AIRASIA INDIA

On May 7, 2014, AirAsia's founder received an Air Operator's Permit (AOP) from the Indian aviation regulator the Directorate General of Civil Aviation (DGCA). The permit essentially a flying license for AirAsia to operate in Indian skies brought to an end the long approval process and legal hurdles that AirAsia had to face after it announced its entry into the Indian aviation market. AirAsia India was a joint venture partnership between Malaysian low-cost carrier (LCC) AirAsia Berhad, Tata Sons Limited and Telestra Tradeplace Private Limited. It had acquired a reputation of being the most aggressive LCC in Asia and one of the most aggressive in the world. Entry into India, with its large population, high economic growth, large and growing middle class, as well as an aspirational young and urban population, was a natural choice for AirAsia. Yet, the Indian aviation market posed its own set of challenges, including demand supply dynamics, regulatory procedures, high aeronautical charges, high fuel costs, etc. AirAsia India aimed to create a revolution in the Indian aviation market by pursuing its characteristic aggressive pricing strategies, together with extremely competitive operational targets. The founder of AirAsia had tweeted his intent regarding the same. Would AirAsia India's entry and its aggressive pricing decisions work in the oligopolistic Indian aviation market? How would the barriers to entry affect its operational targets? What strategies should AirAsia India pursue in such a market? Would it be able to revolutionize air travel in India?

THE INDIAN AVIATION IDUSTRY

As journalist Paul Cuckoo noted, "The airline business is complex anywhere in the world and even more so in India. It burns cash fast, is highly regulated and produces a commodity that is worth nothing if not sold in time. Making a success of it is no small [feat]."

DEVELOPMENTS IN INDIAN AVIATION

Civil aviation in India dated back to 1912. The first domestic air route between Karachi and Delhi was serviced by the Indian state Air Services in collaboration with Imperial Airways, United Kingdom. In 1915, the first private Indian airline, Tata Sons Ltd., started a regular airmail service between Karachi and Madras. Later it began carrying scheduled passenger traffic. In 1946, Tata Airline was renamed as Air India. Nine air transport companies operated in India in 1947, at the time of independence; this was gradually reduced to eight, with Orient Airways shifting to Pakistan.

The Government of India, together with Air India, established a joint-sector company, Air India International Ltd., headed by J.R.D. Tata, in 1948. The government nationalized the airline sector under the Air Corporations Act 1953, due to the worsening financial condition of airlines. Nationalization of the aviation sector led to the emergence of a state-led monopoly. Indian Airlines, formed through the merger of eight domestic airlines, came to enjoy a monopoly in the operation of domestic services; Air India had a virtual monopoly to operate overseas services (except some routes to neighboring countries, which were given to Indian Airlines).

In 1986, the government opened up the sector to private players in a limited manner by allowing them to operate as air taxi operators. With economic reforms in 1991, there was a move towards greater privatization and liberalization of the aviation sector as well. In 1994, the Indian government revoked the Air Corporation Act to enable the entry of private carriers who could offer scheduled services. However, the market did not grow sufficiently large enough for all players to compete; many of the airlines went bankrupt. Only two private carriers survived the tough Indian aviation industry in the new century: Jet and Sahara.

In 2003, a landmark year in the history of the Indian aviation sector, Air Deccan, the first Indian LCC or 'no-frill' airline emerged as a challenge to the duopoly of Jet and Sahara as private carriers. Jet and Sahara had been following the stereotypical pricing strategies of economy and business fares. Air Deccan changed the way the Indian aviation industry operated with its different and innovative pricing strategies in the form of check fares, web fares, APEX fares, Internet auctions, special discounts, corporate plans, last-day fares, promotional fares, etc.

Witnessing the tremendous growth rates of air traffic as well as the success of LCC model, other airlines

such as Indigo, Paramount and Go Air entered the Indian aviation market as LCCs. Others, such as Kingfisher, opted for the full-service carrier (FSC) model.

A series of mergers and acquisitions took place in 2007, including the Indian Airlines/Air India merger, the Jet-Sahara deal and the Kingfisher-Deccan deal. In 2008, domestic air transport policy was revised to allow foreign equity participation. Foreign investors were allowed to invest up to 49 per cent in Indian carriers, while non-resident Indians were allowed to invest up to 100 per cent through the automatic (no government approval) route. However, no direct or indirect participation by any foreign airlines was allowed. The sector remained closed to foreign direct investment (FDI) by international carriers.

