Portfolio Analysis of the Indian Aviation Industry

Submitted By: Group 4, Section C

Aditya Kumar Singh | Devanand Shukla | Jashanjot Singh Sekhon | Jharana Murmu | Krishna Bajaj | Pratheek Perala | Piyush Prakash | 2011PGP515 2011PGP618 2011PGP663 2011PGP665 2011PGP696 2011PGP774 2011PGP780

The Indian Aviation Industry

India is expected to be amongst the top five nations in the world in the next 10 years in the aviation sector. On the sidelines of the International Civil Aviation Negotiation (ICAN) Conference, Ms Pratibha Patel, President of India highlighted that currently; India is the 9th largest civil aviation market in the world. "Recent estimates suggest that domestic air traffic will touch 160-180 million passengers a year, in the next 10 years and the international traffic will exceed 80 million passengers a year," added Ms Patil. India is poised to emerge as the third largest aviation market in the world by the end of this decade, according to Dr Nasim Zaidi, Secretary, and Ministry of Civil Aviation. The sector with a growth of 18 per cent in domestic market is expected to generate approximately 2.6 million jobs in the next one decade, added Dr Zaidi. In addition, the US-based electrical components company, Eaton Corporation foresees plenty of opportunities for itself in India's unfolding civil and military aerospace story. "India is expected to emerge as one of the largest aviation markets in the world," according to Joe-Tao Zhou, APAC President, Aerospace Group, Eaton Corporation. Historically, the Indian aviation sector has been a laggard relative to its growth potential due to excessive regulations and taxations, government ownership of airlines and resulting high cost of air travel. However, this has changed rapidly over the last decade with the sector showing explosive growth supported by structural reforms, airport modernizations, entry of private airlines, adoption of low fare - no frills models and improvement in service standards. Like elsewhere in the world, air travel is been transformed into a mode of mass transportation and is gradually shedding its elitist image. And yet, the picture is not as rosy as it seems. The Indian Aviation Industry has been going through a turbulent phase over the past several years facing multiple headwinds high oil prices and limited pricing power contributed by industry wide over capacity and periods of subdued demand growth. Over the near term the challenges facing the airline operators are related to high debt burden and liquidity constraints - most operators need significant equity infusion to effect a meaningful improvement in balance sheet. Improved financial profile would also allow these players to focus on steps to improve long-term viability and brand building through differentiated customer service. Over the long term the operators need to focus on improving cost structure, through rationalization at all levels including mix of fleet and routes, aimed at cost efficiency. At the industry level, long-term viability also requires return of pricing power through better alignment of capacity to the underlying demand growth. While in the beginning of 2008-09, the sector was impacted by sharp rise in crude oil prices, it was the decline in passenger traffic growth which led to severe underperformance during H2, 2008-09 to H1 2009-10. The operating environment improved for a brief period in 201011 on back of recovery in passenger traffic, industry-wide capacity discipline and relatively stable fuel prices. However, elevated fuel prices over the last three quarters coupled with intense competition and unfavorable foreign exchange environment has again deteriorated the financial performance of airlines. During this period, while the passenger traffic growth has been steady (averaging 14% in 9m 2011-12), intense competition has impacted yields and forced airlines back into losses in an inflated cost base scenario. To address the concerns surrounding the operating viability of Indian carriers, the Government on its part has recently initiated a series of measures including (a) proposal to allow foreign carriers to make
Source: Indian Aviation Industry, ICRA Research, March 2012

strategic investments (up to 49% stake) in Indian Carriers (b) proposal to allow airlines to directly import ATF (c) lifting the freeze on international expansions of private airlines and (d) financial assistance to the national carrier. However, these steps alone may not be adequate to address the fundamental problems affecting the industry.

Market Size
The rapidly expanding aviation sector in India handles 2.5 billion passengers across the world in a year; moves 45 million tonnes (MT) of cargo through 920 airlines, using 4,200 airports and deploys 27,000 aircraft. Today, 87 foreign airlines fly to and from India and five Indian carriers fly to and fro from 40 countries. Passengers carried by domestic airlines during January 2012 was recorded at 5.33 million as against 4.94 million during the corresponding period of previous year thereby registering a growth of 8.06 per cent, according to data released by the Directorate General Civil Aviation (DGCA). The air transport (including air freight) in India has attracted foreign direct investment (FDI) worth US$ 429.70 million from April 2000 to December 2011, as per data released by Department of Industrial Policy and Promotion (DIPP). Private carriers are anticipated to post a combined profit of US$ 350 million US$ 400 million for the financial year ending March 31, 2012, according to a report titled, '2011-12 Aviation Industry Outlook' by Centre for Asia Pacific Aviation (CAPA) India. The firm expects the domestic traffic to grow as high as 20 per cent. International passenger numbers, which grew by about 10 per cent last year, are expected to increase towards the upper end of a 10-12 per cent range over the next 12 months. Exhibit 1 gives details of the operational airlines in India (civil, general and freight). Airline Air India ICAO IATA AIC AI Call Sign AIRINDIA Commenced Operations October 1932 (as Tata Airlines) 1996 (as Alliance Air) 1995 August 2005 2009 1997 June 2004 August 2006 Headquarters Mumbai Kochi Mumbai Chennai Delhi Bangalore Bangalore Mumbai Gurgaon

Air India Express AXB IX Air India Regional Blue Dart Aviation Club One Air Deccan 360 LLR CD

EXPRESS INDIA April 2005 ALLIED BLUE DART DECCAN CARGO DECCAN GOAIR IFLY

BDA BZ DEC 3C

Deccan Aviation DKN DN GoAir IndiGo GOW G8 IGO 6E

Invision Air Jagson Airlines Jet Airways Jet Konnect JetLite Kingfisher Airlines Kingfisher Red SpiceJet TajAir

