A case study On Air India As the requirement for the subject BB45 case study & presentation

Submitted by: Bhumika Parmar Class: 4th Semester BBM June/July 2011

Submitted to: Ms. Nitu Gupta

LN group of institute, Surat Code: GJ 160

Index

Abstract of case study

Objective of the study

C s stud on Ai ndi

Introduction or present situation

Air India is India's national flag carrier. Although air transport was born in India on February 18, 1911 when Henri Piquet, flying a Humber bi-plane, carried mail from Allahabad to Nain Junction, some six miles away, the scheduled services in India, in th real sense, began on e October 15, 1932. It was on this day that J.R.D. Tata, the father of Civil Aviation in India and founder of Air India, took off from Drag Road Airport, Karachi, in a tiny, light single-engine de Havilland Puss Moth on his flight to Mumbai (then known as Bombay) via Ahmadabad. He landed with his precious load of mail on a grass strip atJehu. At Mumbai, Neville Vincent, a former RAF pilot who had come to India from Britain three years earlier on a barn storming tour, during which he ha surveyed a number of possible air routes, took over d from J.R.D.Tata and flew the Puss Moth to Chennai (then Madras) via Bellary.

Company s present situation

Air India strike
Despite the hard attitude adopted by Delhi High Court against the pilots' strikein Air India and the direction given by it to the pilots to resume duty, the dispute continues to defy a solution. The situation has come to such a head that despite the threat of losing their jobs and contempt of court proceedings, pilots appear to be ad amant to hold on to their stand. The Air India administration has hinted a lock out in the organization .

Demands of Employees
The fact remains that the Air India administration or the government have never displayed any liberal attitude to the just demands of employees, nor it showed any courage to hold on to its decision despite its harsh attitude which was displayed initially when the strike began.

It re s a fact that whe ever there was a strike in the Air India, the administration took strong meas res to dismiss the striking pilots, but it never implemented its own decision. It was compelled to withdraw the decision of dismissal of pilots following the discussions and talks with the striking pilots. That is why pilots are adamant despite dismissal of some of their colleagues and the threat of contempt of court proceedings looming large on them. Without caring for any punitive action pilots are continuing their strike for which none other but the very attitude of the Air India is responsible .

Background
Air India was founded by J. R. D. Tata in 1932 as Tata Airlines, a division of Tata Sons Ltd. (now Tata Group).On 15 October 1932, J. R. D. Tata flew a single -engine De Havilland Puss Moth carrying airmail (postal mail of Imperial Airways) from Karachi's Drag Road Aerodrome to Bombay's Juhu Airstrip via Ahmadabad. The aircraft continued to Madras via Bellary piloted by former Royal Air Force pilot Neville Vincent. Fol lowing the end of World War II, regular commercial service was restored in India and Tata Airlines became a public limited company on 29 July 1946 under the name Air India. In 1948, after the Independence of India, 49% of the airline was ac uired by the Government of India, with an option to purchase an additional 2%.In return; the airline was granted status to operate international services from India as the designated flag carrier under the name Air India International. On 8 June 1948, a Lockheed Constel lation L-749A named Malabar Princess and registered VT- CQP took off from Bombay bound for London via Cairo and Geneva. This marked the airline's first long-haul international flight, soon followed by service in 1950 to Nairobi via Aden. On 1 August 1953, the Government of India e ercised its option to purchase a majority stake in the carrier and Air India International Limited was born as one of the fruits of the Air Corporations Act that nationalized the air transportation industry. At the same time all domestic services were transferred to Indian Airlines. In 1954, the airline took delivery of its first L-1049 Super Constellations and inaugurated services to Bangkok, Hong Kong, Tokyo and Singapore. Air India International entered the jet age in1960 when its first Boeing 707420, named Nandadevi and registered VT-DJJ, was delivered. Jet services to New York City via London were inaugurated that same year on14th May 1960. On 8 June 1962, the airline's name was officially truncated to Air India. On 11 June1962, Air India became the world's first all-jet airline.