In September 2012, the FDI norms in the sector were relaxed. Foreign carriers were allowed to invest up to 49 per cent of the paid-up capital of an Indian carrier under the government approval route in scheduled air transport services. Several foreign airlines sought to enter India in response to these relaxed norms. These included Singapore Airlines Ltd., Abu-Dhabi's Etihad Airways and Malaysia's AirAsia Berhad. In April 2013, Etihad picked up a 24 per cent stake of US$379 million in the financially strained domestic carrier Jet Airways. It also paid $70 million to buy Jet's airport slots at London's Heathrow Airport and committed to invest another $150 million to buy out Jet's frequent flyer programme. However, the deal ran into significant regulatory hurdles. In late 2013, the Tata group joined with Singapore Airlines to launch a full-service airline with an initial investment of $100 million.

AirAsia India a three-way joint venture, owned by the Tata group (30 per cent), AirAsia (49 per cent) and India's Telestra Trade place (21 per cent) was meant to launch a budget airline/LCC in India. It had received the approval of the Foreign Investment Promotion Board (FIPB) in April 2013. Yet, it faced keen competition from other players waiting to enter the Indian skies, as well as from domestic players. Exhibit 1 depicts the dynamism witnessed in the Indian aviation sector over the period from 1995 to 2014, and the entry and exit of different airlines. Exhibit 2 depicts the changes in the market shares of the key players in the Indian aviation sector over the period from 2005/06 to 2013/14, and also the key statistics pertaining to the domestic aviation situation in 2013.

Performance of the Indian Aviation Industry

The Indian aviation sector witnessed high growth in terms of passengers carried. The decade from 2001/02 to 2011/12 witnessed a 373 per cent increase in the passengers carried by Indian scheduled domestic service operators and a 290 per cent increase in the passengers carried byinternational services. Capacity utilization in civil aviation was measured using the passenger load factor (PLF) (see Exhibit 3 for a glossary of terms). The domestic service sector's capacity utilization as measured by the PLF increased from 55 to 75 per cent.

Market Size

India was the fastest-growing aviation market and the ninth-largest civil aviation market in the world in 2013.The domestic passenger throughput was estimated to grow at an average of 12 per cent per annum, while that for international passengers grew at 8 per cent per annum over the period from 2012 to 2017.

Further, it was estimated that by 2020, India would have the third-largest civil aviation market in the world, with the number of airborne passengers increasing from 140 million in 2010, to about 420 million in 2020.

Capacity versus Demand

The supply side parameter used to assess capacity growth in the aviation market was the available seat kilometres (ASK), whereas the demand side parameter used to assess the revenue generated by airlines from passenger traffic was the revenue passenger kilometres (RPK) performed. The ASK and the RPK measured the supply and the demand side of the market, respectively. While both ASK and RPK generally moved in tandem, the increase in the gap between ASK and RPK especially after 2005/2006

was indicative of excess capacity creation in relation to demand (see Exhibit 4).

Most Indian carriers, anticipating significant growth in traffic, placed orders to augment their aircraft fleet. An estimate by KPMG indicated that airlines in India were expected to add around 370 aircrafts worth INR 1,500 billion to their fleet by 2017 (see Exhibit 5).

KEY DRIVERS OF GROWTH IN THE INDIAN AVIATION INDUSTRY

Indian air penetration rates measured by the domestic passengers carried per year as against the total population compared extremely unfavorably with India's global peers. Thus, while the United States and Australia registered an air penetration rate of two air trips per capita per annum, the corresponding rate for India was only 0.04 air trips per capita per annum. China, while slightly more populous, exhibited about five times higher rates of domestic travel. Clearly, as Indian gross domestic product (GDP) and per capita incomes rose and as Indians began to value time more, the Indian civil aviation industry could grow exponentially.

The key drivers of growth in the Indian aviation industry included the following:

Growth in national income: India's national income hadgrownover the periodfrom 2001/02 to 2007/08, and had reached 9.6 per cent. Various domestic and global factors had, however, caused a reduction in growth and in 2012/13, the GDP growth was at its lowest at 5 per cent. The growth rate had further decreased to 4.4 and 4.8 per cent in the first and second quarters of fiscal year 2013/14, respectively. However, this was projected to improve.

