INDUSTRY ANALYSIS

COMMERCIAL
AVIATION SECTOR

Compiled by:
Anjaly Meera Abraham
Shashwat Mishra
 1. Aviation Industry Overview
The global airline market comprises air transport service providers of passenger and
cargo. Industry services are used by individuals and business,international,
domestic, and regionaland governments around the world. The industry is
fragmented in terms of suppliers and buyers. North America led this industry,
followed by Europe and Asia in 2012. Growth of the North American market is
driven by growing demand in long-haul international services.

The airline industry is characterized by intense competition with strong price pressure
that entails a continuous requirement to enhance efficiency. In parallel, this is an
industry that continues to grow with more passengers who travel more often.

Global growth, increased productivity and intense competition

Since the start of commercial air traffic, the airline industry has been marked by high
growth compared to the GNP trend and continuous productivity increases. The
industry has been gradually liberalized, which has contributed to new business
models, such as low cost carriers (LCCs), arising since the 1990s. Even if a number of
new LCCs have contributed to total market growth, existing network airlines have
continued to fly with unchanged or slightly rising volumes. Technical developments,
new business models and efficiency enhancements have helped absorb inflation
which, in combination with raised living standards, have enabled more people to fly.

2. Size and scope of aviation

The global general aviation market revenue is expected to increase during 2017-2022 (the
forecast period) due to the infrastructural development, growth in demand among developing
economic countries, like India.
The major roadblocks for the Indian general aviation market growth are the stringent
regulatory norms, expensive services, and the lack of infrastructures to support such aircraft.
However, this situation is changing, for instance, the first heliport built in Delhi, India, is
expected to boost the Indian helicopter market and, thus, accelerate the general aviation
sector.
The penetration of rotary wing in civil aviation is quite substantial in North America, Europe,
and some countries of Latin America, whereas, is negligible in countries like India where the
lack of connectivity and airports make helicopters more useful. This is expected to be a major
propellant for the helicopter industry in developing economies.

Size and scope of aviation sector in India

Airlines registered and operating in India carry 50 million passengers and approximately 1.1
million tonnes of cargo a year within a year.
The civil aviation industry in India has emerged as one of the fastest growing industries in the
country during the last three years. India is currently considered the third largest domestic
civil aviation market in the world.
According to International Air Transport Association IATA, India will displace the UK for
the third place in 2026.

Market Size
Domestic air traffic rose nearly 16 per cent in August 2017, continuing its double digit
growth, according to the civil aviation regulator Directorate General of Civil Aviation
(DGCA). About 9.69 million passengers flew in August, up from 8.38 million a year earlier.
Passengers carried by domestic airlines during January-August 2017 were 75.411 million as
against 64.468 million during the corresponding period of previous year, thereby registering a
growth of 16.97 per cent, as per the DGCA.
As against 395 aircrafts in the fleet of Indian carriers, there are 496 aircrafts in operation
today, and another 654 are under purchase.

Investment
According to data released by the Department of Industrial Policy and Promotion (DIPP),
FDI inflows in air transport (including air freight) between April 2000 and March 2017 stood
at US$ 1.01 billion.
India is estimated to see an investment of US $25 billion in the next decade in the airports
sector, a demand for 935 more planes and traffic growth of 13 per cent, according to Morgan
Stanley. According to them, the share of air travel in air and rail travel combined in India will
grow to 15.2 per cent by 2027 from 7.9 per cent now.

Key investments and developments in Indias aviation industry include:

1. The Airports Authority of India (AAI) will undertake new development works at
Lucknow, Deoghar, Rajkot and Allahabad airports.
2. The Ministry of Civil Aviation along with Airports Authority of India (AAI) plans to
develop small airports with frugal facilities, and encourage private airlines to bid for
routes connecting these small airports with existing larger airports, thereby increasing
regional air traffic.
3. AAI plans to increase its capital expenditure for 2017-18 by 25 per cent to Rs 2,500
crore (US$ 375 million), primarily to expand capacity at 12 airports to accommodate
rising air traffic
4. The Government of India has started a new regional connectivity scheme (RCS) called Ude
Desh ka Aam Nagrik (UDAN) under which fares will be capped at Rs 2,500 (US$ 37.5) for
half the seats in an one-hour flight
5. Constructing 17 highways-cum-airstrips are the government's priorities and it will start work
on them this year, Union Minister Nitin Gadkari has said. The projects are designed in such a
fashion that the roads will double up as airstrips and traffic will be stopped when an airplane
lands or takes off. The road and air connectivity will also provide better access to remote
areas.
6. Airport building and modernization projects worth over Rs 19,300 crore (US$ 2.99 billion)
have been recommended green clearance, in line with the Government of Indias focus on
improvement in regional air connectivity.
7. Indian airline companies like Air India, Air Deccan, SpiceJet, Air Odisha and Turbo Megha,
have been awarded with the right to fly to 128 routes across India, requiring them to cap half
the seats at nearly 50 per cent of the fare, under the Government of Indias regional aviation
scheme named UDAN.

Category Segmentation
Domestic is the largest segment of the airlines industry in India, accounting for 79.7% of the
industry's total volume.
The International segment accounts for the remaining 20.3% of the industry.

India airlines industry category segmentation: million passengers, 2016

Category 2016 %
Domestic 79.7
International 20.3
Total 100%
Source: MARKETLINE

India airlines industry category segmentation: % share, by volume, 2016

Geography Segmentation
India accounts for 5.5% of the Asia-Pacific airlines industry value.
China accounts for a further 36.4% of the Asia-Pacific industry.
 India airlines industry geography segmentation: $ million, 2016
Geography 2016 %
China 36.4
Japan 11.6
South Korea 8.1
Taiwan 6.9
India 5.5
Rest of Asia-Pacific 31.4
Total 212,920.3 100%

5. Challenges for Aviation Sector

1. Air traffic and Competition

As per reports made by IATA, more than 3 billion people are expected to fly in the
year 2018. This results in increased competition among al airlines whether they are
low cost carriers or legacy network carriers.

2. Fuel Prices
The largest impact on the profitability of the airline sector would be the reduction in
fuel prices. The increases in airline profits will allow many carriers to invest in new
aircraft, technology, and infrastructure. however, the industry does need to maintain
uniformity in their expenditures as fuel prices will change at any point in the future.

3. Overcapacity
A number of airlines have gone out of business due to overcapacity. Most major
airlines in the industry still struggle to get a grip on the constant changes, and many
carriers have been seen to be slow to adapt to the changing economic environment.
As a result of overcapacity, airlines have had to suffer from rock bottom fares,
something that might delight flyers, but not the airlines. These fares directly lead to a
major revenue problem, which is already suffering from high fuel costs.

4. Labour Unrest
A number of airlines in Europe have suffered because of issues like pilot walkouts.
Issues like these outweighing the benefits that lower oil prices had to offer in recent
times.
 5. The Emergence of Low Cost Carriers
Due to competitive pricing of low cost carriers, premium airlines are loosing their
customers to them.

6. Customer Expectations
Ability to manage your customers expectations relative to their shopping experience
is more important than ever before.

7. Aircraft
According to Boeing, over the next 20 years there will be a need for 38,050 airplanes
valued at more than $5.6 trillion. Approximately 40 percent of all new airplanes are
being delivered to airlines based in the Asia Pacific region. Twenty percent will be
delivered to airlines in Europe and North America, with the remaining 20 percent to
be delivered to the Middle East, Latin America, the Commonwealth of Independent
States, and Africa. These new airplanes will continue to stimulate growth for lowcost
carriers and will provide needed replacements for older, less-efficient airplanes.

8. Airport Growth
The need for more runways, more gates, and more capacity to handle more passengers
are all concerns to airlines.

Challenges for Aviation in India

Issues affecting the aviation industry in a very broad sense can be classified under:
a) High operational costs
b) High cost of aviation turbine fuel
c) High service tax and other charges
d) Shortage of maintenance facilities
e) High foreign exchange rate
f) Competition from foreign airlines
g) Congestion at airports
h) Lack of qualified pilots and technical manpower etc.

