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Industry Analysis
COMMERCIAL
AVIATION SECTOR
Compiled by:
Anjaly Meera Abraham
Shashwat Mishra
1. Aviation Industry Overview
The global airline market comprises air transport service providers of passenger and
cargo. Industry services are used by individuals and business,international,
domestic, and regionaland governments around the world. The industry is
fragmented in terms of suppliers and buyers. North America led this industry,
followed by Europe and Asia in 2012. Growth of the North American market is
driven by growing demand in long-haul international services.
The airline industry is characterized by intense competition with strong price pressure
that entails a continuous requirement to enhance efficiency. In parallel, this is an
industry that continues to grow with more passengers who travel more often.
Since the start of commercial air traffic, the airline industry has been marked by high
growth compared to the GNP trend and continuous productivity increases. The
industry has been gradually liberalized, which has contributed to new business
models, such as low cost carriers (LCCs), arising since the 1990s. Even if a number of
new LCCs have contributed to total market growth, existing network airlines have
continued to fly with unchanged or slightly rising volumes. Technical developments,
new business models and efficiency enhancements have helped absorb inflation
which, in combination with raised living standards, have enabled more people to fly.
Market Size
Domestic air traffic rose nearly 16 per cent in August 2017, continuing its double digit
growth, according to the civil aviation regulator Directorate General of Civil Aviation
(DGCA). About 9.69 million passengers flew in August, up from 8.38 million a year earlier.
Passengers carried by domestic airlines during January-August 2017 were 75.411 million as
against 64.468 million during the corresponding period of previous year, thereby registering a
growth of 16.97 per cent, as per the DGCA.
As against 395 aircrafts in the fleet of Indian carriers, there are 496 aircrafts in operation
today, and another 654 are under purchase.
Investment
According to data released by the Department of Industrial Policy and Promotion (DIPP),
FDI inflows in air transport (including air freight) between April 2000 and March 2017 stood
at US$ 1.01 billion.
India is estimated to see an investment of US $25 billion in the next decade in the airports
sector, a demand for 935 more planes and traffic growth of 13 per cent, according to Morgan
Stanley. According to them, the share of air travel in air and rail travel combined in India will
grow to 15.2 per cent by 2027 from 7.9 per cent now.
Category Segmentation
Domestic is the largest segment of the airlines industry in India, accounting for 79.7% of the
industry's total volume.
The International segment accounts for the remaining 20.3% of the industry.
Geography Segmentation
India accounts for 5.5% of the Asia-Pacific airlines industry value.
China accounts for a further 36.4% of the Asia-Pacific industry.
India airlines industry geography segmentation: $ million, 2016
Geography 2016 %
China 36.4
Japan 11.6
South Korea 8.1
Taiwan 6.9
India 5.5
Rest of Asia-Pacific 31.4
Total 212,920.3 100%
2. Fuel Prices
The largest impact on the profitability of the airline sector would be the reduction in
fuel prices. The increases in airline profits will allow many carriers to invest in new
aircraft, technology, and infrastructure. however, the industry does need to maintain
uniformity in their expenditures as fuel prices will change at any point in the future.
3. Overcapacity
A number of airlines have gone out of business due to overcapacity. Most major
airlines in the industry still struggle to get a grip on the constant changes, and many
carriers have been seen to be slow to adapt to the changing economic environment.
As a result of overcapacity, airlines have had to suffer from rock bottom fares,
something that might delight flyers, but not the airlines. These fares directly lead to a
major revenue problem, which is already suffering from high fuel costs.
4. Labour Unrest
A number of airlines in Europe have suffered because of issues like pilot walkouts.
Issues like these outweighing the benefits that lower oil prices had to offer in recent
times.
5. The Emergence of Low Cost Carriers
Due to competitive pricing of low cost carriers, premium airlines are loosing their
customers to them.
6. Customer Expectations
Ability to manage your customers expectations relative to their shopping experience
is more important than ever before.
7. Aircraft
According to Boeing, over the next 20 years there will be a need for 38,050 airplanes
valued at more than $5.6 trillion. Approximately 40 percent of all new airplanes are
being delivered to airlines based in the Asia Pacific region. Twenty percent will be
delivered to airlines in Europe and North America, with the remaining 20 percent to
be delivered to the Middle East, Latin America, the Commonwealth of Independent
States, and Africa. These new airplanes will continue to stimulate growth for lowcost
carriers and will provide needed replacements for older, less-efficient airplanes.
8. Airport Growth
The need for more runways, more gates, and more capacity to handle more passengers
are all concerns to airlines.
c. Congestion
Presently capacity constraints are reported mainly at Delhi and Mumbai airports.
