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Submitted by J.S.Jenkin (52) Neeta kavalil(76) Paromita (85) C.P. Raj mohan (98) Mozzam (99)
Contents
Introduction............................................................................................................................................. 4 Chapter 2: External Analysis ................................................................................................................... 4 Industry Overview ............................................................................................................................... 4 Porters Five Forces Model .................................................................................................................. 5 Chapter 3: Internal Analysis .................................................................................................................... 6 SWOT Analysis................................................................................................................................... 6 Air Indias Competitive Advantage ...................................................................................................... 6 Chapter 4: Functional Level Strategy ....................................................................................................... 7 Economies of Scale ............................................................................................................................. 7 Learning Effects .................................................................................................................................. 7 Marketing Strategy .............................................................................................................................. 7 Operational Strategies .......................................................................................................................... 8 HR Issues ............................................................................................................................................ 8 Financial Issues ................................................................................................................................... 9 Chapter 5: Business-Level Strategy ......................................................................................................... 9 Generic Business-Level Strategy: Cost leadership with a bit of differentiation ..................................... 9 Disadvantages of cost leadership: Price war ....................................................................................... 10 Strategic Group Analysis ................................................................................................................... 11 Chapter 6: Industry Environment ........................................................................................................... 11 Industry Stage.................................................................................................................................... 11 Applying game theory ....................................................................................................................... 13 Chapter 8: Strategy in the Global Environment ...................................................................................... 14 Air Indias Global Strategy ................................................................................................................ 14 Basic Entry Decisions to overseas market .......................................................................................... 14 Strategic Alliances ............................................................................................................................. 15 Chapter 9: Corporate Strategy: Horizontal Integration, Vertical Integration, and Strategic Outsourcing . 17 Vertical Integration ............................................................................................................................ 17 Alternatives to Vertical Integration: Cooperative Relationships .......................................................... 18 Strategic Outsourcing ........................................................................................................................ 18
Chapter 10: Corporate Strategy: Diversification, Acquisitions, and Internal New Ventures Expanding Beyond a Single Industry ....................................................................................................................... 19 Increasing Profitability through Diversification .................................................................................. 20 Entry Strategy.................................................................................................................................... 20 Restructuring ..................................................................................................................................... 21 Chapter 11: Corporate Performance, Governance, and Business Ethics .................................................. 21 Agency Theory .................................................................................................................................. 21 Governance Mechanisms ................................................................................................................... 22 Board of directors .......................................................................................................................... 22 Financial statement and Auditor: ................................................................................................... 24 Ethics and Strategy ............................................................................................................................ 24 Lethargic work environment: ......................................................................................................... 24 Unethical business practices:.......................................................................................................... 25 Conclusion............................................................................................................................................. 26
Introduction
In the following analysis of Air Indias business strategies, an attempt has been made to critically examine the principles followed by Air India in devising its policies and the usefulness of those strategies in resolving Air Indias issues and helping its restructuring process. These strategies are a part of Air Indias Turn Around Project (TAP) and Financial Restructuring Plan (FRP).
Bargaining power of suppliers is high Only two established suppliers of aircrafts are Boeing and Airbus Less number of aviation turbine fuel (ATF) providers
Bargaining power of buyers is high Customers can easily switch between airlines High disposable income, Emerging economy and high price sensitivity Substitutes like rail and road transport are used if air fares are too high
Industry Rivalry The industry is highly competitive Many emerging low cost airlines There is always a price war in the industry and customers shift to the airline which offers service at the cheapest cost
Threat of New Entrants Threat of new entrants is low Initial investment required is huge and profits can only be achieved by providing excellent service at low cost All the existing companies have build their brand equity Poor infrastructure and unfavourable government regualtions
Substitutes Threat of substitutes is medium Road and Rail transport are alternatives Although time required by air is far less than the time required to reach the destination by rail or road
Opportunities India airline industry is growing at a CAGR of 20% Customers are getting wealthier, tend to be less price-conscious and prefer to choose quality service over cost. Approval of FDI by foreign airlines in the domestic carriers The number of foreign visitors and investors to India is increasing rapidly.
