Product Strategy and Management
Airline Industry in India from the perspective of Air India
The airline industry in India has grown at CAGR of 12% over the last 12 years with rising
income levels in India and also growing in middle-class segment aviation industry is about to
become 3rd largest air passenger market by 2024.Yet there is very little growth in profitability
of the airlines with some of the airlines going bust. Although there is a growth in air traffic, Air
India is losing the market share continuously, and this year it ended up with a 12% market
share compared to the previous year’s 13.2%
Topic:
The airline industry in India from the perspective of full-service carriers, especially Air India.
Identified Problem/issue:
Even though the airline's industry is growing, Air India is losing market share despite having
prime slots at major airports, trained staff, and years of experience in the business.
Objective:
To study the current condition of the Indian aviation industry and analyse the structural
problems within the industry and study about the problems faced by Air India and come up
with a recommendation to increase its market share.
Scope:
1- In the context of the current growth of the Indian aviation industry, where does the Air
India fits in as a full-service airline?
2- How does government aviation policies would affect Air India and its competitors?
3- Is continuous price war sustainable for the companies which are already in stress?
Expected Learnings
Structural problems faced by airline businesses. And to understand how the competition is
eating into Air India’s market share and how Air India’s brand image has tarnished over the
years due to its operations.
Reason for choosing a topic
As there is a continuous growth in airline traffic still, we see that some of the airlines are
going bust it has triggered a curiosity about why Airlines Industry in India is not viewed as a
sustainable business. Air India, which is viewed as Maharaja of skies, is not able to sustain
the competition.
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Background of the company
Air India is a central government-owned aviation company and headquartered at New Delhi.
It was formerly known as National Aviation Company of India Limited. It was formed after
merging state-owned airlines which are Air India and Indian Airlines.
Air India: It was founded as Tata Airlines in 1932 by J.R.D. Tata and became a public
limited company in 1946 as Air India.
Airlines: It was established in 1953 through a merger of seven domestic airlines, following
the passing of legislation, nationalizing independent airlines in India. It was state-owned after
the merger of eight pre-Independence domestic airlines and was administered by the
Ministry of Civil Aviation.
Air India operates on both domestic as well as international routes. It operates a fleet of
Airbus and Boeing aircraft 94 domestic and international destinations. It has its hub at Indira
Gandhi International Airport, New Delhi. Air India has a market share of 18.6% in
international routes. It serves 60 international destinations across 4 continents. It has
subsidiaries namely Air India and Alliance Air.
Considering that the airline is saddled with accumulated losses and debt, which are to be
restructured, the civil aviation ministry prompted the company to go through a financial and
operational re-engineering exercise. This resulted in a merger between Air India and Indian
Airlines which got the cabinet clearance on March 1, 2007. Consequent to the above, a new
company viz National Aviation Company of India Limited (NACIL) was incorporated under
the Companies Act,1956 on 30th March 2007. It was decided that post-merger, the new
entity will be known as "Air India" while "Maharaja" will be retained as its mascot.
The airline became the 27th member of Star Alliance on 11 July 2014.
As of July 2019, it has a fleet of 136 planes which includes Airbus, Boeing, etc types of
aircraft. During year 201-17, the airline suffered a net loss of rupee of 5765 crores. The
airline has a burden of debt worth rupee 48,781 crores.
Domestic market share of the company has been declining continuously. For Domestic
share, it has decreased from 16% (FY16) to 13.1% whereas for international market share
(among domestic carriers only) it has decreased from 52% to 51% in FY18.
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Industry
Indian civil aviation industry has emerged as one of the fastest-growing industry in last from
the past three years. It is being considered as the third largest domestic aviation market in
the world and expected to surpass the UK to become the largest air passenger market by
2025.
Market Size
Indian airline passengers grew with a CAGR of 12.72 per cent during 2017-18. Passenger
traffic has risen with a rate of 16.52 per cent year on year to each year to reach 308.75
million in the financial year 2018. International passenger grew at a rate of 18.28% and
which is expected to grow 243 million during 2018 and whereas domestic passenger grew at
a rate of 18.28 per cent which is further expected to grow to 293.8 million to FY20.India’s
domestic and international aircraft movements grew 7.93% YoY and 6.36% YoY to 2,153
thousand and 453.61 thousand during 2018-19, respectively. In FY19, domestic aircraft
movement stood at 2.15 million while international aircraft movement stood at 0.45 million.