Constraints in India are:

a. Infrastructural Woes
With infrastructure constraints one of the biggest obstacles to the growth of Indian
civil aviation, a good deal has already been invested in airport development. The
Indian Civil Aviation Ministrys Vision 2020 plan stresses a need to develop the
countrys infrastructure, with a particular focus on well-equipped, user friendly
airports to handle as many as 280 million passengers per year expected in the country
by 2020.

b. Rising Airline Turbine Fuel (ATF) prices

 Aviation Turbine Fuel (ATF) prices in India are higher than the international market.
The airline industrys operational cost component is dominated by the cost of the
(ATF). The ATF price accounts for nearly 45% of the operational expenses.

c. Congestion
Presently capacity constraints are reported mainly at Delhi and Mumbai airports.
Congestion leads to a huge wastage of fuel. It is estimated that if a flight hovers in the
sky for an additional half an hour due to delay in allocation of landing slot, it can
consume between 25 to 30 per cent extra fuel thereby increasing the operational cost
of the airline.

d. High airport charges

The airports / aeronautical charges include
- Route Navigation Facility Charges (RNFC)
- Landing, Housing and Packing Charges
- User Development Fees ( in case of private airports)
- Terminal Navigation Landing Charges
- X-ray Baggage Charges

e. Alternate/secondary airports not available

Airline operators elsewhere in the world have the flexibility of using alternate or
secondary airports where the airport charges are comparatively low. This option is not
available in India.

f. Land acquisition
Recent government initiatives of building Greenfield, merchant, cargo and low cost
airports and modernization of existing domestic and international airports require
huge tracts of land. a number of large projects are facing extreme
opposition from landowners

Key Player (India)

INDIGO
InterGlobe Aviation Ltd.-promoted low-cost airline IndiGo began the new year with yet
another month of superior market share in the domestic aviation industry.
IndiGo's market share in January 2017 stood at 39.8 percent, slightly lower than the revised
40.3 percent share it had captured in December 2016, according to data released by the
regulatory body Directorate General of Civil Aviation (DGCA).
The passenger load factor, used to measure the capacity utilisation of airlines, was largely
unchanged from December for most major operators.
The number of passengers carried by domestic airlines during January grew 25.1 percent to
95.8 lakh from 76.6 lakh in the corresponding month of the previous year.

On a monthly basis, the number passengers carried in January was slightly higher than the
95.2 lakh passengers carried in December 2016.
Other Performance Indicators
Overall, the Indian aviation industry had a cancellation rate of 1.1 percent in January. With a
cancellation rate of 0.63 percent, Jet Airways had the fewest cancelled flights, followed by
SpiceJet at 0.77 percent and IndiGo at 0.98 percent. Government-operated Air India was the
second worst with 1.97 percent of its flights being cancelled.
Youngest entrant Air Vistara had the highest customer satisfaction with just 0.1 complaints
for every 10,000 passengers carried. IndiGo followed closely with 0.3 complaints per 10,000
passengers. Air India was the worst with 2.5 complaints for 10,000 passengers.
In terms of on-time performance of flights, SpiceJet and IndiGo led the pack with 71.6
percent and 71.2 percent flights on schedule respectively. Vistara underperformed with only
53 percent of its flights running on time.
The performance was computed for Bangalore, Delhi, Hyderabad and Mumbai airports.

