airlines, primarily as a result of dramatic and sudden
reductions in passenger demand.

However the challenges faced by the Airline industry can be summarized as below

There is problem for Capacity Constraints as Air Traffic is being forecasted to increase 65%
between 2003 and 2015 as the overall traffic returns to pre 9/11 levels in 2004. It has been observed
that 641 million people flew in 2003, more than 1 billion expected in 2014.

Declining Yields as Domestic passenger yields to fall an average of .9% annually through 2015

Weather Hazards There will be Persistent and Costly Weather hazards to degrade capacity and
quality of service even further. It is a fact that weather accounts for 70-75% of all delays and each
subsequent delays cost airlines $ 6.5 billion in 2000 which is gradually increasing since then.

IMPACT OF TECHNOLOGY

SABRE (Semi-Automated Business Research Environment)
The automated reservation system SABRE (semi-automated business research environment) is the
store front," with its interface with reservation agents and, hence, with customers. Through
computer terminals in airports and travel agencies, SABRE makes available a complex array of
itinerary and fare options. The system controls the availability of seat inventory, and it is a key
component of the yield management system because it permits collecting the data on which models
like the overbooking system depend. E.g. Jet Airways uses IBM computer systems provided by
SABRE and Air Sahara uses Unisys family of mainframe provided by SITA.
The next step of technological development of the airlines will be in the form of automated check-in
procedure. In this system, the customers who are frequent fliers and uses credit cards for payment
option will be benefited as this will allow passengers to skip long check-in-queues, selection of seats
and checking of luggage without involving any one. The procedure will be facilitated by latest security
terminals with touch screen computers display.
Replacement of ground based Communication, Navigation and Surveillance (CNS) with Satellite
based CNS system will promote the smooth flow of air traffic along with the establishment of
Differential Global Positioning System (DGPS). The Automation in the Air Traffic Control Services
along with the establishment of Automatic Dependent Surveillance (ADS) will be key factor in the
up gradation of the air traffic and better service to promote the growth of the airline industry.

Source: EDS Report
VALUE CHAIN
The airlines industry value chain comprises:

The Airline Value Chain is quite a complex issue which consists of various processes and interfaces
catering to Marketing, Operations, Maintenance, and other Business Supporting functions. The entire
value chain is supported by various applications which is being supported by the IT infrastructure.
The cumulative effect of each of these processes and interfaces results in the increasing of the
revenue and creating value for the company as well as the customers.

REGULATIONS

The policies and regulations which have governed the air transport industry for several decades have
various motivations (including safety, national prestige, national Defence, regional and urban
development, environmental sustainability, public service and other non-commercial objectives)
specific to each country. However, there is growing consensus that unnecessarily restrictive
regulations may have led to significant losses of economic efficiency, and thereby failure to secure
low-cost air transportation to the largest possible proportion of the population - the ultimate
objective of air transport policies. Recognizing these shortcomings, several OECD governments
have initiated reforms in the past two decades. Their aim was to improve efficiency and reduce
airfares by increasing competition, encouraging the rationalization of air networks, and enhancing
airline governance.
Open-Sky Policy
The Open-sky policy came in April 1990. The policy allowed air taxi- operators to operate flights
from any airport, both on a charter and a non charter basis and to decide their own flight schedules,
cargo and passenger fares. The operators were, however, required to use aircraft with a minimum of
15 seats and conform to the prescribed rules.
The Aircraft Act, 1934
An Act to make better provision for the control of the manufacture, possession, use,
operation, sale, import and export of aircraft.
Aviation policy to keep NRIs outside foreign equity cap

A modified aviation policy being formulated by the Civil Aviation Ministry will treat NRI investment
in the domestic civil aviation sector as distinct from the 40 per cent ceiling on foreign investment.
This translates into 100 per cent investment in dollar terms since there could be foreign investment
of 40 per cent and an additional NRI investment of 60 per cent in a civil aviation venture. The new
guidelines, cleared by the Finance Ministry, are applicable only to the aviation sector and the foreign
investment ceiling in other sectors, restricted to 40 per cent, continues to include NRI investment
Segments earmarked for private investments include construction/operation of new as well existing
airports/helipads/heliports related infrastructure besides cargo complexes, express terminals, cargo
satellite cities. To encourage entry and operation of private airlines/airports, competitive regulatory
framework with minimum controls is being structured. Price of ATF/AV Gas and various other
charges are being rationalized to encourage private air services in the feeder and regional routes.

MICHAEL PORTER ANALYSIS

INDUSTRY GROWTH DRIVERS

Organizational Innovation
Low-fare airlines (Southwest, Ryan Air, Deccan Airlines etc) are believed to be the strong drivers of
tourism which help in the increase of the leisure market growth to the price sensitive business travel
segment. The discounted airfares schemes are regarded as a potential option for the increase in the
air traffic.

Globalization:
Transnational airline alliances and airport groups helps in the globalization of the airline industry and
is one of the key growth drivers. The paradigm of new commercial concept rocking the airline
industry is hub and spoke model of operations which incorporates operators of Network Carriers,
Subsidiaries/JVs etc.

Technical innovation:
E-commerce, RJs, A380 New large aircraft, satellite-based navigation and other high end applications
will drive the airline industry to new heights.

