International Business

Individual Assignment
Opportunities and challenges that a
foreign investor faces when seeking to
invest in the Indian Aviation Industry.

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Table of Contents

Introduction! 2

Emerging Wealth & Work Force! 2

Competition and Native Brand Loyalty! 3

Strategic Alliance & Acquisitions! 4

Off Pace Infrastructure! 6

Conclusion! 6

Appendices! 8

Reference List! 11

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Introduction
The Indian aviation industry is one of the fastest growing markets within the BRIC economies (Brazil,
Russia, India & China) showing a 20.7% year on year growth to 11.9 million passengers, figure 1 (see
appendices) shows the growth of traffic within the Indian domestic airline market. Nonetheless its India’s
budget airlines that are taking up market share and the market is currently dominated by natively owned
low cost airlines. Centre For Asian Pacific Aviation (2011) quotes “The combined market share of
pure LCCs is now close to 40%, while the nation’s full service carriers are now deploying almost 70-80%
of their domestic fleet on budget brands.” Figure 2 (see appendices) highlights the capacity share by
LCC’s against full service airlines in both India’s international and domestic markets.

However a foreign investor seeking to invest in the Indian aviation market can take advantage of a large
amount of opportunities. The emerging wealth of the Indian population into a middle class nation and a
large amount of aviation industry trained citizens. Foreign investors can capitalise on this new found
wealth and demand for domestic and global travel, while been able to access a large workforce. A key
area for foreign investors is to also fabricate strategic alliances or part acquisitions with Indian airlines to
gain direct access to this fast growing market as legislation still blocks full 100% FDI.

The Indian aviation market however offers a variety of challenges to foreign investors seeking to invest.
One of those being that within the aviation industry foreign direct investment (FDI) is capped by the
government possibly creating difficulty successfully completing a move into the Indian aviation sector.
Also a market dominated by native and local brands could hinder the success of a foreign investor as
even though the market is growing it is heavily saturated and brand loyalty may already exist among
native airlines. Also the fast pace of growth has not been seen throughout the industry and much of the
required infrastructure is struggling to keep up with the double digit growth, a hindrance that could
stagger any success from a potential investment .

Emerging Wealth & Work Force

India’s population is accumulating more wealth as its economy continues to develop. One fifth of the
worlds middle class population live in a BRIC economy. Figure 3 (see appendices) shows the growth of
the global middle class population over the next 20 years. China circa 2010 were 13th in the list of
countries with the most of their population who were middle class this can be seen in figure 4 (see
appendices). India over the coming years has the opportunity to expand its middle class population to

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overtake the likes of China. According to Li, C (2010:39) this will be a result of “India’s...more rapid
population growth and even income distribution which allows growth to be distributed across all
segments of society.”

This is ideal for a foreign investor as the wealth and growth of the Indian population currently being seen
is a long term benefit. Any investor seeking to invest can have the reassurance that there will an ever
increasing number of middle class citizens with higher disposable income. This is a huge opportunity for
an investor seeking to invest in the Indian aviation industry as there seems to be a strong correlation
between economic growth and growth in the aviation industry. Currently there is a lack of a western
influenced Indian based airline that offers both domestic and international routes, the Indian’s desire to
embrace the western lifestyle gives the ideal platform for a western influenced airline. Hjarvard, S
(2003:243) backs this up by quoting “a middle-class utopia of India’s global modernity is a desire to
appropriate and take part in certain forms of Western otherness: the ability to travel abroad...the ability
to consume foreign goods and to appropriate other aspects of a Western material lifestyle.”

Not only is there a wealth of potential customers within India there is also a large amount of workforce
that are trained within the aviation industry. This will allow any foreign investor to quickly build a quality
workforce and integrate them into business operations. Swaminathan, M (2009:140) states that the
India’s civil aviation has become the third largest creator of jobs and careers. Also states that in the
1980’s state-owned Indian Airlines recruited personnel in so much excess compared to its operational
demand. Therefore recruitment within the industry would be the ideal opportunity to recruit the best
personnel from industry competitors as they would in most cases be operating from the same airports
across India.

Competition and Native Brand Loyalty

With double digit growth occurring within India’s aviation industry over such a short period of time with
domestic passenger growth hitting 18% in the first half of 2011, it was the perfect opportunity for new
start up airlines to gain a foothold in the market and compete as demand was outstripping supply. This
can be seen in figure 5, Figure 6 (see appendices) shows the amount of competition in the ever growing
domestic market and there representative market shares. This quick emergence of suppliers eventually
led to the supply of budget domestic airline flights outstripping demand for the first time in June 2011.

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Any potential foreign investor would face a series of challenges seeking to invest in the aviation industry
one of them being the level of competition from home grown firms. Already established firms in the
Indian domestic market will able to take advantage of brand loyalty and economies of scale and take full
commercial advantage of a jurisdiction they know thoroughly. Taking full advantage of native affinity. Van
Gelder, C (2003:134) states this would effect a foreign brand by quoting “Native brand affinity is based
on a sense among consumers that an indigenous brand is closer and better suited to them than a
foreign one.” This would leave any potential new entrant to the market on the back foot especially in the
Indian aviation market which is renowned for its competitive nature. Centre For Asian Pacific Aviation
(2011) backs this up by quoting “aggressive and sometimes predatory pricing, resulting in moderate
pricing power and price wars, which is negatively impacting yields.”

