A

PROJECT REPORT

ON

“INDUSTRY ANALYSIS”

Submitted in partial fulfillment of the requirement for the award of degree of

Submitted by

Ms. Pooja Tushar Wavhal

Roll no: 61

Class: MMS (II) – Finance

Subject: Strategic Management

Under the guidance of

Prof. Jitendra Singh

Bharati Vidyapeeth’s Institute of Management Studies & Research

Sector 8, CBD-Belapur, Navi Mumbai –400614

Aviation Industry in India is one of the fastest growing aviation industries in the world. With the
liberalization of the Indian aviation sector, aviation industry in India has undergone a rapid
transformation. From being primarily a government-owned industry, the Indian aviation industry
is now dominated by privately owned full service airlines and low cost carriers. Private airlines
account for around 75% share of the domestic aviation market. Earlier air travel was a privilege
only a few could afford, but today air travel has become much cheaper and can be afforded by a
large number of people. 

The origin of Indian civil aviation industry can be traced back to 1912, when the first air flight
between Karachi and Delhi was started by the Indian State Air Services in collaboration with the
UK based Imperial Airways. It was an extension of London-Karachi flight of the Imperial
Airways. In 1932, JRD Tata founded Tata Airline, the first Indian airline. At the time of
independence, nine air transport companies were carrying both air cargo and passengers. These
were Tata Airlines, Indian National Airways, Air service of India, Deccan Airways, Ambica
Airways, Bharat Airways, Orient Airways and Mistry Airways. After partition Orient Airways
shifted to Pakistan. 

In early 1948, Government of India established a joint sector company, Air India International
Ltd in collaboration with Air India (earlier Tata Airline) with a capital of Rs 2 crore and a fleet
of three Lockheed constellation aircraft. The inaugural flight of Air India International Ltd took
off on June 8, 1948 on the Mumbai-London air route. The Government nationalized nine airline
companies vide the Air Corporations Act, 1953. Accordingly it established the Indian Airlines
Corporation (IAC) to cater to domestic air travel passengers and Air India International (AI) for
international air travel passengers. The assets of the existing airline companies were transferred
to these two corporations. This Act ensured that IAC and AI had a monopoly over the Indian
skies. A third government-owned airline, Vayudoot, which provided feeder services between
smaller cities, was merged with IAC in 1994. These government-owned airlines dominated
Indian aviation industry till the mid-1990s.

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In April 1990, the Government adopted open-sky policy and allowed air taxi- operators to
operate flights from any airport, both on a charter and a non charter basis and to decide their own
flight schedules, cargo and passenger fares. In 1994, the Indian Government, as part of its open
sky policy, ended the monopoly of IA and AI in the air transport services by repealing the Air
Corporations Act of 1953 and replacing it with the Air Corporations (Transfer of Undertaking
and Repeal) Act, 1994. Private operators were allowed to provide air transport services. Foreign
direct investment (FDI) of up to 49 percent equity stake and NRI (Non Resident Indian)
investment of up to 100 percent equity stake were permitted through the automatic FDI route in
the domestic air transport services sector. However, no foreign airline could directly or indirectly
hold equity in a domestic airline company.

By 1995, several private airlines had ventured into the aviation business and accounted for more
than 10 percent of the domestic air traffic. These included Jet Airways Sahara, NEPC Airlines,
East West Airlines, ModiLuft Airlines, Jagsons Airlines, Continental Aviation, and Damania
Airways. But only Jet Airways and Sahara managed to survive the competition. Meanwhile,
Indian Airlines, which had dominated the Indian air travel industry, began to lose market share to
Jet Airways and Sahara. Today, Indian aviation industry is dominated by private airlines and
these include low cost carriers such as Deccan Airlines, GoAir, SpiceJet etc, who have made air
travel affordable. 

Airline industry in India is plagued with several problems. These include high aviation turbine
fuel (ATF) prices, rising labor costs and shortage of skilled labor, rapid fleet expansion, and
intense price competition among the players. But one of the major challenges facing Indian
aviation industry is infrastructure constraint. Airport infrastructure needs to be upgraded rapidly
if Indian aviation industry has to continue its success story. Some steps have been taken in this
direction. Two of India's largest airports-Mumbai and New Delhi-were privatized recently. Two
greenfield airports are coming up at Bangalore and Hyderabad in southern India. Investments are
pouring into almost all aspects of the industry, including aircraft maintenance, pilot training and
air cargo services. The future prospects of Indian aviation sector look bright.

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SWOT Analysis

Strength

 Growing tourism: Due to growth in tourism, there has been an increase in number of the
international and domestic passengers. The estimated growth of domestic passenger
segment is at 50% per annum and growth for international passenger segment is 25% 
 Rising income levels: Due to the rise in income levels, the disposable income is also
higher which are expected to enhance the number of flyers.

Weakness

 Under penetrated Market : The total passenger traffic was only 50 million as on 31st
Dec 2005 amounting to only 0.05 trips per annum as compared to developed nations like
United States have 2.02 trips per annum. 
 Untapped Air Cargo Market: Air cargo market has not yet been fully taped in the
Indian markets and is expected that in the coming years large number of players will have
dedicated fleets. 