CRITICAL SUCCESS FACTORS AS EXPLAINED BY PREZ

ADITYA GHOSH

1) IndiGo has made sure that its average fleet age remains four years till 2032. It was a
well thought-out fleet strategy that was made 10 years back, and not something done a
couple of months ago. The last plane of the three bulk orders of 530 aircraft that
IndiGo placed will come in 2026 100 Airbus A-320 in 2005, 180 A-320 Neos in
2011 and 250 A-320 Neos in 2015. IndiGos bulk buying helped negotiate better
rates. We buy planes at a lower price than what a seller would buy for. We gain right
at the beginning this is netted against our rentals and brings our cost down.
2) Once all airplanes are delivered, IndiGo will not have a fleet of 530 planes this is
due to the buy, sell and lease back strategy. At peak we will have 330 planes. Once
the order is placed the planes are sold to lessors at market price. The planes are then
leased back for the next six years which means for the first six years IndiGo
receives a plane every month.
3) Every month a plane goes out of IndiGos fleet and a new aircraft joins, thus
reducing the average fleet age, and with an average fleet age that is low the cost of
maintenance is also lower. In 2011, IndiGo was the first customer for Airbus to order
the new range of fuel efficient A-320 Neo planes. Neos help in saving 10-15% of the
overall fuel cost. Fuel makes up for 50% of a carriers cost.
 4) Because of the six year lease back plan, with the next two-and-half years one-third of
IndiGos fleet will be Neos, and in the next six years it will have an all Neo fleet.
There is a straightaway positive impact of 7% on the companys bottomline because
of of the Neos. People can copy our food, our advertising, our buses, and other things
but they cannot replicate the fleet we have.
5) With orders in place, IndiGo is planning to increase its presence in the number of
cities it flies to adding two to three cities to its portfolio every year. In the next
eight and half years it plans to have presence in 56 airports compared to 33, now.
Regional flying is not on the radar, and neither are smaller planes. We do not have
any plans to induct smaller planes into our fleet. Nobody in this world has been able
to implement a two-model strategy.

Operational Highlights
The following table sets forth key operational data for the periods indicated
Particulars FY Ended March 31

2017 2016 Change

ASK (in million) 54,583 42,826 27.5%

RPK (in million) 46,288 35,968 28.7%

Number of Scheduled Passengers Carried (in thousands) 43,532 33,104 31.5%

Passenger Load Factor (%) 84.8% 84.0% +0.8 points

Block Hours 558,567 436,739 27.9%

Number of Scheduled Destinations Served as of period end 44 40 10.0%

Total Number of Flights 300,526 236,385 27.1%
Number of aircrafts at period end 131 107 22.4%

RASK (Rs.) 3.44 3.78 -9.2%

Yield (Rs.) 3.50 3.91 -10.5%
CASK (Rs.) 3.04 3.12 -2.5%
CASK ex-fuel (Rs.) 1.88 2.01 -6.3%
KEY PLAYER (GLOBAL)

PORTERS FIVE FORCES

Barriers To Entry: High

- High Capital Expenditure(cost of buying and
leasing aircrafts, safety and security measures, customer service and manpower).

- Existance of Companies that have high

brand value and high consumer loyalty.

Threat of Substitutes: High

- Existence of well established brands
such as Emirates, Lufthansa, British Airways, Etihad, KLM etc.

Buyer Power: High

- The High competition provides a lot of
options to consumers, hence allowing them to hold a good amount of power over the airline
companies.

Rivalry: High
- Competition through tapping into new
destinations, providing more services such as increase in in-flight channels and better menues and also
the use of extensive advertising.

Supplier Power: High

-Suppliers can affect the industry through their abilities to raise prices or reduce the quality of
purchased goods and services. The airline industry has few suppliers globally, namely Boeing and
Airbus. Thus the power of the suppliers is high, because those limited suppliers have a control on the
market due to the huge demand of their manufactured products

KEY DRIVERS
 Consistency

Product Development

Advertising, Direct Marketing & PR

Website, E-commerce, on-line reservations

Merchandising, on-board amenities, duty-free shopping Literature, stationery,

leaflets, brochures, tickets, schedules

Environment : Signage, livery, exhibitions & trade shows

Sponsorships & co-branding, CRM & loyalty programmes

Human interaction, Customer care

SWOT ANALYSIS
Strengths:
-Comprehensive marketing strategies to build a strong brand identity.
-High standards of performance, including safety, security and customer service
-Unique services
-First in providing a variety of customer oriented services regarding comfort, convenience and
luxury
- Winner of several important awards

Weaknesses
-Relying Heavily on International Onward Moving traffic.
- Very Little Domestic Traffic and limited market share growth.

Opportunities
-Brand New Fleet to improve customer confidence -Hub developing well.
- More brand building and marketing can increase brand recall.

