Analysis of Aviation Sector in India & Its Major Player

ANALYSIS OF AVIATION
SECTOR IN INDIA & ITS MAJOR

PLAYER
AVIATION SECTOR :AN OVERVIEW

Revolutionized by liberalisation, the aviation sector in India
has been marked by fast-paced change in the past few
years. From being a service that few could afford, the sector
has now graduated to being a fiercely competitive industry
with the presence of a number of private and public airlines
and several consumer-oriented offerings.
The promise and the potential of the Indian aviation market

is awesome. Over 135 aircrafts have been added in the last
two years alone. By 2010, India’s fleet strength will stand
500-550.
Economic Survey 2006-07 says:

The years 2004-05, 2005-06 and 2006-07 has been years of
record growth in air traffic in India. During the period April-
September 2006, international and domestic passengers
recorded growth of 15.8 per cent and 44.6 per cent,
respectively, leading to an overall growth of 35.5 per cent.
During the same period, international and domestic cargo
N. L. Dalmia Institute of Management Studies & Research Page # 1

Analysis of Aviation Sector and its Major Player
recorded growth of 13.8 per cent and 8.7, respectively,

resulting in an overall growth of 12.0 per cent.
India is the second largest aviation industry of the

world
The Indian fleet comprised of 370 at the end of year 2007

and growth is expected to continue apace: the Centre
estimates that India’s fleet will reach approximately 500-550
air craft by the end of year 2010.
In the same period, the domestic market size will cross 60

million and international traffic 20 million. Aircraft
manufacturer Airbus pegs India’s demand at 1100 aircraft,
worth US$ 105 billion, over the next 20 years. According to
Civil Aviation Minister Praful Patel, the country will need
1500 to 2000 passenger planes in 10 years, up from 370
now.
India continues to show steady year on year growth, with a 7

per cent increase in the number of flights into and out of
India (an additional flights and more than 200000 seats a
month). The number of flights has virtually doubled from
6800 in May 2001 to 13200 in May 2007.
In fact, India is in third place in the Top 10 list of countries

with the highest number of additional flights in May last year
behind only China and US.

Investments, revenues, jobs: All set to

take off
India’s civil aviation passenger growth, at 20 per cent, is
among the highest in the world. The sector is slated to
cruise far ahead of other Asian giants like China or even
strong economies like France and Australia. The number of
passengers who will be airbone by 2020 is a whooping 400
million.
Between April and September 2006, however, amid a flurry

of new entrants to the sector, domestic traffic growth
accelerated to more than 45 per cent. The centre for Asia
Pacific Aviation (CAPA) predicts that domestic traffic will
grow at 25 per cent to 30 per cent a year until 2010 and
international traffic growth by 15 per cent, taking the overall
market to more than 100 million passengers by the end of
decade. Indian carriers have 480 aircraft on order for
delivery by 2012 as compared with a fleet size 370 aircrafts
operating in the country today.

As pointed out by Minister of Civil Aviation, Praful Patel

presently, the number of air travelers is about 0.8 per cent
of the population. By the time even 10 per cent of the
pupulation begins fly, India will need about 5000 aircraft.
Upgrading Airport Infrastructure

By 2020, Indian airports are estimated to handle:
• 100 million passengers
• Including 60 million domestic passengers
• Cargo in the range of 3.4 million tones per annum
Several improvements are envisaged to sustain this

tremendous growth in the civil aviation sector. The
Government’s airport modernization plan proposes
investments of US$ 9 billion. In January 2006, joint venture
companies with 74 per cent private sector participation won
contracts to upgrade New Delhi and Mumbai airports. The
Airports Authority of India has got the contract to upgrade
Kolkata airport and Government is also planning to upgrade
the Chennai airport.
International no-frills budget carriers, especially Asian low-

cost carriers (LCCs) are also making a beeline for India.
Already, Iran’s Jazeera Airways and Sharjah-based Al Arabia

have registered their presence here. Other airlines planning

to enter the market are: Tiger Air(a joint venture between
Temasek Holdings and Singapore Airlines), Thailand-based
private carrier Nok Air, Indonesia’s Lion Air, United Arab
Emirates’Ras Al Khaima(RAK) Airlines, Malaysia’s Air Asia
and Saudi Arabia’s Sama Airway.
Increased activity in the maintenance and repairs (MRO)

sector has attracted many foreign companies. Lufthansa has
tied up with GMR Hyderabad International Airport Limited
(GHIAL) to open an MRO facility for which it intends to invest
US$100 million in a facility in Nagpur.
With airport infrastructure being upgraded, non-aeronautical

revenues(from malls, bookshops and entertainment centres)
are expected to contribute almost 50 per cent to revenue of
airports.
Of late, the domestic market is witnessing a trend towards

consolidation. In a bid to augment capacity and grab market
share, the sector is witnessing a consolidation as well as
rationalization of resources. Accordingly, Jet Airways has
acquired Air Sahara, King Fisher and Air Deccan, Air-India
and Indian Airlines have merged.