 Infrastructural constraints: The infrastructure development has not kept pace with the
growth in aviation services sector leading to a bottleneck. Huge investment requirement
for physical infrastructure for airports. 

Opportunities

 Expecting investments: investment of about US $30 billion will be made.

Threats 

Huge investments are expected to take place in aviation sector in near future. It is estimated that
by 2012

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  Shortage of trained Pilots: There is a shortage of trained pilots, co-pilots and ground
staff which is severely limiting growth prospects. 
 Shortage of Airports: There is a shortage of airport facilities, parking bays,air traffic
control facilities and takeoff and landing slots. 
 High prices: Though enough number of low cost carriers are already existing in the
industry, majority of the population is still not able to fly to other destinations. 

PEST (Political Economical Social Technological) Analysis

A PEST analysis is an analysis of the external macro-environment that affects all firms.
P.E.S.T. is an acronym for the Political, Economic, Social, and Technological factors of the
external macro-environment. Such external factors usually are beyond the firm's control and
sometimes present themselves as threats. For this reason, some say that "pest" is an appropriate
term for these factors. Let us look at the PEST analysis of the Indian aviation sector:

Political Factors

In India, one can never over-look the political factors which influence each and every
industry existing in the country. Like it or not, the political interference has to be present
everywhere. Given below are a few of the political factors with respect to the airline industry:

o The airline industry is very susceptible to changes in the political environment as it has a great
bearing on the travel habits of its customers. An unstable political environment causes
uncertainty in the minds of the air travellers, regarding travelling to a particular country.
o Overall India’s recent political environment has been largely unstable due to international
events & continued tension with Pakistan.
o The recent Gujarat riots & the government’s inability to control the situation have also led to
an increase in the instability of the political arena.

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o The most significant political event however has been September 11. The events occurring on
September had special significance for the airline industry since airplanes were involved. The
immediate results were a huge drop in air traffic due to safety & security concerns of the
people.
o International airlines are greatly affected by trade relations that their country has with others.
Unless governments of the two countries trade with each other, there could be restrictions of
flying into particular area leading to a loss of potential air traffic (e.g. Pakistan & India)
o Another aspect is that in countries with high corruption levels like India, bribes have to be
paid for every permit & license required. Therefore constant liasoning with the minister &
other government official is necessary.

The state owned airlines suffer the maximum from this problem. These airlines have to make
several special considerations with respect to selection of routes, free seats to ministers, etc
which a privately owned airline need not do. The state owned airlines also suffers from archaic
laws applying only to them such as the retirement age of the pursers & hostesses, the labour
regulations which make the management less flexible in taking decision due to the presence of a
strong union, & the heavy control &interference of the government. This affects the quality of
the service delivery & therefore these airlines shave to think of innovative service marketing
ideas to circumvent their problems & compete with the private operators.

Economic Factors

Business cycles have a wide reaching impact on the airline industry. During recession,
airline is considered a luxury & therefore spending on air travel is cut which leads to reduce
prices. During prosperity phase people indulge themselves in travel & prices increase.

After the September 11 incidents, the world economy plunged into global recession due
to the depressed sentiment of consumers. In India, even a company like Citibank was forced to
cut costs to increase profits for which even the top level managers were given first class railway
tickets instead of plane tickets.

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 The loss of income for airlines led to higher operational costs not only due to low demand
but also due to higher insurance costs, which increased after the WTC bombing. This prompted
the industry to lay off employees, which further fuelled the recession as spending decreased due
to the rise in unemployment.

Even the SARS outbreak in the Far East was a major cause for slump in the airline
industry. Even the Indian carriers like Air India was deeply affected as many flights were
cancelled due to internal (employee relations) as well as external problems, which has been
discussed later.

Social Factors

The changing travel habits of people have very wide implications for the airline industry.
In a country like India, there are people from varied income groups. The airlines have to
recognize these individuals and should serve them accordingly. Air India needs to focus on their
clientele which are mostly low income clients & their habits in order to keep them satisfied. The
destination, kind of food etc all has to be chosen carefully in accordance with the tastes of their
major clientele.

Especially, since India is a land of extremes there are people from various religions and
castes and every individual travelling by the airline would expect customization to the greatest
possible extent. For e.g. A Jain would be satisfied with the service only if he is served jain food
and it should be kept in mind that the customers next to him are also jain or at least vegetarian.

Another good example would be the case of South West Airlines which occupies a solid
position in the minds of the US air travelers as a reliable and convenient, fun, low fare, and no
frills airline. The major element of its success was the augmented marketing mix which it used
very effectively. What South West did was it made the environment inside the plane very
consumer friendly. The crew neither has any uniform nor does it serve any lavish foods, which
indirectly reduces the costs and makes the consumers feel comfortable.

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Technological Factors

The increasing use of the Internet has provided many opportunities to airlines. For e.g.
Air Sahara has introduced a service through the internet, wherein the unoccupied seats are
auctioned one week prior to the departure.

