Overview, 2010he Year That Was

Almost every global industry emerged from 2009 changed in some way. Though many industrialized nations officially entered the recession in 2008, the full effects of the global economic slowdown were felt most acutely in the year now ending. While headlines lingered on choking automakers and imploding financial institutions, the airline industry also faced One of the most challenging operating environments it has encountered in the past thirty years in every corner of the globe. In most markets, demand for air travel fell to historic lows. Fares across the industry remained at or near bargain basement levels. Fuel costs, after a brief respite in early 2009, proved to be consistent only in their volatility. An environment such as this virtually assures sweeping change across the industry. Its already happening. The reality is that the new face of the airline industry has actually been evolving over years. The standout characteristics of aviation in 2009 and 2010 - i.e., the emphasis on ancillary revenues, the adoption of a business model that closely resembles that employed by low cost airlines, the unbundled airfare, and capacity limitation - were brought into bare relief by the recession, but have in fact been developing over the past ten years. This is not the face of an industry disfigured by the recession. Its the changing face of an industry moving toward the next plateau in its evolution.

The Current Environment, Here and Now

Paradoxically, as the industry approaches 2011, it is both remarkably similar and drastically different from the end of 2008. Many of the same themes are dominant, including how to manage depressed demand, how to identify and optimize growing markets, and how to best compete in an era of high and volatile fixed costs. By the beginning of 200, the merger mania that had defined the US legacy airline market had subsided, and the handful of bankruptcies encountered by the global industry had been all but assimilated into the operating market. At the beginning of 2011, this is largely unchanged. The last year saw no major mergers; save Republics purchase of Frontier out of bankruptcy, and only a handful seem to be on the horizon. (Of course, that handful is significant; the potential union of British Airways and Iberia would redefine the legacy market in the EU, and a potential Continental-United merger would rival the new Delta/Northwest conglomerate as one of the North American markets dominant lines.) The few airlines that did succumb to the ravages of the recession in 2009 were limited and devoid of any legacy names, though several airlines encountering sustained losses over the year seemed to hint at potential filings in 2010, should conditions not improve. East Star and Sky Europe both sought bankruptcy protection in 2009.

The New Airline Business Model

The sum of all of these macro-parts - the strength of LCCs, the importance of ancillary revenues and the volatility of fixed costs - is the new airline business model. A more sustainable, less volatile model that draws from the best strategies of retail and other consumer-centric industries, this new model builds on the strengths of airline operations that have helped the industry-at-large weather the recession as well as it has. The model derives in part from the customizable flight experience that has arisen from the unbundled airfare. Though seemingly an invention of necessity, the ancillary revenue revolution actually allows for many other revenue generation options for airlines. If 2009 was the year of the unbundled airfare, with many of the worlds most visible legacy airlines adopting fee-for-service practices, then 2010 will certainly see an evolution and refinement of this unbundling process. Emphasis will shift from the low hanging fruit - checked bag fees, etc. - to offerings that represent true growth potential. Offerings will also feature high potential for upsell and cross-sell, or what might be termed as incremental or unit growth, turning minimal fees or commissions on compulsory items to more efficient revenue drivers. In short, the new airline business model draws on the proven practices of retail and e-commerce, and makes many aspects of the existing airline business model more efficient and effective. The new airline business model is not about making lumbering legacies look more like LCCs - or vice versa - but rather incorporating new techniques to make a challenged industry viable for the long term.