Airlines on a buying spree

With such rapidly growth in the sector, manufacturers like
Boeing and Airbus are filling their order book fast.
Boeing has received a US$ 1.5 billion order for 10 aircraft

from Jet Airways, India’s private airline. Airbus plans to
invest more than US$1 billion in the Indian aviation industry
in the next 10 years. Bombardier Aerospace, a Canada-
based company that manufactures regional aircraft and
business jets, is looking to tap the growing regional market
in India for flight services. SpiceJet has ordered 10 next-
generation Boeing 737-800 aircraft valued at a list price of
more than US$ 700 million.

FDI Policy in Indian Aviation
Paving the way for foreign investment in domestic airline

companies, the Reserve Bank of India (RBI) has said that
foreign institutional investors (FIIs) can pick up stake in
these airlines beyond the sectoral FDI cap of 49 per cent
through secondary market purchases.
1. Airports
• For greenfield airports, foreign equity upto 100 per cent

is permitted through automatic approvals.
• For existing airports, foreign equity upto 74 per cent is

permitted through automatic approvals and upto 100
per cent thorugh special permission (from FIPB).
2. Air Transport Services

• Foreign equity upto 49 per cent and NRI investment

upto 100 per cent is permissible in the domestic air
transport services through the automatic route;
• Equity from foreign airlines is not allowed, directly or

indirectly, in the domestic air transport services.
A Brief History of Indian Aviation

1912 — First flight from Karachi to Delhi started by Indian
State Air Services and Imperial Airways UK
collaboration.
1932 — Tata Airline introduced by JRD Tata.
1946 — Tata Airlines was transformed into Air India.
1953 — The Government of India nationalized the airline

industry in 1953 through enactment of the Air
Corporations Act. Pursuant to this Act, there were
only two players left in the Indian aviation sector,
both of which were owned and controlled by the
government: (a) Indian Airlines, primarily serving
domestic sector with operations to select

international destinations; and (b) Air India,

serving the international sectors.
1990 — Liberalization in the aviation industry began in

1990, with private-sectors players being allowed
to operate as air taxi operators, but not permitted
to operate scheduled services. A number of
private players (including Jet Airways, Air Sahara,
Modiluft, Damania Airways, NEPC Airlines and East
West Airlines) commenced domestic operations as
air taxi operators.
1994 — With repeal of the Air Corporation Act, private

carriers were permitted to operate scheduled-
carrier status upon fulfillment of certain applicable
criteria.
1995 — Jet, Sahara, Modiluft, Damania, NEPC, East West

granted scheduled carrier status
1997 — 4 out of 6 operators shut down. Jet & Sahara

continue
2003 — Air Deccan, India’s first low carrier, started

operations in August 2003, taking the total
number of private players providing scheduled

service to three. The Naresh Chandra Committee

Report was set up to chart out a road map for the
civil aviation sector. Private domestic airlines were
given permission to fly to international
destinations in the SAARC region with effect from
December 2003.
2004 — Some of the Naresh Chandra Committee’s

recommendations were implemented.
2005 — On 11 January 2005, Jet and Sahara obtained

permission to operate internation services to and
from Singapore, Malaysia , Thailand, Hongkong,
the United Kingdom and the United States of
America. However, the Persian Gulf routes were
reserved for three years for public carriers Air
India and Indian Airlines. Kingfisher, SpiceJet and
GoAir launched services in the domestic sector.
Airline Industry Infrastructure
The scheduled airline industry requires infrastructure,

particularly airports. According to the information currently
available on the website of the MoCA, there are
approximately 450 airports in India managed by the AAI,

Defence Services, state governments or private

parties.Presently, the AAI manages 126 airports in India, of
which 89 are civil domestic airports, 11 are international
airports and 26 are civil enclaves in defence airports.
Formed in 1995, the AAI is responsible for creating,

upgrading, maintaining and managing civil aviation
infrastructure both on the ground and in India’s air space. It
has been tasked with the integrated development,
expansion and modernisation of operational, terminal and
cargo facilities at the international and domestic airports, as
well as at the civil enclaves of defence airports. The only
privately owned airport is located at Cochin. Two privately
owned international airports are currently under
construction at Bangalore and Hyderabad. In addition, the
Government is seeking to modernise and restructure the
Mumbai and Delhi airports.
The Indian aviation sector is broadly divisible into four main

categories:
• Domestic airlines, which operate scheduled flights

within India and to select international destinations,
• International airlines, which operate scheduled flights to
and from India,

• Charter air operators, which include charter operators

and air taxi operators and
• Air cargo services, which includes air transportation of
cargo and mail.
• Scheduled domestic airlines can also be divided into
two categories: full-service carriers and low-cost
carriers. Currently in India, low-cost carriers operate
predominantly as domestic carriers
Key industry characteristics

1) Under-penetrated markets
Despite recent growth in air passenger traffic, India

continues to have relatively high under penetration of
air services. According to the CMIE, domestic air traffic
in the year ended March 31, 2005 reached 20 million.
For a country with a billion plus population, this
amounts to an average Indian making 0.02 trips per
annum which is one of the lowest in the world,
compared to an average of 2.02 trips per person per
year in the United States for the same period.

