Professional Documents
Culture Documents
Air India
Air India
SUBMITTED IN PARTIAL FULFILLMENT FOR THE AWARD OF THE DEGREE OF BACHELOR OF BUSINESS ADMINISTRATION 2009-12 UNDER THE GUIDANCE OF Ms.Divya singh (Project Co-ordinator) SUBMITTED BY: ANKUR VATS Enrollment no - 12724401709 BBA SEM Vth E2
STUDENT UNDERTAKING This is to certify that I have completed the Project titled Financial Performance of N.A.C.I.L (Air India) before and after Merger under the guidance of Ms.Divya singh in partial fulfillment of the requirement for the award of degree of Bachelor of Business Administration at Institute of Institute of
Innovation In Technology and Management, janakpuri, newdelhi. This is an original piece of work & I have not submitted it earlier elsewhere.
ANKUR VATS
BBA Sem V e2 Enrollment No: 12724401709
CERTIFICATE
This is to certify that the project titled Financial Performance of N.A.C.I.L (Air India) before and after Merger is an academic work done by ANKUR
VATS
submitted in the partial fulfillment of the requirement for the award of the degree of Bachelor Of Business Administration from janakpuri, newdelhi Institute of Innovation In Technology and Management under my guidance & direction. To the best of my knowledge and belief the data & information presented by him in the project has not been submitted earlier.
Ms.Divya singh
Project Co-ordinator
ACKNOWLEDGEMENT This project has been done under the sincere guidance of ms. Divya singh without which I would not have been able to come to the conclusion of this project. He has guided me throughout the project from the beginning to the end. I am also thankful to Mr. lovelish Arora (Finance) NACIL, Northern Division to allow me to do my summer training in a prestigious company like Air India on project titled Financial Performance of N.A.C.I.L (Air India) before and after Merger and let me prove my excellence in this area.
ANKUR VATS
BBA Sem V E2
TABLE OF CONTENTS
StudentDeclaration i Certificate from company Certificate from Guide Acknowledgement Executive Summary Chapter-1 Industry Profile Chapter 2 Company Profile Chapter 3 Research Methodology Chapter 4 Functioning of Finance Department in Northern Division Chapter 5 Amalgamation of Air India and Indian Airlines Chapter 6 Ratio Analysis Chapter 7 ii iii iv v
SWOT Analysis Chapter 8 Conclusion Chapter 9 Challenges and Issues Faced Chapter 10 Recommendations Bibliography... vi
At the time of independence there were 9 airlines operating with and beyond the frontiers of the country carrying both air cargo and passengers. It was reduced to 8 with Orient Airways shifting to Pakistan. These were: Airways India Ltd. Air Services India Ltd. Bharat Airways Ltd. Deccan Airways Ltd. Himalayan Aviation Ltd. Indian National Airways Ltd. Kalinga Airlines.
Taking into consideration to deteriorating financial position of the conglomeration of private airlines, the Govt. nationalized the Airlines Industry in 1953 through Air Corporation Ace 1953. Nationalization resulted in creation of two companiesIndian Airlines Corporation (operating domestic services and short range International services to adjacent countries) & Air India International (operate for overseas services) & assets of all then existing companies transferred to those companies. Foreign airlines carrying international passenger traffic to and from India existed long before Independence. Their operations are governed by bilateral agreements signed from time to time between the Government of India and the governments of respective countries. In 1980-81, the number of such airlines was 35. It rose to 49 in 1996-97.
The share of foreign airlines in Indias scheduled international traffic has increased. In 1971, their share was 55.58 per cent which went up to 65 per
cent and declined to 58 per cent during 1972-75. It fell to 55.72 per cent in 1976 and further to 55.02 per cent in 1977. Between 1978 and 1990 it gradually increased and rose to 75.93 per cent. In 1996, the share was nearly 72 per cent. The act prohibited any other than two companies to operate any schedule air transport to or across India. The repeal of Air Corporation Act from 1 s t March 1994 enabled private operators to provide air transport services. Eight operators got the nod to commence operation out of which only two have survived: Jet airways Sahara India
Aviation services in developed countries are categorized into three levels: 1. Trunk Routes- Which connect major city pairs 2. 3. Regional Air Services Which connect smaller towns, over small aircraft Non-Scheduled Services Which include air taxi, charters, shorter distances with
corporate or private aviation In India unfortunately the regional and non-scheduled or Tier 2 and Tier 3 services are almost non existent. Even though such services normally constitute a small percentage of domestic air services, the importance of such services should not be under-estimated, as general aviation forms the entry point for personnel to enter the industry and gain grassroots experience. In 1953 a new dream took shape to air link the vast South Asian subcontinent by a single, modern and efficient airline. The airline was Indian Airlines. Today, Indian Airlines, together with its fully owned
subsidiary Alliance Air, is one of the largest regional Airlines system in Asia with a fleet of 56 aircrafts, 8 wide bodied Airbus A300s, 34 Fly-bywire Airbus A320s, 11 Boeing 737s and 3 Dornier D-288 aircrafts. Indian Airlines has been setting the standards for civil aviation in India since its inception in 1953. It has many firsts to its credit, including introduction of the wide bodied A300 aircraft on the domestic network, the fly-by-wire A320, Domestic Shuttle Service and Walk-in-Flights. Its unique orange and white logo emblazoned on the tails of all its aircrafts is perhaps the most widely recognized Indian brand symbol that, over the years has become synonymous with services, efficiency and reliability.
