Airline Industry in India - Assignment Example

Airline Industry Contents Airline Industry Contents 2 Section 3 Introduction on Airline industry 3 Section 2 4 Indian aviation industry 4 Market share 4 Profit and profit rate 5 Capital 7 Section 3 9 Porter’s five forces 9 Section 4 10 Analysis and interpreting the data 10 Section 5 11 Recent development 11 Legalisation factors 11 Conclusion 12 Reference 14 Section 1 Introduction on Airline industry The airline industry function is to accommodate the passengers and cargos taking them to different places between cities or towns within a country or outside the nation. The present study deals with the airline industry of India. The choice of the nation assumes significance as it’s one of the fastest growing aviation industries in the world. The airline industry has seen a major change and growth in the past few years. With the liberalization, many private players have entered the industry. The airline industry was earlier confined to only elite class of people because of the high cost of airline tickets (ITOPC, n.d). The airline industry has experienced an increase in the number of domestic passengers and this was because of factors like increase in the purchasing power of the middle class, low airfares introduced by the private players, growth of tourism in India and the overall economic growth of the nation (ICMR, 2007). The economy has reshaped the Indian airline industry. High cost of fuel has lead to mergers, constraints in infrastructure, wage inflation and increased competition has led the low cost carriers, Sahara and Air Deccan to merge with larger airlines. This project report would deal with the Indian aviation sector and the airline which currently tops the list in the Indian airline industry along with its market share and profits. The industry analysis is done with the help of porter’s five forces and some recent development has been pointed out in the report. Therefore it has been stated that the Indian airline industry has been performing well and would continue to do it in future also. Section 2 Indian aviation industry This section would deal with the size of the Indian aviation market and the major players in the sector. According to IATA, the Indian aviation sector has been ranked ninth. With the open skies policies it has been able to attract too many foreign players and the industry is growing both in terms of players and the number of aircrafts. It is estimated that the civil aviation market would grow by 16% during 2010 to 2013. The airline sector has reported a growth trend with passenger growth rate of 22.3% in 2011. It is expected to cross about 450 million of domestic passenger by 2020. The private players reported a profit of US$ 350 to US$ 400 million by 2012. The market players include jet airways with a market share of 26.1%, kingfisher and indigo sharing the same place with 19% of the market share. Air India with 15% and spice jet with 14% of market share respectively (IBEF, 2010, p.1). The annual profits of the Indian aviation industry recorded a loss of &6.5 billion between the financial year 2006 and 2009 and still remains to struggle even during 2010 (Business& Economy, 2011). The problem encountered was also due to the entry of new players in the aviation industry. But despite of the drawbacks, the Indian aviation industry has been more resilient than its global counterparts. Market share Jet Airways which are regarded as India’s premier international airline, along with Jet Lite recorded a market share of 26.1% in February 2011 (PRLOG, 2011). Figure 1: Market Share (Source: Money Control, 2011) Profit and profit rate Jet airways have claimed a net profit of Rs 11.823 million in the third quarter of the fiscal year 2011 as compared to the last fiscal year of Rs. 10.580 million (The Economic Times, 2011). The net profit reported for the company was 0.0075 Table 1: Financials of Jet Airways (Values in INR) (2010-11) (Source: Jet Airways, 2011, p.71) Capital The share capital of Jet Airways: equity share of 180,000,000 at RS 10 each as on 31 March 2011 and Preference share of Jet Airways of 20,000,000 at Rs 10 each as on 31 March 2011 (Jet Airways, 2011, p.52). Figure 2: EPS for Jet Airways (Source: Money Control, 2011) Figure 3: Share Price Fluctuations for Jet Airways (Source : Money Control, 2011) Section 3 Porter’s five forces Bargaining power of supplier The bargaining power of the airline industry is high because few suppliers dominate the airline industry likes Airbus and Boeing, thus seller has more power over the airline industry. The cost to switch on to different supplier is also high; the industry experiences a low barrier to entry. Bargaining power of consumers Jet Airways produces standard product and services, there are many options available to the consumers, and they can compare and contrast the ratings of jet Airways with other airlines. Thus the bargaining power of consumer is high. Threat of substitute Substitutes for the airline industry include roadways and railways. These modes are believed to have a better reach and penetration than the airlines. And also because of lower pricing strategy, it plays a major role in becoming a threat of substitute to the airline industry. Threat of new entrants The airline industry requires a huge amount of capital in order to enter the market, the profit margin is also low and there is hardly any differentiation between the airlines products and its services. Thus the threat of new entrant is low. Rivalry The rivalry among competitors is high as there are many big players in the industry like Kingfisher, Air India, etc. Price rivalry among the airline industry is also quite common with the introduction of low cost carrier. Section 4 Analysis and interpreting the data The market share of Jet Airways is 18% and Jet Lite is 8%. Combining the two the total market share of Jet comes to 26.1% and by looking at the graph (Figure 1) it is indicated