Growth of the middle class: Using the Asian Development Bank standards of a per capita consumption per day of $2 to $20, it was estimated that about 25 per cent of the Indian population (1.2 billion) belonged to the middle class. This growing middle class was likely to drive Indian consumption. A McKinsey Global Institute estimate further put the country's middle class at 583 million by 2025, making India the world's fifth-largest consumer market.

Growing urbanization and shifting demographics/growth in working-age population: The 2011 census placed the urban population at 31.2 per cent, up from 17 per cent in 1951.Further, a demographic dividend resulted in more than 60 per cent of India's population being in the working-age group. This increased economic activity, as well as business and leisure travel.

Investments in airports and related infrastructure: An important factor for the surge in air passenger traffic in India was the opening up of the airport infrastructure to private sector participation. The private sector invested to the tune of INR 300 billion in the Hyderabad and Bengaluru international airports and in the modernization of Delhi and Mumbai international airports.

Untapped market potential: India's air traffic density (measured by linking urban per capita income with air passengers), which was 72 in 2010, as compared to 282 in China, 231 in Brazil, 1225 in Malaysia, 2896 in the United States and 530 in Sri Lanka, was very low. This indicated untapped market potential, especially given the growing young population and rising disposable income levels.

Other factors responsible for the growth in the aviation industry included growth in tourism and growing integration of India with the rest of the world, necessitating greater business travel.

INDIAN AVIATION INDUSTRY: CHALLENGES

The Indian aviation industry faced a diverse set of problems, including multiple taxes, high operating costs, lack of infrastructure, policy issues such as high sales tax on aviation fuel and airlines having to fly unviable routes to develop connectivity in the country, etc.

High airport charges: Indian airports charged some of the highest fees in the Asian and Gulf region. Indian LCCs were further disadvantaged compared to their international peers, since there were no secondary airports levying lower airport charges for such LCCs in India.

High taxes and fees: The Indian aviation sector was subject to multiple fees and taxes on inputs, which were either absent or lower in matured aviation markets. Thus, fees and taxes on inputs such as fuel, aircraft leases, airport charges, air passenger tickets, air navigation service charges, maintenance costs, fuel throughput fees, and service taxes on other items raised costs substantially. Consequently, the Indian aviation sector had larger operating losses than its other global counterparts.

Lack of adequate airport infrastructure: Inadequate airport infrastructure led to congestion at airports. This not only affected the turnaround time of the aircraft and reduced the average aircraft utilization but also added to the costs significantly in the form of fuel wastage as the aircraft often were delayed in the sky. It also led to concerns regarding air safety.

High cost of aviation turbine fuel (ATF) in India: The cost of ATF accounted for 40 to 50 per cent of the total operating cost for the Indian aviation industry. Such high costs posed a challenge to the financial health of airlines. ATF prices in India were distorted due to the multitude of cascading taxes by different government entities. In addition, ATF was also subject to a high value added tax (VAT) of 30 per cent, despite its being an input fuel (similar to coal and gas). A KPMG analysis indicated that the high ATF prices in India, which were 60 per cent higher compared to neighboring hubs such as Dubai, Singapore and Kuala Lumpur, rendered the Indian aviation industry uncompetitive (see Exhibit 6).

Sensitivity of industry profitability to oil prices: The industry was highly sensitive to oil prices. The Centre for Asia Pacific Aviation (CAPA) carried out a study assessing the sensitivities of airline profits to higher average oil prices in April 2011. It found that LCCs could sustain profits at a modest level and perform better than full-service carriers at oil prices up to $95 to $100 per barrel, other things remaining constant. However, at oil prices above $110 per barrel, the entire industry would be impacted, since at these levels the fare differentiation between them became less significant.With the crude oil to ATF price correlation at 93 per cent, any increase in global crude prices and/or a depreciation of the rupee had a direct impact on the ATF prices. In September 2013, international oil prices, which had been trading between $105 and $115 per barrel, increased due to global developments. Indian oil companies, which supplied ATF after refining imported crude, consequently raised ATF prices steeply by 6.9 per cent. This followed two rounds of ATF price hikes that they had already carried out in July and August 2013, by 5.8 per cent and 6.3 per cent respectively.

Exchange rate volatility: The rupee had depreciated steeply against the U.S. dollar between 2008/2009 and 2012/13 (see Exhibit 7). With the costs of fuel, insurance and freight, maintenance, repair and overhaul (MRO) expenses and lease rentals (all calculated in dollar terms), such depreciation increased industry costs substantially. Even as late as May 1, 2014, the rupee was trading at INR 60.11 to US$1.

