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SUMMER TRAINING REPORT SUBMITTED TOWARDS THE PARTIAL FULFILLMENT OF POST GRADUAT E 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: MR.ANIL KUMAR SINGAL Faculty Guide: MRS.HIMA BINDU KOTA FACULTY NIILM CMS OFF. DY GERENAL MANAGER (AUDIT) NACIL INFORMATION SHEET Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

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 comp any - 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 Gui de - Mr. ANIL SINGAL 7) Designation of the industry Guide - Off. DY General Mana ger 8) Students Name - AJAY SINGLA 9) Students Roll Number-28048 10) Students E-mai l ID- ajayniilm@gmail.com 11) Students Mobile/ residence numbers - +91999992244 NIILM CENTRE FOR MANAGEMENT STUDIES 1 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

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 NIILMCMS, New Delhi for giving me the platform to work with such an emergi ng company in the financial sector. I am thankful to my faculty guide Mrs Hima B indu Kota, NIILMCMS 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 Gup ta 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 nev er such a great success. I would also take the opportunity to thank the entire staff of AIR INDIA who hel ped 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 t he project. Ajay Singla PGDBM 2008-2010 NIILM-CMS, New Delhi NIILM CENTRE FOR MANAGEMENT STUDIES 2 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

CERTIFICATE This is to certify that Ajay Singla student of PGDBM (FINANCE) 2008 -10 Batch NI ILM-CMS has undergone summer training from 01.05.2009 to 31.06.2009 in NACIL. Du ring 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 NIILM CENTRE FOR MANAGEMENT STUDIES 3 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

CERTIFICATE This is to certify that this project work on A STUDY OF THE INDIAN AV IATION INDUSTRY WITH SPECIAL FOCUS ON ATF TRENDS is done by Ajay Singla PGDBM BAT CH 2008-10 under my supervision for partial fulfillment of PGDBM program and thi s 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 NIILM CENTRE FOR MANAGEMENT STUDIES 4 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

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 ch anges in their respective field of business & to move with the pace of the indus try. The environmental scanning makes it possible for every organization to stud y 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 compet ition in the field of Aviation many new players entered into this industry. So i t becomes very difficult to aviation companies to reduce the cost & earn good pr ofit. Objectives of the project: 1. To study the trend of the ATF (Aviation turbine fuel) 2. To do the ratio anal ysis of the company 3. To do the SWOT analysis of the company and the industry a s a whole. Industry Guide ANIL KUMAR SINGAL OFF. DY. GENERAL MANAGER NACIL NIILM CENTRE FOR MANAGEMENT STUDIES 5 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

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 Organizati onal structure o Corporate Vision o Business Strategy o Product Upgradation o Op erational 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 PSUs o ATF price movement in India o Price Structure in India o Expenditure of NACIL on ATF NIILM CENTRE FOR MANAGEMENT STUDIES 6 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

Staff Cost Ratio Analysis SWOT Analysis of AIR INDIA NDUSTRY Discussion and Conclusion BIBLOGRPHY NIILM CENTRE FOR MANAGEMENT STUDIES 7

SWOT Analysis of AVIATION I

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INDIAN AIRLINES INDUSTRY- AN OVERVIEW Defining Aviation sector The airlines industry comprises passenger air transport ation; 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 obt ained by airlines from transporting these passengers. The Indian airlines indust ry 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 domest ic segment was the industries most successful in 2006, generating total passenge r 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 increa sed with a CAGR of 25.6% between 2002 2006, to reach a total of 40.1 million peo ple in 2006. The industry s volume is expected to rise to 205.2 million people b y the end of 2011, this representing a CAGR of 38.6% for the 2006-2011 period. T he international segment contributed the remaining passenger volumes of 3.7 mill ion in 2006, equating to 9.1% of the industry s aggregate volumes. NIILM CENTRE FOR MANAGEMENT STUDIES 8 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

History of Aviation Industry in India The first commercial flight in India was made on February 18, 1911, when a Frenc h pilot Monseigneur Piguet flew airmails from Allahabad to Naini, covering a dis tance of about 10 km in as many minutes. Tata Services became Tata Airlines and then Air-India and spread its wings as Ai r-India International. The domestic aviation scene, however, was chaotic. When t he 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, an d 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, vor acious 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 airli nes 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 an d aviation is now viewed in a different light - as an essential link NIILM CENTRE FOR MANAGEMENT STUDIES 9 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

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 p art 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 c ountry and for providing stimulus to business activity and economic growth. Unti l 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 mer ged into either Indian Airlines or Air India and, by virtue of the Air Corporati ons Act, 1953; this monopoly was perpetuated for the next forty years. The Direc torate General of Civil Aviation controlled every aspect of flying including gra nting flying licenses, pilots, certifying aircrafts for flight and issuing all r ules and procedures governing Indian airports and airspace. Finally, the Airports Authority of India was entrusted with the responsibility o f managing all national and international air ports and administering every aspe ct 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 Corpora tion Act was repealed to end the monopoly of the public sector and private airli nes were reintroduced. NIILM CENTRE FOR MANAGEMENT STUDIES 10 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

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Market Volume The Indian airlines industry grew by 41.4% in 2006 to reach a volume of 40.1 mil lion passengers. The compound annual growth rate of the industry volume in the p eriod 2002-2006 was 25.6%. NIILM CENTRE FOR MANAGEMENT STUDIES 12 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

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 billi on, an increase of 425.2% since 2006. The compound annual growth rate of the ind ustry in the period 2006-2011 is predicted to be 39.3%. NIILM CENTRE FOR MANAGEMENT STUDIES 13 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