Type
Government-owned
Industry
Airlines & Aviation Airline Catering & Foodservice Hotels & Hospitality
30 March 2007 Air India Building, Nariman Point, Mumbai, India Arvind Jadhav, Chairman & Managing Director
Products
Rs 15257.47 Crores ($3.31 billion) (2007-08) Rs 1619.12 Crores ($351.98 million)(07-08) 32,000 (2009)
Hotel Corporation of India Limited Air India Air Transport Services Limited Air India Engineering Services Limited
Air India Charters Limited IAL Airport Services Limited Airline Allied Services Limited
Website
www.airindia.in
Research Methodology
Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying how research is done scientifically. In it we study the various steps that are generally adopted by a researcher in studying his research problem along with the logic behind them. It is necessary for the researcher to know not only the research methods or techniques but also the methodology.
Region
[A]
The basic function of Area Revenue Division (ARD) is to book "Traffic Revenue" earned by Indian Airlines in its books. The various components of Traffic Revenue are: 1. 2. 3. 4. 5. Mail Revenue: This is the revenue derived from the carriage of Mail on the routes of the carrier. Airfreight Revenue: It is the revenue derived from carriage of cargo on the routes of the carrier. Excess Baggage Revenue: It is the revenue derived from carriage of excess baggage on the routes of the carrier. Passenger revenue: It is the revenue derived from the carriage of passengers over the routes of the carrier. Pool Revenue: Pool is an agreement entered into by two national carriers operating on the same route, to pool their revenue in a kitty and then share the same on a mutually agreed basis. The main object of such agreements is to make the services operated by the Pool Partners complementary and not competitive. Revenue generated by such a pool is Pool Revenue. 6. Charter Revenue: It is the revenue derived from the Chartering operations. Charter is a special arrangement, whereby for an agreed operation, the carrier places the entire capacity of an aircraft at the disposal of the person requesting for charter services. All these revenues are booked by ARD in books of Indian Airlines with an instrument of maintaining records known as "Reporting Form".
Accounts Officer(s)
Accounts Officer(s)
Accounts Officer(s)
Staff
Staff
Staff
Sections at ARD :
1. Agency: Deals with the agents of Indian Airlines and maintain records of all the transaction or sales done by Agents through Reporting Forms. 2. Screening: Performs the sequential screening of all the Reporting Forms and execute Interline Billing.
3.
Bills Receivables (B/R): It maintains the records of all the credit parties of Indian Airlines and raise bill or debit notes to such parties for services rendered to them by Indian Airlines.
1. Agency Section
This section deals with the agents of Indian Airlines and maintains records of all the transactions or sales done by the agents through the reporting forms. About 80% of Indian Airlines sales are through its agents & there are about 600 Indian Airlines agents in Northern Region. The Agency Section at ARD deals with all Indian Airlines agents maintains records, take disciplinary actions against defaults if any & prepare concealed summary of all transaction through agents for the Head Quarters. Agent : An agent is an individual or an organization authorized to act for and on behalf of an airline, subject to the terms and conditions specified in the Agency Agreement. Passenger Agents of Indian Airlines are authorized to issue Passenger Tickets and Cargo Agents are authorized to issue Consignment Notes/Air Waybills. There are two kinds of agents: General Sales Agent (GSA): A GSA is one and only one agent authorized by Indian Airlines to operate in a particular country however he can have sub-agent under him. Indian Airlines have their GSA's in U.K., U.S.A., Russia and Canada. GSA's are entitled to Special rates by Indian Airlines as per the contract.
Passenger Sales Agent (:PSA) When various Sales agents are appointed by Indian Airlines for the same region, they are known as PSA's. The rates for all the PSA's are same and fixed in advance.
a.
New applicants apply to the commercial department, which scrutinize the applications at very step and then forward the applications to the finance department. Finance Department checks the financial viability of the applicant and confirms the Bank Guarantee provided by the applicant. Bank Guarantee should be at least of Rs. 2 lacs. Once the verification of documents is complete the Agency Section allots an agent with a unique code. Bank Guarantee is taken from the agents and tickets are issued to the agent. b. Maintaining records of Agents:
Agents are required to submit details of each and every transaction or sale to ARD, records of which are maintained by agency section. Agents are supposed to submit following Reporting Forms: AGT-1: Agents will prepare Reporting Form AGT-1 in duplicate incorporating the particulars of sale of tickets each day. In AGT-1, the value of tickets sold on Normal and Concessional Fare basis will be reported separately. In case tickets are voided, the reasons therefore will be mentioned on the voided document. Such documents will also be reported in AGT-1 with the remark 'voided' in the "Remarks" column. Agents will also prepare sheet-wise Summary of AGT-1.
The total number of voided coupons will also be mentioned in the Summary of AGT-1: Agents will forward the original copy of AGT-1 to ARD on daily basis. The audit coupons of the sold documents will be attached to each AGT-1 sheet in the order of reporting. AGT-2: Agents will prepare Form-AGT-2 in duplicate, consolidating the bookings made during a fortnight. This form will show the value of bookings reported through AGT-1. This form will also show the amount of commission due to the agent on the bookings made during that fortnight. Agents will forward the original copy of AGT-2 to ARD by the stipulated dates. AGT-3: Agents will prepare Form-AGT-3, in duplicate, incorporating the particulars of refunds affected during a fortnight. Agents will forward the original copy of AGT-3 to ARD by the stipulated dates. AGT-4: Agents will prepare AGT-4 in duplicate, consolidating the net booking reported through AGT-2 and the net refunds reported through AGT-3. This form will also show the particulars of Invoices/Debit Notes rose on the Agent and Credit Notes issued to the Agent. This form will also show the net amount payable by the agent in respect of the fortnight's transactions. Agents will forward the original copy of AGT-4 together with copies of Credit Notes
reported in AGT-4 and a Demand Draft for the net amount due to IAL, to ARD by the stipulated dates.
c.