Consequently, there is a high level of potential demand

which may be generated as the Indian economy grows
and air travel becomes more affordable for a larger
population.
2) High fixed cost operating environment
Despite recent reforms, the domestic aviation sector in

India continues to experience high input costs in terms
of overnment charges levied on fuel and airport related
charges. These fixed costs often represent a substantial
portion of the operating costs of most airlines. Domestic
airlines generally have to pay higher charges than
those paid by international airlines procuring fuel within
India, as such international airlines are exempt from
paying excise duty and sales tax.
3) Regulatory constraints
The domestic aviation sector in India continues to be

highly regulated. The Route Dispersal Guidelines issued
by the DGCA require all scheduled airlines operating in
India to provide a minimum number of ASKMs on routes
that service certain rural or smaller urban destinations
that are classified as Category II and Category IIA,
which results in lower average passenger load factors
and yield for many airlines.

4) Infrastructure constraints
With the entry of four new players in the short span of a

year and with more having announced their intentions
for the same, the continued growth of the domestic
aviation sector may be hampered by shortage of
enabling infrastructure, such as airport facilities,
parking bays, air traffic control facilities and takeoff and
landing slots.
5) Relatively limited reach across the country
Historically, many areas of the country have not been

served by scheduled airlines. Although the Route
Dispersal Guidelines have helped to ensure that certain
areas of the country are serviced, airport infrastructure
and economic feasibility have meant that many airports
do not have scheduled airline service. Of the
approximately 450 airports in India less than 100
airports have a daily flight.
Demand Drivers
1) High economic growth
Growth in air transport (both passengers and cargo) is

closely associated with growth in GDP. According to the
IATA (International Air Transport Association) air

transport can be projected to grow at roughly twice the

rate of GDP growth. With Indian GDP expected to
expand at a rate of 7.5% for 2005-2007, the IATA
expects air traffic in India to grow approximately 15%
for the same period.
2) Increasing consumerism and affordability
The aviation market in India consists of leisure

travellers, business-related travellers and corporate
travellers. Leisure and business related traffic tends to
be more price-elastic. Corporate travellers, who fly at
the expense of their employer or client, have
historically formed the majority of the domestic air
travel market in India. However, with increasing income
levels and the emergence of flexible fare schemes and
low-cost carriers, we expect that middle- to high-
income leisure travellers and business travellers paying
their own travel costs are likely to shift more from
premium class travel in trains to air travel. In contrast
to the 15.25 million passengers carried by domestic
Indian airlines in fiscal 2004, the Indian railways carried
approximately 52 million passengers in its premium
class products, i.e., air conditioned and first class
coaches during the same period.
3) Growth in tourism

The Indian tourism market has been growing at a

significant pace over the last few years, with the
Government giving impetus to the industry through
various schemes and organized events. According to
the World Travel & Tourism Council India 2004 report,
domestic tourists visits in India grew by 19% from
309.0m to 367.6m in fiscal 2004. During the same fiscal
domestic air travel has grown by 13% while in fiscal
2005 domestic air traffic registered a growth of
approximately 27%. The same source has predicted
that travel and tourism expenditure in India is expected
to achieve an annualised real growth rate of 8.8% over
the 10-year period from fiscal 2004 to fiscal 2014.
4) The emergence of low-cost carriers
Low-cost carrier airlines in the United States (such as

Southwest Airlines and JetBlue) and in Europe (such as
Ryanair and easyJet) have created a revolution in the
aviation sector. These airlines have sought to provide
lower, if not the lowest, fares along with relatively high
margins, by providing:
• “no-frills” service;
• careful route selection to optimise passenger loads

and yields;

• minimised costs on various aspects of business;
• innovative use of Internet and other

communications technology to avoid the high cost of
traditional airline reservations and communications
systems;
• innovative approaches to attracting customers;
• introducing previously unavailable routes on a

commercially feasible basis; and
• lower or lowest initial pricing with careful revenue

management.
The concept of low-cost carriers has also generated

interest in Asia, and a number of no-frills airlines have
emerged. For example, AirAsia is a low-cost carrier
based in Malaysia and Thailand with destinations
including Malaysia, Thailand, China, Hong Kong, Macau,
Indonesia and the Philippines. Air Deccan was the first
such airline in the Indian market, commencing
operations in August 2003, with SpiceJet and GoAir
beginning operations subsequently and plans for more
low-cost carriers announced. Air India Express, a

subsidiary of Air India, is providing an international low-

cost carrier service. Indian low-cost carriers, seeking to
take advantage of the growth of disposable income in
India and the increasing need for geographic
connectivity, have sought to adapt the low-cost carrier
model to the Indian aviation climate.
Low Cost Carrier (LCC) Model

LCC’s try to achieve a cost advantage by avoiding the in-

flight services, E-ticketing, fewer employees per aircraft,
single class configuration & ancillary revenues
Company Analysis of Deccan Aviation

Ltd.