that Jet Airways has the highest market share in the Indian air industry followed by Indigo and Kingfisher. . The market share is set to rise in the coming years as with the strategic expansion in the domestic as well as internationally, jet airways serves about 23 international destinations. The market share is set to rise in the coming years. The net profit of the company has increased from the previous year recording a profit of Rs 118.23 million as compared to last year’s profit. But the operating profit recorded a low profit because of an increase in the aviation fuel price as compared to 2010 which was Rs. 2108.72 million as compared to the current year of 1640 million approximately. Earnings per share of Jet Airways stood at Rs 10.12 million as compared to previous years negative EPS of 54.17 million INR. Thus this indicates that Jet Airways has a positive outcome and has proved of it being the top airlines in the year 2011 beating its competitors Kingfisher Airlines and Air India. The total operating revenue for the fiscal 2011 amounted to Rs 1,277,638 lakh an increase of about 22% from the previous year and this was due to increase in the number of passengers, in the levels of operation and revenue from cargo (Jet Airways-a, 2011, p.22). Section 5 Recent development The aviation industry remains the large and the growing industry. It caters to economic growth of the nation, international investment, trades and tourism and is therefore regarded as central to the globalization taking place. The air travel has increased by 7% a year. The airline industry has taken up five international projects under the PPP mode, which includes the modernization of airports in Mumbai and Delhi. The government of India is planning the development of 24 non metro airports with the support from private players. Under the eleventh five year commission plan the Indian government expects an investment of INR 361.3 billion for the development of airports. The government is also promoting the expansion between the tire II and tier III cities (IBEF, 2010, p.29). Legalisation factors The government has allowed a 100% FDI for existing airports and green field projects under the automatic route. For FDI which exceed 74% an approval is required from the FIPB (Foreign Investment Promotion Board) in the domestic sector, up to 49% of FDI is allowed and NRI can hold up to 100% in domestic airlines (IBEF-a, 2010). The airline industry drives its revenue majorly from ticket fees and freight charges. The driving keys are: The demand drivers and The supply drivers The demand drivers of the airlines industry are ticket prices, with the coming up of low cost carrier there price of tickets has fell considerably motivating the people to travel through airlines. With the increase in the disposable income and growth in spending habits of the people led to the success of major airlines in India. Another important demand driver of airline industry is safety and accessibility; the airlines are considered the safest mode of transportation because of the combined effort taken by the government, aircraft manufacturers, the aviation infrastructure which includes the airports and air traffic control system. In terms of accessibility, a passenger can get in from one point to any other point in the world in a little more than a day. Airlines offer nonstop service in long haul markets. When it comes to the supply drives of the aviation industry, factors like the behaviour of the competition, regulation of the government like the open skies policies which has helped foreign players to enter the Indian aviation industry and lastly the cost of resources like fuel, maintenance and labour cost are the key drivers of the Indian airline industry (Bajpai, 2009, p.728). Conclusion Indian airline industry has been regarded as one of the fastest growing airlines, but due to rise in fuel price have slowdown with reduction in the budget in the past three years. Due to the poor infrastructure there has been a drop in the number of passengers. Therefore, with the development of infrastructure and certain other issues would definitely put a positive impact on the industry. In future the Indian airline industry would need to hire skilled personnel in order to helm the growth. Mergers, consolidations and liquidation seem to be necessary for the growth of Indian aviation sector. With improving efficiency of engines, infrastructure, increase in regional connectivity will have a positive impact. India is already experiencing a shortage of pilots hence it’s a great opportunity for the aviation sector to play a major role as the industry holds great promise for development in the coming years or so. Reference Bajpai, N. (2009). Business Statistics. 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[Accessed on October 24, 2011]. IBEF-a. (2010). Airports. [Pdf]. Available at: http://www.ibef.org/download/Airports_270111.pdf. [Accessed on October 24, 2011]. ICMR. (2007). A Report on Aviation Industry in India. [Online]. Available at: http://www.icmrindia.org/casestudies/catalogue/Business%20Reports/BREP036.htm. [Accessed on October 24, 2011]. ITOPC. (No Date). Domestic airlines in India. [Online]. Available at: http://www.itopc.org/travel-requisite/domestic-airlines-in-india.html . [Accessed on October 24, 2011]. Money Control. (2011). Jet Airways. [Online]. Available at: http://www.moneycontrol.com/financials/jetairways/ratios/JA01. [Accessed on October 24, 2011]. PRLOG. (2011). Jet Airways Group Retains leadership Position With 26.1% Market Share. [Online]. Available at: http://www.prlog.org/11395223-jet-airways-group-retains-leadership-position-with-261-market-share.html. [Accessed on October 24, 2011]. The Economic Times. (2011). Jet Airways posts net profit of Rs 118.23 Crore in Q3. [Online]. Available at: http://articles.economictimes.indiatimes.com/2011-02-02/news/28425702_1_jet-airways-net-profit-q3. [Accessed on October 24, 2011]. Read More