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2. Market Volume Forecasts In 2011, the Indian airlines industry is forecast to have a volume of 205.2 mill ion passengers, an increase of 411.8% since 2006. The compound annual growth rat e of the industr y volume in the period 2006-2011 is predicted to be 38.6%. Esti mated domestic passenger segment growth is at 12% per annum. Anticipated growth for International passenger segment is 7% while the growth for International Car go is likely to grow at a healthy rate of NIILM CENTRE FOR MANAGEMENT STUDIES 15 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

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AIR INDIA History of Air India Air India is Indias national Airline. Air Indias history can be traced to October 15, 1932. On this day J.R.D. Tata, the father of Civil Aviation in India and fou nder of Air India, took off from Drigh Road Airport, Karachi, in a tiny, light s ingle-engine de Havilland Puss Moth on his flight to Mumbai via Ahmedabad. Air I ndia was earlier known as Tata Airlines. At the time of its commencement, Tata A irlines consisted of one Puss Moth, one Leopard Moth, one palm-thatched shed, on e whole time pilot, one part-time engineer, and two apprentice-mechanics. Tata A irlines was converted into a Public Company under the name of Air India in Augus t 1946. On March 8, 1948, Air India International Limited was formed to start Ai r Indias international operations. On June 8, 1948, Air India started its interna tional services with a weekly flight from Mumbai to London via Cairo and Geneva with a Lockheed Constellation aircraft. In early 1950s due to deteriorating fina ncial condition of various airlines, the Government decided to nationalize air t ransport. On August 1, 1953 two autonomous corporations were created. Indian Air lines was formed with the NIILM CENTRE FOR MANAGEMENT STUDIES 17 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

merger of eight domestic airlines to operate domestic services, while Air India International was established to operate the overseas services. The word Intern ational was dropped in 1962. With effect from March 1, 1994, the airline has be en functioning as Air India Limited. Air India s worldwide network today covers 44 destinations by operating services with its own aircraft and through code-sha red flights. Important destinations covered by Air India are Bangkok, Hong Kong, Jakarta, Kuala Lumpur, Osaka, Singapore, Tokyo, Seoul, Dar-es-Salam, Nairobi, F rankfurt, London, Paris, Birmingham, Abu Dhabi, Al Ain, Bahrain, Dammam, Doha, D ubai, Jeddah, Muscat, Riyadh, Kuwait, Los Angeles, Chicago, Newark, New York, an d Toronto. Air Indias 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 B oeing 777-200 NIILM CENTRE FOR MANAGEMENT STUDIES 18 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

Incorporation Established in 1953 under Air Corporations Act Became Public Limit ed Company in 1994 Registered Office Head Office Authorized Capital Paid-up Capi tal : New Delhi : Mumbai : Rs 500.00 Crores : Rs 153.84 Crores Subsidiary Companies Air India has the following Subsidiary Companies with an Au thorized / Paid-up Capital (in Rs. Crores) as under Authorised (a) Hotel Corpora tion of India 40.00 (b) Air India Charters Ltd. 30.00 (c) Air India Air Transpor t Services Ltd. 0.05 (d) Air India Engineering Services Ltd. 0.05 10.00 100.00 3 0.00 41.00 Paid-up NIILM CENTRE FOR MANAGEMENT STUDIES 19 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

Subsidiary Companies HCI Hotel Corporation of India Ltd Centaur Hotels at Juhu, Mumbai Airport and Ra jgir Sold Centaur Hotel at Delhi, Chefair-New Delhi and Chefair-Mumbai Under Dis investment 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 NIILM CENTRE FOR MANAGEMENT STUDIES 20 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

AIESL Air India Engineering Services Ltd Incorporated to undertake engineering a nd other allied activities To be operationalized Cabinet approval required NIILM CENTRE FOR MANAGEMENT STUDIES 21 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

AIRCRAFT OF AIR INDIA The total aircraft on order are 111 (68 from Boeing and 43 from Airbus). Aircraf t on order include eight B777-200LRs, 15 B777-300ERs, 27 B787 Dreamliners, 18 B7 37-800s, 19 A319s, 20 A321s and four A320s. Of the 111 aircraft ordered, 24 Boei ng (five B777-200LRs, five B777-300ERs, 15 B737-800s) and 21 Airbus (12 A321s an d nine A319s) have been in the fleet so far. Aircraft Airbus A 310 Airbus A 319 Airbus A 320 Airbus A 321 Airbus A 330 Boeing 737-800 Boeing 747 Boeing 737 Boeing 777 Airbus A 310 Freighters Boeing 737 Fre ighters ATR* CRJ 700 Total 8 15 43 12 2 22 6 5 14 4 6 7 3 Total 147 NIILM CENTRE FOR MANAGEMENT STUDIES 22 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

ORGANIZATION STRUCTURE Organization Structure Chairman & Managing Director Chief Vigilance Officer ED - Engineering ED - Engine Overhaul ED- Operations DirectorEngineering DirectorFinance DirectorPersonnel DirectorCommercial* ED - Finance ED Materials Mgm t. ED IT ED - Com mercial ED - Public Relations** ED - Security ED - Ground Services ED - Northern Region ED Internal Audit ED - P lanning & Intl Relations ED Air Safety ED - Corporate Affairs ED - Properties & F acilities ** ED - Training * ED Co- ordination Company Secretary ED Inflight Services ED HRD ED - Medical Services * Yet to be appointed ** Presently in charge in the grade of GM. 9 NIILM CENTRE FOR MANAGEMENT STUDIES 23 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