Deccan Aviation Limited operates Air Deccan, India’s first

low cost carrier. It is also a leading player in the helicopter
and aircraft chartering services.
Business Segments
DECCAN
AVIATION
LIMITED
Deccan
Air Deccan DALPL
Aviation
Air Deccan Cargo (48% JV with
(Helicopter &
(LCC Model) (Proposed Sri Lankan
Charter
Cargo Airline) Companies)
Service)
Deccan Aviation -Helicopter, Charter & Other

Services
Deccan Aviation (the helicopter & charter division) is India’s

largest private sector charter aviation company with a
network spanning seven locations across the country.
Deccan aviation commenced operations in 1997 as
chartered aircraft service provider. It currently has a fleet of
11 helicopters and 3 fixed winged aircraft. It provides a
variety of charter services through out India including Heli-
tourism, VIP and corporate executive travel, Aerial surveys

etc. Deccan aviation cater largely to higher-income

individuals and corporations. Some of its clients are: Adidas,
Dell, Fiat and Bank of America.
Air Deccan
Air Deccan is the low cost, no frills scheduled carrier which

primarily targets the higher end rail travelers and the leisure
travel segment. Air Deccan commenced its operations in
August 2003 and is currently the largest LCC in India. It has
carried more than 14 mn passengers since its launch, with a
market share of about 14%.Since its launch, the airline grew
to 62 destinations by June 2007; with its vision being “to
empower every Indian to fly”, the airline penetrated
extensively into the deeper pockets of the country and
provided low-cost connectivity to all towns.
DALPL – Joint Venture with Sri Lankan Company
Deccan Aviation Lanka (Private) Ltd. (DALPL) is a joint

venture between Deccan Aviation and two Sri Lankan
entities, Favourite Investments & Navamaga Investments. It
was Incorporated in Colombo in December 2003 and will be
providing helicopter charter services with intention of
providing scheduled airline operations in Sri Lanka. Deccan
Aviation Limited currently has 48% stake in the Joint
Venture.

Key Milestones : Deccan Aviation

1997 − Launch
1998 − Commencement of Offshore Flying Operations
2001 − 1st Fixed Wing Aircraft introduced into the Fleet
2007 − BOD Approval to spin off the Charter Business into

a separate entity
Key Milestones : Air Deccan

2003 − Launch
2004 − Introduction of 1st Airbus into Fleet

Launch of Rs.500 Ticket Schemes
Launch of Travel Agent Credit Cards
2005 − Tie Up with Club HR
2006 − Alliance with Jet Airways for Code Sharing Foray

into Air Cargo business through a wholly owned
subsidiary
2007 − United Breweries Group acquires 26% stake by

way of preferential allotment Merger of Air
Deccan with Kingfisher Airlines approved by BOD
2008 − Demerger of Scheduled Airline Business of

Kingfisher approved with effect from 1-April-2008
Business model of airline operation

The elements of Air Deccan’s “no-frills, low-cost” air carrier

business model include:
1) Offering low fares to stimulate demand
We believe low fares will help Air Deccan generate new

business throughout India – not only in new and under-
served markets, but also in established markets that
have so far failed to offer Indian middle-class
consumers and cost-conscious businesses a choice of
sufficiently cost-effective fares. Air Deccan targets
leisure, small business and corporate customers, and
seeks passengers from the Indian middle class as well
as from the cost-conscious segments of more well off
classes.
2) Selecting routes to stimulate demand
As of November 30, 2005, Air Deccan offers passengers

a choice of 62 routes and 44 destinations. As at
November 30, 2005, it is the only carrier providing
service to 9 of its destinations and one of only two
carriers providing service to 7 of its destinations. We
believe that Air Deccan’s route strategy will help it grow
new markets for air travel in India, as well as help it
serve major urban centres with cost-effective fares. As
it grows, we expect Air Deccan to increase the
frequencies of its flights on certain existing routes,

connect new city pairs among destinations it already

serves and initiate service to new destinations,
including some already served by other airlines and
some currently not served by airlines at all.
3) Reducing costs, increasing utilisation
To help make its low-fare strategy as profitable as

possible, Air Deccan strives to:
(i) Reduce the costs of its operations.

