air india

AIR INDIA

HISTORY OF AIRLINES

The Indian aviation sector consists of many players which are divided into Low-cost and Full-service carriers.

Jet Airways, Kingfisher(closed now), Air India are some examples of Full-service carriers and IndiGo, Spicejet, GoAir are some of the leaders in Low-cost carriers segment.

Recently the Indian Airline Industry is witnessing a series of disastrous events which are a cause for the significant loss in profit and reputation of the individual airlines .

The only way for airline companies to defeat the competitors and stay profitable is to provide better service than that of their competitors.

Customers evaluate their experience of the flight based on the variety of services delivered by the carrier. Currently low-cost carriers are offering variety of services to attract new customers and retain the existing ones.

Air India is desperately trying to gain its lost market share by lowering down its fares and offering better service to its customer

HISTORY OF AIR INDIA

Air-India was a small, private, domestic carrier which began its operations in 1932 as Tata Airlines, named after J. R. D. Tata, its founder but it is now government owned.

The company was formerly known as National Aviation Company of India that was established to facilitate the merger of the two main state-owned airlines in India: Air India, with its subsidiary Air-India Express and Indian, together with its subsidiary Alliance Air

It was the first to provide commercial Airline services. After World War II in 1946, Tata Airlines became a public limited company under

the name of Air India. Under the Air Corporations Act of 1953, the Government nationalized the Air

transportation industry and Air India International Limited was born.

In 1960, Air India flew its first international flight to New York via London.

LOGO

• The logo of the new airline is a red coloured flying swan with the `Konark Chakra' in orange, placed inside it.

• The new logo would feature notably on the tail of the aircraft. While the aircraft will be ivory in colour, the base will retain the red streak of Air India.

• The painted on red palace style carvings on the outside of the windows refer to their slogan "your palace in the sky" which is written on the back of the aircraft.

Porter’s Five Forces Analysis

• Bargaining power of Buyers

• Bargaining power of buyers is high • Customers can easily switch between airlines • High disposable income, Emerging economy and high price

sensitivity • Substitutes like rail and road transport are used if air fares

are too high


• Industry Rivalry • The industry is highly competitive • Many emerging low cost airlines • There is always a price war in the industry and

customers shift to the airline which offers service at the cheapest cost


• Threat of New Entrants • Threat of new entrants is low • Initial investment required is huge and profits can only be

achieved by providing excellent service at low cost • All the existing companies have build their brand equity • Poor infrastructure and unfavourable government

regualtions


• Substitutes • Threat of substitutes is medium • Road and Rail transport are alternatives • Although time required by air is far less than the time

required to reach the destination by rail or road

SWOT Analysis

• Strengths

• Strong backing by the government

• India carrier with the largest number of fleet and most of them providing in-flight entertainment

• Oldest and has developed a strong brand over a period of time

• It has the first right of refusal for any new route that is initiated by the government

• Weaknesses

• Growing labour problems

• Weak Management resulting in huge losses

• Excess staff

• Inefficient operations resulting in flight delays

• Tarnished brand image

SWOT Analysis

• Opportunities • India airline industry is growing at a

CAGR of 20%

• Customers are getting wealthier, tend to be less price-conscious and prefer to choose quality service over cost.

• Approval of FDI by foreign airlines in the domestic carriers

• The number of foreign visitors and investors to India is increasing rapidly.

• Threats • Air India faces aggressive

competition from world leading airlines and price wars triggered by domestic players.

• The Indian Railway Ministry has improved the speed and services in their medium/long distant routes, attracting passengers away from air service

• Rising ATF (Airline turbine fuel) and labour cost

Functional Level Strategy

• Economies Of Scale In case of Air India, economies of scale can be utilized by targeting

maximum occupation of in-flight seating. The two prime requirements for this are low fares and on-time departures

Air India recently reduced its fares to undercut competition and regain market share that it possessed prior to its employee strikes in May. However, after attaining its 15-16% market share target (this was its share prior to the May 2011 employee strike), it raised its fares so that competitors could price their tickets rationally.

Functional Level Strategy

Air India is also constantly working towards improving its on-time performance (OTP) which is being monitored at the highest level. The executive directors of the region have been made responsible for monitoring, analysing the causes of the delay and taking adequate measures to resolve the same

CASE POINTS

AIL carriers connect 93 destinations (60 domestic and 33 international) in 24 countries as of February 2011.

The main bases of operation of the airline are Mumbai's Chhatrapati Shivaji International Airport and Delhi's Indira Gandhi International Airport.

Air India Ltd. was a pioneer in the aviation industry before the independence of the country which after its merger with Indian Airlines attained the status of being the biggest South Asian airline.