Policy rules: The Indianaviation industryconsisted of policyregulations which contributedtoits financial non-viability. These included the following:

Fleet, equity and experience requirements: According to civil aviation requirements (CAR), domestic scheduled operators had a minimum fleet requirement of five aircraft and a minimum equity requirement ranging from INR 200 million to INR 500 million (based on the take-off mass of aircraft). Such regulatory requirements meant a restriction on the number of new market entrants as well as their size, since only firms which could raise the required capital could enter. The '5/20' rule also meant that Indian carriers which did not possess the mandatory five years operational experience and 20 aircraft fleet size could not operate on international routes. Such restrictions, which were binding only on Indian (and not international) carriers, affected their competitiveness further.

Restriction on FDI by foreign carriers: FDI by international carriers was restricted to 49 per cent.

Such FDI restrictions limited the potential sources of low-cost capital, as well as expertise. It also restricted access to technology and management know-how.

Route dispersal guidelines: Aviation routes in India were divided into three categories based on their

profitability. Category I routes were the profitable routes, Category II consisted of loss-making routes and Category III comprised the remaining routes. Additionally, Category IIA routes (within Category

II) consisted of routes exclusively within the North Eastern region, Jammu and Kashmir, Andaman and Nicobar and Lakshadweep. Airlines were required to deploy a minimum percentage of their capacity deployed on profitable (Category I) routes on the other routes. This ranged from 10 per cent in the case of category II and IIA to 50 per cent in the case of Category III routes (see Exhibit 8).

Such deployment of aircraft on unviable routes affected profitability adversely.

Lack of skilled manpower: With passengers and aircraft fleets likely to triple by 2025, there was a need for skilled manpower. According to a KPMG analysis, the total manpower requirement of airlines was estimated to rise from 62,000 in 2011, to 117,000 by 2017. This included pilots, cabin crew, aircraft engineers and technicians, ground handling staff, cargo handling staff, administrative and sales staff etc. Lack of adequate trained and skilled workforce would pose a challenge.

Slot allocation policy: The slot allocation policy within the Indian aviation sector created an artificial barrier to entry and limited competition. "A'slot' allocated to a particular carrier referred to its entitlement to use the runway capacity at a particular airport on a specific date at a specific time." Such slots were limited in supply. India followed the International Air Transport Association (IATA) global guidelines of a 'grandfather rule' for allocation of slots. As per the guidelines, an incumbent airline, based on utilization of the slot at least 80 per cent of the time in the preceding season, was entitled to retain a group of prime slots at airports on prime routes based on historic precedence. New entrants had no access to such pre-allotted slots; nor could they access more than 50 per cent of the pool of the available slots. With a limit on the number of free slots available to new entrants, incumbent airlines garnered substantial market share and deterred any potential entry to the market.

In case of mergers, the application of the 'use it or lose it' rule allowed the merged entity to retain access to all infrastructure, including slots, controlled by the airlines prior to the merger. A consolidation in the airline industry through mergers and acquisitions of incumbent carriers thus accentuated such barriers further. Airline mergers created artificial scarcity of slots and thus restricted competition. Underutilized slots, which may be open for allocation to new airlines, tended to be at odd times and not peak hours.

Pricing strategies: The Indian civil aviation sector found pricing its services to be the biggest problem. With no airline owning a significant chunk of the market, any attempt to hike prices would result in a loss of customers; at the same time, a drop in prices by one player would set into motion a ruinous price war. Again, while high prices across the industry were likely to come under the scanner of the Competition Commission of India for possible cartelization, low prices were also frowned upon as predatory pricing and anti-competitive behaviour.

In late 2010 during the peak season of the most important Indian festival, Diwali airfares had risen by 250 to 300 per cent and the Indian aviation ministry constituted a fare-monitoring cell for the first time to protect consumers. However, in January 2013, SpiceJet had launched a three-day mega ticket sale, when it had offered tickets at INR 2,013. The DGCA advised it not to do so and asked others not to follow. In February 2013, led by Jet Airways, other airlines (Indigo, SpiceJet and Go Air) had slashed ticket prices across 450 flights covering 57 destinations. The scheme, which was valid for travel until December 2013, covered profitable Category I routes, as well as Category II and III routes.