To meet this growing demand of passengers, the Government of India has taken steps to
increase the number of airports. India has 103 operation airports as of March 2019. It is
expected that the number of operational airports will increase to 190-200 by the year 2040.
There are 620 planes as of July 2019 which are being used by various airlines. Further, this
number is expected to grow to 1100 by 2027.
FDI investments have reached $ 1817 million in Indian air transport sector which also
includes air freight. Indian Government has allowed 100 FDI under air transport services,
regional air transport services and in several domestic scheduled airlines. Though one has
to take approval if stakes are more than 49 per cent under FDI. The Indian aviation industry
is expected to receive approximately $ 4.99 billion of investment in the next four years.
Current State of Air India:
As of May 2019, Air India is the 4th largest airline after Indigo, Jet Airways and SpiceJet.
Currently, there are 157 aircraft with Air-India and its subsidiaries, 119 with Air India, 23 with
Air India Express and 15 with Alliance Air. When it comes to International routes, Air India
covers 17 percent of total traffic share. Air India’s debt has crossed Rs. 50,000 crores with
recurring annual losses of almost Rs. 5,000 crores. Air India owes money to pilots, vendors
and is on its path to defaulting on bank loan repayment. It also suffers from the problem of
unserviceable aircraft which adds to its low productivity.
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As of Aug 6th, Air India may try to raise Rs. 7000 crores in bond sales to repay the existing
loan. The statement of Profit and Loss for year-end 2018 states that one-sixth of their
revenue is spent in repayment, alongside this the constant rise in fuel prices has resulted in
an unprofitable business model. Air India total debt currently stands at 50000 crores, while
the competitor in the industry is operating at a very low level of debt. Taking the example of
Jet Airways, which is currently facing the heat from its shareholders, has a debt outstanding
of 5000 cr, i.e. 10 times lower than Air India while Indigo which has been operating with-
profits have a debt of 2900 Cr.
The application of funds has been a major issue for the firm, the company has been able to
raise funds, but the utilization has been poor on the part of Air India. The company has been
making loss perpetually, and the losses seem never to end. While on the other hand, talking
about Indigo it has been operating with the utmost efficiency and delivering profits to its
shareholders continuously. Indigo even tried to take over Air India, but a deal could not be
struck between the management of both companies. In order to revive the company, last
fiscal year around 4000 cr were injected by the government, and currently, with the turmoil in
the Indian airline industry, the government needs to make sure that Air India is operating
efficiently.
Jet Airways had serious mismanagement of funds/debts which has led to the whole turmoil
in the Indian airline sector with one of the major players filing for bankruptcy. The
government, in order to improve the operating and financial efficiency of the company, is still
trying to privatize the company. But the problem in front of the government is that the debt
the acquiring company would have to service would amount to 33973 Cr, while the market
leader in the domestic market, i.e., Indigo has total current and non-current liability totaling to
14000 Cr. The size of Air India is making it tough for the acquiring company to arrange such
a level of funds and on top of that the fear that is it worth investing.
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Current Scenario:
Following are the problems faced by the Air India.
High debt:
In the airlines industry generally, companies prefer to lease planes and pay lease every
year, Air India chose to have its own planes. For this purpose, Air India borrowed $7.3 billion
from different financial institution. Air India borrow Rs. 18,000 crores from State Bank of
India and 19 other banks to do the financial restructuring. Air India did not used its debt to
improve its revenue. In the march 2018 interest rate cost of Air India was Rs. 4500 crore
which was approximately 1.5 times higher than its employment cost. It is very difficult to
make profit with huge amount of interest payments. Debt of Air India is highest compare to
other competitors of the industry.
Continuous declining in passenger’s revenue:
When debt of Air India is continuously increasing, revenue from passenger is continuously
decreasing. The industry like airlines where revenue from passengers is the main sources of
the income it is very difficult to survive with the love passenger revenue. Air India has the
lowest passenger load factor. Half of the Air India load factor filled by government officials
due to compulsion. In the financial year 2017-18 Air India was unable to fill its 17000 seats
out of 62000 every day. As per the diagram given below the passenger load factor of Air
India continuously fall in the financial year 2017-18.
Air India earned passenger revenue of Rs. 26,000 crores in financial year 2019, almost 18%
lower than Rs 33,000 crore in financial year 2018.Reason behind the same may include poor
services, odd flight timings, faulty deployment, lack of ancillary revenue, high ticket rate etc.