JGN JAI JAI JLL KFR KFR SEJ

JA 9W 9W S2 IT IT SG

JAGSON JET AIRWAYS JET AIRWAYS LITE JET KINGFISHER KINGFISHER SPICEJET

March 2011 November 1991 May 1993 May 2009 1991 (as Air Sahara) May 2005 August 2003 May 2005

Mumbai Delhi Mumbai Mumbai Mumbai Mumbai Mumbai Gurgaon Mumbai

Exhibit 1: Operational Airlines in India (Source: Wikipedia)

Kingfisher Airlines
Kingfisher Airlines Limited is an airline group based in India. Its head office is in Andheri (East), Mumbai and Registered Office in UB City, Bangalore. Kingfisher Airlines, through its parent company United Breweries Group, has a 50% stake in low-cost carrier Kingfisher Red. The airline has been facing financial issues for many years. Until December 2011, Kingfisher Airlines had the second largest share in India's domestic air travel market. However due to the severe financial crisis faced by the airline, it has the fifth largest market share currently, only above GoAir. Kingfisher Airlines serves 63 domestic destinations and 8 international destinations in 8 countries across Asia and Europe. Kingfisher's short haul routes are mostly domestic apart from some cities in Asia, Southeast and Western Asia. All short haul routes are operated on the Airbus A320 family aircraft. ATR 42s and ATR 72s are used mainly on domestic regional routes. All long haul routes are operated on the Airbus A330-200. Kingfisher has its medium, long haul destinations in East Asia, Southeast Asia, and Europe. Its first long haul destination was London, United Kingdom, which was launched in September 2008. All ATR's and a few aircraft from the A320 family are used for Kingfisher Red service.

Services
Civil Aviation (Domestic) Kingfisher First The domestic Kingfisher First seats have a 48-inch seat pitch and a 126-degree seat recline. There are laptop and mobile phone chargers on every seat. Passengers can avail of the latest international newspapers and magazines. There is also a steam ironing service on board Kingfisher First cabins. Every seat is equipped with a personalized IFE system with AVOD, which offers Hollywood and Bollywood movies, English and Hindi TV programs, 16 live TV channels and 10 channels of

Source: Wikipedia

Kingfisher Radio. Passengers also get BOSE noise cancellation headphones. Domestic Kingfisher First is only available on selected Airbus A320 family aircraft. Kingfisher Class The domestic Kingfisher Class has 32-34 inch seat pitch. Every seat is equipped with personal IFE systems with AVOD on-board the Airbus A320 family aircraft. As in Kingfisher First, passengers can access movies, English and Hindi TV programs, a few live TV channels powered by Dish TV, and Kingfisher Radio. The screen is controlled by a controller-console on the seat armrest. Ear cup headphones are provided free of cost to all passengers. The default channel shows, alternating every few seconds, the airplanes ground speed, outside temperature, altitude, distance and time to destination, the position of the aircraft on a graphical map, and one or more advertisements. Passengers are served meals on most flights. Before takeoff, passengers are served bottled lemonade. Kingfisher Red Kingfisher Red, known formerly as Simplifly Deccan and prior to that as Air Deccan, is a low-cost brand run by Kingfisher Airlines. It was formed in early 2008 by the merger of Indias first Low Cost Carrier (LCC), Air Deccan with Kingfisher Airlines. It currently operates the whole of Kingfishers ATR fleet and some of the Airbus A320s. It is facing stiff competition from other LCCs like Indigo, Spicejet, Go Air, Jet Lite / Jet Konnect (the LCC arm of Jet Airways) and Air India Express. It offers no frills air services between Tier II cities in India and also some metros.

Civil Aviation (International) Kingfisher Airlines provides scheduled international air services on its Airbus A330s to certain locations in the UK and Western Europe. Its international services are provided only in the Full Service Airline segment consisting of upgraded versions of Kingfisher First and Kingfisher Class. It does not offer LCC services on its international routes. Cargo Kingfisher Xpress is a new Door-to-Door cargo delivery service from Kingfisher Airlines. Kingfisher Xpress Same Day service claims to be India's first and only same day delivery by air service. Service offered a pick up facility in the 8 main metropolitan cities of India viz Mumbai, NewDelhi, Bangalore, Hyderabad, Chennai, Ahmedabad, Cochin and Kolkata with guaranteed same day delivery in up to 22 cities of India namely Ahmedabad, Bagdogra, Bangalore, Chennai, Coimbatore, Delhi, Kochi, Goa, Guwahati, Hyderabad, Indore, Jaipur, Kolkata, Mumbai, Patna, Raipur, Ranchi, Lucknow, Nagpur, Pune, Vijayawada, Srinagar and Thiruvananthapuram. General Aviation Kingfisher Airlines also offers a high-end special charter service called Kingfisher Elite, which is designed to offer customers a flexible flying experience. Customers can fly within the comfort of their own schedule, in an aircraft reserved exclusively for them, and choose where, when and with whom they wish to travel. With access to over 200 airstrips in India, the service is quite expansive. Luxury and comfort are of prime importance in this segment.

The airline offers a range of aircraft that includes the Eurocopter EC155, Business Jets and Airbus Corporate Jets. For a group charter, customers can choose from the regular fleet, which include Airbus 321, Airbus 320, Airbus 319, ATR 72-500 and ATR 42-500 aircraft depending on their requirements.