LOW-COST CARRIERS IN INDIA

Air Deccan introduced the low-cost model in the Indian aviation sector in 2003. The model was based primarily on online booking and a 'no-frills' service. Additionally, several innovative pricing strategies were introduced. However, Air Deccan could not keep up to its tagline of "Simplifly." Poor on-time performance, cancellations, lost baggage and an overall poor service delivery resulted in poor performance. Air Deccan spread itself too wide, too quickly. It scaled up to 63 cities at its peak, flying with A320 as well as ATRturboprops. It opened up newer routes every month. With inadequate passenger loads, the venture failed. Gorur Ramaswamy Iyengar Gopinath (called Captain Gopinath), Air Deccan's visionary chief executive officer, sold his stake to Kingfisher in 2007. IndiGo, which entered

the industry in 2006, learned from Deccan's experience and focused on building more flights on one city- pair, rather than expanding to new cities.

By 2013, the LCC model had emerged as the significant business model of airline industry in India. In 2013, more than 60 per cent of the market share was held by LCCs. This share was even higher at 70 per cent if the low-cost arm of full-service carriers was included in the LCC share (see Exhibit 9).

However, the LCC model in India was unlike its global counterparts in terms of various parameters: choice of routes, ticketing, check-in, passenger service, baggage rules, labour engagement and aircraft configuration. The Indian LCCs mirrored the FSCs on all parameters except aircraft configuration and salaries. The lack of access to low-cost airports, unlike their global counterparts, meant that LCCs operating in India paid up to 13 per cent higher airport-related costs. This factor also affected operational costs since LCC terminals (LCCTs) globally were relatively uncongested, leading to faster turnaround; their airport fees were lower, facilitating lower ticket prices and hence boosting air passenger growth. In the absence of such facilities, Indian LCCs were merely "lower-priced carriers."

Total Losses and Debts

Thus, despite the phenomenal growth in passenger traffic, most LCCs in India made losses. CAPA reported that between 2006 and 2013, the Indian airline industry had total accumulated losses of $8.6 billion. Between fiscal years 2007 and 2010, the accumulated operational losses of Indian carriers was in excess of INR 260 billion, with the three largest airlines alone accounting for close to 88 per cent of these losses. The total debt burden of the Indian airline industry was estimated at close to US$20 billion for 2011/12. While half of this debt was aircraft related, the rest was for working capital loans/payments to airport operators and fuel companies.

In 2013, Indian airlines lost US$1.65 billion on total revenue of approximately US$9.5 billion. Exhibit 10 depicts the reported and estimated Indian carrier revenue and net income in fiscal year 2012 and fiscal year 2013. In 2013, all airlines, including FSCs (with the exception of IndiGo), reported losses.

Operational Parameters

With inflexible capacity in the short run in the airline industry, aircraft utilization rates held the key to maintaining efficiency of carriers and thus maximizing yield and reducing overall operating cost. An industry expert suggested that only if the utilization rates increased to 90 per cent could the aviation sector be sustainable. The average aircraft utilization rate of LCCs was 11.25 hours in 2012, while that for FSCs was 9.7 hours (see Exhibit 11). One way of improving utilization rates was through aggressive discount sales. LCCs, with their higher passenger load factors compared to the breakeven load factors, were in a better position to start making profits compared to FSCs.

AIRASIA BERHAD (OR AIRASIA)

AirAsia Berhad, a Malaysian low-cost airline headquartered in Kuala Lumpur, Malaysia, had been established in 1994. It began its operations in 1996, and had pioneered low-cost travel in Asia, where it enjoyed first-mover advantage. In 2012/13, it had scheduled domestic and international flights to 83 destinations across 17 countries. Its efforts in the Malaysian aviation sector had led to the tiny country having more airlines than all Indian carriers put together. AirAsia had been named as the world's best low-cost airline and a pioneer of low-cost travel in Asia in 2012, and had won several accolades andawards.India, with its large population (almost 50 times that of Malaysia), provided a "monster of an opportunity" for AirAsia.

AirAsia's Low-cost Model

AirAsia's cost per available seat kilometre (CASK) of 13 Sen (US$ 0.04) in 2012/13 was one of the lowest in the world. It had managed to maintain a low-cost model globally, through a series of processes it had put in place over the 12 years of its existence. Since 2012, it also had a focused 'cost out avoidance' (COA) program, which aimed at a cost savings of US$20million in five years. The program targeted both ground and flight-related operations to improve operational efficiencies. AirAsia had managed to lower its costs through the following:

Optimizing crew and aircraft utilization through a new and superior airline management system that enhanced on-time performance.