All these forms are scrutinized and for any discrepancies, disciplinary actions are taken against the agents. These actions are generally "legal" but due to growing complexities of legal procedures Indian Airlines is getting its transactions with agents insured. Thus, defaults if any are recovered by insurance agencies. d. Reconciliation:
Another major job of the Section is to prepare concealed summary of all the transactions by each and every agent and the total revenue accrued. A TDS of 2.05% is to be deducted out of the commission of the agents and to be submitted to the authority by stipulated dates. The Agency Section is also responsible to the agents for providing the certificate of TDS, for them to file their annual return.
e.
Billing of Charter:
Charter: It is a special arrangement, whereby for an agreed operation, the carrier places the entire capacity of an aircraft at the disposal of the person requesting for the charter. Fixed charges for charter are: Airbus-320 A-300 Boeing Rs. 330,000 /hr Rs. 550,000 /hr Rs. 260,000 /hr
f.Foreign transactions:
For the Indian Airlines agents abroad, all the transactions are carried through BSP with the help of IATA agent. Sale of tickets, transfer of revenue and payment of commission to agents, everything is done through IATA agents.
2. Screening Section
This section performs the sequential screening or checking of all the reporting forms and executes Interline Billing. The basic function of the Screening Section is to screen: a. Reporting Forms b. Sales Records (JVs) c. Interline Billing d. Mail Statements recovered from outstations a. Reporting Forms:
Reporting Forms are standard formats designed to report the sale of Cash Value Documents (CVDs) that is basically the air tickets. The Reporting Forms in use in I.A.L. are as follows: a. Reporting Form-1: Issuance of Passenger Tickets, Excess Baggage Tickets and MCOs b. Reporting Form-2: Issuance of I.A.L. Air Waybills and carriage on other airlines AWBs on IAL routes c. Reporting Form-3, 4, 5, 6, I (Insert) & D (Delete): Adjustments in Sundry Parties (Computerized) Accounts d. Reporting Form-7: Outstanding Recoveries & Miscellaneous receipts e. Reporting Form-8: Receipts form agents f. Reporting Form-9 & 9A: Cash & Credit Refunds g. Reporting Form - 10: Bank lodgment
b.
Journal Vouchers:
It confirms that the tickets are issued serially by the agents and that they report them along with the rates charged for the service along with details of any concession and discount offered. For any discrepancies Debit Notes are issued to agents for the same amount. c. Interline Billing:
Suppose a Dealer at Bangkok wants to deliver some goods to Jaipur, the transit will be as follows: Bangkok ----- Delhi-------Jaipur Thus the dealer will deposit the entire sum at Bangkok and the transit of goods from Delhi to Jaipur will be by Indian Airlines thus the Indian Airlines will raise the Bill on Bangkok Air for the transit. This is known as Interline Billing. d. Mail Statement:
This is to keep a check on the weights transited as Mails and charge on them. The various mail transits are as follows: State -to-State Region -to-Region Country-to-Country Speed Post etc.
Another job for the section is to keep a check on the money received for the transactions. It needs to prepare all the bank documents regarding receipts, refunds and concealed Net Receipts and dispatch them to the CRA or EDP along with the Bank Statements confirming the deposit in Bank.
1. Computer Cell: Indian Airlines issues tickets and provides services to certain "credit parties" like Government Departments and big business houses. It recovers the credit amount due from them on monthly basis.
These parties initially approach to the commercial department for the authorization. Once the terms & conditions are signed a permanent credit code is allotted to the party. Now with the authorization letter and the credit party code Indian Airlines services can be availed on credit and the bills are sent to the party directly. Authorities to avail services are given for a fixed period known as "Extension Period". After the extension period, bills are drawn, payment is collected and the parties are intimated to pay. However if the party fails to clear the bills within the stipulated time period the authority is suspended. 2. Non-Computer Cell: The non computer cell recovers any credit due from internal parties, that is, the employees. The collections from internal parties can be on account of the following: Credit Cargo: It is when consignor agrees to pay a booking
amount and consignee is supposed to pay the cargo/freight charges at the destination on point of receiving the cargo. Thus, it is duty of station manager to recover such amount. Issuing Recovery Section: Sometimes due to human error there
are short collections on account of booking amount on cargo or packs at the stations. When the Screening Section identifies such short collections it either asks the EDP or itself raises the bill on Station. The Station manager follows it up and recovers the amount. Staff Clearance: Bills Receivable Section also recovers the
pending clearances from the staff. Non Computer Cell maintains the records of the recovery from the employees and raise the bills on staff accordingly which are further dispatched to the payroll Section so as to be recovered from the salary of the employee.
[B]
Expenditure Division
Expenditure Division is responsible for accounting for the expenses made in the region. This includes expenses on salary bills, purchase of stationery and any other administrative expenses. The division however does not book any expenditure that is related to the aircraft in any way.
1. Bill Passing-Local
All the goods, products and equipment that are required for the day-to-day operations by the supporting departments are purchased in bulk to be stored in anticipation of future requirement. The Bill Passing-Local passes all the bills regarding purchases like centralized purchasing of uniform, catering, stationary etc. for all 5 regions.
The major functions of this section are: a. Purchasing b. Deductions c. Security Deposits a. Purchasing: The Store & Purchase Section places the purchase order for every local purchase (including all cash sales). Three documents required for the purchase order are: a) Initial proposal by vendor. b) Invoice by seller.
