A Flight to Destiny

In India, the aviation sector continues to look promising. The liberalization of the sector in the mid nineties
resulted in significant growth due to the entry of private service airlines. There was, and continues to be a
strong surge in demand by domestic passengers, due primarily to the burgeoning middle class with its
massive purchasing power, attractive low fares offered by the low cost carriers, the growth of domestic
tourism in India and increasing outbound travel from India. In addition, the Government has also focused on
modernizing non-metro airports, opening up new international routes, establishing new airports and
renovating existing ones. Some estimate industry growth at 15% YoY.

Unfortunately, most major airline operators in India such as Air India, Indian Airlines, Jet Airways and
Kingfisher Airlines have reported large losses since 2006, due to high aviation turbine fuel (ATF) prices,
rising labor costs and shortage of skilled labor, rapid fleet expansion, and intense price competition. The
problem was also compounded by new players entering the industry even before the existing players could
stabilize their operations. As a result of the already weak domestic scenario, the airlines suffered even
further when the recession, which exacerbated all these factors, hit. Suffice to say, though that the Indian
aviation industry has been more resilient than its global counterparts.

The Indian aviation industry is one of the fastest-growing aviation industries in the world with private airlines
accounting for more than 75 per cent of the sector of the domestic aviation market (as of 2009). With a
compound annual growth rate (CAGR) of 15 per cent and 454 airports and airstrips in place in the country,
of which 16 are designated as international airports, the aviation sector is expected to witness revival by
2011.

Passengers carried by domestic airlines from January-February 2010 stood at 8,056,000 as against
6,761,000 in the corresponding period of 2009—a growth of 19.2 per cent, according to a report released by
the Ministry of Civil Aviation. The prediction stated that international passengers will touch 50 million by
2015. The Airports Authority of India (AAI) is set to spend over US$ 1.02 billion in 2010, towards
modernization of non-metro airports. AAI is planning the city-side development of 24 airports, including
those at Ahmedabad and Amritsar. Additionally, 11 new Greenfield airports have been identified to reduce
passenger load on existing airports, according to Praveen Seth, member-operations, AAI.

The government has also merged national carriers Air India and Indian Airlines into a single entity, the
National Aviation Company Ltd (NACIL). The civil aviation ministry has prepared a blueprint to convert Delhi
airport into an international hub for passenger airlines with effect from August 2010 to help the airport utilize
large amounts of additional capacity that will be ready by July 2010. Under the plan, NACIL will set up its
hub in Delhi.

Currently, for the civil aviation sector:

• FDI up to 100 per cent is allowed under the automatic route for Greenfield projects.
• For existing projects, FDI up to 100 per cent is allowed; while investment up to 74 per cent under
the automatic route and beyond 74 per cent under the government route.

The case is not descriptive of actual market conditions or plans from various institutions. It is only narrative of a hypothetical
situation meant to provide students with an opportunity to study, analyze and provide appropriate solutions against the same
and learn the subject objectively.
Future of Airlines industry in India
The challenges of the Indian aviation industry are cited below:

• Passenger traffic is estimated to grow at a CAGR of over 15% in the coming few years.
• By 2020 400 million Indian passengers are likely to be flying and Indian airports would be handling more than
100 million passengers.
• The Aviation industry has to be guarded against foreign carriers especially from the Middle East. The global
meltdown and decrease in air travel due to terrorist activity have eroded the profitability of the aircraft operators
in India.

Market share / Capacity Utilization of key players in the Indian aviation sector (July, 2010)

Name of the players Market Share Capacity Utilization

Kingfisher Airlines and Kingfisher Red (previously Air Deccan) 20% 79.3%

Jet Airways and Jet Lite (previously Air Sahara) 26.6% 73.8% & 76.6% Resp

Air India and Indian (previously Indian Airlines) 17.3% 62.5%

IndiGo 16.9% 80%

SpiceJet 13.2% 76.8%

GoAir 5.6% 71.3%

Others Airlines 0.4% NA

THE past six months (Jan-June, 2010) have been quite lucrative for some airline companies. During the
period, there has been a 21% growth in domestic passengers on a year-on-year basis. However, much of
this growth was already factored in aviation stocks. The stock of SpiceJet, one of the proponents of low-cost
carrier model, was no exception. It gained 1% during the period, thus underperforming the 2.6% return of the
benchmark Sensex.