In addition, it has code-sharing arrangements with other international carriers to

various destinations in Europe, the Asia Pacific, the U.S. and Canada, the Asia Pacific region, south Asia, the Gulf and Middle East region, Africa, and Australia

Case Points

• In 2007, the Government of India announced that Air India would be merged with Indian Airlines.

• As part of the merger process, a new company called the National Aviation Company of India Limited (NACIL) was established.

• Around 2006-2007, the airlines began showing signs of financial distress. The combined losses for Air India and Indian Airlines in 2006-07 were 770 crores (7.7 billion).

• On 27 February 2011, Air India and Indian Airlines merged along with their subsidiaries to form Air India Limited.

Case Points

The merger was to be the starting point of all the trouble and distress of the new Air India Limited• The combined losses for Air India and Indian Airlines in 2006–07 were 7.7

billion (US$120 million). After the merger of the airlines, it went up to 72 billion (US$1.1 billion) by March 2009

• By March 2011, Air India had accumulated a debt of 425.7 million(US$6.8 billion) and an operating loss of 220 billion (US$3.5 billion), and was seeking 429.2 billion (US$6.8 billion) crore from the government

• A report by the Comptroller and Auditor General (CAG) blamed the decision to buy 111 new planes as one of the major causes of the debt troubles in Air India; in addition, it blamed on the ill timed merger with Indian Airlines as well

Budget Allocation To Airline Industry

Government of India has taken several steps to tide over the crisis," the statement said mentioning that the government in the federal budget 2011-12 had allocated Rs 2,000 crore for the airline and that another Rs 1,200 crore was expected to be infused this year".

Currently the airline, which is laden with a cumulative debt of Rs 40,000 crore it incurred over aircraft acquisition and as short-term loans to maintain its operations, expects a fresh equity infusion of Rs 1,200 crore in July. The cash-strapped carrier is also seeking a total infusion of Rs 17,000 crore, which includes Rs 5,000 crore for this fiscal year alone, the report pointed out

THE CHRONOLOGY OF THE AIR INDIA STRIKE MAY 2012

On May 8, 2012 about 100 pilots went on medical leave as a mark of protest.• Later, the same day it sacked ten agitating pilots and de-recognized their

union after 160 pilots failed to join duty by the given deadline.• After putting forth an original list of 14 demands, the aviators are now

asking for reinstatement of their 101 sacked colleagues• On the 15th of May, the Union Civil Aviation Minister Ajit Singh stated that

the Government was giving Air India one last chance and that it must perform in order to qualify for a bailout.

• on 4 July 2012 AI management gave an assurance to Delhi High Court that it would look into the hardships of the pilots sympathetically, the striking pilots have decided to end the 58 day old strike immediately.

• Due to pilots' strike Air India suffered a loss of 500 crores (US$90.5 million)

Management’s view over The Strike Issue

• Efforts are being made to resolve the situation. • Appeal to the pilots that they should think about the

passengers.• As per Rule 42 (2) of the Aircraft Rules, 1937: Pilots who

have claimed sickness for two months have been asked to submit medical reports. But verification of the two-month long sickness and related tests and reports may catch pilots on the wrong foot

How The Strike Ended?

• The 58-day protracted strike by Air India pilots was called off on 4th July after the Delhi high court asked them to join duty within 48 hours and the management to sympathetically consider their grievances.

• "The AI management shall sympathetically consider the grievances of the pilots including the aspect of reinstatement of those pilots whose services were terminated as a consequence to their strike," Justice Khetrapal said while disposing of the pilots' plea for a direction to the AI management to take back the 101 sacked pilots, including 10 IPG office bearers

Financial Issues

• Air India has huge financial burdens

• The new government has been mounting pressure on the Air India management to turnaround the loss-making airline and it has initiated steps to cut costs but the loss-making airline appears to be falling behind the target that was set as part of its turnaround plan.

• The airline has been losing money on international routes and the Dreamliner fleet that had been inducted at a huge cost is flying at a loss on several international routes.

Revenue

• Total Revenue increased from Rs.140,620.1 million in 2010-11 to Rs.147,138.1 million (an increase of Rs.6,518.0 million) during 2011-12.

• Operating Revenue was Rs.146,753.0 million as against previous year’s revenue of Rs.139,760.3 million (increase of Rs.6,992.7 million).

• Passenger Revenue increased from Rs.104,438.2 million last year to Rs.114,236.9 million (an increase of Rs.9,798.7 million) which was mainly due to increase in yield per PKM from 3.46 to 3.74 and increase in Passenger Load Factor from 66.1 to 67.9

Revenue

• The total expenditure incurred during the year was Rs.234,594.8 million as compared to the previous year’s figure of Rs.213,215.9 million (an increase of Rs.21,378.9 million).