CEO's details

Mr. Arvind K. D. Jadhav, IAS serves as the Chief Vigilance Officer of Gail India Ltd. (formerly, Gas Authority of India Limited). Mr. Jadhav serves as the Chairman and Managing Dir ctor e of Air India. He has been the Chairman of the Board and Managing Director of National Aviation Company of India Limited since May 2009. He serves as Joint Secretary of the Member of Parliament, India. He served as an Indian Administrative Services Oficer of f Karnataka cadre since 1970. He served as Secretary, Ministry of Mines, and Government of India. He served as Principal Secretary, Infrastructure Development Department, and Government of Karnataka. Mr. Jadhav has held various positions such as Secretary, Energy Department; Managing Director, Mysore Minerals Limited and Commissioner, Commerce and Industries Department. He served in various fields that include local government, development sectors like rural development, irrigation, command area development, industrial promotion and development, public finance, sericulture, horticulture, education, silk marketing and exports, mining, housing board and energy. He serves as Chairman of the Board of Directors at Air-India Express. He has been Vice Chairman and Director of Sandvik Asia Ltd., since June 23, 2009. Mr. Jadhav serves as a Director of SITA and Bangalore International Airport Ltd. He serves as a Director at National Aviation Company of India Limited. He served as a Director of National Thermal Power Corp. from October 2003 to July 11, 2005, Nuclear Power Corporation Of India Limited from January 3, 2002 to January 2007 and Rural Electrification Corporation Limited from May 23, 2002 to March 13, 2007. He served as a Director of Power Finance Corporation Limited until July 6, 2006. He is a Member (Economy) at Maharashtra Water Resources Regulatory Authority, Mumbai. He was Commissioner of Karnataka Housing Board. Mr. Jadhav holds Master of Arts from Kanpur, a Post Graduate Diploma in International Trade from IIFT, New Delhi, a certificate of Export Promotion from the Italian Institute of Foreign Trade, Italy and Master of Business Administration from the Curtin University, Australia. He also holds his Masters from Delhi University and Master in Social Science from University of Birmingham, UK.

Air India s strategies

Air India s new Management plans to increase efficiency by launching more flights and achieving higher passenger load factor (PLF) of 75 percent in the domestic market. (Assumption: An aircraft breaks even at a PLF of 62%) The company aims to achieve a positive balance sheet by 2014 -15. The focus of the plan is on reducing the cost of debt to the company and replacing high-cost debt with low-cost ones. The government will also infuse e uity to the tune of Rs 1,200 crore in the coming months subject to the performance of the company. Air India currently has a working capital debt of nearly Rs 18,000 crore and the airline had appointed SBI Capital to assess and plan its financial restructuring. The company will consider launching its domestic low -cost carrier in the coming months to take on the e isting low-cost carriers that have been absorbing its market share. A plan to start a low-cost carrier (LCC) is being implemented again, though the airline was unable to do this by September last year as had been planned. Jadhav's plan is to have 27 pairs of daily domestic flights by moving 10 aircraft to the new Air India Express low-cost carrier. Civil Aviation Minister Praful Patel has already justified the new thrust on expansion, and on not touching the unions, by arguing that the market has improved and that AI will now need the staff as well as extra planes. The passenger growth in the year's first quarter was up by 18 per cent. Apart from the fact that smarter managements try to control costs in an upturn, the point worth keeping in mind is that Air India's performance continues to plummet and there is nothing concrete that it has done to take on the competition. Numerous initiatives have been taken place on the Flying Returns, Frequent Flyer Programme, the Maharajah Club and Leading Edge Club recognition progr amme. Enhanced the effectiveness of the distribution network by increasing the number of agent connected to SITAR; A system has been set up with Route Managers monitoring the performance and advance booking of various routes and suggesting tactical initiatives; Providing the reservation facility on fax. Providing interactive access to the Air India Reservations System through Internet with an eventual upgrade to e-Commerce; providing efficient assisted inter-terminal Transfer a flexible pricing policy has been established to meet the challenge of improving market share, the fares mix as also the yield in each classes. Increasing market penetration through focusing on corporate houses, incentives travel groups, outbound package tours and students; Air India has devised new promotional packages for First and Executive Class passengers who can look forward to all expenses paid holiday package for two to destination in India and Abroad. The scheme provides for air tickets, and hotel.