Threats Air India faces aggressive competition from world leading airlines and price wars triggered by domestic players. The Indian Railway Ministry has improved the speed and services in their medium/long distant routes, attracting passengers away from air service Rising ATF (Airline turbine fuel) and labour cost.
Learning Effects Air India has been suffering from severe labour issues for quite some time now. There are frequent news reports about worker strikes and the resignation of pilots due to unsettled dues. Thus, due to high attrition, Air India fails to reap the benefits from its learning effects in spite of being the oldest airlines service provider in the country. (Ref: http://timesofindia.indiatimes.com/topic/Air-India/news ; http://timesofindia.indiatimes.com/business/india-business/Air-India-pilots-report-sick-10-internationalflights-cancelled/articleshow/10559144.cms)
Marketing Strategy Air India has come up with innovative marketing strategies like Shagun Vouchers as a gift for the wedding season, Silver and Platinum pass scheme, Air Bazaar etc. It also has its loyalty program named Flying Returns which is Indias first loyalty program. It has Uniconnect as its telecom partner to promote its offers. Air India has reduced fares. It has ordered 27 Dreamliners from Boeing. It has started new services between Delhi-Vijaywada, Delhi- Port Blair. Air India has also started additional flights to Goa through its wholly owned subsidiary Alliance Air to take care of the peak season demand between Dec and Jan 2011-2012. Thus it has been adopting competitive marketing strategies based on all four marketing mixespromotion, price, product and place. (Ref: http://home.airindia.in/SBCMS/Webpages/air_india-additional_flight_goa.aspx ; http://home.airindia.in/SBCMS/Webpages/Latest-news.aspx?MID=320 ; )
Operational Strategies An Integrated Operations Control Centre (IOCC) has been launched at T3, Delhi, using Sabre Solutions. A computerized crew rostering system will also be put in place by June 2012. The IOCC has resulted in real time monitoring and reduction of delays and turn-around time. Simultaneously, a Hub Control Centre (HCC) for monitoring and control of all arrivals and departures has been established at T3, Delhi. For the convenience of the international travelers, Air India will be introducing a new Hub & Spoke flight on the Chennai- Delhi sector in the new schedule to enable them to connect international flights departing from the new T3 terminal of the Delhi airport. Air India is also planning to lease out excess capacity of two 747-400 aircraft and some 777-200 LR aircraft (at a future date), after the induction of B787. The above steps have resulted in a decrease of the operational losses during FY 2011-12 from Rs 507 crore in April 2011 to Rs 266 in August 2011, showing an improvement in the operational performance. The top management has been directly involved in improving the quality of service by ensuring punctuality and on-time performance. Air India has also launched a training program for its pilots to learn to operate the Boeing Dreamliners. Thus Quality as reliability as well as excellence (to bring in differentiation and increase profitability) are being ensured. Also, in keeping with Demings strategies, Quality is being made everyones responsibility starting from the top management to the ground crew and security agents. However, there are also occasional safety issues such as the Mangalore Air Crash incident and other operational issues such as frequent delays, which have taken place in the past. All these have raised serious doubts about the reliability of Air Indias service in the minds of its customers. There are also recent issues emerging out of Air Indias inability to offer service on several foreign routes and also its unwillingness to let them be offered to private players by the govt. The private players have been requesting the govt. to grant them these routes so that the Indian Airlines industry does not lose out to foreign players. Thus Air India needs to cover a long distance before it is able to restore customer loyalty and faith in its operations. (Ref: http://home.airindia.in/SBCMS/Webpages/Latest-news.aspx?MID=320)
HR Issues Air India has been hiring in recent times for its crew management and ground staff and security agents. It has also arranged for the training of its pilots for the new Boeing Dreamliners. However, there are several HR issues plaguing Air India. Pilots often complain about non-settlement of dues due to which there are frequent strikes and resignations. There are also small groups of employees within Air India which do not have professional relations with other employee groups within the organisation. Poor inter-employee relations often come in the way of delivering efficient and smooth service. On a particular occasion, an Air India flight got delayed indefinitely due to the co-pilots refusal to fly with the commander. Thus there is a poor employee and cultural integration. Even after the merger of Air India and Indian Airlines, employees are still treated as belonging to different companies. Such issues reflect poorly on the organizations reputation. 8
(Ref: http://articles.timesofindia.indiatimes.com/2011-11-02/thiruvananthapuram/30350100_1_tigerairways-sats-air-india-station; http://timesofindia.indiatimes.com/home/sunday-toi/specialreport/Cockfights-in-the-cockpit/articleshow/10537800.cms; http://timesofindia.indiatimes.com/india/Air-India-pilots-warn-of-anotherstrike/articleshow/10843808.cms;) Financial Issues Air India has huge financial burdens. Recently the government had freezed its bank account due to nonpayment of dues, then on a part payment, the account was unfreezed. Also, it has procured huge financial assistance from the government for its Financial Restructuring Plan (FRP) and its order of 27 Boeing Dreamliners.