• Operating Expenses increased from Rs.180,808.0 million to Rs.198,139.9 million (an increase of Rs.17,331.9 million) mainly due to the following :

• Increase in fuel price by Rs.23,996.1 million i.e. 39.3%;

• Increase in interest on working capital loans by Rs.4,533.1 million

To Cover Up Losses

• The company plans to reduce the pay roll by $40 million by closing some unprofitable routes and reducing the employment, which leads to a strike by the employees and the pilots.

• The national carrier has also decided to discontinue loss-making routes, among others steps, to rein in the spending and return to break-even.

• The use of expensive hotels or five-star hotels for stay during the travel or holding events has been restricted unless it is unavoidable and the budget for such activities has been reduced by 10 percent as part of the measures by AI.

• After a long spell of losses, Air India had recorded a net profit of Rs 14.6 crore in December last on account of a healthy growth in both passengers and cargo revenues.

• Air India's total revenue rose by 6.5 percent to Rs 2070 crore during December 2014 as compared to Rs 1,944 crore in the same period in 2013.

To Cover Up Losses

• The state-run airline has reduced both its operational and net loss over the last two fiscals. Its net loss came down to Rs 5,389 crore in the last fiscal compared with a net loss of Rs 5,490 crore in financial year 2013 and Rs 7,559.74 crores in FY12

• The management has also directed that all routes should be critically reviewed and routes which are not covering fuel cost or variable costs, removed from the network after studying the historical trends.

• The management has also emphasised to all its employees that the targets set under the turnaround plan and the budgets should be achieved for this fiscal on a "war footing" and there can be no compromise on these.

To Cover Up Losses

• On the operational front, the measures are aimed at improving aircraft utilisation by cutting down the turnaround time at transit stations, reducing duty travel of crew to the minimum to increase their productivity, close monitoring of occupancy ratios on various flights, bringing down expenditure on entertainment at foreign stations,

Some Major Steps Taken

• The national carrier has also decided to discontinue loss-making routes, among others steps, to rein in the spending and return to break-even.

• The use of expensive hotels or five-star hotels for stay during the travel or holding events has been restricted unless it is unavoidable and the budget for such activities has been reduced by 10 percent as part of the measures by AI.

• After a long spell of losses, Air India had recorded a net profit of Rs 14.6 crore in December last on account of a healthy growth in both passengers and cargo revenues.

• Air India's total revenue rose by 6.5 percent to Rs 2070 crore during December 2014 as compared to Rs 1,944 crore in the same period in 2013.

• The state-run airline has reduced both its operational and net loss over the last two fiscals. Its net loss came down to Rs 5,389 crore in the last fiscal compared with a net loss of Rs 5,490 crore in financial year 2013 and Rs 7,559.74 crore in FY12.


• AI has a cost base of nearly Rs 24,000 crore out of which nearly Rs 14,000 crore is variable and this includes fuel cost of Rs 9,500 crore."With the decline in fuel prices, the company plans to achieve at least a 20-25 percent reduction in its fuel bills in the next fiscal, which will be a substantial saving for the carrier.

• The management has also directed that all routes should be critically reviewed and routes which are not covering fuel cost or variable costs, removed from the network after studying the historical trends.

• The management has also emphasised to all its employees that the targets set under the turnaround plan and the budgets should be achieved for this fiscal on a "war footing" and there can be no compromise on these.


• On the operational front, the measures are aimed at improving aircraft utilisation by cutting down the turnaround time at transit stations, reducing duty travel of crew to the minimum to increase their productivity, close monitoring of occupancy ratios on various flights, bringing down expenditure on entertainment at foreign stations

Recommendations

• There is a need for Air-India to establish a new fleet with mid and small sized aircrafts, to serve the less busy routes

• Air-India has to appoint, highly skilled managers from private sector, in order to turn over the situation

• Instability in the management has to be eliminated, by appointing a firm and constant management and director, as government is changing the management frequently.

• Ratio of manpower to number of aircrafts has to be reduced, in order to reduce the staff costs

• The unnecessary aircrafts have to be rented or they can sell those aircrafts. For example, half of Air-India’s Boeing 747 aircrafts are remaining in the hangers, without regular usage. The company have to gave them for rent or have to sold them, in order to generate some revenues and to reduce the maintenance costs

Recommendations

• Quality of service and aircraft maintenance have to be improved

• The organization has to encourage the private investments, in order to recover some costs

• Collaboration with major international air line companies will be helpful

• The pace of decision making process has to be improved

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