Strategic Analysis of Kingfisher Airlines

Business Model
While most airlines today either operate a Full Service Airline or a No Frills Service or a Cargo Airline, Kingfisher has adopted an approach called the Triple Service Model. It currently offers all the 3 services under a single umbrella. While the twin service model of FSA and LCC was experimented with by the Full Service Airlines to flank the emerging LCCs, the strategy failed since the models are completely dissimilar and the only thing common between both is the airplane. Exhibit 2 shows a pictorial representation of the difference between the business models of a FSA and a LCC. When Kingfisher acquired Air Deccan, it resulted in the formation of Kingfishers LCC arm called Kingfisher Red. The decision was taken primarily to partially neutralize the damage caused to Kingfishers profitability by the emerging LCCs and to create operational synergies as a result of the merger. Hence, it was argued that the merger would create operational synergies and cost reduction, which would be beneficial to both airlines. In truth however, mixing the 2 business models affected the equilibrium that was in place. The concept of a premium LCC is an oxymoron and contrary to the principles of its foundation. The insistence on giving Kingfisher Red customers the Kingfisher Experience including in flight entertainment, free ticket booking by agents, etc. resulted in erosion of the incredible effort that had been put in by Captain Gopinath when he formed Indias first LCC. In short, instead of focusing on a cost leadership strategy for Kingfisher Red, the company has focused on providing its customers with a great experience, which is not sustainable in the long run. Regardless of Kingfishers operational inefficiency, it is a fact that a twin service model, in most situations, leads to negative synergies. However, if the 3rd service of a cargo airline is added to the portfolio, there is a possibility that if run in a suitable way, an airline can generate great operating efficiencies by working this triple service model. The key to success in the airline industry is to fly more planes for longer time, fully loaded to more places. The example of LAN Airlines, which operates in Latin America, is proof about the success of the triple service model. Passenger demand for LCC air travel is highly elastic: By lowering fares on short-haul routes by 20%, Kingfisher can attract up to 40% more passengers, enabling it to invest in newer, more efficient planes, which could fly more hours per day. The implication is that the most direct (perhaps the only) way to increase capacity utilization for domestic flights is with low fares, made possible solely by offering a basic level of service to drive down costs. By transporting both cargo and passengers, Kingfisher can keep flying routes profitably when demand falls, as the two businesses seldom dip to the same degree in tandem. Similarly, the aircraft can be used at night as well, for the purpose of carrying cargo and increasing utilization. The ability to fly more routes profitably creates a virtuous circle. More routes mean more value for customers, enabling Kingfisher to charge premium prices, thereby generating revenue to support even more routes and to eventually become the one-stop shop for all 3 services (Exhibit 3).

Exhibit 2: Difference in the business model of a FSA and a LCC

Exhibit 3: Virtuous Cycle for a triple business model (Source: When one business model isnt enough by Ramon Casadesus-Masanell and Jorge Tarzijn, HBR Jan-Feb 2012)

PEST Analysis of the Industry

Political The Civil Aviation Ministry is expected to soon circulate a proposal before the union cabinet to consider allowing up to 49% equity investment by foreign carriers in domestic airlines. The FDI proposal, if approved, would certainly be an important milestone in the aviation sector and may provide much-needed relief to the domestic aviation industry reeling under the pressure of mounting losses and rising debt burden. Besides, the move will help bring global expertise and best industry practices over the medium term. The Civil Aviation Ministry has also lifted the freeze on their overseas expansions. The government had imposed the freeze in Mar-2011 with the objective of protecting the financially strained Air India from more competition on foreign routes. However, lower utilizations of maximum permissible limits under the bilateral Air Service Agreements (ASAs) have prompted the move to allow eligible domestic airlines (with more than 5 years experience) expand their international operations. The move will benefit the private carriers as international flights provide better margins owing to the availability of fuel at international rates, higher auxiliary revenue through in-flight sales and higher fleet utilization, as international operations could happen during the otherwise idle night hours. In addition to the proposal on FDI, the empowered group of Minister has also recently approved the proposal for airlines to import Aviation Turbine Fuel (ATF) directly, a demand that the airlines have been lobbying for quite some time now. ATF costs

contributes 30-45% of overall operating costs for Full Service Carriers (FSCs) and 40-55% for Low cost carriers (LCCs) and hence the impact of this development is that the taxation differential (between currently applicable sales tax rates, averaging around 22-26% for domestic fuel uplifts and likely import duty, 8.5%- 10.0%) certainly suggests a large potential saving for airlines. Economic India aviation industry promises huge growth potential due to large and growing middle class population, favorable demographics, rapid economic growth, higher disposable incomes, rising aspirations of the middle class, and overall low penetration levels (less than 3%). The industry has grown at a 16% CAGR in passenger traffic terms over the past decade. Despite strong growth, air travel penetration in India remains among the lowest in the world. In fact, air travel penetration in India is less than half of that in China where people take 0.2 trips per person per year; indicating strong long-term growth potential. Despite reforms, the combined impact of 1) moderating passenger growth 2) lower yields due to excessive competitive 3) rising ATF prices 4) High cost of capital 5) steep rupee depreciation and 6) rising debt levels and interest costs, the profitability margins of the airlines industry have been severely impacted. Exhibit 4 shows the latest trends in ATF prices and rupee depreciation.

Exhibit 4: ATF Price Trends and Rupee Depreciation Trend (Source: ICRA Report on Indian Aviation Industry, March 2012)

Social The traditional joint-family system in India is rapidly breaking up. With increasing expenses and with more people migrating to cities for work, people are increasingly opting for nuclear and small families. This trend of smaller families has also bought a change to their lifestyles, with friends & relatives visiting more frequently and families taking more vacations implying greater frequency of travel. Air travel is finding a growing proportion of this additional travel, with smaller families making air travel for the entire family more affordable.

Technological Both Airbus and Boeing have launched airplane variants, which are almost 10-15% more fuel-efficient than existing planes. With ATF costs forming almost 60% of an LCCs operating expenses, such a development will drastically improve its Operating Profits. Further, with the explosive growth of online and mobile penetration, LCCs can leverage this channel to cut down on ticketing and distribution costs and follow a similar model as that adopted by western LCCs.