Air India s performance in current and last year

Performance in current year
Civil aviation minister Vyalar Ravi will review the performance of the Air India brass. "Air India's top management's performance will be reviewed to find out ways to better the airline," Mr. Ravi said on Th ursday. He did not say whether a restructuring at the top deck is imminent but hinted at the possibility of a new review system. "Air India's top management is still there and I will not comment on if they will still continue to be there or not," he added. He said the approach for a turnaround for Air India will be fresh and different from the past. After meeting the unions over the last two days, the minister said workers problems and the performance of the top management are two different issues. "I have not looked at the top management of the airline (till now) but will look at the whole management now," said Mr. Ravi. A CAG report with CNN-IBN says that Air India has been rewarding employees despite the airline's poor financial health with Rs 1500 crore being paid yearly in performance linked incentives. So the 10-day strike by Air India pilots comes as a blessing to the airline, which will not need to pay out April salaries, stemming a large amount of red on the balance sheet. In 1999, Air India introduc ed performance linked pay, hoping to improve productivity and efficiency. The evaluation parameters were far below the average in other airlines. Despite this, Air India hiked incentives in 2005, and again in 2008. A CAG audit shows airline profitability and load factor were not even considered while evaluating performance. The audit says incentives paid were between 62 per cent and 919 per cent of salary and government guidelines say it cannot exceed 50 per cent. Air India paid out Rs 473 crore in incentiv es, nearly Rs 300 crore of this going to officers. A struggling management recommended that halving performance linked incentives would save Air India Rs 600 crore. General Secretary ACEU Arun Malhotra said, Fifteen per cent of the employees are getting 85 per cent of the salaries. So, their wage bill put together is so much that they get 85 per cent of the entire Rs 4000 crore, which is around Rs 3400 crore. About Rs 600 crore is what 85 percent emplo yees get. So it is a darker side of Air India.

In comparison with other airlines Air India spends the most on its 40,000 odd employees, the wage bill along over Rs 3000 crore. But the productivity is not commensurate. It is the lowest employee cost per revenue passenger kilometers. A 2009 competitive survey by international rating agency Skytrax termed Air India outdated, apathetic, grudging and unpleasant Today, of a yearly wage bill of Rs 3000 crore, half is paid out as performance linked and flying allowances. As a former officer famously said while Air Indians get richer, Air India gets poorer by the day.

Performance in last year

Civil Aviation Minister Praful Patel today reviewed the financial performance of the national carrier Air India during a mee ting with the top airline officials, sources said. The meeting lasted for around four hours, during which the Minister was apprised of the various issues, particularly relating to operations and engineering, they said. "Patel along with Civil Aviation Secretary SNA Zaidi held a meeting with top officials and reviewed financial performance of the airline," airline sources said here. The meeting remained inconclusive and will continue tomorrow, they said adding, "It is not yet clear whether Patel will be attending it or not." Earlier talking to reporters after the launch of India's first seaplane (amphibian), Jal Hans at the Juhu Aerodrome, Patel had said that Air India needed to do a lot more in terms of performance. "We would like to see Air India performing better than what it is today. Some parameters have been met but a lot more needs to be done," he said. Air India is expecting Rs 1200 crore equity infusion in the next few days, Patel said adding the Civil Aviation Ministry has also recommended to the Government to provide another Rs 2000 crore equity infusion for the next fiscal as well.

Current scenario of the industry

The aviation industry in India is one of those sectors that saw a constant pace of growth among the other industries in the world over the past many years. The open sky policy of the government has helped a lot of overseas players entering the aviation market in India. From then, it has only been growing in terms of players and the number of aircrafts. At present, private airlines account for around 75% portion of the domestic aviation market. The 9th largest aviation market in the world is India. Taking the help of the statistics from the Ministry of Civil Aviation, approximately 29.8 million passengers traveled to/from India in 2008, showing a surge of 30% from 2007. The prediction stated that international passengers will touch 50 million by 2015. More opportunities in the aviation industry in India are likely to make way for about 69 foreign airlines from 49 countries. The liberalization of aviation industry in India has precipitated the boom for domestic and international passenger carriers. The domestic passenger and cargo traffic recorded a growth rate of 44.6% and 8.7%, and the international passenger and cargo traffic recorded growth rates of 15.8% and 13.8% respectively during 2006071. The Airport Authority of India (AAI) manages total 122 airports in the country, which include 11 international airports, 94 domestic airports and 28 civil enclaves. Top 5 airports in the country handle 70% of the passenger traffic of which Delhi and Mumbai together account for more than 50%. The Centre for Asia Pacific Aviation (CAPA) has estimated that the domestic traffic will go up by 25% to 30% till 2010 along with a surge in the inte rnational traffic by 15%. There would be more than 100 million passengers by 2010. Then again by 2020, Indian airports will in all probability handle over 100 million passengers every year. The investment plans to the tune of US$ 9 billion has been made by the Aviation Ministry for modernizing the existing airports by 2010. The substantial growth of Indian aviation industry is mostly due to: (I) low fares offered by Low Cost Carriers (LCC) like Deccan, Spice jet, Go Airetc; and (ii) Scheduled domestic air services are now available from 75 airports as against just 50 earlier

Profiles of selected competitors of the same industry

(1) jet airways

Jet Airways (India) Limited is an India-based company. The Company operates in two segments: Air Transportation and Leasing of Aircraft. It also has two geographic segments: domestic (air transportation within India) and international (air transportation outside India). As of March 31, 2010, the Company operates flights to 23 international destination s. The Company has a frequent flyer program named Jet Privilege wherein the passengers who frequently use the services of the airline become services of the airline become members of Jet Privilege and accumulates miles to their credit. Jet Lite (India) Lim ited operates a fleet of 25 aircraft, which consists 18 Boeing 737 series and seven Canadian Regional Jets (CRJ) 200 series. The airline flies to 28 domestic destinations and two international destinations (Kathmandu and Colombo), operating over 110 flight a day, on an average. The Company s s subsidiary includes Jet Lite (India) Limited.