Threats
-Increasing Competition in Middle East market
-Increasing fuel prices would affect operations
-Unfavourable scenarios due to Govt policies and regulations
RECENT DEVELOPMENTS IN INDIAN AVIATION
SECTOR
The civil aviation industry in India has emerged as one of the fastest growing industries in the
country during the last three years. India is currently considered the third largest domestic
civil aviation market in the world.
According to International Air Transport Association IATA, India will displace the UK for
the third place in 2026.
The Civil Aviation industry has ushered in a new era of expansion, driven by factors such as
low-cost carriers (LCCs), modern airports, Foreign Direct Investment (FDI) in domestic
airlines, advanced information technology (IT) interventions and growing emphasis on
regional connectivity.

Market Size

Domestic air traffic rose nearly 16 per cent in August 2017, continuing its double digit
growth, according to the civil aviation regulator Directorate General of Civil Aviation
(DGCA). About 9.69 million passengers flew in August, up from 8.38 million a year earlier.
Passengers carried by domestic airlines during January-August 2017 were 75.411 million as
against 64.468 million during the corresponding period of previous year, thereby registering a
growth of 16.97 per cent, as per the DGCA.
As against 395 aircrafts in the fleet of Indian carriers, there are 496 aircrafts in operation
today, and another 654 are under purchase.

Investment

According to data released by the Department of Industrial Policy and Promotion (DIPP),
FDI inflows in air transport (including air freight) between April 2000 and March 2017 stood
at US$ 1.01 billion.
India is estimated to see an investment of US $25 billion in the next decade in the airports
sector, a demand for 935 more planes and traffic growth of 13 per cent, according to Morgan
Stanley. According to them, the share of air travel in air and rail travel combined in India will
grow to 15.2 per cent by 2027 from 7.9 per cent now.
Capex plans to the tune of Rs 65,000 crore (US$ 10.08 billion) have been finalised by the
Airports Authority of India (Rs 17,500 crore (US$ 27.13 billion) for the next five years) and
around Rs 22,000 crore (US$ 3.41 billion) for brownfield expansion in Delhi, Mumbai,
Hyderabad and Bengaluru by private operators and around Rs 21,000 crore (US$ 32.55
billion) for greenfield airports.

Key investments and developments in Indias aviation industry include:

The Airports Authority of India (AAI) will undertake new development works at
Lucknow, Deoghar, Rajkot and Allahabad airports. The objective is to improve and
develop airport infrastructure to meet growing traffic demands. AAI plans to construct
new integrated passenger terminal building at Chaudhary Charan Singh International
 Airport, Lucknow at an estimated cost of Rs. 1230 crore (US$ 190.65 million). The
new terminal will be able to handle 4000 passengers during peak hour and 6.35
million passengers per annum.
State-owned AAI will construct a cargo terminal at Imphal airport at a cost of Rs
16.20 crore (US$ 2.5 million). The proposed terminal is expected to give a boost to
the export of handicrafts items and perishable cargo. In addition to this, the EICT will
help establish better connectivity with South & Southeast Asia and give a boost to
trade between India and the ASEAN countries.
To meet the demand of increasing air travel in Allahabad, a new civil enclave at will
be developed by AAI at an estimated cost of 125.76 crore (US$ 19.49 million). The
new terminal is to be made operational before the Ardh Kumbh Mela to be held in
January 2019.
Rolls-Royce Holdings Plc, the UK-based aircraft engine manufacturer, has opened a
new defence service delivery centre (SDC) in Bengaluru, which would deliver real-
time solutions for improving capability and provide faster front-line support to over
750 aircraft engines used by the Indian Air Force, Indian Navy and State-owned
Hindustan Aeronautics Ltd (HAL).
Qatar Airways is planning to start Indias first fully owned foreign airline in
partnership with Qatar Government's investment arm, Qatar Investment Authority, as
per Qatar Airways.
Indian budget airline carriers Indigo and GoAir, plan to expand their network to Gulf
cities like Doha, Sharjah and Dammam in 2017, which would likely boost the growth
of Indian aviation sector.
GVK Power & Infrastructure Ltd., which operates the existing airports in Mumbai
and Bangalore, has won the right to build Mumbais second airport in Navi Mumbai,
which will require an investment of Rs 16,000 crore (US$ 2.48 billion) to build the
airport with a capacity to handle 10 million passengers annually in the first phase,
expected to be operational by 2019 and 60 million passengers a year by 2030.