This however should not discourage investors since the company reported a robust growth in the June
quarter. The company’s net profit rose two times to 55 crore from the year ago levels. The strong growth
was fuelled by higher capacity utilisation, which is reflected in the 12 percentage point’s jump in its load
factor. This also culminated in to a 35% increase in sales at 707 crore.

SpiceJet has completed five years of operations. This enables it to start international
flights according to the current aviation regulations in the country. The company also
availed of fresh funding by selling 37% stake to Kal Airways, which is promoted by media
baron Kalanidhi Maran. This should provide SpiceJet with the necessary funds to launch
its operations on international routes. Experts feel that the company will use its low-cost
carrier model internationally to replicate its domestic success. This, however, would come
at a cost of a huge debt as seen for players such as Jet Airways India, which currently has
a high debt of 13,510 crore.

The case is not descriptive of actual market conditions or plans from various institutions. It is only narrative of a hypothetical
situation meant to provide students with an opportunity to study, analyze and provide appropriate solutions against the same
and learn the subject objectively.
SpiceJet, on the other hand, may not have to shoulder a high debt burden given the recent
funding from Kal Airways. It would be prudent for investors to hold on to their investments
in the company considering its low-cost carrier model, comparatively lower debt on its
balance sheet (as of FY09, it has debt of around 488 crore) and better performance in the
industry. The company is currently trading at 35 times its trailing 12 months earnings.

The performance of Jet Air in the June ’10 quarter suffered due to the problem of volcanic ash on its
European routes and unprofitable operations of its new premium service. The company may continue to see
headwinds in the September quarter, given the seasonal sluggishness in tourist arrivals and the fact that it
may take another quarter to turn around its premium launches.

Jet’s operations have turned profitable since the December ’09 quarter. Its profits, though, have fluctuated
by a wide margin. At mere `3.5 crore, its standalone profit in the June ’10 quarter was sharply lower than `58
crore of profit in the previous quarter. The fall is mainly due to the hindrance caused by the volcanic eruption
in Iceland on its European routes. Firmer fuel prices and forex hedging losses aggravated the matter.

But investors need not lose heart as Jet’s depressed performance in the June quarter largely reflects the
impact of unforeseen problems on its international routes. Its domestic business, which forms 44% of its
total revenue, is witnessing traction. This is reflected from the impressive 31% jump in its revenue in the
June quarter. There are, however, some concerns which Jet needs to address, going ahead.

One of them is the weakening yield or revenue per passenger per kilometer of journey on its domestic
routes. In the June quarter, it reported nearly 11% fall in the domestic yield. This is likely to see some
pressure, going ahead, as a major chunk of its seat capacity is price-sensitive. This means, business
volume would increase only if ticket prices fall further as a result of cut-throat competition on domestic
routes.

The second factor that may swing its profitability is fluctuations in jet fuel prices. In the June quarter, fuel
prices relative to sales rose by 400 basis points (bps) from the prior quarter. Fuel prices are expected to
show stability in the September quarter, given the benign petroleum prices. At `1,300 crore, a burgeoning
debt burden is another concern that the company needs to fend against. On a positive note, Jet has
increased its share of domestic traffic to 26% from 23% a year ago. This ensures that the company is well
positioned to take advantage of traffic uptick. Further, the launch of Konnect Select, its premium service, is
likely to yield higher capacity utilization or load factors, thereby enhancing its topline.