(2) Kingfisher airlines

Kingfisher Airlines Limited is engaged in rendering scheduled and unscheduled aircraft passenger and cargo services, including charter services. T Company offers three classes he of service: Kingfisher First (premium business class of service), Kingfisher Class (premium economy class of service) and Kingfisher Red (low fare basic class of service). As of March 31, 2010, the Company had a fleet of 68 aircraft, having an average schedule of 366 domestic and 12 international flights daily and a route network covering 63 domestic and seven international destinations. The Company s wholly owned subsidiary is Vitae India Spirits Limited. During the fiscal year ended March 31, 2010 (fiscal 2010), the Company returned five Airbus A320 aircraft, 4 ATR-42 aircraft and 1 ATR-72 aircraft.

(3)Cathay pacific

Hong Kong's leading airline, Cathay Pacific Airways flies passengers and cargo to about 120 destinations around the globe, including some served by codesharing partners. (Codesharing allows airlines to sell tickets on one another's flights and thus exten their d networks.) Cathay Pacific's partners include fellow members of the one world alliance, which is led by AMR's American Airlines, British Airways, and Japan Airlines. Overall, Cathay Pacific, regional subsidiary Dragon air, and majority-owned cargo unit Air Hong Kong maintain a fleet of about 130 aircraft. Airline operations account for nearly all of the company's sales; other Cathay Pacific units provide flight catering, maintenance, and related services.

(4) Gulf i

Gulf Air is the national airline of Bahrain, with its main base at the Bahrain International Airport. One of the oldest air carriers in the Middle East, it is owned by the Kingdom of Bahrain, Sultanate of Oman and Emirate of Abu Dhabi. The air service is not allied to mega Star Alliance of airlines, but is a part of the global explorer fare of one world, one of the three largest global alliances of airlines. The company also shares special partnerships with Jet Airways and Oman Air s frequent flier programs. The airline has threesubsidiaries, under the name of Gulf Air Cargo, Gulf Air Hotels and Gulf Air Cars. The airline's logo features a golden falcon.

(5) Kuw it i w s

Kuwait Airways is the national airline of Kuwait. It is fully owned by the Government of Kuwait. A member of the Arab Air Carriers Organization, the airline operates its scheduled international flights throughout the Middle East, to the Indian subcontinent, Southeast Asia, the Americas and Europe, via its main hub - Kuwait International Airport, which is located in Kuwait City. Currently, the airline operates a modern fleet. It is planning to increase the number of destinations in the near future.

Co p ison of

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(in At

13549 24186 21990 5308 5761 3722

14418.324 6546.627 2113.671 1416.235 345.599 1094.132

Kuwait airways Jet airways

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of No i ft fl t Singapore 84 airlines Thai airways 76 international Indian 51 airlines Gulf air 30

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p plo E plo p i 161 318 431 177 261 196 1064161 270678 398204 245831 92853 49756

  

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Prospects and challenges for the company

Road ahead
Invite First and Executive Class passengers to participate in the forthcoming Food Presentation, prior to menu change; Plan to observe Customer Care week in the beginning of 2001; Introduction of grooming checks for Cabin Crew; Greater efforts to reduce distribution costs and Augment revenue; Reviewing relevance of GSAs w.r.t. today's global alliances; Market tie-ups inter-carrier agreements such as code share etc. To cater to Haj traffic demand, AI is planning tore-route 33 flights in each Phase-Land Phase-II to Jeddah. Keeping check and control on repetitive complaints and radically improving passenger s service. Failed Merger The merger itself has been a half-baked operation, completed in areas such as higher levels of management, common fuel distribution and accounting, but neglected in key sections such as the mapping of HR and salary issues, says the study. The main grouse of the striking pilots was pay disparity with colleagues. "The airlines should not have been merged without sorting out the HR issues," says former Air India chief operating officer Gustav Baldauf. Air India saw a combined profit of more than Rs 75 crore in 2005-06, but has been in a tailspin ever since. The merger was aimed at creating a monolith Instead; it has wrought havoc, with losses of Rs5000crore each in the past two years alone. Air India s interest payments have climbed to nearly 2,100 crore. This figure puts in perspective Air India chairman and managing director Arvind Jhadav's widely-cited statement that the airline is borrowing to pay interest. A new report by the Comptroller and Auditor General, the national auditor, too has criticized the merger.