Thus the major job of this Section is to maintain records for all the local, purchases made and to pass the bills concerned. These goods are first brought to Delhi and then dispatched to all 5 regions as per the requirement.
b. Deductions: Another important job of Bill Passing-Local is to deduct TDS from the commission or charge paid to vendors for the labor services provided by them. Certain goods in stores are such that they posses the Indian Airlines logo on them for e.g. stationary, bags, tags, folders, batches etc. Thus the Indian Airlines gets those goods printed form the vendors. Generally Indian Airlines provides goods
to the printers and thus a TDS of 2.05% is deducted form the service charges provided to them by Indian Airlines. c. Security Deposit: This is the sum of amount that the vendors need to pay as a security for the transactions with Indian Airlines. All the vendors have to deposit a 10% amount of the order with Indian Airlines for all catering purchases. Even for the items for printing, the vendors are required to deposit a sum equivalent to 10% of the value to goods or material advanced to them by Indian airlines.
2. Bill Passing-Outstation
The northern region of Indian Airlines has its dealings in 15 outstation of which 14 are online and 1(Bhillai) is offline. Bill Passing-Outstation is the controlling authority for these outstations. They issue advance Imprest Cheques of a predetermined value to all the stations on weekly basis. These cheques are always in name of Station Manager & he is the designated person who has the authority to encash it. The Imprest amounts for various outstations are as follows:Agra Bhopal Gwalior Jodhpur Leh Raipur Shrinagar Varanasi - Rs. 10,000 - Rs. 20,000 - Rs. 10,000 - Rs. 12,500 - Rs. 10,000 - Rs. 12,500 - Rs. 40,000 - Rs. 35,000 Amritsar Jammu Khajuraho Lucknow Udaipur - Rs.50,000 - Rs.30,000 - Rs.15,000 - Rs.40,000 - Rs.500 - Rs.20,000
Chandigarh - Rs.15,000
Bhillai
The procedure by which the various stations meet their expenses is: Issue of Impressed cheques
All the vouchers should come along with monthly expenditure statement and Station Managers should sign all the Petty Cash Vouchers. Outstations can ask for the Special Imprest Cheques whenever there is a need for meeting extraordinary expenses. At the end of every financial year the Bank Section is subject to make a reconciliation Statement. Closing Balances with the outstations should match the statement prepared by Bill Passing section. The major expenses for outstations are: a) Hotel Bills: for the packs offered by Indian Airlines or stay over of packs, Cabin crew & Cockpit crew. b) Catering Bills: for the catering services provided onboard by various caterers like Taj Caterers, Shelf Air Catering and Ambassador etc.
c) Medical bills: Bills of all the medical facilities provided to Indian Airlines employees by hospitals, doctors or chemists. d) Rent: All the land with Indian Airlines is on Lease, thus a monthly rent is given to the Leaser (owner).
3. Provident Fund
The facility for provident fund is available to any employee only after the completion of one complete year service. A 9% p.a. rate of interest is payable to employee on the amount in Provident Fund. The amount of Provident Fund is calculated as follows: Contribution to Provident Fund: 10% of Provident Fund Salary Where Provident Fund Salary = Basic Salary + VDA + Special Allowances (There is a provision for a Special pay or any Technical pay for engineers & Technicians etc.) Employees however have the option of withdrawing the amount from their Provident Fund if ever required. The Provident Fund amount can be withdrawn in two ways: Repayable withdrawal: Withdrawal that is to be returned back
within a stipulated time span, exceeding maximum up to a period of 33 months. An interest of 10.5% p.a. is payable on such a withdrawal on 6 Employee can withdraw maximum of 6 times of his/her Provident Refundable withdrawal can be availed for any religious ceremony, months reducing balance. Fund salary. which an employee is incumbent to perform.
returned by the employee. An employee can avail such a nonrefundable withdrawal only after 15 years of service. It is available for the following purposes: For the purpose of marriage of siblings or any Female dependent. Purchase of Land, House etc. Construction of House- Payable in two equal installments. Non-Refundable withdrawal is payable after completion of 15 yrs
service or within 10 yr before the date of retirement. Income Tax is charged on Provident Fund amount as per the taxation norms existing in the country from time to time.
4. Payroll
This section is responsible for making the salary slips of the employees. When a person is appointed the payroll section receives his joining letter and the various terms and conditions on which he is appointed. The section issues the person a Staff Number. Thus every employee has a staff number and is recognized by that. The salary slip of the person includes basic data about the employee like the Staff Number, Name, Designation Code, Designation, Station Code, Department Code, Date of Birth (DOB), Date of Joining (DOJ), Bank Account number. Other than these details it includes Basic Pay, Dearness Allowance (DA) and other allowances. Even if the Government increases the DA the company does not increase it, unless decided by their various unions. Some
allowances are common to all employees whereas some vary according to the agreements with the person. The next items in the salary slip are the Statuary Deductions like Provident Fund, Income Tax and Employee State Insurance (ESI). Salary slip also includes annual salary, taxable salary, tax and rebates etc.
report is to be forwarded to the "Finance and Budget Section" every month. The retention period for such records is about 5 years.
All the bills to foreign Airlines are raised and settled through IATA clearance house. Billing for all private VIP flights i.e. chartered flights for President, Prime Minister, Vice President, is also done by Bill Raising & Realization Section. Bills are raised to the concerned ministries and settlement is done thereafter. Indian Airlines provide all Handling & Security services to Alliance Air, its subsidiary, for which Bill Raising & Realization Section raises the bills on Alliance Air. These bills are booked under the head "Handling Receipt". The revenue earned by Handling is booked in Balance Sheet under the head "Non-Operating Revenue".