Congestion leads to a huge wastage of fuel. It is estimated that if a flight hovers in the
sky for an additional half an hour due to delay in allocation of landing slot, it can
consume between 25 to 30 per cent extra fuel thereby increasing the operational cost
of the airline.
f. Land acquisition
Recent government initiatives of building Greenfield, merchant, cargo and low cost
airports and modernization of existing domestic and international airports require
huge tracts of land. a number of large projects are facing extreme
opposition from landowners
On a monthly basis, the number passengers carried in January was slightly higher than the
95.2 lakh passengers carried in December 2016.
Other Performance Indicators
Overall, the Indian aviation industry had a cancellation rate of 1.1 percent in January. With a
cancellation rate of 0.63 percent, Jet Airways had the fewest cancelled flights, followed by
SpiceJet at 0.77 percent and IndiGo at 0.98 percent. Government-operated Air India was the
second worst with 1.97 percent of its flights being cancelled.
Youngest entrant Air Vistara had the highest customer satisfaction with just 0.1 complaints
for every 10,000 passengers carried. IndiGo followed closely with 0.3 complaints per 10,000
passengers. Air India was the worst with 2.5 complaints for 10,000 passengers.
In terms of on-time performance of flights, SpiceJet and IndiGo led the pack with 71.6
percent and 71.2 percent flights on schedule respectively. Vistara underperformed with only
53 percent of its flights running on time.
The performance was computed for Bangalore, Delhi, Hyderabad and Mumbai airports.
1) IndiGo has made sure that its average fleet age remains four years till 2032. It was a
well thought-out fleet strategy that was made 10 years back, and not something done a
couple of months ago. The last plane of the three bulk orders of 530 aircraft that
IndiGo placed will come in 2026 100 Airbus A-320 in 2005, 180 A-320 Neos in
2011 and 250 A-320 Neos in 2015. IndiGos bulk buying helped negotiate better
rates. We buy planes at a lower price than what a seller would buy for. We gain right
at the beginning this is netted against our rentals and brings our cost down.
2) Once all airplanes are delivered, IndiGo will not have a fleet of 530 planes this is
due to the buy, sell and lease back strategy. At peak we will have 330 planes. Once
the order is placed the planes are sold to lessors at market price. The planes are then
leased back for the next six years which means for the first six years IndiGo
receives a plane every month.
3) Every month a plane goes out of IndiGos fleet and a new aircraft joins, thus
reducing the average fleet age, and with an average fleet age that is low the cost of
maintenance is also lower. In 2011, IndiGo was the first customer for Airbus to order
the new range of fuel efficient A-320 Neo planes. Neos help in saving 10-15% of the
overall fuel cost. Fuel makes up for 50% of a carriers cost.
4) Because of the six year lease back plan, with the next two-and-half years one-third of
IndiGos fleet will be Neos, and in the next six years it will have an all Neo fleet.
There is a straightaway positive impact of 7% on the companys bottomline because
of of the Neos. People can copy our food, our advertising, our buses, and other things
but they cannot replicate the fleet we have.
5) With orders in place, IndiGo is planning to increase its presence in the number of
cities it flies to adding two to three cities to its portfolio every year. In the next
eight and half years it plans to have presence in 56 airports compared to 33, now.
Regional flying is not on the radar, and neither are smaller planes. We do not have
any plans to induct smaller planes into our fleet. Nobody in this world has been able
to implement a two-model strategy.
Operational Highlights
The following table sets forth key operational data for the periods indicated
Particulars FY Ended March 31
Rivalry: High
- Competition through tapping into new
destinations, providing more services such as increase in in-flight channels and better menues and also
the use of extensive advertising.
KEY DRIVERS
Consistency
Product Development
SWOT ANALYSIS
Strengths:
-Comprehensive marketing strategies to build a strong brand identity.
-High standards of performance, including safety, security and customer service
-Unique services
-First in providing a variety of customer oriented services regarding comfort, convenience and
luxury
- Winner of several important awards
Weaknesses
-Relying Heavily on International Onward Moving traffic.
- Very Little Domestic Traffic and limited market share growth.
Opportunities
-Brand New Fleet to improve customer confidence -Hub developing well.
- More brand building and marketing can increase brand recall.
Threats
-Increasing Competition in Middle East market
-Increasing fuel prices would affect operations
-Unfavourable scenarios due to Govt policies and regulations
RECENT DEVELOPMENTS IN INDIAN AVIATION
SECTOR
The civil aviation industry in India has emerged as one of the fastest growing industries in the
country during the last three years. India is currently considered the third largest domestic
civil aviation market in the world.
According to International Air Transport Association IATA, India will displace the UK for
the third place in 2026.
The Civil Aviation industry has ushered in a new era of expansion, driven by factors such as
low-cost carriers (LCCs), modern airports, Foreign Direct Investment (FDI) in domestic
airlines, advanced information technology (IT) interventions and growing emphasis on
regional connectivity.