SWOT Analysis of Kingfisher Airlines

Strengths Kingfisher is known to provide quality service and has been very innovative in coming up with different service lines such as Kingfisher First and Kingfisher Class. The airline offers several unique services to its customers. These include: personal valet at the airport to assist in baggage handling and boarding, accompanied with refreshments and music at the airport, audio and video on-demand, with extra-wide personalized screens in the aircraft, sleeperette seats with extendable footrests and three-course gourmet cuisine. Kingfisher is one of only 6 airlines in the world to have a 5 star rating from Skytrax, along with Asian Airlines, Malaysia Airlines, Qatar Airways, Singapore Airlines and Cathay Pacific Airways. Weaknesses Recently Kingfisher has had to cancel many of its flights, which has built a bad reputation in the minds of the customers. It is also affected by high airport charges and its tight liquidity position. High-ticket prices of Kingfisher First and Kingfisher Class, as compared to its competitors, are also a weakness for the airlines. Opportunities Indias rapid growth rate is leading to higher disposable incomes and a rise in tourism business. This, coupled with current low penetration rate of less than 3% and rising aspirations of the middle class, provides a huge potential for growth.

The recent hikes in railway fares have also provided an opportunity to influence some railway commuters to start using airlines. The fact that the government has allowed airlines to directly import ATF will lead to considerable cost savings as ATF accounts to more than 50% of its operating costs. But it also comes with extra costs involved in either setting up personal infrastructure to transport ATF to airports, or striking deals with existing domestic players who have the necessary infrastructure in place. Also, direct import of ATF will come with stricter credit terms, as compared to the current 60-90 days of credit as provided by domestic players. This will lead to higher debts in a time when liquidity is already a big concern. That being said, direct import will definitely lead to long-term gains. Threats Kingfisher currently faces direct competition from other domestic airlines, which operate in almost all sectors that Kingfisher operates in and offer more lucrative options in terms of pricing. Government initiatives in connecting major cities by direct non-stop trains (Duronto) also threatens to shift some airlines users to railways. The recent hike in service tax, which will be almost completely transferred to the customers, also threatens to reduce the market size. Other than the factors mentioned above, the rising ATF prices, global economic slowdown and the fact that current capacity in the air is much in excess of the demand, threaten to reduce the profits. Positive
Strengths Quality service

Negative
Weaknesses Bad reputation, due to recent cancellations of flights Tight liquidity

Innovation Modern and complete in-house training academy High brand recall

Internal External

High airport charges unsuitable for LCC model High ticket pricing (KF First and KF Class) Threats Tough competition from Air India as well as international players on global routes Government initiatives in railways with fast moving trains like Duronto Excessive regulations and taxations; recent hike in service tax Current capacity is much in excess of demand

Opportunities Rail fare hikes Growing middle class population; rising aspirations of middle class Indias rapid economic growth; higher disposable incomes Low penetration levels Expanding tourism business Direct ATF import has been allowed, although it comes with lower credit periods and requires infrastructure investment by the airlines

Volatility in ATF prices Poor infrastructure development Seasonal demand fluctuation

Value Chain of Airline Industry

BCG Growth-Share Matrix Analysis

To come up with BCG growth-share matrix, the relative market shares and market growth rates for each of the SBUs i.e Low cost carriers, Full service carriers, cargo and charter airlines are given ratings on a scale of 1-9 where 9 implies highest market share in its category and 1 lowest. The following table shows the ratings given for the two parameters:
Business Unit Names
Low Cost Carrier Full Service Airlines Cargo Carriers Chartered Airlines

Relative Market Share 1 -9

2.0 3.0 1.0 1.0

Market Growth Rate 1 -9

8.0 8.0 6.0 9.0

Market Size Rate 1 -9

5.9 3.9 2.4 0.5

Relative Market Share With about 11.8% market share, Kingfisher Airlines is below the average market share and because of the recent financial problems led the firm to plead for a bailout. India's once second largest airline is beset with financial problems which has caused Kingfisher to cancel flights across its fleet. Pilots and crews have taken sick leave in protest against their salaries being delayed, oil companies have cut credit and are demanding fuel payments and aircraft on lease have been returned to their owners. Meanwhile shares have dropped significantly and growing debts have meant that Kingfisher Red, its budget division, has ceased flying profitably. Passengers are losing faith and looking to other airlines as the Indian airline industry struggles to come to terms with rising fuel costs and a battle on fare prices takes a grip.

Market share of Indian airlines (Source: DGCA report on market shares of domestic airlines)

Market Growth rate For calculating the market growth rate to be used in the BCG matrix, YOY CAGR Market growth rates both expected figures are considered and then given a rating over a scale of 1-9. All the four categories are considered to have a great growth considering various factors like huge market size, booming economy, rising disposable income, huge and fast growing middle class almost the size of US and increasing business opportunities in small towns increasing the demand for air travel. Following figure shows the market growth rates and in actual and expected and the corresponding rating.
Market Growth ( YoY CAGR) Low Cost Carrier Full Service Airline Cargo Carrier Charter Airline 13% 13% 8% 15% 31% 0% 13% 34% 8 8 6 9

Expected Figure ( by 2020) Actual Figure Rating ( out of 10)

Based on the two parameters (Relative market share and market growth rate), following BCG matrix report is generated. The area of the circles is proportional to the SBUs industry market size.