CHAPTER - 5
AMALGAMATION AIRLINES
The Government of India, on 1 March 2007, approved the merger of Air India and Indian Airlines. Consequent to the above, a new Company viz National Aviation Company of India Limited (NACIL) was incorporated under the Companies Act, 1956 on 30 March 2007 with its Registered Office at Airlines House, 113 Gurudwara Rakabganj Road, New
OF
AIR
INDIA
&
INDIAN
Delhi. The Certificate to Commence Business was obtained on 14 May 2007. Presently, the Board of NACIL consists of: Shri Raghu Menon, Addl Secretary & Financial Advisor, Ministry of Civil Aviation Shri R K Singh, Jt Secretary, Ministry of Civil Aviation Shri Rajiv Bansal, Director, Ministry of Civil Aviation
The most important development with respect to the company Indian Airlines has been the merger of both the Public Sector carriers of India namely Indian Airlines Ltd. And Air India Ltd With a new company namely National Aviation Company of India Ltd. After the approval to the scheme of merger by the government of India, the ministry of corporate Affairs vides their Order dated 22 n d August 2007 has approved the scheme of Amalgamation of Air India Limited and Indian Airlines Ltd With the National Aviation Company of India Ltd (NACIL) with effect from 1 s t April 2007. The merger of new company will enable the new company to generate further momentum, as the combined strength of two companies will give various synergy benefits resulting into financial benefits to NACIL. Some of the benefits which will accrue to NACIL are: Route Rationalization Fuel Procurement Engineering Stores & Inventory Purchase both aircraft and non aircraft Insurance benefits Handling of flights Employee Productivity
The Scheme of Amalgamation of Air India Limited and Indian Airlines Limited with National Aviation Company of India Limited was approved by the Board of Directors of all the three Companies. Thereafter, the Meetings of Secured and Unsecured Creditors of Air India and Indian Airlines were held in New Delhi on 28 June 2007, in which the Scheme of Amalgamation was approved by the Creditors. The final hearing of the merger petition was held on 31 July 2007 wherein the last date for submissions of objections was fixed on 8 August 2007 and the Order of the Ministry of Corporate Affairs is awaited. The Authorized and Paid-Up Share Capital of the merged entity will be Rs.1500, 05, 00,000/- and Rs.145,00,00,000/- respectively. It has been decided that post merger, the new entity will be known as Air India while Maharaja will be retained as its mascot. The logo of the new airline will be a red colored flying swan with the Konark Chakra in orange placed inside it. The flying 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 will beatMumbai. The Government has approved the appointment of Shri V Thulasidas and Dr V Trivedi as Chairman & Managing Director and Joint Managing Director, respectively, of the merged entity, with effect from the date of merger.
Result of Amalgmation
Transfer of assets :
As per the section 391-394 all the assets of both the companies are managed by the National Aviation Company of India Limited. It includes all intangible assets, land, buildings etc.
As well as all the: Subsidiary companies Of Indian Airlines i.e, Airlines Allied Services Ltd. Vayoodoot Limited IAL Airports Services Limited& Subsidiary Companies of Air India i.e. Air India Engineering Services Limited Air India Air Transport Services Limited Hotel Corporation Of India Limited Air India Charters Limited
Transfer of Liabilities
All loans raised and used and liabilities incurred by both the companies are transferred to the National Aviation Company of India Limited.
or employee to any compensation under any act or law for the time being in force. With regard to Provident Fund, Gratuity or any other funds created by any of the company will continued after merger and the National Aviation Company of India Limited act as substitute for both the companies The National Aviation Company of India Limited undertakes to continue to abide by any agreement/settlements with the labor unions / employees by both the companies.
Significant increase in competitive activity has eroded historical advantage of both carriers. Leading international carriers have increased coverage and frequency to major cities in India. Domestic carriers too have significantly ramped up operations. Fleet renewal and expansion are imperative from a business perspective but the same will add further pressure on account of interest dues and depreciation expenses. Thus, the declining market operating and financial performance poses a serious threat to future survival of the two airlines on a standalone basis. Value for and entry into one of the global airline alliances, which control almost 70% of global passenger traffic, is best facilities through a single Flag carrier with an integrated international and domestic footprints. This is even more imperative given that both the companies, which historically had distinctive roles (air India focusing largely on international sectors and Indian airlines focusing largely on domestic sector), now have increasingly overlapping networks, as Indian airlines has expanded its foot prints to key international locations. Finally, in an increasingly consolidating global aviation environment where critical mass/size is a key success factor, combining the two state owned airlines into a single merged entity will better equip them to survive and proper amidst fierce global and domestic competition.
Create the largest airline in India and comparable to other airline in Asia Provide an integrated international/ domestic footprint which will significantly enhance customer proposition and allow easy entry into one of the three global airline alliances.
Enable optimal utilization of existing resources through improvement in load factor and yields on commonly serviced routes as well as deploy freed up aircraft capacity on alternative routes.
Provide an opportunity to fully leverage strong assets, capabilities and infrastructure. Provide an opportunity to leverage skilled and experienced manpower available with both the companies to the optimum potential. Provide a larger and growth oriented company for the people and same shall be in large public interest. Potential to launch high growth & profitability businesses (ground handling services, maintenance repair and overhaul etc.). Provide maximum flexibility to achieve financial and capital restructuring through revaluation of assets. Provide an increased thrust and focus on airline support businesses.