Statistics
Air India sources confirmed that there was a delay in payment of the working capital loan interest. "The aircraft loan and interest have been paid on time. There has been a delay in the payment of working capital loan due to the additional loss caused by the p ilots' strike," a source said. The corporate debt restructuring was scheduled to be completed by April-end and this process has been delayed. Air India has high -cost loans worth about Rs 40,000 crore. The Air India spokesman did not respond to calls. Air India is facing a tight financial situation and is in talks with lenders to restructure its debt of Rs 40,000 crore. The lenders have agreed to reduce interest rates on part of the debt that is linked to overseas borrowings. The future of the remaining debt is still uncertain, especially because lenders are seeking a conversion of their debt into equity or equity like instruments. Ideally, this should be at par, said a bank chief who is directly involved in the debt restructuring. This is perhaps the first time that the national carrier has defaulted on its payments to banks. Sources said the airline had approached banks for more loans but they have declined to help because of the airline's poor financial health.

Balance sheet
year Sources of funds Owner's fund Equity share capital Share application money Preference share capital Reserves & surplus Loan funds Secured loans Unsecured loans Total Uses of funds Fixed assets Gross block Less : revaluation reserve Less : accumulated depreciation Net block Capital work-in-progress Investments Net current assets Current assets, loans & advances Less : current liabilities & provisions Total net current assets Miscellaneous expenses not written Total Notes: Book value of unquoted investments Market value of quoted investments Contingent liabilities Number of equity outstanding (Lacs) shares 1450.00 1450.00 1538.36 Mar ' 09 Mar ' 08 Mar ' 07

145.00 63.35 2,365.95 28,542.07 31,116.37

145.00 5,668.13 2,891.75 15,521.65 24,226.53

153.84 -261.97 1,846.69 5,818.41 7,556.97

24,329.40 1,838.05 22,491.35 5,011.37 123.18

18,654.56 760.12 17,894.44 3,972.63 90.12

6,471.27 4,366.85 2,104.42 2,994.75 90.70

8,746.02 5,255.55 3,490.47 31,116.37

7,478.95 5,209.61 2,269.34 24,226.53

4,386.48 2,019.38 2,367.10 7,556.97

122.42 43.03 25,918.42

89.36 47.07 26,340.93

90.05 36.78 25,994.75

Profit and loss account

year Income Operating income Expenses Material consumed Manufacturing expenses Personnel expenses Selling expenses Administrative expenses Expenses capitalized Cost of sales Operating profit Other recurring income Adjusted PBDIT Financial expenses Depreciation Other write offs Adjusted PBT Tax charges Adjusted PAT Non recurring items Other non cash adjustments Reported net profit Earnings before appropriation Equity dividend Preference dividend Dividend tax Retained earnings 7,060.64 3,338.85 7,271.07 17,670.56 -4,446.04 254.86 -4,191.18 1,665.88 1,225.89 -7,082.95 -1,641.54 -5,441.41 -106.85 -5,548.26 -7,774.42 -7,774.42 6,252.51 3,224.50 7,615.59 17,092.60 -3,454.25 1,619.12 -1,835.13 701.30 761.66 -3,298.09 -1,071.93 -2,226.16 -2,226.16 -2,226.16 -2,226.16 3,527.42 1,340.51 4,603.36 9,471.29 -1,032.43 780.39 -252.04 239.44 398.75 -890.23 -93.37 -796.86 348.93 -447.93 -353.98 -353.98 13,224.52 13,638.35 8,438.86 Mar ' 09 Mar ' 08 Mar ' 07

Cash flo
year Mar ' 09 Mar ' 08 3,298.09 -1,951.87 -6,672.70 8,707.18 -82.61 1,084.50 1,001.89 Mar ' 07 541.30 -1,872.30 -1,811.29 3,803.58 117.45 187.91 305.36

Profit before tax -7,188.63 Net cash flow-operating activity -3,802.66 Net cash used in investing -6,654.30 activity Net cash used in fin. activity Net inc/dec in cash and equivlnt Cash and equivalent begin of year Cash and equivalent end of year 10,702.42 55.14 1,084.50 1,139.64

Annexure

Bibliography