BCG Growth-Share Matrix

Low Cost Carrier

Question Marks

Stars

Market growth rate

Full Service Airlines

Cargo Carriers
Dogs Cash Cows

Chartered Airlines

Relative market share

Analysis on the basis of BCG Growth Share Matrix

Low Cost Carriers (LCC) From the BCG matrix we can observe that LCC segment has been quite rapidly growing with a market size of $5.9billion but for Kingfisher airlines though, the relative market share dropped drastically where it was second position until December 2011 but now dropped to fifth position only above Go Air. LCC segment stands in the Question marks quadrant but due to its recent financial failures, its market growth is drastically going down and so it can move into the Dogs quadrant. Unless Kingfisher can quickly turnaround the airline and increase its market share and enter the Stars quadrant, sustaining this business seems difficult in the long run. Full Service Airlines (FSA) Compared to LCC, the relative market share rating of Kingfishers FSA is higher than that of LCC. FSA has the same market growth rate as LCC but with a slightly less market size ($3.9billion).As per the BCG matrix, the FSA too comes in the Question Marks quadrant. These low-share SBUs in high market growths require a lot of cash to hold their share or to become a star. Considering the quality of service that Kingfisher Airlines offers vis a vis its competitors, we believe that it can regain its market share in this segment once it is able to pull itself out of its current turmoil. This segment has a huge potential to once again become a star in the near future and even a cash cow in the long run. Cargo Carriers (CC) The cargo carriers segment is a highly untapped market in India yet but there is a huge scope of development. The Indian air cargo industry is expected to soar in the next three to four years with the economy on a solid growth trajectory and the liberalization of the aviation sector in the works.There is rising optimism that India will emerge as a new cargo hub, given its geographical location between South-East Asia and the European Union. The country's air cargo market is expected to grow at a compounded annual growth rate (CAGR) of about 8.3 per cent by 2013. The market is expected to receive a further boost with the recent raising of FDI limits up to 74 per cent in Indian cargo airlines. Such proactive and favorable government policies will greatly encourage investments in the air cargo industry and facilitate the setting up of the required amenities and infrastructure. It will also help establish multimodal cargo hubs for quick and efficient transportation of cargo, the report stressed. With a market size of $2.4billion and with high market growth rates and low relative market shares, the CC segment will be in the Question marks but this segment can quickly grow into stars looking at the favorable situations mentioned above. Chartered Airlines (CA) Chartered Airlines segment has the least market size of all the segments in airline industry. Clearly this segment is being used by very less percentage of the people availing the air travel facility. Kingfisher is doing considerably well compared to its competitors in the industry. A huge growth rate of about 34% and expected CAGR of 15% YOY by 2020 implies that this

segment is very much attractive. But considering a very low relative market share, Kingfisher need to improve a lot by differentiating itself from the other players, and move into stars. Currently they are in Question marks quadrant.

Portfolio Analysis: The GE/ McKinsey Matrix

Companies starting from humble beginnings, having only one product/ service and active in only one industry, often find other industries attractive as they grow. In order to exploit these opportunities companies enter diverse industries and start operations. In businesses with such diverse portfolio of products, it is often observed that some products are more profitable and some less. Since firms have limited funds for investment they often seek the industry in their portfolio, which would create the maximum value if further invested in. This analysis is not as easy as a back-of-envelope calculation. Often it is very difficult to demarcate the industries into profitable/ non-profitable, growing/ stagnant, fund intensive/ fund generating. In order to analyze businesses with diverse portfolio of products and operative in different industries, many models have been proposed, BCG Matrix and GE/ McKinsey Matrix to name a couple. The GE/ McKinsey matrix is one of the most widely used tools for Strategic Business Portfolio Analysis. In this section we would be applying the GE/ McKinsey model to execute a Portfolio Analysis of the Kingfisher Airlines. Why Portfolio Analysis of Kingfisher Airlines Kingfisher Airlines is one of Indian Airlines players which is operative in a number of Airline services such as Low Cost Carriers (LCC), Full Service Airlines (FSA), Cargo Carriers (CC) and the Chartered Airlines (CA). Given its presence in these diverse services, it becomes necessary to analyze the Portfolio of its products in order to know about the business Profitability Potential and Growth Potential. Kingfisher Airlines, like most of airline industry players throughout the world, is facing a heavy financial crunch. In such times of financial crisis it is of utmost importance to focus only on businesses with profitability and growth potential, rather that feeding money to loss making and declining businesses. Portfolio Analysis of Kingfisher Airlines is aimed at finding out the attractiveness of the various businesses and helping the decision making of which businesses to grow, which to hold and which to harvest. Portfolio Analysis: The Procedure The Figure 1 below gives a step-by-step procedure of conducting a Portfolio analysis. We will follow the same procedure in our analysis: (I) Identify the Businesses Kingfisher Airlines is operative in the following businesses: 1. Low Cost Carriers (LCC): This is the affordable price, no frills airline service which is targeted to frequent flying customers for whom airlines is just another means of transportation and who do not link air travel with luxury. 2. Full Service Airlines (FSA): Airline service which includes food, beverages and other comfort items while on journey. These are relatively higher priced than LCC and are targeted to those customers who attach air travel with an experience and/ or expect air travel to be comfortable and more than just a means of transportation.

3. Cargo Carriers (CC): This is the Airline Freight Service, carrying specialized as well as general goods domestically. 4. Chartered Airlines (CA): This is a specialized Air-service, which includes renting, leasing or providing one-time services to private customers. Customers generally include other organizations, wealthy individuals or the Government.

Figure 1: Procedure of Conducting Portfolio Analysis

(II) Identify Strongest Competitor of each Business There are a number of players in Indian domestic airline industry that compete in the above mentioned businesses. Kingfisher has the following strongest competitors in each of the business identified in the Step (I). 1. Low Cost Carriers (LCC): Jet Airways &IndiGo Airlines 2. Full Service Airlines (FSA): Jet Airways 3. Cargo Carriers (CC): Emirates SkyCargo, Indian Airlines 4. Chartered Airlines (CA): Jet Airways, Deccan Charter (III) Define & Weight criteria of Market Attractiveness In this step we enumerate the criteria/ parameters on which we decide the Market Attractiveness of the various businesses. Definition of the criteria beforehand is very important since it clarifies the parameters and helps us to rank the parameters and assign a weight of relevance to them. Following are the Parameters for calculating the Market Attractiveness:

1. Market Size: The size of the Industry to which the business belongs. The size can either be represented as a monetary value or in terms of any relevant parameter prevalent in the industry (such as Passengers etc).
Low Cost Carrier (Billion $) 41.4
Low Cost Carrier (Billion $) 126

Market Size Actual Figure Full Service Airline (Billion $) Cargo Carrier (Billion $) 18.6 2.64
Market Size Expected Figure (by 2020) Full Service Airline (Billion $) Cargo Carrier (Billion $) 54 5.41