Corporate Vision Vision To be among top five Asian airlines in terms of Yield, Profitability, Pro ductivity, Size and Quality Mission Focus on customer satisfaction Grow with emp hasis on sustained profitability Provide exciting and satisfying work environmen t to retain and develop employees committed to Corporate Vision Focus on social responsibility environment & community Objectives Achieve unit revenue, unit cos t, profitability, productivity and service level targets, based on benchmarked p arameters NIILM CENTRE FOR MANAGEMENT STUDIES 24 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

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 u nit costs through Increased asset (aircraft & manpower) productivity Out-sourcin g/hiving-off of non-core activities to subsidiaries Technology upgradation Bench marking & adoption of Best Practices NIILM CENTRE FOR MANAGEMENT STUDIES 25 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

Product Upgradation Customer Friendly Schedules Planned High frequency services with standardized ar rival/departures Network Connectivity Single aircraft services from source marke ts Expanded hub and spoke with own aircraft and from IC, Jet, Sahara Customer Se rvice Plans to match global standards of customer service through benchmarking, training & adoption of new technologies Improvements with New Aircraft Product I mprovements New/Fresh Interior State of the art Seats/IFE Better on time perform ance Business Class pitch of 76 Other Benefits Better Aircraft utilization Lower Fuel Consumption Lower Maintenance Expenditure NIILM CENTRE FOR MANAGEMENT STUDIES 26 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

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 I ncreased Flight Time Limits Settlement to be reached with pilots Cabin Crew - Ex ecutive crew to fly as per DGCA time-off regulations Computerization of Operatin g/Cabin crew scheduling Out-sourcing/Hiving-off Non-Core activities Activities a lready out-sourced Printing Press Crew/Employee Transport Potential for out-sour cing Medical Services Payroll/Revenue Accounting Canteen Civil Works Hiving off to subsidiaries Maintenance NIILM CENTRE FOR MANAGEMENT STUDIES 27 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

Ground Handling Information Technology Security Cargo Technology Upgradation IT Projects Revenue Management PROS implemented Ticketing Time-Limit software imple mented Direct connect with GDSs Integrated computerization system for MMD Disposa l of surplus/redundant inventory Implementation of Unit Load Device management s ystem Disaster recovery site at remote location Air India Express IT Infrastruct ure Data Mart for CRS sales data Ramp Assistance Billing System for GSD/Finance Online Financial Information System (FINESS) NIILM CENTRE FOR MANAGEMENT STUDIES 28 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

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, Man chester, Beijing, Taipei, Sydney, Lagos, Mauritius and South Africa Increased fr equencies on existing routes New airline subsidiary for distinctive brand positi oning Air India to offer premium product in long/mediumhaul markets Air India Expr ess to offer value for money product in price-sensitive markets Availability of ai rcraft, pilots and slots could be a constraint Plan may have to be modified base d on developments Gulf/Middle-East/South-East Asia NIILM CENTRE FOR MANAGEMENT STUDIES 29 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

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-wid e Free Flow Code Share & FFP Cooperation under implementation Special Prorate Ag reement implemented in November 2003 Cooperation in IT/MRO/Cargo being pursued A ir India developing relationship with other Star Alliance partners United Airlin es & Air Canada Joint Marketing Special Prorate Agreement Reciprocal code share FFP cooperation Will pursue FFP cooperation with other domestic airlines in Indi a to generate incremental revenue streams Will continue existing code shares wit h existing 14 airline partners & pursue such relationships with other airlines M ay also consider becoming a full-fledged member of a global alliance in the futu re NIILM CENTRE FOR MANAGEMENT STUDIES 30 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

Awards and Recognitions Air India was conferred the Best West Bound Airline from India award at the Galile o Express Travel and Tourism awards 2005 function held in Mumbai on 7 December 2 005. 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. Rea ders Digest Trusted Brand Gold Award was presented to Air India at a function held in Mumbai on 18 May 2006. NIILM CENTRE FOR MANAGEMENT STUDIES 31 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

Amalgamation of Air India Limited and Indian Airlines Limited with National Avia tion Company of India Limited The Government of India, on 1 March 2007, approved the merger of Air India and I ndian Airlines. Consequent to the above, a new Company viz National Aviation Com pany of India Limited (NACIL) was incorporated under the Companies Act, 1956 on 30 March 2007 with its Registered Office at Airlines House, 113 Gurudwara Rakabg anj 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, Dire ctor, 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 Ind ian Airlines were held in New Delhi on 28 June 2007, in which the Scheme of Amal gamation 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 wa s fixed on 8 August 2007 and the Order of the NIILM CENTRE FOR MANAGEMENT STUDIES 32 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

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 wh ile 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 f lying swan has been morphed from Air Indias characteristic logo The Centaur whereas the Konark Chakra was reminiscent of Indians logo. The Corporate Office of NACIL w ill be at Mumbai. The Government has approved the appointment of Shri V Thulasidas and Dr V Trived i as Chairman & Managing Director and Joint Managing Director, respectively, of the merged entity, with effect from the date of merger. NIILM CENTRE FOR MANAGEMENT STUDIES 33 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

MAJOR EXPENDITURE 1) ATF (AVIATION TURBINE FUEL):- Almost 40% of the total revenue. 2) SALARY:- Al most 20% of the total revenue. ATF (AVIATION TURBINE FUEL) Aviation fuel is a specialized type of petroleum-based fuel used to power aircra ft. It is generally of a higher quality than fuels used in less critical applica tions such as heating or road transport, and often contains additives to reduce the risk of icing or explosion due to high temperatures, amongst other propertie s. 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, alc ohol mixtures and other alternative fuels may be used experimentally but are not generally available. NIILM CENTRE FOR MANAGEMENT STUDIES 34 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