Airline Industry
(Inter Rivalry
High)
Threat of Substitutes
(Low)
1. Railways
2. Transport
Barriers to Entry
(High)
1. Huge Capital
Requirements
2. No FDI allowance
3. High Maintenance
Cost
4. Brand Identity
5. Govt. Policy
Buyer Power (Medium)
1. No bargaining, fixed
price format
2. Highly price sensitive
buyer.
3. LCCs in Demand
4. Choice of Flier
Programmes
Supplier Power (Low)
1. Many suppliers
2. Substitutes in Flying
Programmes

CRITICAL SUCCESS FACTORS

Alliances among various players
Global alliances have developed with remarkable speed over the last half decade, in response to the
increasing liberalization of aviation markets around the world, the growing demand for convenience
and reliable service, and the drive for efficiencies in international commercial activity. During just this
brief period, these networks already have had a profound effect not only on the airline industry, but
also on its key beneficiaries consumers and communities. The growing importance and future
effectiveness of global airline alliances will depend to a large degree on the willingness of aviation
policy makers and potential regulators around the world to acknowledge and facilitate the positive
effects of airline alliances in a fully global aviation marketplace.

Airline Alliances

Selling tickets through Internet could result in cost saving of 10-15 per cent while increase in the
seating capacity result in 10-20 per cent savings. There could be savings worth 20-30 per cent in
operating similar type of aircrafts.

Source: World Airlines Report, 2002

INDUSTRY OUTLOOK

Future Outlook of the Industry
Future projections reflect that the air cargo industry both in the domestic sector and the international
sector will continue in its upward trend of growth. The domestic air cargo will continue at a
somewhat steady rate of growth whereas the international air cargo movement will flourish at a
higher rate of growth.
There are a host of new low-cost airlines getting ready to launch their services in India. About 10 to
12 new airlines are expected to join the fray and the final figure is anybodys guess. But there are at
least five players who are quite certain to make it to the final countdown and they are Vijay Mallyas
Kingfisher Airline, Air Indias Air India Express, AirOne and Visa to be launched by retired pilots of
Indian Airlines and Royal Airlines which will surely benefit the consumers with low air fares.
The entry of low cost airlines would also mean intense competition on the fares and the air routes.
Indian Airlines, Air Sahara and Jet Airways have already come up with lower fares to beat the
competition from Air Deccan that has announced fares as low as Rs 700. Overall the fares my come
down by 35-50 per cent and the seating capacity may go up by 40 per cent. The battle is likely to
intensify by each passing day.
The low cost airlines have made their presence felt in Europe and America. In US 3 million people
fly every day compared to 15 million people in India who travelled by air for the year ended March
2004. India operates 400 flights a day compared to 40,000 in US. There is large scope for expansion
in the civil aviation sector in India and it is poised for 9-10 per cent growth in the current year.
In India the international air travel market in the south is expected to grow into a whopping Rs 3,200
crore business in 2004, 26% higher than 2003, led by Karnataka and TN, followed by AP and Kerala,
as per industry estimates.

Globally, low-cost airlines operate from secondary airports where landing and parking charges are
much lower. So in London, a low cost carrier uses Luton airport instead of the Heathrow. In India
however, there are no secondary airports and no cost advantage thereof. Therefore with the opening
of low cost airports the LCCs will offer better service to attract more passengers in years to come
According to a forecast by National Council of Applied Economic Research, about 200 million
households will be able to afford air travel by 2010. By 2005 Indian airports are estimated to handle
60 million international passengers; 1.2 million tonnes of international cargo; and 300,000 tonnes of
domestic cargo.
Over next 7-10 years growth in domestic passenger traffic is estimated to grow by 12.5 percent per
annum. Growth in international passenger traffic during this period is expected to be around 7
percent per annum. Domestic cargo traffic is estimated to grow at 4.5 percent per annum and growth
in international cargo traffic is estimated at 12 percent.
For very light aircraft (2-19 seats) India is in the process of establishing a domestic industry with both
indigenous production and manufacture through collaborations with mainly European manufacturers
and this will boost the Indian airline industry.

The requirement of helicopters is expected to increase with the use of helicopters in heli-tourism,
adventure sports, mountaineering/trekking, point-to-point heli-services to bypass traffic congestion
on the road , connecting remote areas and islands in North east, Andaman and Nicobar and
Lakshadweep, religious places etc.
Indias air traffic statistics
Year
Domestic
Passengers
(in million)
Increase
(in per cent)
International
Passengers
(in million)
Increase
(in per cent)
2001-02 19.06 8.5 14.9 6.0
2002-03 20.68 8.5 15.8 6.0
2003-04 22.44 8.5 16.8 6.0
2004-05 24.35 8.5 17.8 6.0
2005-06 25.05 7.0 18.8 5.5
2006-07 27.87 7.0 19.8 5.5
2007-08 29.82 7.0 20.9 5.5
2008-09 31.91 7.0 22.1 5.5
2009-10 34.15 7.0 23.3 5.5
2010-11 36.54 7.0 24.6 5.5
2011-12 39.09 7.0 25.9 5.5
2012-13 41.44 6.0 27.2 4.9
2013-14 43.93 6.0 28.5 4.9
2014-15 46.56 6.0 29.9 4.9
2015-16 49.35 6.0 31.4 4.9
2016-17 52.32 6.0 32.9 4.9
Sources: Airports Authority of India, Foundation for Aviation and Sustainable Tourism

Forecaster 2000-2007 2007-2017 2000-2017
Boeing 5% 4.9% 4.9%
Airbus 5.3% 4.8% 5%
SNECMA 5.25% 4.25% 4.7%
IATA 4.7% n/a n/a
Source: Airlines Gate

Over the next decade, the world jet fleet driven by the 5% per year growth in air travel and greater
than 6% growth in air cargo is projected to grow from 12,300 airplanes at the end of 1997 to
17,700 airplanes in 2007 according to latest Boeings market forecast and 17,920 aircraft according to
latest Airbus forecast.
.

Indian Airline: Cygnus Business Consulting & Research

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