It does so in part by seeking to simplify its
operations, minimise the aircraft types in its fleet
consistent with its route strategy, use technology
when such use can reduce costs and rejecting it
when such use can complicate operations, such as
in passenger check-in, and outsource non-core
business processes.
(ii) Provide a no-frills service.

Air Deccan seeks to provide a simple service in
exchange for its low fares. Product and service
extras that are not reasonably necessary to the
core task of flying passengers safely and efficiently
are eliminated. Practices that many other airlines
engage in regularly, such as providing help to
passengers during layovers or offering frequent flier

programmes, are not offered. Air Deccan

passengers experience a pareddown version of
flying compared to what many other airlines offer.
But, they can pay less for an Air Deccan ticket and
still get the basic transportation service they
require.
(iii) Seek high aircraft utilisation.

Air Deccan employs dense, single-class seating
arrangements in its aircraft and follows scheduling,
ground handling and operational strategies
designed to keep its planes in the air as long as
practical every day. These measures help Air
Deccan to increase its available seats flown. Air
Deccan then uses load factor and yield
management techniques in order to help maximise
the revenues earned from, and help minimise the
operating costs associated with, those available
seats flown.
4) Providing a safe and on-time service.
We consider the provision of safe travel to be of

essential importance to our service. We believe that
customers also demand on-time service and expect a
minimum of delays, flight cancellations,
baggagehandling errors and other inconveniences. We

strive to provide these requirements while delivering a

safe, no-frills service.
5) Increasing ancillary revenues.
In addition to charging for tickets, Air Deccan earns

revenues from charging for in-flight food and drink,
selling advertising space on the interior and exterior of
its aircraft and in a number of other ways. The airline
regularly seeks to earn ancillary revenues where
opportunities exist and the simplicity of its operations
will not be compromised.

Competitive strengths of airline

operation
Air Deccan’s competitive strengths include:
1) First mover advantage
Air Deccan is the first no-frills, low-cost, scheduled

commercial passenger airline in India. As a number of
existing and new competitors seek to adopt a no-frills
or low-cost approach to one or more parts of their
operations, Air Deccan retains the advantage of being
known the longest as a no-frills, low-cost
carrier and having had the longest time to adopt and
refine its low cost carrier strategies. By moving earlier,
Air Deccan has also had an easier time getting
desirable flight slots and building its operations in other
ways.
2) Simplifly!
Air Deccan follows a strategy of simplifying its

operations to help keeps its costs down, its fares as
affordable as possible and its services as easy for
customers to evaluate, purchase and use as possible.
Air Deccan seeks to embody and project this strategy to

its employees and customers through the advertising

slogan, “Simplifly!”. Simplification steps include such
strategies as flying only point-to-point routes without
seeking to facilitate onward connections, outsourcing
services such as in-flight food and drink and moving to
a manual, rather than computerised, flight check-in
system.
3) Strong management team, with leading

low-cost carrier expertise.
We believe that Air Deccan’s management team has

the necessary depth and capability to expand the
airline’s operations, refine its service delivery and
implement its business model. The Air Deccan team is
bolstered by a Chief Operating Officer who worked as
Head of UK and Europe Operations at Ryanair and by
others with extensive experience at Ryanair and JetBlue
Airways. In addition, the relative youth of the Air
Deccan organisation helps to provide new perspectives
on Air Deccan’s operations.
4) Load factor and yield management through

dynamic pricing.
Many airlines vary ticket prices in the run-up to a flight

in order to balance load factor (the level of filled seats)

against yield (revenue earned per ticket). Air Deccan

seeks to maximize revenue from ticket sales by
attempting to achieve the best possible ticket price by
filling as many seats as possible. Air Deccan uses
dynamic pricing to help optimise its load factors and
yields. Optimising load factors and yields allows an
airline to better approach a maximum level of revenues
consistent with the preservation and increase of market
share. Using dynamic pricing, Air Deccan can vary its
ticket prices for a given flight over a wide range of
possible prices, for many weeks prior to that flight, in
order to capture more revenue while also seeking to
extend its market. Air Deccan is in the process
negotiating an agreement for implementing Navitaire
software, for conducting its dynamic load factor and
yield management, which is used by many leading no-
frills, low-cost airlines around the globe for their
revenue management.

Growth : Air Deccan

DESTINATIONS
NUMBER OF FLIGHTS

PASSENGERS
AIRCRAFTS

Domestic Market Share

Share of Passengers carried by scheduled operators during

January, 2008
Financials
Rs. In millions
Particulars Year ended 15 months Year ended
June ‘07 ended Jun, Mar’05
06
Total 21,423.09 13,518.06 3,202.83
Revenue
Net Profit (4,195.76) (3,405.47) (195.31)
after tax
Earning per (44.24) (68.24) (8.38)
share
Price Movement (BSE) of Air Deccan

from June, 2006 to January, 2008

Price Movement of Deccan Aviation from

June, 06 to October, 2007
Price Movement of Deccan Aviation in

November-December, 2007
Price Movement of Deccan Aviation in

January 2008
It can be seen from the chart that the share price of Deccan
Aviation when the share price of Deccan Aviation Ltd. has
shot up dramatically from Rs. 146 to Rs. 285 during
November-December 2007 when the deal between
Kingfisher and Air Deccan merger deal was announced.
Later in January 2008 the share price of Deccan Aviation Ltd.