Charter Airline 154,640 hours

Charter Airline 544,000 hours

2. Market Growth: The rate at which the industry, to which the business belongs, is growing. This can be found as a trend from historical data. The growth rate represents the market in which the business is operative (domestic, if the business operates within the country; international, if business operates with a global scope).
Low Cost Carrier (%) 31.4% Market Growth Rate Actual Figure Full Service Airline (%) Cargo Carrier (%) 0% 12.5% Market Growth Rate Expected Figure (by 2020) Full Service Airline (%) Cargo Carrier (%) 13% 8% Charter Airline (%) 33.5%

Low Cost Carrier (%) 13%

Charter Airline (%) 15%

3. Market Profitability: Market profitability is the profit potential of the market. This may be different from the profitability experienced by individual players. Market profitability depends on factors such as competition, supplier power, buyer power and threat of new entrants in the market. 4. Pricing Trends: This is a representative of the type of pricing scenario prevalent in the industry. Pricing trends may be intense price competition (price war), competitive pricing, monopolistic pricing etc 5. Opportunity to Differentiate Products/ Services: This parameter represents whether or not there is scope of differentiation in product/ services in order to get ahead of the competition. Industries dealing with commodity products/ services may have very less scope for differentiation, whereas industries dealing with specialized products/ services may have higher scope of product/ service innovation. 6. Entry Barriers: Whether or not the industry poses an entry barrier. Entry barrier are factors which discourage coming up of new players in the industry. Examples of Entry barriers may be Government Regulation, Hugeinitial capital investment etc. 7. Competitive Intensity/ Rivalry: The degree to which the players in the industry compete with each other to gain market share. Rivalry may range from intense to no rivalry at all. 8. Distribution Structure Requirements: This parameter represents whether or not distribution infrastructure is required to succeed in the industry. Some industries are distribution intensive and they require investment in developing distribution channels and infrastructure, whereas some industries do not require heavy distribution channels investments. 9. Necessary Company Investments: Whether or not timely investments are required to sustain position and grow in the industry. Some industries pose a regular demand of investments to sustain position in the industry. Such investments may be of R&D nature or maintenance nature etc. 10. Overall Risk of returns in the Industry: This parameter represents the riskiness of the industry. Riskiness is in the terms of Returns on Investments (ROI). Whether the industry results in sure-shot and predictable returns or there is hardly any predictability in the returns from the industry.

Rating the Market Attractiveness Parameters Following weighting criteria was used:

A scale of 0-10 was used to rate the parameters of Market Attractiveness. A rating of 0 signifies Extremely Low value of the parameter as compared to the values of that parameter in other industries. A rating of 10 similarly signifies an Extremely High value of the parameter as compared to the values of parameter in other industries. The values corresponding to the various Parameters were found and compared with the values of parameters for other similar industries. Based on the comparison, rating was done for all the businesses identified in the Step (I). This rating along with the weighting helps to calculate the overall market attractiveness of each of the businesses. Following figure shows the ratings assigned to the different parameters:

Figure 2: Rating of the Market Attractiveness Parameters

Weighting of the Market Attractiveness Parameters A weight was assigned to each of the Market Attractiveness Parameters based on their relevance in the calculations of the Market Attractiveness of the industry. The relevance of the various parameters was judged by discussing the effect that the parameter may have on the industry attractiveness. The parameters which were found to have a higher influence on the Market Attractiveness were assigned higher weights (Higher Relevance) that those which had little or no influence on the Market Attractiveness. Following rule was followed while assigning weights: 1. Parameters with higher relevance with respect to Market Attractiveness were assigned higher weights. 2. Sum of all weights equal 1. Wi = 1 where Wi = ith Weight

3. No parameter was assigned sum of more than 1 or less than 0. Following Figure shows the weights assigned to every parameter for each of the identified businesses.

Figure 3: Weights assigned to the Market Attractiveness Parameters

(IV) Define & Weight Criteria of Competitive Strength In this step we enumerate the criteria/ parameters on which we decide the Market Attractiveness of the various businesses. Definition of the criteria beforehand is very important since it clarifies the parameters and helps us to rank the parameters and assign a weight of relevance to them. Following are the Parameters for calculating the Market Attractiveness: 1. Company Image: It is the Brand Value or the trust, liking and loyalty the Company commands. It is based heavily on the past performance of the company, level of its commitment towards the customers, quality of Products/ Services and the after sales services etc. 2. Market Share: It represents the chunk of the industry market size served by the companys business. Again, it may be represented in monetary terms or in terms in which the industry market size has been defined (such as number of Passengers). 3. Strength of Assets & Core Competencies: It represents the level of operative expertise of the company in the business. It also represents the ease and the certainty with which the company creates value using its assets. Core competencies are core business strengths of the company. 4. Record of Technological and other Innovations: This parameter is the representative of the dedication of the company towards innovation in the industry. Whether or not the company involves in regular innovation of its products/ services to create value for the customer. 5. Distribution Strength and Production Capacity: This parameter represents the expertise of the company in distributing its products/ services. It is also a representative of the investments or commitments made by the company to develop & maintain its distribution channels. 6. Access to Financial and other Investment Resources: whether finance is readily available or not to fund future growth in the industry. 7. Product Quality: The perceived quality of the product/ service and the level of commitment of the company to ensure the quality of its products/ services.