Baggage self-tagging service, which reduced its human resource costs and also added to customer

satisfaction.

Operating out of LCCTs, particularly in the Kuala Lumpur International Airport (KLIA). LCCT passenger fees were 86 per cent lower than at the KLIA main terminal building.

Better management of fuel consumption through acquiring aircraft which saved up to 4 per cent on

fuel per aircraft per annum.

In addition, AirAsia relied on ancillary and adjacency income streams as important sources of supplementary revenues. The ancillary income was derived from add-ons, including services such as pick a seat, red carpet, in-flight meals, pre-checked baggage and fly-thru. The adjacency business represented joint venturesin whichAirAsia hadjoined withsynergistic business interests,including: AirAsia Expedia, a joint venture with the world's largest online travel agent, Expedia; the BIG Loyalty program; and the Asian Aviation Centre of Excellence for providing cheap in-house training.

AirAsia carried 21,853,036 passengers and operated with the world's lowest unit cost of 13 sen (US$ 0.04) per ASK in 2013, as against a revenue per ASK of 16.2 sen (US$ 0.05). With a fleet of 143 aircraft, its aircraft utilization rate was 12.1 hours per day. It had a passenger load factor of 80 per cent and break- even load factor of 64 per cent in 2013. Exhibit 12 gives the five-year operating and financial highlights of AirAsia in 2013.

AirAsia India

India was likely to be a major growth market in the future. AirAsia's founder had announced that the company would revolutionize air travel in India by offering fares 35 per cent cheaper thanthe competition. He further announced that AirAsia would achieve an aircraft utilization rate of 16 hours and a turn-around time of 20 minutes, thereby beating competitors on operational parameters. Yet the Indian aviation market posed its own set of challenges and being 'low cost' was no guarantor of success.

AirAsia's first aircraft, a 180 seater A320, had already arrived in Chennai in March 2014. With the grant of the AOP, all that was required was for AirAsia to take to the Indian skies. However, would AirAsia India's entry and its aggressive pricing decisions work in the Indian aviation market? Would its entry cause a clash in the Indian skies and disrupt industry equilibrium? Was there space in the Indian skies for one more airline?

EXHIBIT 1: THE INDIAN AVIATION MARKET: ENTRY AND EXIT OF DIFFERENT AIRLINES*

YEAR

Indian Airlines

Jet Airways

Air India

Archna Airways

Damania Airways

East West Airlines

ModiLuft

NEPC

Alliance Air

Air Sahara

Air Deccan

KingFisher

SpiceJet

GoAir

Paramount

Indigo

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

*Shaded areas show the timeline of operations of different airlines.

Source:AdaptedfromReportofWorkingGroupontheCivilAviationSector.MinistryofCivilAviation,GovernmentofIndia,June2012, http://civilaviation.gov.in/cs/groups/public/documents/document/moca_001680.pdf, accessed May 8, 2014.

EXHIBIT 2: THE INDIAN AVIATION MARKET: KEY STATISTICS

CHANGES IN THE MARKET SHARE (%) OF VARIOUS AIRLINES IN THE INDIAN AVIATION MARKET

(2005-06 TO 2013-14)

AIRLINE

2005-06

2011-12

2013-14

NACIL

30.8%

14.6%

19.1(%)

JET AIRWAYS

36.1

18.2

17.1

JETLITE

-

7.9

5.4

AIR SAHARA

11

-

-

AIR DECCAN

12.1

-

-

KINGFISHER

4.9

19.6

-

SPICEJET

4.4

14

19.8

GOAIR

0.7

6

9

PARAMOUNT

0.1

-

-

INDIGO

19.7

29.5

THE DOMESTIC INDIAN AVIATION SECTOR: SCHEDULED DOMESTIC AIRLINES IN 2013

INDIGO

JET

AIRWAYS

JETKONNECT

AIR INDIA

SPICE JET

GO AIR

AIRLINE MODEL

BUDGET

FULL- SERVICE

HYBRID

FULL- SERVICE

BUDGET

BUDGET

MARKET SHARE

29.1%

18.8%

6.3%

19.9%

17.2%

8.7%

NO. OF

AIRCRAFT

70

95

15

205

56**

13

NO. OF DAILY

FLIGHTS*

447

260

290

413

350

750**

CITIES

CONNECTED

34

71

46

92

55

21

*Includes both domestic and international flights. **No. of weekly flights (market share data as of August 2013).