The other reason behind this is the customer dissatisfaction as Air India failed to meet the
demand of customer and increase of unproductive debt.
Uneven man- power:
The Indian Airline industry is suffering from the shortage of the pilot. Boeing has forecasted
that aviation industry will require 790,000 new pilots by 2037 to address the growing demand
but The Air India has the issue of the excessive man- power. As per the report published on
India Today on October 2017, Air India has 3400 cabin crew members from which 17-20%
are in excess daily, there are approximately 1450 pilots in Air India, who fly about 410
planes. As per the government regulation, a pilot must fly around 84 flying hours a month,
but even in domestic sector, pilots of Air India are not able to complete 56 hours a month.
This causes a significant loss of resources through salaries and perks and unvalued the
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human- power of the system. Air India’s average employee cost in 2017 was Rs 21 lakh per
annum. The average cabin attendant cost was Rs. 24 lakh per annum. IndiGo’s average
staff cost was Rs 14 lakh and average cabin attendant cost was Rs. 6.1 lakh per annum.
From the below table, it is cleared that passengers per employee ratio of the Air India is poor
among all the airlines.
Volatile Fuel Charges:
Fuel charges is one of the major operating expense for any airlines company. So, slight
change in the Price and availability of the aircraft fuel can highly affect the profitability of Air
India. In India Fuel market is highly volatile. Price of fuel is affected by various political and
economic factors. Supply of the crude oil, availability of alternatives, foreign relationship,
weather conditions, government rules and regulations, technological innovations are the
various factors which affect the aircraft fuel prices. On June 6,2018 price of crude oil was
US$ 75 which was increased up to US$20 in 2019.
Non- competitive staff members:
Air- India is not professionally managed organisation. Aviation industry uses the most
advanced form of revenue management principles. Airlines business requires special
skills and knowledge i.e. On the fly decision making and implementation. In order to
meet the necessary requirements of skill and compete with other players in the market
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government should hire professional people from premier institutions. Alternatively, but
government recruited civil servants with a long tenure to serve or with a prior experience
in aviation industry. It is quite difficult foe civil servants to understand the dynamic
revenue system along with detailed route planning.
Loss making Operations:
The government gives away profitable international routes to private players outside
India under bi- lateral arrangements. From daily 250 domestic and 120 international
flights of Air India only 9 flights are profitable on average. This results into huge losses
for Air India and required huge amount of money to sustain in the competitive airlines
industry. The audit says that most of international routes burn a hole in the airline’s
pocket as it fails to recover the cost. For instance, flights to North America and Europe
results in a loss of Rs 2,323.76 crore in 2017-18. In the Delhi-New York-Delhi route the
occupancy stands at 77% as company faces competition from other airlines. In 2019,
Air- India had 128 aircrafts while actual demand was very low. No passenger survey
was done to know customer’s response before highly expensive purchase. But there
was a lack of trained staff and advance infrastructure required to fly the new aircraft.
According to the CAG report five Boeing 777 aircraft and five Boeing 737 aircrafts were
remain unutilised from 2007 to 2009. This resulted into a huge loss of RS. 840 crores.
High Competition:
The market share of the Air India decreases because of the high competition because
fair of Air India is quite high compare to the other airlines. Following image shows the
fair charged by different airlines for Hyderabad to Bangalore flight. The reasons behind
the high fair may include the low passenger load factor, excessive staff etc.
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Analysis, implications and Learnings
Airlines is the industry where it is highly dependent on the economic performance when the
economy is doing good, we can see the boom in the airline's industry, and when the
economy is not doing good, we see that there is a huge impact on the airline's industry. In
India, the domestic airlines could be classified into budget carriers and full-service carriers.
India is a unique case for its carriers as In India airlines doesn’t only compete with
themselves but also with the railways and roadways which presents them a unique
challenge in terms of allocating their routes and gives them limited options in pricing. The
geography of India also presents them a challenge as most of the cities are of 12-hour
distance either on roadways or railways which makes them take an overnight journey which
makes harder for the passengers to take air travel.
Air infrastructure also challenges in India with the major airports highly congested and no
proper Airport infrastructure in tier 2 cities, which has become a major challenge for the
airlines. The competition between domestic carriers is very high; it been viewed as a non-
sustaining competition in the view of airlines to capture market share.