TYPE OF AVIATION TURBINE FUEL 1) Duty Paid Fuel: - It is a type of fuel which is used for the operation with i n 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 F uel: - It is a type of fuel which is used for the operations outside the India i n 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 internatio nal 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. Thi s is the cheapest type of fuel among all of the fuels. NIILM CENTRE FOR MANAGEMENT STUDIES 35 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

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 Ad ministered Price Mechanism (APM). This was based on a system of cross-subsidy fo r socioeconomic reasons prices of some petroleum products such as kerosene and d iesel 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 cost s and world market prices. Thereafter ATF prices in India have fluctuated widely depending on movements in world prices. Despite withdrawal of APM and linkage o f ATF pricing with international market prices, price of ATF in India continues to be much higher than the prices prevailing worldwide. Despite being competitor s with possibly differing input and refining costs, the three Government owned o il companies effectively work as a cartel; prices charged by the three oil compa nies are identical NIILM CENTRE FOR MANAGEMENT STUDIES 36 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

Monopoly of PSU Oil companies: A major reason for high price even after deregula tion of ATF price, is the monopoly of the 3 state owned Oil companies. Because o f 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 su pply of ATF as they were not allotted space by the Airport Authority. Recently R eliance has been allotted land at 25 airports in India; and is moving towards se tting 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 p rice 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 A TF 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 principl e, the Oil Companies also include a 16%-49% add-on towards marketing margin and NIILM CENTRE FOR MANAGEMENT STUDIES 37 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

contingencies on the Refinery Transfer Price after the addition of the import pa rity 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 Stat e 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 Refinery Transfer Price(RTP) Refined ATF Add-on of 20% - Import parity Marketing margin add on 21% Government levies of 3 5% - 8% Central Sales Tax plus 25% State Sales Tax ATF Price ATF Price to airlines Nearly double the world-price NIILM CENTRE FOR MANAGEMENT STUDIES 38 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

Thus, Domestic carriers in India pay nearly double the prices vis-vis elsewhere i n the world. ATF Expenses: Constitute around 40% of the total operating costs fo r domestic Indian carriers. ATF upliftment at metros during 2007-08 14000 12000 10000 Quantity (KL) Delhi 8000 Mumbai Kolkata Chennai 6000 Bangalore Hyderabad 4000 2000 0 April 2007-2008 June Aug Oct Months Dec Feb NIILM CENTRE FOR MANAGEMENT STUDIES 39 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

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. T he infrastructure Hydrants & Storage facilities are owned by Oil Companies, who a re 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 princip le not applicable for infrastructure facilities. Indian carriers are also not pe rmitted to hedge ATF prices Air India is permitted to hedge to a limited extent on Fuel uplifted outside India. Worldwide, airlines have derived significant fin ancial benefits by hedging ATF. ATF is the most important constituent of the ope rating cost of airlines in India. For successful operations of domestic airlines in India, it is imperative that ATF costs / prices be brought down to internati onal levels. NIILM CENTRE FOR MANAGEMENT STUDIES 40 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

Policy makers and aviation specialists have recognized the distortions created i n 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 Average 2001-02 Average 2002-03 Average 2003-04 Average 2004-05 Average 200 5-06 Average 2006-07 Average 2007-08 Average 2008-09 01.08.08 (All time high) 01 .05.2009 (Current price) Duty paid 18800 19900 21000 27500 35200 40500 42900 492 50 74600 34400 Bonded 14350 16700 17800 22500 26100 30500 31000 38800 53780 2450 0 NIILM CENTRE FOR MANAGEMENT STUDIES 41 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

60000 50000 40000 30000 20000 10000 0 2001- 2002- 2003- 2004- 2005- 2006- 2007200802 03 04 05 06 07 08 09 Duty Paid Bonded NIILM CENTRE FOR MANAGEMENT STUDIES 42 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

Movement of ATF in last 2 years Year 2008-2009 Duty 2007-2008 Duty MONTH APRIL MAY JUNE(Upto 4th) JUNE(From 5th) JULY AUGUST SEPTEMBER OCTOBER NOVE MBER (1-3) NOVEMBER 15) NOVEMBER (1630) DECEMBER (1-15) DECEMBER 31) JANUARY FEB RUARY MARCH (16(4Paid 56000 61150 72400 69300 72600 74600 63000 59750 50100 Bonded 43400 47350 52500 50300 52700 54200 47050 44100 38050 Foreign 36000 39200 41700 41700 46800 47450 39200 36550 29500 Paid 37800 39150 38400 38400 39650 41000 40050 41750 43450 Bonded 29050 31750 31350 31350 31700 33100 31900 33600 35050 Foreign 23500 25100 25400 25400 25875 26700 25950 27600 29350 47950 36250 29500 43450 35050 31100 42200 39650 36250 30750 29500 24800 43450 49750 35050 39350 32850 31500 35300 30750 24800 49750 47700 46900 49400 39350 37850 37250 38750 33250 32000 31350 32750

NIILM CENTRE FOR MANAGEMENT STUDIES 43 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