Declined from Rs. 285 to Rs. 177 on account of on weak
trends in the global stock markets.

Synergy benefits with Kingfisher

• Sharing of physical resources both on ground and in air
could potentially spread fixed cost over a larger base
and hence lower unit cost; to illustrate, if the current
inventory of maintenance spares of the two airlines are
pooled together, both the airlines can induct four
aircraft each without incurring any additional
expenditure on maintenance spares;
• Sharing of management bandwidth that has been a

problem for Deccan off late;

• Route and network strategy formation would be

reworked jointly with Kingfisher so that both the airlines
benefit together;
• Fleet expansion is set to be optimised so that lesser

capacity is brought in by each of them and at the same
time they could benefit from the premium aircraft
delivery slots prevailing in the market.
• The Air Deccan-Kingfisher combine will have a fleet of
71 aircraft and fly to 70 cities and towns. The combine
will control a third of the market and will be closer to
the Jet Airways-Air Sahara market share.
• The two airlines will benefit from sharing infrastructure,
ground handling services and security.
Air Deccan…The Story Till Now
1) Hasty growth
The Company grew too fast too soon, without

developing adequate support systems. Over the FY04-
07 period, its fleet strength grew from 4 to 41 and
revenues increased from Rs 682 mn in FY04 to Rs
13,518 mn in FY06 and Rs 21,423 mn in FY07. In a bid
to emulate certain International LCC players and in line
with its vision to make the common man fly, Deccan
placed customer satisfaction and staff empathy as the

very last factors to drive its success. This resulted in

innumerable customer complaints and negative
reputation, which in turn led to even the first time flyers
disassociating themselves from the airline, let alone the
business travelers/ frequent flyers.
2) Subsidized tickets:
The airline is credited with increasing the market size,

and also with penetrative fares. However, this
penetrative pricing followed by the airline continued to
ruin the competitiveness of the market, and only led to
further losses for all players.
3) ATR-42 – the troublemaker- Perennial

Cancellations:
This fleet was of aged aircrafts which resulted in

increased maintenance and frequent breakdowns,
resulting in numerous flights getting cancelled or
rescheduled, leaving passengers stranded and peeved.
On an average, the airline had 1 ATR grounded per day.
Many of their aircrafts were flying to destinations not
served by other airlines, which made matters worse.
The company has since addressed this issue by
recently phasing out 5 ATR-42 fleet, which had been
causing enormous operational troubles.
4) Lack of customer centric approach:

The typical Indian air traveler, whether traveling in an

LCC (Low Cost Carrier) or FSC (Full Service Carrier),
continues to be a notch above the rail traveler; hence
he expects high standard of customer service, as is the
norm in service industries. However, here Deccan could
not strike a chord with the customer. In an effort to
drive down costs, almost the entire staff at the airports
was outsourced; there was no training provided by the
outsourcing agency or Deccan to them, which resulted
in callous attitude towards customers and absence of
customer service. With a number of their flights getting
cancelled and rescheduled on account of maintenance
and airport infrastructure issues, and no customer
service offered at the airports, the name Deccan
became associated with an airline of apathy and the
time bound customer slowly moved away from
traveling here.
5) Competition killed the market: Deccan, a

frontrunner in driving down fares:
The 2003-2006 period witnessed the entry of a number

of private airlines, each of which offered irrationally low
fares, in order to grab a larger market share.
6) May 2007: Entry of the UB Group: Marking

a turnaround:

As a consequence of its penetrative pricing strategy,

the airline piled up losses of Rs 6.1 bn till 31st March
2007. Capital was drying up, and funding was becoming
increasingly difficult. That was when the UB Group
came in and they acquired shares at a price of Rs 155
per share, and today they hold 46% in Deccan. Since
then, efforts are being made to get the company back
on track. The airline had paid a price for growing too
fast, now corrective action is being taken on many
fronts. Deccan has over the last 6-8 months been able
to stabilize its growth which has in turn given it time to
stabilize processes, systems and engineering to support
current fleet and growth. We believe that the Deccan-
Kingfisher Airlines combine would be better placed in
terms of offering air travel options to both the leisure
and business travelers across a wider network.
Future Prospects…
1) Mounting losses gave way to Oligopoly,
resulting in hardening yields:
However, undercutting and poor infrastructure soon ate

into the capital of aviation companies and with losses
becoming unmanageable for a few players, acquisitions
set in. In Q1FY08, Jet Airways acquired Sahara whereas

Kingfisher Airlines picked up a stake in Deccan Aviation.