A Word on Fuel
Speaking of fixed costs, the fact that fuel prices nearly doubled since the March 2010s will almost certainly affect many airlines entering 2011 Those carriers with established fuel hedging programs (or those that were brave enough to engage in hedging contracts during the first quarter of 2010will fare best, in terms of fixed cost mitigation, but overall the continued volatility of fuel prices will be something the industry must watch carefully. Going forward, analysts are split as to where they expect fuel prices to go in the near future. At least one report projects crude oil to break the $100 barrier in as little as 18 months, while many others anticipate price growth commensurate with the global economic recovery. History tends to fall on the latter side of this argument. 2010as really been an incredibly tough year for the airline industry, needless to say. Airlines are virtually unrecognizable from the way they were just a decade or so ago, and thats not a bad thing. The industry is so far into the ancillary revenue revolution it can hardly be called a revolution anymore. Low cost carriers are competing (and gaining) in markets that were thought to be impenetrable just a few years ago. Some airlines have taken this crisis to rethink their model, get rid of old behavior, update their internet strategy, and review their network. Some others have been scratching their heads, wondering if Salvation may lie in consolidation. On that point consolidation will be less efficient during the rebound - except when the airline has deep pockets- than getting leaner, more flexible, closer to customers, being mindful of consumer needs and how they perceive the airlines they patronize. Although 2010as been challenging, we anticipate the emergence of a couple of airlines in 2011which will prove that being reactive, client-focused, leaner and internet driven is the path to profitability and customer satisfaction. After all, these are the two main key drivers in a service oriented industry - arent they? It might be a step too far to declare 2011the year the airline industry will change forever. The change the industry encounters this coming year is likely to be gradual, but no less impactful for it. The stage is set for airlines to return to the most basic Poduct offerings - seat and safe conduct - and build additional offerings onto them as either brand-distinguishing value-adds or revenue-generating ancillary options. Either way, airlines in 2010 will have to be adept at developing and managing their ancillary revenue streams, establishing strong relationships with their existing customers, optimizing their loyalty programs, and embracing the new business model. These will be the hallmarks of 2011 As far as changing faces go, this seems like a very good one. Good enough to face 2011 anyway.

Typical Airline Operating Expenses

Civil Aviation Minister Reviews Performance of Air India Including its Financial Turnaround Plan

The Minister for Civil Aviation Shri Praful Patel reviewed the performance of Air India including its plans for financial turnaround in Mumbai today. The CMD, COO, the Board of Directors including the independent and the functional directors of Air India were present at the meeting. Following this the Minister also held detail discussions with the representatives all the Air India Unions and briefed them about the plans. National Aviation Company of India Limited registered improvement in its operating performance for the first quarter of 2010-11. Highlights of the performance for the first quarter 2010-11 vis-a-vis first quarter of 2009-10: Traffic Revenue went up by Rs 638 Crs - Passenger Revenue Rs 546 Crs (28 per cent growth) and cargo revenue by Rs92 Crs (61 per cent) over corresponding quarter last year thus reflecting a rebound in traffic; Passenger load factor on the domestic was 75 per cent vis-a-vis 67 per cent. Passenger load factor on international sectors was 66 per cent vis-avis 62 per cent. Yield went up by 14 per cent on the net work; Passengers carried averaged to 36,000 per day, an increase of 18 per cent;

Despite the decrease in the effective fleet strength due to the phase out of the old fleet, reduction in the leased fleet, capacity offered remained the same thus indicating better operational efficiency; Till date 20 wide body Boeing aircraft and 43 A320 family aircraft have been inducted in the fleet in the last three years thus reducing the average age of the fleet.

However, the improvement in the financial performance of Q1 was offset by the following factors: Fuel cost increased by 396 Crs- mainly due to 33 per cent price increase. Depreciation and interest due to the induction of the new fleet went up by 292cr

In order to reduce its operating losses, NACIL has projected an aggressive 29 per cent increase in its operating revenue for FY 2010-11 vis--vis FY 2009-10.

The Minister for Civil Aviation Shri Praful Patel reviewed the performance of Air India including its plans for financial turnaround in Mumbai today. The CMD, COO, the Board of Directors including the independent and the functional directors of Air India were present at the meeting. Following this the Minister also held detail discussions with the representatives all the Air India Unions and briefed them about the plans. National Aviation Company of India Limited registered improvement in its operating performance for the first quarter of 2010-11. Highlights of the performance for the first quarter 2010-11 vis-a-vis first quarter of 2009-10: Traffic Revenue went up by Rs 638 Crs - Passenger Revenue Rs 546 Crs (28 per cent growth) and cargo revenue by Rs92 Crs (61 per cent) over corresponding quarter last year thus reflecting a rebound in traffic; Passenger load factor on the domestic was 75 per cent vis-a-vis 67 per cent. Passenger load factor on international sectors was 66 per cent vis-avis 62 per cent. Yield went up by 14 per cent on the net work; Passengers carried averaged to 36,000 per day, an increase of 18 per cent; Despite the decrease in the effective fleet strength due to the phase out of the old fleet, reduction in the leased fleet, capacity offered remained the same thus indicating better operational efficiency; Till date 20 wide body Boeing aircraft and 43 A320 family aircraft have been inducted in the fleet in the last three years thus reducing the average age of the fleet.