Source:AdaptedfromManishaSinghal,"DelayedTake-off",Business Today,Oct.13,2013, http://businesstoday.intoday.in/story/tata-sons-and-singapore-airlines-come-together-again/1/198783.html,accessedMay

13, 2014; DGCA Reports.

EXHIBIT 3: GLOSSARY

Passenger Load Factor: The number of passengers as a percentage of capacity (i.e., the number of seats flown).

Available Seat Kilometre (ASK): Total seats flown multiplied by the number of kilometres flown.

Revenue Passenger Kilometre performed: Number of passengers multiplied by the number of kilometres those passengers have flown.

Aircraft utilization: Average number of block hours per day per aircraft operated.

Block hours: Hours of service for aircraft, measured from the time that the aircraft leaves the terminal at the departure airport to the time that it arrives at the terminal at the destination airport.

Capacity: The number of seats flown.

Cost per ASK (CASK): Revenue less operating profit divided by available seat kilometres.

Revenue per ASK (RASK): Revenue divided by available seat kilometres.

Sen: The standard monetary unit of Malaysia - the Ringgit - is divided into 100 sen. Hence 1 sen is equal to 1/100 of a Ringgit.

Source: Created by author.

EXHIBIT 4: RPK AND ASK OF SCHEDULED DOMESTIC CARRIERS IN INDIA

Source: Adapted by case author from "Report of Working Group on the Civil Aviation Sector," Ministry of Civil Aviation, Government of India, June 2012, http://civilaviation.gov.in/cs/groups/public/documents/document/moca_001680.pdf, accessed May 13, 2014.

EXHIBIT 5: EXPECTED FLEET EXPANSION BY INDIAN CARRIERS

AIRLINE

NO. OF AIRCRAFTS EXPECTED TO

BE ADDED BY 2017

ESTIMATED VALUE OF AIRCRAFTS TO

BE ADDED (IN RS. BILLION)

Air India

40

180

Go Air

22

81

Jet Airways

79

320

JetLite

20

76

Spicejet

68

261

Indigo

69

261

TOTAL

292

1,179

Source: Report of the Working Group on Civil Aviation under the 12th Five Year Plan (2012-17), Government of India, p.26.

EXHIBIT 6: ATF PRICE COMPARISON IN INDIA VERSUS COMPETING HUBS (MAY-AUGUST 2011)

LOCATION

PRICE/KILOLITRE (US$)

India

1,400

Singapore

825

Bangkok

880

Kuala Lumpur

810

Dubai

840

Source: Report of the Working Group on Civil Aviation under the 12th Five Year Plan (2012-17), Government of India, p.27.

EXHIBIT 7: INDIAN RUPEE TO U.S. DOLLAR EXCHANGE RATE

YEAR

RS./US$

2008/09

INR 45.92

2009/10

47.42

2010/11

45.58

2011/12

47.9

2012/13

54.4

2013/14

61.6 (ON OCT. 25, 2013)

May 1, 2014

60.11*

http://ycharts.com/indicators/indian_rupee_exchange_rate, accessed May 5, 2014.

Source: RBI, www.rbi.org.in/scripts/PublicationsView.aspx?id=15428, accessed January 15, 2014.

EXHIBIT 8: COMPLIANCE OF ROUTE DISPERSAL GUIDELINES (MAY 2013)

AIRLINE

ASK DEPLOYMENT OF CATEGORY I

CAT. III

CAT. IIA

CAT.II

AIRINDIA + ALLIANCE AIR

80.5

1.5

20.6

JET AIRWAYS

+JETLITE

96.6

1.77

17.5

SPICEJET

108.9

1.51

25.4

GO AIR

125.3

2.33

63.9

INDIGO

100.2

1.3

15.9

Source: http://dgca.nic.in/reports/stat-ind.htm, accessed May 22, 2014.