These developments finally cleared the grounds for an
oligopolistic market with the emergence of three strong
groups – Air India-Indian combined, Jet-Sahara comined,
and Kingfisher-Deccan Aviation combined; these three
entities today account for about 85% of the domestic
aviation market. Since then, the domestic airline
industry has been maturing steadily. Moreover, fares
have witnessed a gradual rise due to the increasing
price
inelasticity of passengers.
2) Implementation of an effective revenue

management system, with focus on
increasing yields rather than load factors:
Deccan has experienced improvement in yields since

November 2007 to Rs 3,100 per ticket. This has mainly
been on account of implementation of a Yield
Management System, which will result in higher
bookings at higher fares. It has also opened up new
lines of distribution using mobile phones, prepaid cards
and even post offices. As a result of these revenue
enhancement measures, despite an increase in the
airline’s capacity, it managed to improve its yields by
about 7.5% to Rs 2,745 in the lean season of Q1FY08
from Rs 2,553 in the relatively strong Q4. Besides the
Rs 300 increase in fares, in November 2007, it initiated

Rs 200 hike in Fuel surcharge. Effectively, about Rs 400

gain per passenger has accrued to the Company. On a
7 mn passenger base, we expect a net revenue
addition of Rs 2.8 bn to the airline.
3) However, Load factors took a hit:
Over the past 1 year, Deccan added about 31% to its

capacity, which resulted in ASKMs (Available Seat
Kilometer) rising to 2,221 mn over Q1FY08 against
1,695 mn in Q1FY07. However, on account of trimming
of certain routes and consistent rise in fares (since
Kingfisher’s entry), the airline experienced steadily
declining load factors, which fell to 66% in Q1FY08 from
72.6% in Q1FY07. Hence, the RPKMs rose by only 20%
to 1,515 mn. We feel that going ahead, with the
passenger market maturing and Deccan displaying
rationality in route addition, load factors would
gradually rise.
4) Conscious Image makeover:
Despite the odds against Deccan’s poor quality of

service and customer orientation, its first mover
advantage as the “Pioneer of India’s Low Cost Travel”

continued to retain the Top-of-mind recall. Consciously,

Deccan realized that in order to leverage on this
strength and phase out the negative image which the
airline had gained on account of passengers’
experiences, a Re-branding exercise was the need of
the hour and it initiated this immediately; it is now
aligning the airline with the corporate identity of the
Kingfisher Group, known for higher standards of
customer orientation and service levels. The prime
focus has been on changing the mindset of the
passenger who felt that the airline perpetually operated
behind
schedule.
5) Focus on deriving higher revenues from

“Perishable” inventory:
Earlier, focus was on filling seats, so unnecessarily low

fares were offered 2-6 months in advance, just to
increase occupancy levels and to sustain working
capital. Even now promotions would continue; albeit
only from the anticipated perishable inventory, i.e. over
and above the capacity expected to be utilized. Thus,
on the basis of optimal inventory management and
empirical estimates as to occupancy factors, the
remaining unutilized seats would be offered as
Promotional seats.

The company has initiated several synergy initiatives

which would result in lowering costs, increasing
efficiencies and profitability, resulting in a gain of Rs
1.5 bn over the next 1 year. These would be on
account of:
1) Rationalization of routes and frequencies

by leveraging on the combined strengths
of both the groups in terms of network
reach, connections, frequencies and
infrastructure:
Now Deccan and Kingfisher do not compete with each

other; instead the focus has shifted to improving yields
and occupancies for both, by adequately spacing the
departures of their flights. Also, a number of unviable
routes and frequencies have since been withdrawn.
Kingfisher could leverage on Deccan’s extensive route
penetration to provide better onward connectivity to its
passengers.

2) Operations and maintenance and

Engineering headcounts:
The combined entity has adequate engineering
headcounts even for future fleet expansion and would
not need to increase them going forward; this would in
turn help to stabilize future costs also.
3) Inventory management of engines and

spare parts:
Deccan’s base for future expansion is already built,
since it already maintains sufficient spare inventory to
accommodate future fleet induction. Currently, Deccan
has 5 spare engines and Kingfisher Airlines has 4; a
total of 9, which are adequate for a fleet of 50-60
aircrafts. Against this, Deccan has a fleet of 23 Airbus
and Kingfisher another 24, total of 47. Hence, a scale-
up of fleet would not necessitate any increase in their
spare engines.
4) Enhanced negotiation terms with various

vendors on a joint basis for services like Ground
handling, engine overhaul and vendors of engineering,
rotable suppliers, spare parts, seats, etc.