AT F R AT E S D U R IN G 2 0 0 7 - 0 8 & 2 0 0 8 - 0 9 80000 70000 60000 Rs / Kl 50000 40000 30000 20000 10000 0 M O NTHS 2 0 0 8 - 2 0 0 9 D u t y P a id 2 0 0 8 - 2 0 0 9 F o r e ig n 2 0 0 7 -2 0 0 8 Bo nd e d 2 0 0 8 -2 0 0 9 B on de d 2 0 0 7 - 2 0 0 8 D u t y P a id 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 pe r KL in august 2008 which is almost 82% high then the last year price of Rs 4100 0. and the highest Bonded ATF prices during last 2 years is Rs 54200 per KL in a ugust 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% NIILM CENTRE FOR MANAGEMENT STUDIES 44 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

high then the last year price of Rs 26700 per KL. But as the year move further t he 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 th e domestic ATF prices is 35300 which is almost 41% lower then the last year pric e 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 f uel 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, wh ich 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 - Highest - Gujarat - Tamil Nadu / Bihar - Kerala 30% 29% 29.0375% 25% NIILM CENTRE FOR MANAGEMENT STUDIES 45 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

- Madhya Pradesh - Lowest - Port Blair 28.75% 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 it s price in international markets. Even the bonded price applicable for internati onal 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 NIILM CENTRE FOR MANAGEMENT STUDIES 46 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

Average ATF prices in India (As on 1st May 2009) (Rs./Kl) Domestic flights Intern ational flights (Ex-India) ATF prices in international market 34400 24500 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% hig her compared to international ATF price. Despite, deregulation of ATF price sinc e, 1st April, 2002, there has been no major reduction in ATF price as PSU oil co mpanies continue to enjoy virtual monopoly for ATF supply in India. There is alm ost cartelization amongst PSU oil companies whereby they fix common ATF price as per some non-transparent formula applied by them. NIILM CENTRE FOR MANAGEMENT STUDIES 47 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

The fuel cost of NACIL including Alliance Air has gone up manifold over the year s as indicated below: Year 1999-00 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 (Budget est imates assuming 2007-08 av. price) (Rs.Crores) 1568 2271 2588 3944 5446 6331 730 9 7700 2009-10 (Budget estimates assuming Feb09/Mar09 price) 5291 2009-10 (Revised estima tes based on current price) 5300 T expenditure on AT otal F 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 19992002-- 2003- 2004- 2005- 2006- 2007- 2008- 200900 03 04 05 06 07 08 09 10 Total expenditure on AT F NIILM CENTRE FOR MANAGEMENT STUDIES 48 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

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 C entral Sales Tax Act to limit maximum rate of sales tax to 2% - Initially, ATF s old to turbo-prop aircraft was categorized as Declared Goods under Central Sales T ax Act since 2001 and the same was extended to cover all small aircrafts with ma ximum take off mass of less than 40000 Kgs in 2007. - Some State Governments hav e reservations about loss of revenue if they reduce sales tax rate on ATF. Howev er, it may be mentioned that their sales tax collection on ATF may just be a fra ctional percentage of their total sales tax collection and therefore, financial impact of sales tax reduction on ATF would be negligible. - On the other hand, r eduction in ATF price would contribute significantly to their economic, regional & tourism growth NIILM CENTRE FOR MANAGEMENT STUDIES 49 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

- 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 a irlines vis--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 f or domestic airlines in significantly improving their competitiveness by lowerin g cost of operations and provide the necessary financial stability. A booming do mestic aviation industry should be seen as a necessary infrastructural requireme nt to ultimately boost the economy, tourism and all round regional development i n the country. An FIA estimate indicates that a reduction in ATF price by 60% (t o bring it closer to international benchmarks) has an impact of lowering airline operational losses by 25%. NIILM CENTRE FOR MANAGEMENT STUDIES 50 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

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 t he first half of 2008 has led to a corresponding rise in the price of aviation t urbine fuel (ATF) for all airline companies, due to which they are expected to p ost heavy losses. Fuel cost as a percentage of total operating costs has increas ed by 300-600 basis points. Research has analyzed the movement in breakeven tick et prices of domestic carriers at various prices of crude oil and at varying loa d factors and concluded that a structural increase in ticket prices is required in the near term. NIILM CENTRE FOR MANAGEMENT STUDIES 51 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

STAFF COST: A staff cost constitutes nearly 20% of Air India s total cost. Currently, the ca rrier runs an annual wage bill of over Rs.3,000 crore. AI is also looking at imp roving 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 50 0 crore per annum. The following efforts were made to reduce the staff cost: - F reezing of external recruitment in non-operational categories; - Freezing of vac ancies and abolition 781 vacant posts; - Reduction in staff strength in India th rough 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); - Rede ployment of staff from non-operational to operational areas; - Reduction in temp orary postings and duty tours abroad; - Retrenchment of staff at foreign station s through Voluntary Retirement Schemes. NIILM CENTRE FOR MANAGEMENT STUDIES 52 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

RATIO ANALYSIS (As balance sheet available of year 2005-06) Short Term Solvency Ratio Current Ratio= 1.28 The current ratio of AIR INDIA mee ts the bare minimum of 1.33, which is considered by banks as the minimum accepta ble level for providing working capital finance. The ratio indicates that the co mpany not enjoys a better financial health and would not be able to meet its imm ediate debts. A ratio under 1 suggests that the company would be unable to pay i ts 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 the re are many ways to access financing. AIR INDIA dealings consists a major of Let ter 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 ra tio. Liquid Ratio= 1.09 The liquid ratio of the company is more than the preferred li mit 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 l iquidity measure, because it excludes inventory from current assets. . NIILM CENTRE FOR MANAGEMENT STUDIES 53 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