However, the improvement in the financial performance of Q1 was offset by the following factors: Fuel cost increased by 396 Crs- mainly due to 33 per cent price increase. Depreciation and interest due to the induction of new fleet went up by Rs 292 Crs. the

In order to reduce its operating losses, NACIL has projected an aggressive 29 per cent increase in its operating revenue for FY 2010-11 vis--vis FY 2009-10.

HIGHLIGHTS OF THE TURNAROUND PLAN 2010-2014

A.

CORPORATE VISION AND MISSION TURNAROUND PLAN DOC ENVISAGES A CORPORATE VISION TO BE THE LEADER IN INDIAN AVIATION AND INDIAS AMBASSADOR TO THE WORLD; CORPORATE MISSION IS TO DELIVER THE HIGHEST QUALITY OF SERVICE AROUND THE WORLD AND BE THE EPITOME OF INDIAN HOSPITALITY; BE INDIAS FLAG CARRIER AND PROVIDE SEEMLESS TRAVEL WITHIN INDIA AND THE WORLD.

B.

FINANCIAL RESTRUCTURING : RESTRUCTURING WORKING CAPITAL LOANS THRU MIX OF BONDS GUARANTEED BY GOVT WITH LONGER TENOR AND BULLET PAYMENT; LAND/BUILDINGS MONETISED EITHER THROUGH OUTRIGHT SALE OR AS SECURITY FOR RAISING FRESH LOAN; EQUITY INFUSION BY GOVERNMENT TO STRENGTHEN THE BALANCE SHEET; RELEASE OF SECURITY GIVEN UNDER LONG TERM LOANS TO PROVIDE SECURITY FOR WORKING CAPITAL LOANS TO REDUCE BORROWING COST.

C.

OPERATIONAL RESTRUCTURING GOALS: GOALS TO BE ACHIEVED BY 2015 - 25M DOMESTIC AND 15M INTERNATIONAL PASSENGERS; ONTIME PUNCTUALITY 93 PER CENT; 75% LOAD FACTOR WITH TARGET PAX REVENUE OF RS 35000 CRS. TARGET NON PAX REVENUE OF RS 6500 CRS. COVERING THE MARKET WITH DIFFERENT BUSINESS MODELS VIZ., LOCAL FEEDER SERVICES,LCC,HIGH QUALITY MAINLINE OPERATION AND CARGO; PROVIDING NON-STOP/ONE STOP CONNECTIVITY; MOVING TO A HUB CARRIER (DELHI AND MUMBAI HUBS SUPPORTED WITH SMALLER HUBS WITHIN AND OUTSIDE INDIA); DEVELOP A STRONG FEEDER NETWORK.

D.

FLEET SIZE 35-45 FEEDER AIRCRAFT,120-150 NARROW BODY AIRCRAFT FOR DOMESTIC OPERATIONS,50-55 WIDEBODY AIRCRAFT FOR MEDIUM AND LONG TERM INTERCONTINENTAL TRAFFIC; 25-30 NARROW BODY PLUS 4-6 WIDEBODY AIRCRAFT FOR LOW COST OPERATIONS; CLUSTER OF MAJOR 60 CITIES WILL BE CONNECTED USING INDIAN HOPPER ANDMAINLINE,INTERNATIONAL LONG HAUL WILL BE OPERATED THROUGH PRIMARY HUBS BY MAILINEINDIAN HOPPER WILL SERVE FIVE REGIONS IN DOMESTIC MARKETS BRINGING TRAFFIC ALSO FOR MAINLINE. BUSINESS PROCESS AND ORGANISATION F. INTRODUCE BEST PRACTICS TO SUPPORT JOINING OF ALLIANCE STRONG IT BACKBONE TO SUPPORT BUSINESS PROCESSESS MRO AND GROUNDHANDLING TO BE SHIFTED TO SUBSIDIARY COMPANIES CATERING ,HOSPITALITY AND INDEPENDENT TRAINING CENTER TO BE SEPARATE BUSINESS UNITS NEW GOVERNANCE STRUCTURE WITH A SUPERVISORY BOARD AND EXECUTIVE BOARD AIR INDIA EXPRESS DOMESTIC AND INTERNATIONAL LOW COST CARRIER WITH OWN BRAND CAPTURE LOW COST MARKET IN INDIA AND COMPETE WITH INCOMING LCC HANDLING OF SEASONAL CAPACITY FOR HAJ FLIGHTS, ADHOC CHARTERS ETC.

E.