Market Size
Domestic air traffic rose nearly 16 per cent in August 2017, continuing its double digit
growth, according to the civil aviation regulator Directorate General of Civil Aviation
(DGCA). About 9.69 million passengers flew in August, up from 8.38 million a year earlier.
Passengers carried by domestic airlines during January-August 2017 were 75.411 million as
against 64.468 million during the corresponding period of previous year, thereby registering a
growth of 16.97 per cent, as per the DGCA.
As against 395 aircrafts in the fleet of Indian carriers, there are 496 aircrafts in operation
today, and another 654 are under purchase.
Investment
According to data released by the Department of Industrial Policy and Promotion (DIPP),
FDI inflows in air transport (including air freight) between April 2000 and March 2017 stood
at US$ 1.01 billion.
India is estimated to see an investment of US $25 billion in the next decade in the airports
sector, a demand for 935 more planes and traffic growth of 13 per cent, according to Morgan
Stanley. According to them, the share of air travel in air and rail travel combined in India will
grow to 15.2 per cent by 2027 from 7.9 per cent now.
Capex plans to the tune of Rs 65,000 crore (US$ 10.08 billion) have been finalised by the
Airports Authority of India (Rs 17,500 crore (US$ 27.13 billion) for the next five years) and
around Rs 22,000 crore (US$ 3.41 billion) for brownfield expansion in Delhi, Mumbai,
Hyderabad and Bengaluru by private operators and around Rs 21,000 crore (US$ 32.55
billion) for greenfield airports.
The Airports Authority of India (AAI) will undertake new development works at
Lucknow, Deoghar, Rajkot and Allahabad airports. The objective is to improve and
develop airport infrastructure to meet growing traffic demands. AAI plans to construct
new integrated passenger terminal building at Chaudhary Charan Singh International
Airport, Lucknow at an estimated cost of Rs. 1230 crore (US$ 190.65 million). The
new terminal will be able to handle 4000 passengers during peak hour and 6.35
million passengers per annum.
State-owned AAI will construct a cargo terminal at Imphal airport at a cost of Rs
16.20 crore (US$ 2.5 million). The proposed terminal is expected to give a boost to
the export of handicrafts items and perishable cargo. In addition to this, the EICT will
help establish better connectivity with South & Southeast Asia and give a boost to
trade between India and the ASEAN countries.
To meet the demand of increasing air travel in Allahabad, a new civil enclave at will
be developed by AAI at an estimated cost of 125.76 crore (US$ 19.49 million). The
new terminal is to be made operational before the Ardh Kumbh Mela to be held in
January 2019.
Rolls-Royce Holdings Plc, the UK-based aircraft engine manufacturer, has opened a
new defence service delivery centre (SDC) in Bengaluru, which would deliver real-
time solutions for improving capability and provide faster front-line support to over
750 aircraft engines used by the Indian Air Force, Indian Navy and State-owned
Hindustan Aeronautics Ltd (HAL).
Qatar Airways is planning to start Indias first fully owned foreign airline in
partnership with Qatar Government's investment arm, Qatar Investment Authority, as
per Qatar Airways.
Indian budget airline carriers Indigo and GoAir, plan to expand their network to Gulf
cities like Doha, Sharjah and Dammam in 2017, which would likely boost the growth
of Indian aviation sector.
GVK Power & Infrastructure Ltd., which operates the existing airports in Mumbai
and Bangalore, has won the right to build Mumbais second airport in Navi Mumbai,
which will require an investment of Rs 16,000 crore (US$ 2.48 billion) to build the
airport with a capacity to handle 10 million passengers annually in the first phase,
expected to be operational by 2019 and 60 million passengers a year by 2030.
Government Initiatives
In the Union Budget 2017-18, the Civil Aviation Ministry received a substantial
increase of over 22 per cent in budgetary allocation at Rs 5,167.60 crore (US$ 775.14
million) for the next financial year.
Road Ahead
Indias aviation industry is largely untapped with huge growth opportunities, considering that
air transport is still expensive for majority of the countrys population, of which nearly 40 per
cent is the upwardly mobile middle class.
The industry stakeholders should engage and collaborate with policy makers to implement
efficient and rational decisions that would boost Indias civil aviation industry. With the right
policies and relentless focus on quality, cost and passenger interest, India would be well
placed to achieve its vision of becoming the third-largest aviation market by 2026.
In the coming 20 years, Indian companies will buy 2,100 new planes worth US$ 290 billion.
Exchange Rate Used: INR 1 = US$ 0.0155 as of October 31, 2017.
REFERENCES
Media Reports, Press Releases, Press Information Bureau,
Directorate General of Civil Aviation (DGCA),
Airports Authority of India (AAI), Union Budget 2017-18
Annual Report (2015-16) and (2016-17) IndiGo Airlines
Indian Brand Equity Foundation
Moneycontrol.com