Government Initiatives

In the Union Budget 2017-18, the Civil Aviation Ministry received a substantial
increase of over 22 per cent in budgetary allocation at Rs 5,167.60 crore (US$ 775.14
million) for the next financial year.

Some major initiatives undertaken by the government are:

Constructing 17 highways-cum-airstrips are the government's priorities and it will
start work on them this year, Union Minister Nitin Gadkari has said. The projects are
designed in such a fashion that the roads will double up as airstrips and traffic will be
stopped when an airplane lands or takes off. The road and air connectivity will also
provide better access to remote areas.
Airport building and modernization projects worth over Rs 19,300 crore (US$ 2.99
billion) have been recommended green clearance, in line with the Government of
Indias focus on improvement in regional air connectivity.
 Indian airline companies like Air India, Air Deccan, SpiceJet, Air Odisha and Turbo
Megha, have been awarded with the right to fly to 128 routes across India, requiring
them to cap half the seats at nearly 50 per cent of the fare, under the Government of
Indias regional aviation scheme named UDAN.
The Government of India has approved the construction of 18 Greenfield airports in
the country, which would be executed and financed by the respective airport
promoters, and are estimated to require an investment of Rs 30,000 crore (US$ 4.66
billion).
The Cabinet Committee on Economic Affairs, Government of India, has approved the
proposal to revive 50 un-served and under-served airstrips in three financial years
starting from 2017-18 at an estimated cost of Rs 4500 crore (US$ 698.7 million).
The Government of India has started a new regional connectivity scheme (RCS)
called Ude Desh ka Aam Nagrik (UDAN) under which fares will be capped at Rs
2,500 (US$ 37.5) for half the seats in an one-hour flight, as per Mr Jayant Sinha,
Minister of State Civil Aviation. The Government of India has also received bids from
11 airlines for the same.
The Ministry of Civil Aviation along with Airports Authority of India (AAI) plans to
develop small airports with frugal facilities, and encourage private airlines to bid for
routes connecting these small airports with existing larger airports, thereby increasing
regional air traffic.
AAI plans to increase its capital expenditure for 2017-18 by 25 per cent to Rs 2,500
crore (US$ 375 million), primarily to expand capacity at 12 airports to accommodate
rising air traffic, as per Mr Guruprasad Mohapatra, Chairman, AAI.
The Ministry of Civil Aviation has revised its air services agreement with
Netherlands, which would enable air carriers from both the countries to operate up to
28 flights each week, up from current weekly limit of 21 flights, which would benefit
regional carriers as well as enhance connectivity between the countries.
The Executive Development Programme of Rajiv Gandhi National Aviation
University in collaboration with Indo US American Cooperation Program,
inaugurated by Mr Ashok Gajapathi Raju, Minister for Civil Aviation, aims to
promote skill development of senior leadership and close the gap of increasing
demand for trained people in the aviation sector.

Road Ahead
Indias aviation industry is largely untapped with huge growth opportunities, considering that
air transport is still expensive for majority of the countrys population, of which nearly 40 per
cent is the upwardly mobile middle class.
The industry stakeholders should engage and collaborate with policy makers to implement
efficient and rational decisions that would boost Indias civil aviation industry. With the right
policies and relentless focus on quality, cost and passenger interest, India would be well
placed to achieve its vision of becoming the third-largest aviation market by 2026.
In the coming 20 years, Indian companies will buy 2,100 new planes worth US$ 290 billion.
Exchange Rate Used: INR 1 = US$ 0.0155 as of October 31, 2017.
REFERENCES
Media Reports, Press Releases, Press Information Bureau,
Directorate General of Civil Aviation (DGCA),
Airports Authority of India (AAI), Union Budget 2017-18
Annual Report (2015-16) and (2016-17) IndiGo Airlines
Indian Brand Equity Foundation
Moneycontrol.com