Revenue synergy will be driven by integration of the complementary networks of both Indian airlines and air India. Cost and capital productivity synergies will be driven by opportunities for leveraging economies of scale and opportunities for rationalizing overlapping facilities and infrastructure. In addition to these synergies, the amalgamation will also provide an opportunity to initiate a comprehensive transformation program to improve the overall competitiveness of the merged airline i.e., Indian Airlines and Air India. This while improving the financial position would help position and equip the merged entity to better face the current and future challenges arising out of intense competition and declining industry profitability.
runway is hassle free, well almost. The biggest airline will see more planes flying into its stables too. The two carriers have placed orders for more aircraft. Reports said that Air-India has ordered 68 Boeings, while Indian has finalized the acquisition of 43 Airbus aircraft. So by year 2011, these new planes will also be Air Indians own, making its stock soar high in the industry and service circles. Mr. kapil kaul , chief executive for South Asia for Centre for Asia Pacific Aviation, a leading airline industry think tank said 'The two state-owned carriers have both suffered from years of underinvestment in their fleet and products,''A combined Air India-Indian Airlines has the potential to become a major global player if the merger is completed quickly. A full restructuring must also follow to allow them to realise their potential, Finally, there must be partial sale of equity by way of an initial public offer to help induce professionalism and market dynamics, followed by privatisation over the next five years or so.'
The merger to create an airline with 125-130 aircraft which is Asias biggest airlines and soon more aircrafts are to be purchase. The cost is also going to reduce because the new routes and timetables of flights are made according to the need and through which proper utilization of resources are made.
Negative aspects
Despite the bullish growth potential, overseas experience shows that it is extremely difficult for a market to absorb this many new entrants, particularly in such a short space of time,' the study said, adding that the losses by airlines industry is expected to top $500 million in the current fiscal year. But experts said the merger would also pose some serious challenges in the months to come, especially in integration of two companies that have had completely divergent operations.
CONCLUSION
From the above brief discussion of the facts and figure we can easily conclude that the merger plays huge advantage not only for the growth and survival of the companies but also to be in market. As we know, the merged entity will have a fleet size of 125 new generation aircraft by 2010 after new aircraft are added and some of the existing ones are phased out to emerge among the top 30 carriers globally. The turnover will also top Rs.150 billion. This will showing that both Indian airlines and air India going on right track and soon it will become the No.1 Airline player.
CHAPTER - 6
RATIO ANALYSIS OF N.A.C.I.L, AIR INDIA & INDIAN AIRLINES
Financial analysis is the starting point of making plans, before using any sophisticated forecasting and planning procedures. Understanding the past is a prerequisite for anticipating the future. Management should be particularly interested in knowing financial strength of the firm to make their best use and to be able to spot out financial weakness of the firm to
take suitable corrective action. The future plans of the firm should be laid down in view of the firms financial strengths and weakness. Following ratios have been calculated:-
Liquidity Ratios:
1. Current Ratio 2. Quick Ratio
Leverage Ratios:
1. Debt Equity Ratio
Activity Ratios:
1. Fixed Assets Turnover Ratio 2. Inventory Turnover Ratio 3. Debtors Turnover Ratio 4. Current Asset Turnover Ratio 5. Working Capital
Profitability Ratios:
1. Net Profit Ratio 2. Return on equity 3. Return on Investment
CURRENT RATIO
200304 0.44 0.67 200405 0.45 0.73 200506 0.67 1.28 200607 0.75 2.3 1.2 1.08 200708 200809
The current ratio is the ratio of total current assets to current liabilities. It is calculated by dividing current assets by current liabilities. Current Ratio is considered satisfactory if it is 2:1. If the value of current assets becomes half, the organization will be able to meet its obligation. The current ratio of NACIL meets the bare minimum of 1.33, which is considered by banks as the minimum acceptable level for providing working capital finance. The ratio indicates that the company not enjoys a better financial health and would not be able to meet its immediate debts.
QUICK RATIO
200405 0.42 0.61 200506 0.64 1.09 200607 0.71 1.91 1.01 0.86 2008-09 2007-08
Quick ratio refers to current assets which can be converted into cash immediately or at a short notice. The quick ratio is the ratio between quick current assets and current liabilities and is calculated by dividing the quick assets by current liabilities. The Quick Ratio is quite satisfactory.
DEBT-EQUITY RATIO
200304 1.36 200405 1.11 200607 2.34 2008-09 2007-08
2005-06 1.34
1.2
2.3
1.48
Debt-Equity ratio is a measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets .A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without the outside financing. The Debt-Equity ratio of NACIL is quite satisfactory.
2008-09 2007-08
.7
Fixed asset turnover is the ratio of sales (on the Profit and loss account) to the value of fixed assets (on the balance sheet). It indicates how well the business is using its fixed assets to generate sales Higher the ratio, the better, because a high ratio indicates the business has less money tied up in fixed assets for each dollar of sales revenue. A declining ratio may indicate that the business is over-invested in plant, equipment, or other fixed assets. This ratio shows the firms ability in generating sales from all financial resources committed to Total Assets. It is calculated to know the utilization of fixed assets. Here we see that FATR for NACIL is very high, the reasons for this high FATR is the fact that the combined assets of Air India & Indian Airlines which have been merged into NACIL have been booked at fair value i.e. their current values, hence high FTR for NACIL.
200708
200809
15.23
It indicates that how quickly the inventory is sold. High ratio is always better than low ratio as it shows good inventory management. Low ratio adversely affects the ability to meet customer demand which is bad for companys image. The ITR of NACIL is quite low.
This ratio is also known as Debtors velocity. The higher the value of DTR the more efficient is the management of credits. The ratio has declined for IA. Also DTR for Air India has declined. For NACIL DTR is decent if compared to DTRs of Air India & Indian Airlines.
Current Assets Turnover ratio shows the productivity of the company's current assets. Here we see that the CATR was very high for both the companies, hence it shows that the companys current assets were highly productive. CATR for NACIL is also satisfactory which shows that companys current assets are highly productive.