Air India also provides many internet based services to its customer such as online ticket
booking, updated flight information & handling of customer complaints.

USTDA (US trade & development association) is funding a feasibility study and
workshops for the Airports Authority of India as part of a long-term effort to promote Indian
aviation infrastructure. The Authority is developing modern communication, navigation,
surveillance, and air traffic management systems for India's aviation sector that will help the
country meet the expected growth and demand for air passenger and cargo service over the next
decade.

A proposal for restructuring the existing airports at Delhi, Mumbai, Chennai and Kolkata
through long-term lease to make them world class is under consideration. This will help in
attracting investments in improving the infrastructure and services at these airports. Setting up of
new international airports at Bangalore, Hyderabad and Goa with private sector participation is
also envisaged.

A good example of the impact of technology would be that of AAI, wherein with the help
of technology it has converted its obsolete and unused hangars into profit centers. AAI is now
leasing these hangars to international airlines and is earning huge profits out of it. AAI has also
tried to utilize space that was previously wasted installing a lamination machine to laminate the
luggage of travelers. This activity earns AAI a lot of revenue.

These technological changes in the environment have an impact on Air India as well.
Better airport infrastructure, means better handling of airplanes, which can help reduce
maintenance cost. It also facilitates more flights to such destinations.

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Porters 5 Forces Analysis

1) Rivalry among competition firms

Competition among major competitors is extremely intense in many aspects.  Sincemost of the c
ompetitors are directly competing, each is emphasizing  a  lowcoststrategy. Many consumers loo
k  only  to  cost  as  a  determining  factor  in  apurchase. This creates an intense environment.  S
witching  costs  are  generallylow, even though companies have tried to increase switching costs 
with  the  useof “frequent flyer” programs.

2) Potential entry of new competitors

Entry in the airline industry is very hard due to many  factors.  These  includegovernment regulat
ions and licensing, brand loyalty and identification of  majorairlines, contracts between  airlines  
and  airports  for  use  of  runways  and
terminals and the substantial cost associated with forming an airline (airplanespurchased, labour 
costs, fuel costs, maintenance, etc.). The three  consolidatedgroups Air India, Jet Airways, and K
ingfisher dominate the Indian skies with  an85% market share.

3) Potential development of substitute product

Substitute products are of little threat  to  the  airline  industry.  No  otherproduct domestically co
mpetes directly  with  airlines  in  terms  of  speed  oftravel. The First AC fares of train are comp
arable with those of  the  airlines.The Lower classes fares are less but is slower. Bus services ma
y cost  less  buttravel speed is extremely slow and tedious. Besides there are many stops  beforet
he destination. Taxis are  extremely  expensive  for  long  distances  and  aresubject to speed limi
ts and road layouts.

4) Bargaining power of suppliers

In case of the airlines industry the suppliers have tremendous bargaining power.There are 
few fuel providers and no reliable alternative to fuel. There is shortsupply of pilots in the job mar
ket. It is  true  for  mechanics  for  airplanes.Flight attendants provide services  that  cannot  be  e
asily  replaced.  Furtherairports are in limited supply.

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5) Bargaining power of consumers

Generally  speaking  consumers,  business  or  regular  travelers,  have  littlebargaining 
power with the airlines. One traveler does  not  hurt  the  airlines.Either they buy the ticket or not

Growth Prospects of the industry

The Indian aviation industry has shown continued growth in recent years with key drivers being
positive economic factors (including high GDP growth), industrial performance, corporate
profitability/expansion, higher disposable incomes and growth in consumer spending as well as
wider availability of low fares.
The aviation industry is expected to grow at a compounded annual growth rate of 25% till 2011.
Also, by 2011 Indian airports will be handling between 90 and 100 million passengers per year,
as against the current 34 million passengers. It is expected that nearly 80% of this growth will be
driven by the low cost carrier segment (LCC). By 2010, the LCCs would capture 70% of the
direct on-line air ticket market  

The challenges of the Indian aviation industry are cited below:

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 Passenger traffic is estimated to grow at a CAGR of over 15% in the coming few
years.
 The Ministry of Civil Aviation would handle around 280 million passengers by 2020.
 US$ 110 billion investment is envisaged till 2020 with US$ 80 billion solely for new
aircraft and US$ 30 billion for developing the airport infrastructure.

Few recent developments:

The Domestic Air Transport Policy approved by the government provides for foreign equity
participation up to 49% and investment by Non-Resident Indians (NRIs) up to 100% in the
domestic air transport services. Foreign airlines are, however, not permitted to pick up equity
directly or indirectly.

Moreover, the flow of foreign investment into aviation is likely to get smoother as the
government is planning to fix a higher foreign direct investment (FDI) ceiling for five sub-
sectors of the industry. The FDI ceiling for the sectors would be higher than the 49% allowed in
airlines now.

The five categories proposed in the Cabinet note for FDI review include maintenance, training
facilities, cargo handling, passenger handling and chartered services.

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