A STUDY ON FINANCIAL PERFORMANCE AND GOVERNANCE IN INDIAN AVIATION

SECTOR

INTRODUCTION

With a number of failures in the aviation sector, it becomes important to probe into the reasons of ongoing
failures. In the last decade, more than 13 airlines companies closed down causing huge setbacks to the
economy. The Indian Airline Industry has been going through a turbulent phase over past several years facing
multiple head-winds. Financial Performance Analysis is the process of determining the operation and financial
characteristics of a firm from Accounting and Financial Statements. The ability of an organization to analyze its
financial position is essential for improving its competitive position in the market place. Through a careful
analysis of its Financial Performance, the organization can identify opportunities to improve performance at the
organizational level. In this context, the researcher wants to undertake an Analysis of Financial Performance of
Airline Industry to understand how management of finance plays a crucial role in the growth of industry. While
with high quality governance and management within the airlines sustains their success despite the challenges
they face. On a prima facie, it seems governance has been lacking in the airline companies. The Indian Aviation
Industry promises huge growth potential due to large and growing middle class population, favorable
demographics, rapid economic growth, higher disposable incomes, rising aspiration of the middle class, and
overall low penetration level. Hence, the researcher has made an attempt to choose the topic entitled “A Study
on Financial Performance and governance in Indian Airline Industry” for the present study.

LITERATURE REVIEW

CORPORATE GOVERNANCE

Cohen, Jeffery, Krishnamurthy, Ganesh, Wright and Arnold in their study titled ‘corporate governance and the
Audit process’ (2002), have examined the impact of various corporate governance factors, such as the board of
directors and the audit committee, on the audit process. Importantly, there is little professional guidance on how
auditors should consider such factors when formulating an appropriate audit strategy. Uzun Hatice, Szewczyk H
Samuel and Varma Raj in their study titled ‘Board Composition and Corporate Fraud’ (2004) examined how
various characteristics of the board of directors and other governance features affected the occurrence of U.S.
corporate fraud in the 1978-2001 period. Irani, J. J, Raha, Subir Prabhu, Suresh, in their article titled ‘Corporate
Governance: Three Views’ (2005) present conceptualization of governance from three different perspectives. J J
Irani strongly feels that values are coming back into demand once again. Responding to the apprehensions of
critics about playing the game of business according to rules, he comments that being ethical does not mean
losing on profits. According to him, it is, in fact, most important to make profits and to generate wealth because
only then can one have the resources to do good for the community.

2. AVIATION SECTOR
As per Ali, Shaukat in his study, “ A comparative study of the financial performance of Air India Corporation
and Indian Airlines Corporation”, It may be worthwhile for the government to try to free Air India and Indian
Airlines of all the government controls, free to operate as they choose, without constant surveillance, not even
by parliamentary committees. A study by Lockhart and Taitoko (2005) examined causes surrounding the
collapse of Ansett Holdings Ltd and the largest corporate loss of Air New Zealand, which they attributed to a
failure of governance to act in the organization’s (stakeholders) interests. Bell (2009) established that despite
Southwest Airlines being the most unionized airline in the U.S. and proudly offering nothing to eat or drink in
the cabin, it enjoys outstanding customer service ratings and loyalty as well as the best financial returns in the
industry. Isah Rabiu Umar (2018) described the effect of structure, composition and leadership of the board and
its use to strengthen monitoring role of the board on management and initiate structural reforms in board and in
the management. Geeta Duppati, Frank Scrimgeour, Rikkie Stevenson (2016) conducted a study to analysis the
strength and weakness of Airline Governance in the Asia Pacific Region with the view to improving trust in the
Airline Industry. Sean,hennssey (2004), in their study imply that managerial entrenchment is a powerful
motivating force that may be impossible to counter even for a large, poorly performing corporation that is
subject to a very attractive takeover offer. Alves, Carlos & Barbot, Cristina (2006) investigated whether
different business models in the same industry (passenger air transportation) lead to different corporate
governance models and found that low cost carriers (LCCs) organise their boards differently from full service
carriers (FSCs), in order to achieve lower costs and the faster decision-making process that is required by their
business model. We also found that LCCs and FSCs solve their potential agency cost problems differently.
FSCs have more board committees in order to monitor management, and LCSs have a closer coincidence of
interests between shareholders and management. Dr.a.muthuswamy,m.muthumeena (2015) analysed the
financial performance with the help of some key measures relating to the performance in ratios on the overall
financial performance of the selected private Airline companies in India during the period from 2009-10 to
2013-2014. Abhijit Phukon , Ms. Mitali Konwar , Divya Verma Gakhar(2019) Authors found a considerable
improvement in the financial performance of Jet Airways and Air India, the performance of Kingfisher Airlines
had deteriorated due to post-merger acute financial crisis caused by heavy debt resulted the company to close
off its operation.since the airline deregulation took place in the year 1994, a new business model has emerged in
the Indian aviation industry. It has caused a shift in the way people travel within India. Shah (2008), this article
extensively speaks about the period of grandeur that the aviation sector in India has seen. This growth was an
outcome of many macro-economic factors such as government reforms and market lead dynamics. Further the
articles talk about the Marketing concept of POD- Point of Differentiation which various airlines use in order to
attract the customers to fly with them.

OBJECTIVES

The research will be undertaken with the aim of achieving following objectives:

1. To evaluate the profitability of Select Companies of Indian Airline Industry.

2. To analyze the solvency position of Select Companies of Indian Airline Industry.
3. To examine the impact of governance on the performance of Airline Companies.
4. To identify the reasons of rising failure in Indian aviation sector.

RESEARCH QUESTIONS

The research questions in this study are:

• What are the reasons of high risks in airline companies?

 • What are the reasons behind the failed and loss making airline companies?