EXHIBIT 9: LCC VS. FSC MARKET SHARE: CHANGING BUSINESS MODEL

150

100

50

99

95

0

1

5

70.95954.3

52.336.731.44637

5.423.924

29.14145.742.339.444.65463

Low Cost Carrier (LSC) (%)Low fare (%)

Full Service Carrier (FSC) (%)

Source: Adapted by case author from SpiceJet Annual Reports.

EXHIBIT 10: REPORTED AND ESTIMATED INDIAN CARRIER REVENUE AND NET INCOME IN FY 2012 & FY 2013 (IN US$)

AIRLINE

FY 12 REVENUE

FY 12 NET INCOME

FY 13 REVENUE

FY 13 NET INCOME

AIR INDIA

2.6 billion

(1.4 billion)

3 billion

(950 million)

GO AIR

278 million

(24 million)

375-400 million

(14-16 million)

INDIGO

1.0 billion

23 million

1.5-1.6 billion

100-110 million

JET AIRWAYS

2.7 billion

(226 million)

3 billion

(87 million)

JET KONNECT

340 million

(33 million)

387 million

(53 million)

KINGFISHER

1.0 billion

(423 million)

91 million

(500-520+ million)

SPICEJET

720 million

(109 million)

1 .0 billion

(34 million)

Source: "Highlights of CAPA India Aviation Outlook 2013/14," CAPA, May 2013, p. 5, www.capaindia.com/PDFs/CAPA_India_Outlook_FY14_Highlights.pdf, accessed May 13, 2014.

EXHIBIT 11: COMPARISON OF PASSENGER LOAD FACTOR, BREAK-EVEN LOAD FACTOR* AND AIRCRAFT UTILIZATION RATES FOR INDIAN CARRIERS

*The PLF and BELF data are for 2010/11 for all, except GoAir and JetLite (2009/10).

Source: Adapted by case author from http://civilaviation.gov.in/cs/groups/public/documents/document/moca_001680.pdf, p.

94, accessed May 8, 2014.

EXHIBIT 12: FIVE-YEAR OPERATING AND FINANCIAL HIGHLIGHTS OF AIRASIA BERHAD

PARAMETER

2009

2010

2011

2012

2013

OPERATING PARAMETERS

Passengers

carried

14,253,244

16,054,738

17,986,558

19,678,576

21,853,036

Revenue per

ASK sen/(US$)

14,1 (0.04)

16.2 (0.05)

17.2 (0.05)

17.4 (0.05)

16.2 (0.05)

Cost per ASK

sen/(US$)

10 (0.03)

11.8 (0.03)

12.8 (0.04)

13.8 (0.04)

13 (0.04)

Size of the Fleet

(group)

84

90

97

118

143

FINANCIAL PARAMETERS

Revenue (US$

million)

1103

1272

1375

1523

1631

PBT ( US$

million)

219

352

238

297

115

Net Profit (US$

million)

178

342

170

243

115

Capacity

19016280

20616,120

22474,620

24,751,800

27,307,980

Load Factor

75

78

80

80

80

RPK (million)

16890

18499

21037

22731

25333

ASK (million)

22159

24362

26074

28379

31582

Aircraft

utilization (hrs per day)

12.0

12.2

12.3

12.3

12.1

Average fare in

RM/ (US$)

168 (53.76)

177 (56.99)

176 (53.85)

184 (56.67)

166 (52.95)

Yield

Revenue/AK sen/(US$)

14.1 (0.05)

16.2 (0.05)

17.2 (0.05)

17.4 (0.05)

16.2 (0.05)

No. of

employees at year-end

4597

4702

5137

5644

6089

% Revenue via

internet

76

77

78

79

85

RM-US$

average exchange rate

3.52

3.22

3.06

3.08

3.19

Note: RM refers to the Malaysian Ringgit.

Source: Adapted from the AirAsia Annual Report, 2013, pp.140-143, www.airasia.com/docs/common-docs/investor- relations/annual-report-2013.pdf, accessed May 22, 2014

1.What is the market structure prevalent in the Indian Aviation sector? What are its features? The number of airline player in the Indian aviation declined by nearly half between 2005 and 2014. Can this statement be taken to conclude that the degree of market power within the Indian aviation increased/doubled during the period? (15 Marks)

2.What are the barriers to entry faced by new entrants? Such as AirAsia India in the Indian aviation Market? Can the Indian Aviation market called a contestable market? (15 Marks)

3.Analyze the demand supply dynamics within the Indian aviation market. How do these dynamics impact Air Asia India? (10 Marks)