.0147
.0124
0.0016
-.053 -0.14
Net Profit Ratio indicates management efficiency in manufacturing, administration and selling the products. This ratio is the overall measure of firms ability to turn each rupees sale into net profit. It also indicates the firm capacity to withstand adverse economic condition. The NPR of both the airlines has declined sharply in 2006-07, it is due to the increasing operating expenses it has to focus on increasing its NPR as it would really be difficult to a low net margin firm to withstand the adversities i.e. declining demand etc. Also NPR for NACIL has gone negative; the reasons for this declining demand are increase in fuel prices as well increase in taxes, which in turn has led to increase in price of tickets. Also security threat has been a major reason for declining demands.
RETURN ON EQUITY
Return on Equity measures the rate of return on the ownership interest (shareholders' equity) of the common stock owners. It measures a firm's efficiency at generating profits from every dollar of shareholders' equity. It shows how well a company uses investment dollars to generate earnings growth. ROE is equal to a fiscal year's net income (after preferred stock dividends but before common stock dividends) divided by total equity (excluding preferred shares), expressed as a percentage. Here the ROE for Indian Airlines is much higher as compared to Air India. Return on Equity for NACIL is negative, it shows that investors will not really be interested in investing in NACIL.
RETURN ON INVESTMENT
200304 .0779 .0520 2008-09 2004-05 .0470 .0610 2005-06 .0440 .0479 2006-07 -.11 -.0210 -.098 2007-08
It explains the relationship between EBIT (net of taxes) and Capital Employed. ROI has sharply declined due to decline in EBIT, after 2005-06. It shows that the investment is not yielding a satisfactory return due to increase in expenses and decline in EBIT. Return on Investment for NACIL is also negative, which shows that investing in NACIL is not beneficial.
STRENGTHS
Operational Performance
During fiscal year 2008, the companys revenue growth was driven by increase in passenger segment revenue and merger with Indian airlines. The increase in passenger revenues primarily was due to an increase in capacity, and an increase in load factor. In addition the revenue growth is backed by growth in freight and cargo revenues, which was a result of higher rates charged. This growth was also partly driven by improved efficiency in the companys operations. Strong operating performance lends financial stability to the company which could be leveraged to seek more growth avenues in the future. Market Leadership
Air India is the leading airlines in the India. The airline has been ranked the top in Indias domestic airline (in terms of number of passengers) by the bureau of transportation statistics (BTS) in 2005. Air India newly orders about 68 from Boeing and 43 from Airbus. Air India dominates the markets it serves, ranking first in market share in India. Its strong market position is driven not just by consistent delivery of low fares but also due to reliable service, frequent and convenient flights, comfortable cabins, inflight experience, frequent flyer programs, hassle-free airports, and friendly customer service. Strong market position gives the company the advantage of scale and helps it in strengthening its brand image.
WEAKNESSES
High Dependence on Passengers Revenue Passenger revenues accounted for major part of the Air India total revenue. Cargo services allow airlines to generate additional revenues from existing passenger flights. In addition, cargo revenues are usually counter-cyclical to passenger revenues and have lower demand elasticity than passenger business, which allows airlines to pass on fuel price hikes to customers. Small cargo business exposes Air India to the demand fluctuations in passenger business. Under Utilisation of Capacity
NACIL sells space, which is highly perishable. This is because idle capacity would imply opportunity lost. Capacity means the total number of seats offered by NACIL daily to its passengers.
OPPORTUNITIES
Growing Demand for Low Cost Airlines
In mature markets demand for air travel is increasingly being driven by ticket price and consumer confidence. A survey by the US Commerce Department shows that ticket price is the number one criterion for passengers when selecting a flight, well ahead of the availability of a nonstop service. As markets have progressively matured, the GDP elasticity of air travel demand has declined. In the US for example, a 1% growth in GDP will typically result in a 1.2% growth in domestic air travel, compared with a growth of almost 2% in air travel some 20 years ago. Growth in Freight Business
The Indian economy is one of the fastest growing in the world, but the boom is not without its stops, starts, and bottlenecks, all of which also make themselves felt in the countrys freight transport sector. Air India had also launched a major cargo incentive scheme for cargo agents of Air India and erstwhile Indian on the entire network. The scheme, which generated enormous response, entitled top producing agents of each region to become eligible for an all-inclusive incentive trip on Star Cruise. Expanding Passenger Trafic in Asia Pacific
The demand for air travel to the Asia Pacific is rising driven by increased economic activity in emerging Asian countries such as China and India.
Traffic is projected to grow at 7% in China and India combined, above the world average of 5%. Further, the share of Asia Pacific region in world passenger traffic (revenue passenger kilometers) is forecast to rise from 25% in 2003 to 31% in 2023. Against this backdrop, Air India well positioned to benefit with its increasing emphasis on Asia-Pacific operations.
THREATS
Incresing Aviation Turbine Fuel Prices
The price of aviation turbine fuel (ATF) has soared to record highs in the past few years and continues to hold at that level. Last few years have once again clearly highlighted the highly cyclical nature of the Aviation industry worldwide. The ATF prices in India are substantially higher than its price in international markets. Aircraft fuel is a major contributor to Air India operating expenses. Moreover, the bonded price applicable for international flights ex-India is higher than the ATF price in the international markets. Priced 65% higher in India on an average, compared to international benchmarks. Therefore, this will need stronger revenue growth and greater cost controls in other areas to overcome the increase in fuel prices.