SWOT Analysis
Strengths…
• Flying to about 10 – 12 airports where it has monopoly
• In-House simulators to reduce training costs
• First mover advantage in terms of access to airport

infrastructure during peak periods
• Deccan – Kingfisher control almost 30% of the domestic

market
Weaknessess…
• Weak Balance Sheet
• Dependence on leased aircrafts- 3 aircraft, so incurs

higher inventory cost
• Poor perception regarding service quality and reliability

• The strategy of flying to previously unconnected routes

may reduce Air Deccan to just a market discoverer, as
competition kicks in, in these routes.
Opportunities…
• Growing middle class population and increased
standard of living
• Change in perception of air travel as a necessity rather

than a luxury
• Increase in tourism
• Improvement in airport infrastructure
• Potential Demand and Development of Tier II & Tier III

cities
• Positive economic factors and strong performance of

service and retail sectors, leading to sustained growth
in passenger traffic
Threats…
• Over capacity in the sector leading to deteriorating
yields

• Increasing competition
• Low Entry Barriers leading to entry of new players in

LCC segment
• High fuel prices in India
• Shortage of trained manpower
• Upgradation of the regional airports would allow

carriers with larger aircrafts to fly there, thereby
nullifying Air Deccan’s USP of being the exclusive airline
going to these airports.

Conclusion
• Robust growth of economy would lead to high
disposable income and propensity to spend, resulting in
more passenger traffic.
• Deccan, with its restructured, focused and better

connectivity is all set to show increase in performance
over the next few years
• Deccan Aviation has a promising future…

Bibliography
www.economictimes.com
www.airdeccan.com
www.bseindia.com
www.goole.com
Ministry of Civil Aviation (www.civilaviation.nic.in)
Naresh Chandra Committee Report – I
RBI, Mid-Term Review 2005-06; IATA
CMIE

Analysis of Aviation Sector in India & Its Major Player

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Analysis of Aviation Sector in India & Its Major Player

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ANALYSIS OF AVIATION

SECTOR IN INDIA & ITS MAJOR

AVIATION SECTOR :AN OVERVIEW

The promise and the potential of the Indian aviation market

Economic Survey 2006-07 says:

N. L. Dalmia Institute of Management Studies & Research Page # 1

recorded growth of 13.8 per cent and 8.7, respectively,

India is the second largest aviation industry of the

The Indian fleet comprised of 370 at the end of year 2007

In the same period, the domestic market size will cross 60

India continues to show steady year on year growth, with a 7

In fact, India is in third place in the Top 10 list of countries

N. L. Dalmia Institute of Management Studies & Research Page # 2

Investments, revenues, jobs: All set to

Between April and September 2006, however, amid a flurry

N. L. Dalmia Institute of Management Studies & Research Page # 3

As pointed out by Minister of Civil Aviation, Praful Patel

Upgrading Airport Infrastructure

Several improvements are envisaged to sustain this

International no-frills budget carriers, especially Asian low-

N. L. Dalmia Institute of Management Studies & Research Page # 4

have registered their presence here. Other airlines planning

Increased activity in the maintenance and repairs (MRO)

With airport infrastructure being upgraded, non-aeronautical

Of late, the domestic market is witnessing a trend towards

N. L. Dalmia Institute of Management Studies & Research Page # 5

Airlines on a buying spree

Boeing has received a US$ 1.5 billion order for 10 aircraft

N. L. Dalmia Institute of Management Studies & Research Page # 6

FDI Policy in Indian Aviation

Paving the way for foreign investment in domestic airline

• For greenfield airports, foreign equity upto 100 per cent

• For existing airports, foreign equity upto 74 per cent is

2. Air Transport Services

N. L. Dalmia Institute of Management Studies & Research Page # 7

• Foreign equity upto 49 per cent and NRI investment

• Equity from foreign airlines is not allowed, directly or

A Brief History of Indian Aviation

1932 — Tata Airline introduced by JRD Tata.

1946 — Tata Airlines was transformed into Air India.

1953 — The Government of India nationalized the airline

N. L. Dalmia Institute of Management Studies & Research Page # 8

international destinations; and (b) Air India,

1990 — Liberalization in the aviation industry began in

1994 — With repeal of the Air Corporation Act, private

1995 — Jet, Sahara, Modiluft, Damania, NEPC, East West

1997 — 4 out of 6 operators shut down. Jet & Sahara

2003 — Air Deccan, India’s first low carrier, started

N. L. Dalmia Institute of Management Studies & Research Page # 9

service to three. The Naresh Chandra Committee

2004 — Some of the Naresh Chandra Committee’s

2005 — On 11 January 2005, Jet and Sahara obtained

Airline Industry Infrastructure

The scheduled airline industry requires infrastructure,

N. L. Dalmia Institute of Management Studies & Research Page # 10

Defence Services, state governments or private

Formed in 1995, the AAI is responsible for creating,

The Indian aviation sector is broadly divisible into four main

• Domestic airlines, which operate scheduled flights

N. L. Dalmia Institute of Management Studies & Research Page # 11

• Charter air operators, which include charter operators

Key industry characteristics