Working Capital Ratio=0.08 The working capital ratio is an indicator of the effi ciency of a company s management of stocks, debtors and creditors. If the workin g capital ratio is 0.2, this means the company needs 8p of working capital for e very Rs1 of annual sales. If annual sales increase by Rs1,00,000 of then the com pany will have to invest Rs8,000 in working capital to be able to meet this. A w orking 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 t he value of fixed assets (on the balance sheet). It indicates how well the busin ess 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 mone y tied up in fixed assets for each rupees of sales revenue. A declining ratio ma y indicate that the business is over-invested in fixed assets. However, financia l analysts claim that such a ratio is inconclusive: companies do not generally c ite 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 effect ive in using the investment in fixed assets to generate revenue. There is no exa ct number that determines whether a company is doing a good job of generating re venue from its investment in fixed assets. This makes it important to compare th e most recent ratio to both the historical levels of the company along with peer NIILM CENTRE FOR MANAGEMENT STUDIES 54 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

company and/or industry averages. But due to lack of availability of data this c ould not be done. Operating Ratio=104.52% It is a ratio that shows the efficiency of a company s m anagement by comparing operating expense to net sales. The smaller the ratio, th e greater the organization s ability to generate profit if revenues decreases. A n 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 shoul d be used cautiously because it may be affected by a number of uncontrollable fa ctors beyond the control of the firm. Moreover, in some firms, non-operating exp enses 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 be ing 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 th e operating ratio. One way to combat the effects of a business recession is to w ork 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 s lump. It s much easier to reduce these expenses 10 percent through more effectiv e management NIILM CENTRE FOR MANAGEMENT STUDIES 55 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

Operating profit & expenditure analysis (in crores) Operating Operating Operatin g Years revenue expenses profit 2006 8439 9870 -1431 2005 8833 9233 -400 2004 75 88 7538 50 2003 6146 6113 33 2002 5275 5465 -190 2001 4751 4805 -54 2000 4927 49 24 3 1999 4448 4372 76 1998 4135 4139 -4 1997 3837 4029 -192 1996 3533 3945 -412 NIILM CENTRE FOR MANAGEMENT STUDIES 56 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

12000 10000 8000 6000 4000 2000 0 2006 2005 2004 2003 2002 2001 2000 1999 1998 1 997 1996 -2000 O peating rev enue O perating expenses O perating 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 R atio is by increasing its trading margin, or by decreasing its cost of expenditu re. 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 compan y has been aggressive in financing its growth with debt. This can result in vola tile earnings as a result of the additional interest expense. If a lot of debt i s used NIILM CENTRE FOR MANAGEMENT STUDIES 57 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

to finance increased operations (high debt to equity), the company could potenti ally generate more earnings than it would have without this outside financing. I f this were to increase earnings by a greater amount than the debt cost (interes t), then the shareholders benefit as more earnings are being spread among the sa me amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and busine ss activities and become too much for the company to handle. This can lead to ba nkruptcy, which would leave shareholders with nothing. Revenue passenger carried A statistical unit in the airline industry; one fare-paying passenger carried on e mile. A revenue passenger kilometre (RPK) is a measure of the volume of passen gers carried by an airline. A revenue passenger-kilometre is flown when a revenu e passenger is carried one kilometre. A passenger for whose transportation an ai r carrier receives commercial remuneration is called a revenue passenger. This e xcludes passengers travelling under fares available only to airline employees an d 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 passen gers carried on each flight stage by the stage distance - it is the total number of kilometres travelled by all passengers. NIILM CENTRE FOR MANAGEMENT STUDIES 58 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

Revenue passenger carried 5000000 4500000 4000000 3500000 3000000 2500000 200000 0 1500000 1000000 500000 0 199798 199899 199900 200001 200102 200203 200304 2004 05 200506 200607 Revenue passenger carried 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 seatkilometres availab le. This is a measure of capacity utilisation. As airlines frequently have heavy fixed costs and are capital intensive, the efficiency with which assets are use d is crucially important. This is an important efficiency measure, but it does n ot 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 t he number of kilometres flown. NIILM CENTRE FOR MANAGEMENT STUDIES 59 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

Passenger load factor 74 72 70 68 66 64 62 60 58 1997- 1998- 1999- 2000- 2001- 2 002- 2003- 2004- 2005- 200698 99 00 01 02 03 04 05 06 07 Passenger load factor NIILM CENTRE FOR MANAGEMENT STUDIES 60 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

SWOT ANALYSIS OF AIR INDIA Air India is the leading airlines in the India. Air India is based on domestic e nplaned passengers and scheduled domestic departures. Air India has shown a stro ng performance in revenues in 2008. Strong operating performance lends financial stability to the company which could be leveraged to seek more growth avenues o f growth in future. However, the rising prices of aviation turbine fuel could ad versely affect Air India operating margins. Strengths Operational performance Air India registered a strong operational performance fo r fiscal 2008-09. The company recorded revenues of Rs 15000 Crore during the fis cal year, an increase of 70% over 2005-06. During fiscal year 2008, the companys revenue growth was driven by increase in passenger segment revenue and merger wi th Indian airlines. The increase in passenger revenues primarily was due to an i ncrease in capacity, and an increase in load factor. In addition the revenue gro wth is backed by growth in freight and cargo revenues, which was a result of hig her rates charged. This growth was also partly driven by improved efficiency in the companys operations. Strong operating performance lends financial stability t o the company which could be leveraged to seek more growth avenues in the future . NIILM CENTRE FOR MANAGEMENT STUDIES 61 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