In a respite for private airlines, state-run Air India Ltd has raised airfares to destinations within the country over the past one month, even after the rise Air India offers lower costs than most Airlines in the Industry. Price hike means next-day Air India tickets, which were going for Rs. 3,600 for Delhi-Mumbai, are now sold for Rs. 6,694 or Rs. 152 cheaper, than budget carrier Go Airs Rs. 6,542, according to data from travel portal IxiGo.com. Jet is priced Rs. 189 higher than Air India at Rs. 6,542. While Air India may have increased its airfares, the carrier still has the advantage of offering free food, in-flight entertainment systems and better seats while being close to the airfare of budget airlines that dont offer such facilities, said the person familiar with the development. Air India is struck in the middle unable to decide the direction of movement in the competitive positioning, For Delhi-Bangalore, Spice Jet was priced at Rs. 7,155, Air India at Rs. 7,355, and Jet at Rs. 9,005.Flights to Chennai from Delhi were priced at Rs. 7,143 on Indigo and Rs. 7,355 on Air India, or about Rs. 212 more. Disadvantages of cost leadership: Price war Air India is compounding a price war that has caused industry wide losses and prompted Kingfisher Airlines to cut flights. Air India is discounting fares and thats absolutely a problem. Ideally, fares should go up when oil-import costs go up. Thats not happening and thats why airlines are in this situation. Jet and Kingfisher, the countrys two largest listed carriers, have lost a combined Rs 63 billion in three years as low fares and rising fuel prices offset surging passenger numbers. Air India has also been unprofitable since a 2007 merger, causing it to win Rs 32 billion of state bailouts and seek another Rs 65 billion before the end of March. Its low prices are also destabilizing for the entire industry. Air Indias prices are determined by market forces. Every other airline in India also needs to file fares with the industry regulator. The regulator isnt asking airlines to stop offering low fares. The regulator will step in only if there is a huge aberration.
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Air India comes in the low cost but offers moderate amount of features like food, entertainment etc. It is difficult to make profit staying in the position indicated.
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According to latest report released by Aviation ministry, there has been a sustained growth in both the capacity and demand which continued even in the month of January, 2011.
Seat Factor
On back of festive peak season, December saw tremendous growth in seat factor ratio, with Indigo registering maximum seat factor of 93.3%. However, Jan seat factors dipped on lower demand.
Flight Cancellations
Indigo scored very well in this area as well which registered lowest cancellation ratio of just 0.5 percent. Spice jet (0.9%) and Jet Airways (1.3%) also witnessed quite less cancellations. On other hand, JetLite was by far the worst performer with 3.5 percent flight cancellations.