HYPOTHESISES

The study evaluates the profitability of airline companies.

1. Ho: The return on investment ratio of airline companies is not satisfactory.

Ha: The return on investment ratio of airline companies is satisfactory.

2. Ho: The return on shareholders’ fund is not satisfactory.

Ha: The return on shareholders’ fund is satisfactory.

3. Ho: The return on total assets is not satisfactory.

Ha: The return on total assets is satisfactory.

4. Ho: The operating profit ratio is not satisfactory.

Ha: The operating profit ratio is satisfactory.

The study evaluates the solvency position of airline companies.

1. Ho: The current ratio is not satisfactory.

Ha: The current ratio is satisfactory

2. Ho: The cash position ratio is not satisfactory.

Ha: The cash position ratio is satisfactory.

3. Ho: The fixed asset ratio is not satisfactory.

Ha: The fixed asset ratio is satisfactory.

4. Ho: The Debt to Equity ratio is not satisfactory.

Ha: The Debt to Equity ratio is satisfactory.

The study tests the influence of the company's governance on performance.

1. Ho: Company's philosophy on corporate governance does not affect performance.

Ha: Company's philosophy on corporate governance affects performance.

2. Ho: Composition and conduct of board of directors do not influence performance.

 Ha: Composition and conduct of board of directors influence performance.

3. Ho: Composition and conduct of audit committee do not influence performance.

Ha: Composition and conduct of audit committee influences performance.

4. Ho: Procedures related to risk management committee do not influence performance

Ha: Procedures related to risk management committee influence performance.

5. Ho: Procedures related to management committee do not influence performance.

Ha: Procedures related to management committee influence performance.

6. Ho: Policies and procedures related to remuneration committee do not affect performance.

Ha: Policies and procedures related to remuneration committee affect performance.

7. Ho: Policies and procedures of shareholders/ investors' grievance committee do not affect performance.

Ha: Policies and procedures of shareholders/ investors' grievance committee affect

Performance

8. Ho: Policies and procedures related to general body meetings do not affect performance.

Ha: Policies and procedures related to general body meetings affects performance.

9. Ho: Disclosures on related party transactions and penalties does not affect performance.

Ha: Disclosures on related party transactions and penalties affects performance.

10. Ho: Procedures related to directors' committee do not influence performance.

Ha: Procedures related to directors' committee influences performance.

11. Ho: Non-mandatory disclosures do not influence performance.

Ha: Non-mandatory disclosures influence performance.

12. Ho: Other items of disclosures included in the annual report do not influence performance.

Ha: Other items of disclosures included in the annual report influences performance.

METHODOLOGY

The research approach that will be used to carry out the research work will be both descriptive and analytical
form of research. Both qualitative and quantitative research techniques will be used. The study will take
secondary data. The secondary data will be collected through annual reports, corporate governance reports,
internet, journal books and research papers.
Various tools like Ratio Analysis, Statistical Techniques (Mean, Standard Deviation and Co-efficient of
Variance) will be used.

For the 5th objective i.e. T o examine the impact of governance on the performance of Airline Companies,
Corporate governance index and performance variables will be calculated for the airlines companies. In order to
investigate, descriptive statistics, correlations and regression analysis will be done using SPSS software. The
hypotheses will be tested using linear multiple regression technique to analyse the relationship between
corporate performance and corporate governance.

Corporate governance index will have the following variables:

1. Companies' philosophy on code of governance

2. Board of directors
3. Audit committee
4. Risk management committee
5. Management committee
6. Directors' committee
7. Remuneration committee
8. Related party transactions and penalties
9. Shareholders/ investors' grievance committee
10. General body meetings
11. Non-mandatory disclosures
12. Other items of disclosures
Measures of performance will be
1. ROE = Return on equity
2. RONW = Return on net worth

3. ROCE = Return on capital employed

4. ROA = Return on assets

BIBLIOGRAPHY

• Alok agraval and Mridu agraval, “A comparative approach to financial management”

• Cohen, Jeffery, Krishnamurthy, Ganesh, Wright and Arnold (2002), “corporate governance and the
Audit process”
• Irani, J. J, Raha, Subir Prabhu, Suresh (2005) “Corporate Governance: Three Views”
• Ali, Shaukat (1995), “ A comparative study of the financial performance of Air India Corporation and
Indian Airlines Corporation”
• Lockhart and Taitoko (2005) . “ An Examination of Shareholder–Stakeholder Governance Tension: A
Case Study of the Collapses of Ansett Holdings and Air New Zealand”
• Bell (2009), “ The governance of public affairs”
• Isah Rabiu Umar (2018), ”Issues and Challenges In The Implementation of Corporate Governance In
Private Owned Airlines In Nigeria: A Case Study of Med-View Airline”
• Geeta Duppati, Frank Scrimgeour, Rikkie Stevenson (2016). “corporate governance in the airline
industry - evidence from the asia-pacific region”
• Sean,hennssey (2004), “ Corporate Governance Mechanisms in Action: The Case of Air Canada”
• Rais ahmad khan “A study on financial performance of Select companies of indian airline Industry”
• Mr. Abhijit Phukon , Ms. Mitali Konwar , Divya Verma Gakhar(2019) “Impact of Mergers and
Acquisitions on Financial Performance of Select Airline Companies in India”
• a.muthusamy, m.muthumeena (2015) “financial performance of selected private airlines in india”
• Anubhav Singh (2016), The study of current scenario of Aviation Sector in India.
• Ipseeta Satpathy, Dr. BCM Patnaik, Sharad Kumar (2017)- Indian aviation Industry- An
• overview
• Shah (2008), A secondary research study on Indian airlines industry
• Pillai, akhil, mohan(2013-2014)- Indian airlines industry