8. Relative Cost Position: Whether the company is able to induce low cost in the production and/or delivery of its products/ services. Cost incurred is inversely related to the competitive strength, higher the cost incurred relative to the competitors, lower the competitive strength. 9. Delivery Time: This parameter is a representative of the time taken by the company to deliver its products/ services. Shorter delivery times are better. 10. Sales Force: How efficient and capable is the sales force of the company. Both the strength and the capability of the sales force is taken into consideration. Rating the Competitive Strength Parameters Following weighting criteria was used:

A scale of 0-10 was used to rate the parameters of Competitive Strength. A rating of 0 signifies Extremely Low value of the parameter as compared to the values of that parameter for other players in the industry. A rating of 10 similarly signifies an Extremely High value of the parameter as compared to the values of parameter for other players in the industries. The values corresponding to the various parameters were found and compared with the values of parameters for other players in the industries. Based on the comparison, rating was done for all the businesses identified in the Step (I). This rating along with the weighting helps to calculate the overall market attractiveness of each of the businesses. Following figure shows the ratings assigned to the different parameters:

Figure 4: Rating of the Competitive Strength Parameters

Weighting of the Competitive Strength Parameters A weight was assigned to each of the Competitive Strength Parameters based on their relevance in the calculations of the Competitive Strength of the company in the given

industries. The relevance of the various parameters was judged by discussing the effect that the parameter may have on the companys competitive advantage over other companies in the industry. The parameters which were found to have a higher influence on the Competitive Strength were assigned higher weights (Higher Relevance) that those which had little or no influence. Following rule was followed while assigning weights: 1. Parameters with higher relevance with respect to Competitive Strength were assigned higher weights. 2. Sum of all weights equal 1. Wi = 1 where Wi = ith Weight 3. No parameter was assigned sum of more than 1 or less than 0. Following Figure shows the weights assigned to every parameter for each of the identified businesses.

Figure 5: Weights assigned to the Competitive Strength Parameters

(V) Draw GE/ McKinsey Portfolio Matrix In order to draw the GE/ McKinsey Portfolio Matrix, a weighted average score was calculated for the Market Attractiveness Parameters and the Competitive Strength Parameters. This weighted average score was arrived at by multiplying the rating of the parameters with the respective weights assigned to the parameters. Figure 6 below show the weighted average values for the two sets of parameters. Calculating the weighted average for all the parameters, we choose Market size as our key parameter for construction of the GE/ McKinsey Matrix. It was constructed based on the market size as the key parameter for circle size.

Figure 6: Weights average calculation of all the parameters

(VI)

Interpret Portfolio & Develop Strategy Following is the Interpretation of the Portfolio Analysis for the different businesses:

1. Low Cost Carriers (LCC): The Portfolio Analysis clearly shows that the Low Cost Carriers has below average Industry Attractiveness and the Business Unit Strength of Kingfisher in the industry is also below average. This means that the Low Cost Carrier is not such an attractive Industry when considered with a future perspective of next 8 years. Also the Kingfisher does not have any competitive advantage in the industry and is not doing better than the competitors. Strategy Recommended: Harvest 2. Cargo Carrier (CC): The Portfolio analysis clearly shows that the CC has above average Industry Attractiveness and Kingfisher has average Competitive Strength in this Industry. This means that in the future CC industry in India is likely to become more attractive than what it is today (industry growth). Also, Kingfisher is going at par with the competitors as in terms of performance in the Industry. Strategy Recommended: Hold 3. Full Service Airlines (FSA): The Portfolio analysis shows that the FSA business above average Industry Attractiveness and Kingfisher has above average Competitive Strength in the business. This clearly means that the FSA industry will become more attractive in the future and has profitability potential when considered with a long term perspective. Also, Kingfisher is doing slightly better than other players in the FSA industry. This may be the result of an inherent competitive advantage enjoyed by Kingfisher. Kingfisher must consider this competitive advantage while framing its future strategy. Strategy Recommended: Hold

4. Chartered Airlines (CA): Analysis of the GE Matrix reveals that the CA industry is the most attractive when considered from a long-term perspective for the company. The CA business has significantly above average Industry Attractiveness score and Kingfisher has well-above-average competitive strength in this industry. This means that CA industry is very likely to become an attractive industry in the future with significant profitability potential. Also, the Kingfisher has significant competitive advantage in the CA industry and is doing considerably better than its competitors in the industry. This competitive advantage is very critical to the company and must be taken into account while framing the companys future strategy and deciding future investments. Strategy Recommended: Grow

Ansoff Matrix
Ansoff matrix helps a firm decide their market growth as well as product growth strategies. The 2 questions which the Ansoff Matrix can answer is How can we grow in the existing markets and What amends can be made in the product portfolio to have better growth. The matrix is divided in two quadrants The product quadrant and the market quadrant. The Product quadrant on the X-axis is further divided into Existing products and new products. The market scenario on the Y-axis is divided into existing markets and new markets. Thus the Ansoff matrix divides a firm on the basis of the products it has existing products or new products, as well as the markets it is in existing markets or new markets. Depending on the characteristic of each, the marketing strategy is decided. These marketing strategies are as follows. 1) Market Penetration In the Ansoff matrix, market penetration is adopted as a strategy when the firm has an existing product and needs a growth strategy for an existing market. 2) Market Development Market development is the second market growth strategy, which can be adopted as per the Ansoff matrix. The market development strategy is used when the firm targets a new market with existing products. There are many possible ways of approaching this strategy, including: New geographical markets; for example exporting the product to a new country New product dimensions or packaging: for example New distribution channels Different pricing policies to attract different customers or create new market segments 3) Product development Product development in the Ansoff matrix refers to firms, which have a good market share in an existing market and therefore might need to introduce new products for expansion. 4) Diversification Diversification is a strategy used in the Ansoff matrix when the product is completely new and is being introduced in a new market. This is an inherently more risk strategy because the business is moving into markets in which it has little or no experience. For a business to adopt a diversification strategy, therefore, it must have a clear idea about what it expects to gain from the strategy and an honest assessment of the risks. The following growth strategies were studied for Kingfisher airlines. Some of them are strategies already adopted by the airline; competitors adopt some others, while some are innovative and new to the industry.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

New customers through associations with malls and brands Code sharing and alliances with other airlines Unbundling the seat cost, reduce seat cost and charge extra for check in baggage New routes Apps for smart phones Co-branding with credit card companies Advertisements on fuselage/tail Holiday packages Wider seats Associations with malls and brands (Earn miles through shopping) Satellite phones for Kingfisher First and KF Class Tie ups with hotels and car rentals Airport lounges (sell food and internet services) Smokeless cigarettes on board Kingfisher First (an upgrade over KF Class)