We have seen many full-service carriers going bankrupt with the emergence of budget
airlines there is a huge pressure on the pricing this led cost leadership is one of the most
important factors to survive in the industry, and all the airlines were streamlining their
operations. Jet Airways is one perfect example wherewith its higher costs of operations
being a full-service airline with food being served for one-hour duration flights and also extra
leg space which is not valued by the customer jet airways was not able to appropriate the
price for the services they provided is one of the major setbacks for the Jet airways. As we
also see, there are not many full-service carriers in India except the Vistara which primarily
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serves to Business customers and premium segment of the market. Vistara can maintain
that position with 90% on-time performance, which is highly appreciated in the industry and
with the superior levels of customer service. Without this air, India has been continuously
losing market share to the low-cost airlines in the domestic sector.
Air India had continuously placed at the bottom of the list for the on-time performance, which
is a critical factor for full-service carrier airlines in July month of 2018 alone Air India received
256 complaints. Where it couldn’t even solve 68 of the complaints whereas its competitors
with greater market share received far lesser customer complaints and were able to close
most of them in time.
As in the kano’s model
There are some basic needs which are expected by the customer which are to be fulfilled for
any service or the product or else customer would be extremely disappointed in the case of
Air India those basic needs like Timeliness and the cancellations are very high being a full-
service carrier airlines which charge premium over its competitor’s air India is not able to full
the basic needs which are causing an extreme disappointment for the customers.
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Technical glitches at Air India is a major problem for its operations which is causing
considerable deterioration in its customer experience as Air travel is viewed as a service
more than a product that we offer to the customer. Air India, despite its premium pricing, was
not able to maintain the standards for any service the interaction of the customer with the
company is very important in which Air India is completely failing. In June 2018 25 flights
were delayed due to a technical glitch due to which thousands of passengers are stranded at
the airport this can also be reflected in the dropping of market share in the domestic
segment year on year basis last year itself market share came to 12.7% in 2018 from 14% in
2017 and 2016 its near to 16%. We also see the drop in Air India’s international market
share we find the same trend.
More is not always better this principle clearly applies in the case of air India which is a full-
service airline which provided free food and extra leg space of 14Inch instead if 12 inches in
the domestic airspace in India if we see the longest flight is near to 3 hours, so food and
extra leg space is not adding much value to the customer, but it adds substantial cost to the
Air India which is reflected in the price charged to the customer.
Air India has 12 different types of aircraft operating from Boeing and Airbus but if you see
Indigo which has the least cost structure in the industry it operates only two different types of
aircrafts which means Indigo spends less time and money training its staff for the various
aircrafts and also the spares Air India has to maintain a large number of spares for each type
of its aircraft and train its staff at each airport to handle these machines. Air India has a
history of poor maintenance of its aircraft, which is leading to many snag problems adding to
the costs. Air India has the highest number of employees per aircraft in the industry and is
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also highly paid than its competitors. They also came to be known as very unfriendly
employees in the industry for their brash attitudes with the customers.
Air India has a Huge debt of 55,000 crores, and in last year alone it made losses of 4700
crores, and Government proposal to disinvest from air India did not garner any interest
despite having the prime slots in major airports, major routes, and well-trained staff. Majorly
due to the huge debt on its books Air India’s domestic operations a major concern as its not
able to recover its variable costs in domestic flights.
References
AIR INDIA TO PREPARE FY19 FINANCIALS (for strategic disinvestment). (n.d.). Retrieved from India
Business Insight: http://indiabusinessinsight.com/ibi/searchResult/?q=%26quot%3Bair+india
%26quot%3B&mq=+%22air+india%22&t=all&fa=industry_category%2Cbusiness_term
%2Ccompany_name%2Cproduct_name%2Csource_name%2Cpublication_year
%2Cpublication_date%2Cstatus&c=sort%5Bpublicatio
DGCA, C. R. (n.d.). AIr India. Retrieved from Crissil:
https://www.crisilresearch.com/#/industry/airlineserv/companyProfileView/AIRINARCUI
DGCA, India. (n.d.). Retrieved from DGCA: http://www.dgca.nic.in/reports/hand-ind.htm
Domestic and International, ^. p.-u. (n.d.). Aviation. Retrieved from
https://www.ibef.org/archives/industry/indian-airports-analysis-reports/indian-airports-
analysis-industry-analysis-may-2019
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