Domestic budget travelers may soon be spoilt for choice. Air India’s low-cost arm, AI Express that
focuses on nearby international routes, plans to launch and expand its domestic operations in a calibrated
manner. The aim is to have domestic operations of the size of an IndiGo or Spice-Jet in two to three years in
terms of passenger carriage although the airline already has a higher fleet size than these LCCs, said a
source.
Of all Indian carriers, AI is the only one that does not have a domestic LCC. The other two full service
airlines, Jet and Kingfisher, deploy over 65% of their domestic capacity on LCC brands like JetKonnect,
JetLite and Kingfisher Red. While Jet and Kingfisher overtook AI in terms of domestic market share long
ago, now LCCs are also catching up, with IndiGo coming within kissing distance of AI (domestic) last month.

Having a powerful LCC presence in the domestic market may be part of the AI turnaround strategy being
prepared by the management but rests solely on the airlines financial situation. Soon a team at AI will make
a presentation on the plan for financial restructuring before the board, independent directors and aviation

The case is not descriptive of actual market conditions or plans from various institutions. It is only narrative of a hypothetical
situation meant to provide students with an opportunity to study, analyze and provide appropriate solutions against the same
and learn the subject objectively.
minister and the same shall focus on loan restructuring through things like going in for lower rate of interest
and extended payment period. The management has to finalize a workable turnaround plan and bring the
unions on board at the earliest as the ministry has to forward a cabinet note to the government.

The airline also plans to have more nonstop flights to North America and a new direct flight to Australia from
winter. The current European hub, Frankfurt, is proving to be a very expensive one. Nonstop flights will at
least help us lose less initially before becoming profitable, said a source. The AI management also has to
take a final decision on the fate of brand Vayudoot whether it has to be given a burial or revived

One of the latest venture in the sector (In the logistics space) is the cargo venture called Deccan 360. The
company does lot of charters carrying vaccines, automobile parts from India to the rest of the world, relief
material to Kabul and Kandahar, charters to Imphal due to the trouble there. The plan of the company is to
be in all the 650 districts in the next three years and in all the 5,000 taluks in the next 5-6 years. Deccan
360s reach is already bigger than Blue Darts in India.

Spice jet is planning a major expansion of Business and has several options to choose
from. They can expand their domestic reach in India to additional destinations, increase
the number of flights within the local routes already catered to, launch international routes
or set up a cargo venture on the same lines as Deccan 360. Each of these strategies would
come with their unique sets of threats and benefits. The company needs to plan out the
same as soon as possible and plan big to capitalize on the growing market on one hand,
benefits provided by the government to existing players and also the modernization and
development programme carried out by the government in a big way. Also the company
now wishes to take a lead and try and compete with the industry leaders head on, if the
same is required for growth. On the other hand it wishes to maintain profitability which
can be assured only if the Product Mix is very appropriate and the pricing strategies are
bang on target. It believes an appropriate trigger can be affected to society, to get more
people to travel by air. Most of the airlines operate at around 70-80% occupancy. Its
average is around 76%. If it can find a way to fill the balance 24% the same would be a
major contributor towards revenue. This coupled with the expansion of business being
planned could do wonders for the company in the near future. You never know, the
company could be a market leader within the next 2-3 years.

Analyze the case:

i) What activity would you choose for Spicejet to expand their business? Explain the same with regard to competitive
characteristics and the strength and opportunities that Spicejet could bring to the fore.

ii) Plan a strategy to achieve 95-100% occupancy levels in the domestic operations. Describe the pricing strategy in detail.

iii) What are the strategic advantages Jet & Kingfisher have over Spicejet and how should the company overcome the
same to become a market leader.

iv) If the company needs a foreign partner (Airline) to tie up in terms of overseas operations, whom would you recommend
and why?

v) Can you recommend some other business activity / activities (other than the ones mentioned above) for the company,
which could be a strategic fit in terms of Company’s current Businesses, Resources, Policies and Mission. The same
should ensure a steady Business growth over a long period of time. Explain your rationale for the same.

Kindly use additional secondary data available on the industry for your analysis.
The case is not descriptive of actual market conditions or plans from various institutions. It is only narrative of a hypothetical
situation meant to provide students with an opportunity to study, analyze and provide appropriate solutions against the same
and learn the subject objectively.