Ansoff Product/Market Matrix

1 7 2 4 3 8

New

11

12 13

Existing

9 10 14

15

Existing

New

Conclusion and Recommendations

Whilst Ansoffs strategy talks about growth, it is our belief that considering its precarious state, Kingfisher Airlines should follow a strategy of consolidation for the time being, and focus on growth once the situation is under control. The primary concern for Kingfisher should be to regain the footing that it has lost over the last 6 months due to its financial instability. Preferably, Kingfisher should try and focus on its strength its brand image and ability to provide customer with a unique flying experience. It should leverage its core competency of quality service and innovation so as to convince its customers that the airline still stands for its values and is committed towards their comfort and needs while in the air. In order to consolidate, it is necessary for Kingfisher to relook at its portfolio of services and analyze which ones fit into its strategy going forward. While the Air Deccan acquisition was done in order to penetrate the market that was quickly becoming competitive, in hindsight, it seems that the expected synergies were never created. Air Deccan worked on a strategy platform of cost leadership while Kingfisher was working on the other end of the spectrum with its primary focus on differentiation. After integrating Air Deccan as the LCC arm of Kingfisher, it had no option but to provide the Kingfisher Experience even to its LCC customers, so as not to lose the brand value. While such a premium LCC was widely appreciated by the customers, for the company it quickly eroded the profitability of the venture. Operational efficiency, which forms the backbone of the LCC business model had to be sacrificed to preserve brand equity. The net result was an unviable twin business model. While it is almost certain that the phenomenal growth in the LCC segment is not going to diminish in the near future, if Kingfisher Red is continued in its present form, it will bleed the coffers of its parent airline and may even lead to its demise. Thus, it is proposed that Kingfisher should drop the twin business model in its present form, either by exiting the LCC segment completely, or spinning it off as a separate business. The Indian aviation industry is currently going through a difficult phase. High oil prices and limited pricing power contributed by industry wide over capacity and periods of subdued demand growth, have affected the profitability of all airlines including Kingfisher. However, all is not bleak and the growth potential in the market shows no sign of reducing. The opportunities for a Full Service Airline, which is less affected by external cost factors than LCCs, are extremely bright and Kingfisher, whose core competency lies in this segment, can challenge for the market leadership once again. It should operate with a single focus of customer satisfaction and differentiation in order to achieve what it has lost. At the same time, the general aviation sector has been overlooked by most commercial airlines in the country. With the booming Indian economy and the exponential increase in the number of millionaires, this segment is expected to explode very soon. Air Charter Service is right up Kingfishers alley and it can achieve a significant first mover advantage here. With regard to air cargo services, Kingfisher can challenge the dominance of Blue Dart by adopting a model similar to the cargo passenger model adopted by LAN Airlines in Latin America to boost aircraft utilization. We strongly believe that the Kingfisher brand still holds sway in the market. It stands for premium-ness and has the potential to turn around the company. It is not yet too late for the airline to recognize this and act in a manner that is in line with its corporate strategy. Once it comes out of the red, it can focus on growth strategies as suggested in the Ansoffs Matrix. If this is done, we are absolutely positive that Kingfisher will once again fly the good times.

References
Industry Reports 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Indian Airlines Industry Sector View, Ideas1st Research, August 24th 2010 Indian Aviation Industry, ICRA Research, March 2012 An Assessment of Indian Air Cargo Industry, IMRS Advisory, September 2008 India's domestic aviation market shows rapid growth in first half, CAPA Centre for Aviation, September 14th 2011 Aviation, IBEF Research, March 2012 Directorate General of Civil Aviation Report, March 2012 Strategic Analysis of Air Cargo Market Opportunities in India, Frost & Sullivan, September 2009 Aviation Industry in India - Challenges for the Low Cost Carriers, Shashi Sharma, May 2007 Report on Indian Aviation: Scaling New Heights, Deloitte in association with FICCI & CII Now Everyone Can Fly : Air Asia; SAGE India and the Middle East Aviation Market Analysis; OAG Market Intelligence; October 2011

Articles & Websites 1. http://www.transportweekly.com/pages/en/news/articles/89759/ 2. http://www.rediff.com/getahead/2007/oct/22cards.htm 3. http://www.researchandmarkets.com/reports/1096358/strategic_analysis_of_air_cargo_mark et 4. http://smartinvestor.in/market/Features-109000-FeaturesdetStock_Analysis_Cairn_India_Biocon.htm 5. http://dgca.nic.in/dgca/dgca-ind.htm 6. http://info.shine.com/Industry-Information/Aviation/140.aspx 7. http://www.strategicbriefings.com/2011/india/low-cost-airlines-creating-travel-revolution-inindia/ 8. http://smartinvestor.in/market/Features-109000-FeaturesdetStock_Analysis_Cairn_India_Biocon.htm 9. http://en.wikipedia.org/wiki/Low-cost_carrier 10. http://tejas-iimb.org/articles/34.php 11. http://en.wikipedia.org/wiki/Kingfisher_Xpress 12. http://www.flykingfisher.com/ 13. http://www.jetairways.com/EN/IN/Home.aspx 14. http://www.goindigo.in 15. http://www.flykingfisher.com/media-center/press-releases.aspx 16. http://www.moneycontrol.com/news/business/budget-2012-13-import-atffdi-not-approvedpranab-tells-airlines_681164.html 17. http://www.financialexpress.com/news/direct-atf-import-to-cost-states-rs-2-500-cryr/919667/ 18. http://www.mid-day.com/news/2012/mar/170312-Importing-jet-fuel-is-fine-but-where-willyou-store-it.htm Financial and Annual Reports 1. KF Results Q3 FY12 2. Kingfisher Annual Report 2010 2011 3. Jet Airways Annual Report 2010 2011