Market leadership Air India is the leading airlines in the India. The airline has been ranked the top in Indias domestic airline (in terms of number of passengers) by the bureau o f 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 fi rst in market share in India. Its strong market position is driven not just by c onsistent delivery of low fares but also due to reliable service, frequent and c onvenient flights, comfortable cabins, in-flight experience, frequent flyer prog rams, hassle-free airports, and friendly customer service. Strong market positio n gives the company the advantage of scale and helps it in strengthening its bra nd image. Weaknesses High dependence on passenger revenues Passenger revenues accounted for major par t of the Air India total revenue. Cargo services allow airlines to generate addi tional 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 c ustomers. Small cargo business exposes Air India to the demand fluctuations in p assenger business. NIILM CENTRE FOR MANAGEMENT STUDIES 62 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

Lower load factor Though the overall operating performance has been steady, Air India passenger load factor of 63.2%, which was the companys record, lags the ind ustry 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 companys load factor is decreasing year by year, in 200506 load factor is 66.2% which is more than p resent load factor. Air India load factor is likely to be low because of the muc h higher frequency operated on each route. Lower load factor could decrease the companys 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 t he US Commerce Department shows that ticket price is the number one criterion fo r passengers when selecting a flight, well ahead of the availability of a non-st op service. As markets have progressively matured, the GDP elasticity of air tra vel demand has declined. In the US for example, a 1% growth in GDP will typicall y result in a 1.2% growth in domestic air travel, compared with a growth of almo st 2% in air travel some 20 years ago. NIILM CENTRE FOR MANAGEMENT STUDIES 63 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

Growth in freight business The Indian economy is one of the fastest growing in the world, but the boom is n ot without its stops, starts, and bottlenecks, all of which also make themselves felt in the countrys freight transport sector. Air India had also launched a maj or 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 incentiv e trip on Star Cruise. In January 2008, Air India registered a growth of 6.4% wh ereas 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 A ir India cargo showed an increase of 43.4%. Strong economic and foreign trade gr owth 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 econ omic activity in emerging Asian countries such as China and India. Traffic is pr ojected 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. Again st this backdrop, Air India is NIILM CENTRE FOR MANAGEMENT STUDIES 64 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

well positioned to benefit with its increasing emphasis on Asia-Pacific operatio ns. 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 na ture of the Aviation industry worldwide. ATF consumption has roughly doubled fro m 2002 to 2007 The ATF prices in India are substantially higher than its price i n international markets. Aircraft fuel is a major contributor to Air India opera ting expenses. Moreover, the bonded price applicable for international flights e x-India is higher than the ATF price in the international markets. Priced 65% hi gher in India on an average, compared to international benchmarks. Therefore, th is will need stronger revenue growth and greater cost controls in other areas to overcome the increase in fuel prices. NIILM CENTRE FOR MANAGEMENT STUDIES 65 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

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 an other 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 posit ive trends in the India for the company. Year GDP, constant price Percentage Change 2003 2004 2005 2006 2007 2008 6.88% 7.89% 9.13% 9.75% 9.21% 7.90% 50.54% 14.99% 15.79% 6.75% -5.47% -14.25% NIILM CENTRE FOR MANAGEMENT STUDIES 66 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

GDP real Growth Rate 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 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 na me and ambitious growth plans over the next seven years. Air India also faces in creased competition from Air Deccan low-fares subsidiary, Song. Moreover, major legacy airlines have been focusing on restructuring costs, which has improved th eir competitiveness. With costs restructured, the legacy airlines are becoming more formidable competitors in terms of increasing capacity, matching prices and leve raging their frequent flier programs. Increasing competition could adversely aff ect the companys margins. NIILM CENTRE FOR MANAGEMENT STUDIES 67 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

SWOT Analysis of Aviation Industry Strengths Liberal Environment: India s airlines operate in a liberal environment in both t he domestic and international spheres. With three major airline groups and four smaller carriers all operating domestic routes, there is no shortage of competit ion, although this factor combined with excess capacity has tended to depress yi elds. Nevertheless, carriers are free to operate any domestic routes without see king permission from the government, and without restriction on pricing. One con dition that airlines find onerous however, is the requirement to operate a propo rtion of ASKs to remote and underdeveloped regions of the country. On the intern ational front, the Indian government has pursued an increasingly liberal approac h to bilateral air services agreements with key overseas markets, resulting in g reater access for foreign carriers. Emirates for example, the largest foreign ca rrier 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 internat ional capacity share of just over 36% but face strong competition from foreign c arriers, 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 NIILM CENTRE FOR MANAGEMENT STUDIES 68 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

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 opera ting models in existence. Jet Airways and Kingfisher Airlines are competitive in terms of their in-flight service against the leading carriers in the world. Kin gfisher for example is one just half a dozen global carriers such as Singapore A irlines and Cathay Pacific, with a Skytrax 5 star rating. In fact it could be ar gued that the full service product on domestic routes is excessive for the secto r lengths involved and results in a higher cost structure, which the passenger d oes not necessarily see value in paying for. The LCCs too, by and large, offer a comfortable, efficient and reliable service. Until a couple of years ago, Air De ccan was one carrier that had developed a reputation for poor on-time performanc e, flight cancellations and overbooking, however since being acquired by Kingfis her, 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 co untries. 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 glo bal economic recession, this was a creditable performance. The increased busines s confidence following the general election result in May 2009 has eased concern s that growth may slow further. The stock market has soared 25% in the last NIILM CENTRE FOR MANAGEMENT STUDIES 69 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

month and the outlook for growth and consumption has improved, which is a positi ve for the aviation industry. Political Stability: The re-election of the Congress Party, with a stronger majo rity is expected to allow the new administration to push ahead with further econ omic 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 agen da is extremely encouraging. In addition, Minister Praful Patel, who was the arc hitect of the dramatic transformation of the aviation sector, has retained the p ortfolio, 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 dec ades of neglect, many of India s airports were forced to operate well above desi gn capacity. The resulting congestion in the terminals and on the runways delive red a poor experience for the passenger and a costly, inefficient operating envi ronment 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 fa cilities at Delhi and Mumbai. The upgrade of non-metro airports remains behind s chedule so it may be another 3-4 years before we see good quality facilities acr oss the country, but there are tangible signs of improvement. NIILM CENTRE FOR MANAGEMENT STUDIES 70 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