Within the airline industry there are few firm specific advantages to be had, even less now during the
current economic climate. Factors such as soaring fuel costs do not allow allow new competitors to
differentiate in other areas as price is a deciding factor in choosing airline and is diminishing profits. This
is evident with the majority of airlines in India concentrating on budget flights. A potential investor would
have financial backing to enter such a market, possibly taking a loss leader approach to initial operations
to gain brand loyalty however investors looking to seek investment in the aviation industry in India will
have there investment capped. Bhandari, J (2009) states that certain sectors do have foreign direct
investment caps on the amount prohibited. including the civil aviation industry. Therefore one of the key
challenges facing a foreign investor is gaining maximum exposure and market share on a limited amount
of foreign direct investment.

Strategic Alliance & Acquisitions

Due to the current legal legislation does not allow a FDI to take full control of an Indian airline The Hindu
Business (Oct-2011) states this as “Currently, the foreign direct investment limit is 49 per cent in
scheduled domestic passenger airlines and 74 per cent in non-scheduled domestic passenger airlines.”
Also the competitive nature of the Indian airline industry means a key opportunity for a foreign investor is
to seek for a strategic alliance with an existing Indian airline. Extremely large start up and running costs
within the airline industry and competitive advantages often coming from an aspect of location such as
landing slots at airports or flight routes, suggest that a non-equity strategic alliance would be best
suited. Rakowski, N & Patz, M (2007:5) state that a non equity strategic alliances tend to be
contractual and are often an arrangement that indicates the responsibilities of each member.

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A non-equity strategic alliance would allow a very limited entry into the Indian aviation market in
exchange for sharing aspects of home markets. However choosing whom to operate a strategic alliance
is the key to its success. According to Park, N, K & Dong-Sung, C (1997:162) “alliances can seriously
affect the competitive dynamics of increases the carriers’ market shares. In terms of partner selection,
we found that codesharings between existing airlines increase market shares less than those between
relatively new carriers.” Therefore the best opportunity for a foreign investor in-terms of creating an non
equity strategic alliance is to approach a relatively new entrant to the Indian airline industry.

Also the lack of infrastructure that a foreign investor would experience when entering the Indian aviation
market would suggest that a certain aspects of a non-equity strategic alliance would take priory over
another. For example the sharing of unique resource to achieve a competitive advantage. Rhoades, D,
L & Lush, H (1997:111) support this and identify an example within the airline industry by quoting
“baggage handling, ground maintenance, and facility sharing. This type of alliance is for airlines with
similar routes who have the ability to work together in providing baggage handling and ground
maintenance so that the operations of both airlines can run smoothly.”

If there is reluctancy from a foreign investor to share an alliance with a potential competitor maybe the
key to entering the market, to use existing knowledge and skills along with FDI to pursue an acquisition
of an already existent Indian Airline. Currently Air India is in financial meltdown Overdorf, J (2011) “Air
India couldn't make money if all the other airlines shut down.” However it would be ideal for a foreign
investor to take over and gain instant access to the Indian Airline market. The process of re investing
and restructuring firms like these can return a firm a profit. Subrahmanyam, S & Singh, A (2011) back
this up by quoting “recent US airline restructuring (e.g. United, Delta, and US Airways) that helped
carriers on the brink of liquidation achieve profitability.”

Therefore a part acquisition (within the legal limits) of an already existing airline would allow a foreign
investor direct access to industry resources such as landing slots, terminal real estate and airplane
leases etc... Areas of the business which to a new start up in the industry would be hard to achieve and
acquire. The ease of integrating business practices into a recently acquired Indian airline would be
another opportunity for a foreign investor because according to Wallraff, B (2000:59) “English is a
second language for virtually everyone in India who speaks it. And obviously the United States, too,
contains speakers of English as a second language -- some 30 million of them in 1995, according to an
estimate.”

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Off Pace Infrastructure
One key challenge that faces a foreign investor when deciding to invest in the Indian aviation industry is
how to maintain customer satisfaction, brand image and steady growth in an fast growing aviation
industry where required infrastructure is not been developed at the same rate. This has led to the
necessity of vast investment by airports to expand and upgrade facilities and infrastructure to meet the
ever increasing demand. Asian Aviation (2010) quote “airports trying to cover the cost of upgrades and
construction by charging airlines higher landing and parking fees.” These higher cost are leading to
diminishing yields on investment making turning a profit in a already competitive market extremely
difficult. This matched up with rising fuel costs lead to foreign investors facing serious challenges with
business fundamentals in the Indian aviation market.

The off pace infrastructure does not only spread to airports, personnel infrastructure is at tipping point.
Even though the aviation industry is the third largest employer in India there has been issues in keeping
up with the demand for pilots to match the ever increasing air traffic. Asian Aviation (2010) “A shortage
of skills is already impacting their expansion and this is the case in technical roles such as pilots.” This
would be a challenge for foreign investors because even though the demand and growth for air travel is
there if airlines are unable to supply all aspects of operations then their companies will struggle to grow
at the same rate as the industry.