The past few years have seen Central Banks impose higher interest rates to check inflation and the overheating of regional economies. The Reserve Bank of India has led the way raising interest rates. Inflation fears in the India may see another raise in the short-term. According to Economics times, the India real GDP growth is 9.20% in 2007 to 9.00% in 2008 and this downward trend is also seen in 2009. This in turn could depress consumer spending and offset some of the positive trends in the India for the company. Intensifying Competetion
AIR INDIA is now competing against more credible low cost carriers such as Spice jet, Go air, Indigo Airline, and Jetlite etc. Indigo Airlines remains Air India strongest competitor because of its competitive cost structure, strong brand name and ambitious growth plans over the next seven years. Air India also faces increased competition from Air Deccan low-fares subsidiary, Song. Moreover, major legacy airlines have been focusing on restructuring costs, which has improved their competitiveness. With costs restructured, the legacy airlines are becoming more formidable competitors in terms of increasing capacity, matching prices and leveraging their
frequent flier programs. Increasing competition could adversely affect the companys margins.
Skyrocketing oil prices during 2004-08 were offset by efficiency gains and rising consumer confidence. The broadening impact of the U.S. credit crunch has brought buoyant consumer confidence to an abrupt end. Oil prices continue to rise. Now oil price is almost US$140 per barrel. Aircraft Delivery Cycle
The downturn in demand coincides with a stepping-up of aircraft deliveries from 1041 new aircraft in 2007 to an expected 1231 in 2008.while some of this will be offset by retiring less fuel-efficient aircraft, real yields are expected to drop 4.1% in 2008 as compared to 3.2% drop in 2007. Increased Competetion
There is increase in competition with private airlines entering this field. Overstaffing
As mentioned earlier the total staff strength of Indian Airlines Limited is 18715 as on date. On the average 19300-19500 people travel on Indian Airlines Limited on its 112 flights daily. It records three hundred departures per day (including Alliance Air). This means that there is roughly about one staff recruited against every passenger traveling. This is no doubt a bad sign. Indian Airlines Limited has understood this weakness now and hence has not made any major recruitment for last few years. Moreover, there are around two thousand employees
retiring within next two years which will trim work force automatically. Lack of personalized and customer friendly services
This is one of the major findings of our study. Almost all passengers feel that Indian Airlines Limited staff needs to be more customers friendly and professional in its approach. In services industry, it is the kind of services that one provides matters and leaves its impression in the mind of passengers. It in fact is a measure of quality of the product. Indian Airlines Limited needs to take immediate steps in this regard to change the public opinion. Under utilization of capacity
Indian Airlines Limited sells space, which is highly perishable. This is because idle capacity would imply opportunity lost. Capacity means the total number of seats offered by Indian Airlines Limited daily to its passengers. It has been observed that Indian Airlines Limited offers around 32000 seats daily where as on average 19300 seats are utilized meaning an average seat factor of about 60%. It is imperative to improve upon the situation before it is too late. More marketing efforts are required to attract larger passenger.
CHAPTER - 9 RECOMMENDATIONS
The Indian Aviation industry has hit an air pocket, forcing three largest airlines NACIL, Kingfisher and Jet Airways to scramble into salvage mode. In India, on the back of soaring fuel prices and dwindling passenger loads,
there
is
need
for
cost
cutting
initiatives.
Following
are
the
As the magnitude of losses are very high there is need to reduce of employee allowances. Reducing In-Flight Catering Expenses There is need for reduction in-flight catering expenses on short-haul flights and restructuring functional arms. Axing Flights in some Sectors With the increase in losses there is need for axing the flights in those sectors where passengers are very less. Changing Schedules To overcome the losses NACIL can change the schedules of flights to increase passenger loads. loses. Lowering Distribution Costs As NACIL is suffering from big loss there is need for lowering of distribution costs. Operating Different Size Aircraft NACIL can operate with small aircraft where passengers are low to avoid
Twenty-Four airlines across the world have gone bankrupt on account of high and unsustainable fuel costs, thus they should look for increasing average seat factor. Reduction of Maintainance Cost
The airline can also look for reducing of maintenance cost by stationing officers at hubs instead of allowing them to travel at regular intervals. No New Recruitments
NACIL is suffering from the problem of overstaffing so they should not do fresh recruitments unless it is essentially required. Beside cost cutting initiative other recommendation to attain zero net working capital are: Improving Collection and Payment Period
The company should aim at reducing its collections period to around 25 to 30 days while bringing the payment period down to 35 to 40 days over the next three years. This will help it in increasing its debtor turnover resulting in a decrease in the collection period and increase in the availability of the funds with the organization. At the same time a fall in payment period will improve the working capital position of the company. Thus NACIL would be able to decrease its creditors to a great extent and at the same time improve its creditworthiness. Raising Long Term Funds
The company should raise long term funds either by issuing shares or debentures or any other long term credit. It may also raise debt by issuing External Commercial Borrowings (ECBs). As the rates of interest are lower in Japan, European Countries and America, it can raise low cost long term debt to partly replace the current liabilities that are being used to finance the fixed assets. Other than ECBs shares and debentures are also sustainable sources of long term finance. Increasing Investment in Marketable Securities NACIL can cover a part of the increased financing costs due to resorting to long term finance by investing a part of its funds in short term marketable
securities. This will serve the dual purpose of having productive and yet liquid funds. For more profitable short term funds NACIL can form a special team of investment managers who can manage both the long term and short term funds.
BIBLIOGRAPHY
Annual Reports / Financial Statements
Annual Report of NACIL Financial Statements of Air India
Books
Reddy Sumati, Introduction To Mergers & Acquisitions, 2007. Brigham & Eharhardt, Financial Management, Thomson South Western, 2002.
Websites
www.wikipedia.org www.google.com www.airindia.co.in
Magazine
Business Today
Newspaper
The Times of India