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 exp ensive aircraft holding patterns, indirect flight paths and sub-optimal use of r unways. National Carrier: The state-owned carrier, Air India, is in a dire situation. Th e 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 Indi a as an urgent priority. Deep Pockets: Over the last three years, India s carriers have accumulated billi ons of dollars in losses and debt. Ironically, a characteristic that would norma lly be considered a strength - namely deep pockets - has resulted in carriers re maining afloat that would perhaps in other circumstances have failed. With the b acking of either the government or large corporations, several carriers have bee n able to access funding that they might have been denied on a strictly commerci al basis as standalone airlines. As a result of the intense competition which ha s been perpetuated, airlines have struggled to raise fares to break even levels. NIILM CENTRE FOR MANAGEMENT STUDIES 71 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

High Cost Structure: India s airlines operate in a relatively high cost environm ent, primarily due to the punitive taxation structure. The greatest impact is fe lt in the area of sales taxation on fuel, which can increase the cost to 60% abo ve the international benchmark. The limitations of airport infrastructure also i ncrease costs due to the fact that carriers are unable to schedule fast turnarou nds, 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 20 08, 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 learni ng on the fly. This means there is a lack of in-depth experience and knowledge a t all levels. Furthermore, there is an absence of high quality training infrastr ucture in-country to deliver the resources to support future growth. This lack o f personnel affects the government as well and the FAA has expressed its concern at the shortage of qualified safety inspectors within the Directorate General o f 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 In dian carriers would not be permitted to increase services to the US. NIILM CENTRE FOR MANAGEMENT STUDIES 72 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

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 domesti c 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, l ess 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 econo mic 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 aviat ion was a neglected sector for so long has allowed airports such as Dubai and Si ngapore to effectively establish themselves as offshore hubs for Indian passenge rs, and they now have a significant head start. However, as India s airports imp rove, 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 avia tion sector despite, and not because of, its environment. The NIILM CENTRE FOR MANAGEMENT STUDIES 73 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

improvements in airport and airspace infrastructure, the development of indigeno us training and maintenance facilities and the potential for fiscal reform, all point to the potential for Indian aviation to increasingly operate in a lower co st, higher quality and more efficient manner. This could in due course lead to a n 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 Ind ia, with high frequencies from multiple destinations to their hubs, from where p assengers can access extensive global networks. The ability for a passenger for example to travel one-stop from Ahmedabad to Hamburg, or multiple daily frequenc ies 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 questi on is how far ahead will the Middle East carriers be by that stage. Terrorism: India has seen frequent terrorist activity in recent years. The count ry has shown great resilience in bouncing back after each attack; however inboun d international traffic in particular is sensitive to such events. Similarly the potential for India to develop as a global traffic and services hub is continge nt upon it being seen as a safe and attractive destination. NIILM CENTRE FOR MANAGEMENT STUDIES 74 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

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 2,5 00-3,000 crore for the next four to five years, which will be linked to the indu ction 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 i nitial 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 b e 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 c rore 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 h it all airlines, has affected the already struggling AI particularly badly and i t needs a massive cash infusion to stay in the skies. However, it was made abund antly clear to NACIL that any financial help from the government will come, if a nd only if, NACIL is able to convince it about two things it has a plan, and mor e importantly, that NIILM CENTRE FOR MANAGEMENT STUDIES 75 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

it can implement it. Also, any assistance from the government would have to be m atched 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 c ost reduction proposal. On the salary front, AI and IA give their 31,000-odd employees performance-linke d incentives (PLI), which comprises almost 60-80% of their overall pay package a t 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 tr ying to cut the PLI but reaching an agreement with unions could be more difficul t 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 f or the new planes that would also be very fuel efficient unlike the old rented A TF 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 la khs. The airline also told the panel that it needed new aircraft to phase out th e old ones in its fleet in order to compete. NIILM CENTRE FOR MANAGEMENT STUDIES 76 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

Other remedial costs measures taken to improve operating results include:- Focus on cost reduction and rationalization of costs in major areas of Company s func tioning; - closing down uneconomical offices and the down sizing of foreign offi ces; - More economical hotel accommodation for operating and Cabin crew; - Intro duction 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 an d 25% at Indian stations; - Reduction of meal wastage and the rationalization of catering on board; - Curtailment of Cash Publicity Budget; - Curtailment of ove rtime, temporary posting and a substantial reduction in costs in respect of cont rollable heads viz. Communication, Printing and Stationery, General Charges etc; - Outsourcing of staff transport and redeployment of drivers to operational are as. NIILM CENTRE FOR MANAGEMENT STUDIES 77 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

BIBLOGRPHY www.airindia.co.in www.wikipedia.org http://search.ebscohost.com Business India Economics Times I M Pandey NIILM CENTRE FOR MANAGEMENT STUDIES 78 Evaluation notes were added to the output document. To get rid of these notes, p lease order your copy of ePrint 5.0 now.

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