Conclusion
In my opinion the double digit growth being experienced in the Indian aviation market matched with the
emerging middle class wealth of the Indian population and their desire to experience the western world
make it an ideal business proposition for a foreign investor. However it has to be taken into consideration
that the heavy and constantly evolving legislation in this industry does currently allow full 100% FDI in
either domestic or international airlines. Ultimately, it is apparent that any investment from a foreign
investor would take on the form of a strategic alliance or part acquisition of an already existing Indian
airline allowing for instant direct access to the market, therefore any investment has to be seen as long
term.

The tight legislation nonetheless is becoming more in favour of full FDI, Federation of Indian Airlines
(2011) quote ‘India allows 100% FDI in greenfield airports and this is a good example of a proactive
government policy.” This is evidence that India is opening up to the concept of full FDI in aviation and is

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a great indication for any foreign investors that eventually the freedom of investment will be available in
the Indian market. Ability to get investment into the market now is crucial, as it will allow a strong brand
image and loyal customer base to be built before the legislation frees up and the double digit growth
being experience is taken advantage of by many other foreign investors.

The high competitive nature of this market is a challenge for a foreign investor. Poorly run public airlines
such as Air India have struggled to maintain profitable business and an investor with little native
knowledge and a lack of experience in the Indian aviation market; will find it extremely difficult to get a
foothold on the market especially when the supply of the most popular low budget flights has
outstretched demand. The low prices charged for flights and rising running costs are stretching profit
margins and its only the most efficient run airlines that are surviving.

I believe there are greater opportunities within the Indian airline industry than significant challenges that
would stop a potential investor. An expansion into any foreign market regardless of the industry is always
a risk. An investment in the Indian aviation industry is a long term prospect and one that will unfold and
as the market expands and legislation changes.

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Appendices
Figure 1 - Indian domestic market

Source - www.centreforaviation.com

Figure 2- Capacity Share By LCC’s Against Full Service Airlines

Source - www.centreforaviation.com

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Figure 3 - Global Middle Class Growth Over Next 20 Years

Source - Cheng Li (2010:38)

Figure 4 - Middle Class Consumption

Source - Cheng Li (2010:40)

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Figure 5 - Indian Budget Airline Capacity Versus Demand 2010/2011

Source - www.centreforaviation.com

Figure 6 - Indian Budget Airline Market Share 2011

Source - www.centreforaviation.com

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Reference List
Asian Aviation (2010) Indian Aviation Faces Challenges, Opportunities, Asian Aviation 10th November 2010,
www.asianaviation.com accessed 17/11/2011

Bhandari, J (2009) Emerging Markets Review, MGI Business Solutions Worldwide, www.mgi-uk.com accessed 14/11/2011

Centre for Asian Pacific Aviation (2011) Brazil, Russia, India, China (BRIC): Emerging aviation markets performing well in
2010, CAPA, Centre for Aviation 10th May 2010, www.centreforaviation.com/analysis accessed 14/11/2011

Centre for Asian Pacific Aviation (2011) India is world’s fastest growing aviation market as double-digit domestic growth
continues, CAPA, Centre for Aviation 29th September 2011, www.centreforaviation.com/analysis accessed 14/11/2011

Federation of Indian Airlines (2011) FDI in Airline Industry, www.fiaindia.in, accessed 17/11/2011

Hjarvard, S (2003) Media in a Globalized Society, Museum Tusculanum Press, Denmark

Li, C (2010) China's emerging middle class: beyond economic transformation, The Bookings Institute, United States of
America

Overdotf, J (2011) Sell Air India Now, Before it’s Worthless, Global Post 11th July 2011, www.globalpost.com accessed
16/11/2011

Park, N, K & Dong-Sung, C (1997) The Effect of Strategic Alliance on Performance: A Study of International Airline Industry,
Journal of Air Transport Management Vol. 3(3), pages 155-164

Rakowski, N & Patz, M (2007) An Overview and Analysis of Strategic Alliances, GRIN Verlag, Germany

Rhoades, D, L & Lush, H (1997) A Typology of Strategic Alliances in the Airline Industry: Propositions for Stability and
Duration, Journal of Air Transport Management Vol. 3(3), pages 109-114

Subrahmanyam, S & Singh, A (2011) Saving India’s National Carrier, Airline News India 25th September 2011,
www.airlinenewsindia.com accessed 16/11/2011

Swaminathan , J, M (2009) Indian economic superpower: fiction or future?, World Scientific Publishing Co, Pte, Ltd,
Singapore

The Hindu Business (2011) India may allow direct foreign investment in domestic airlines, The Hindu Business 23rd October
2011, www.eturbonews.com accessed 16/11/2011

Van Gelder, S (2003) Global Brand Strategy: Unlocking Brand Potential Across Countries, Cultures and Markets, Kogan Page
Ltd, United Kingdom

Wallraff, B (2000) What Global Language?, The Atlantic Monthly Company Vol.286(5) pages 52-66

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