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Other players
No cash rebates Cash rebates
No cash rebates
Air India
Profit profit
Loss Profit
Cash rebates
Profit loss
Loss Loss
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Desired: Only way out, is to compete with international carriers by providing differentiated service at low cost
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Strategic Alliances
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The above alliance will provide practical and cost effective solutions for engine repair management which will result in reduced cost of ownership for engines operators. Air Indias technical expertise in the field of engine overhaul and its elaborate facilities coupled with Aerostars capabilities in MRO marketing and material sourcing will be an ideal combination for high level of customer care, lower repair cost & tighter TAT and assured quality that will ensure longer engine time on wing. The arrangement will also result in additional revenue earnings for Air India.
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Chapter 9: Corporate Strategy: Horizontal Integration, Vertical Integration, and Strategic Outsourcing
Horizontal Integration: Single Industry Strategy In 2007, the Government of India announced that Air India would be merged with Indian Airlines. As part of the merger process, a new company called the National Aviation Company of India Limited (NACIL) was established, into which both Air India (along with Air India Express) and Indian Airlines (along with Alliance Air) was merged. On 27 February 2011, Air India and Indian Airlines merged along with their subsidiaries to form Air India Limited. Advantages Staying inside an industry allows a company to focus its total managerial, financial, technological, and functional resources and capabilities on competing successfully in one area. A company sticks to the knitting i.e. it stays focused on what it knows best and does best.
Vertical Integration
Change in top brass The government is learnt to have decided to replace Air India CMD Arvind Jadhav, handing over interim charge of the airline to civil aviation secretary Nasim Zaidi and joint secretary Rohit Nandan. The two officers face a difficult task at the helm of the carrier that has accumulated losses of Rs 20,000 crore till 2010-11, and carries a debt burden of around Rs 40,000 crore. Observations Utilizing general organizational competencies: These are competencies that transcend individual functions or business units and are found at the top or corporate level of the multi business company. Typically these are the skills of a companys top managers and functional experts. It is expected that the new blood will be helpful in reviving the Maharajas sagging fortunes and in filling up the government coffers. The airline also suffers from bureaucratic costs as it is a public entity. It refers to the costs of solving the transaction difficulties that arise from managerial inefficiencies and the need to manage the handoffs or exchanges between 17
business units to promote increased differentiation or to lower the companys cost structure.
Aeroflot
Ethiopian Airlines Kuwait Airways Lufthansa Singapore Airlines South African Airways
The above agreeents actually help Air India in offering a variety of routes to different places in the world at the same time maintaining a lower cost structure.There are higher economies of scale and the cost of serving each customer are greatly reduced. Also there is less duplication of services that is being required since the airline is effectively transferring passenger requirements to other airlines coming under the codesharing agreement.. Thus strategic alliances have prooved to be very useful in the industry.
Strategic Outsourcing
We are open to joint ventures, long-term partnerships and license production under transfer of technology with leading international aerospace companies to make our aerospace sector strong, competitive and selfreliant," Defense Minister A.K. Antony said while inaugurating Asia's biggest air show Aero India 2011 on Feb 9. However still outsourcing is limited to supply of aircrafts to the company. This could be explained by the fact that India is an attractive location for outsourcing and host country demands necessitate investment by premier aerospace companies in the country.
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Chapter 10: Corporate Strategy: Diversification, Acquisitions, and Internal New Ventures Expanding Beyond a Single Industry
Hotel Corporation of India Limited (HCI): The Hotel Corporation of India Limited (HCI) is a Public Limited Company wholly owned by Air India Limited and was incorporated on July 8, 1971 under the Companies Act, 1956 when Air India decided to enter the Hotel Industry in keeping with the then prevalent trend among world airlines. The objective was to offer to the passengers a better product, both at the International Airport and at other places of tourist interest, thereby also increasing tourism to India. However, in 2002-03, three properties of HCL, viz, Indo-Hokke Hotel Limited (Centaur Hotel, Rajgir), Centaur Hotel, Juhu Beach and Centaur Hotel, Mumbai airport were sold off. The remaining units of HCI are Centaur Hotel, Delhi Airport, Centaur Hotel Lakeview, Srinagar and Flight Kitchens at Delhi and Mumbai. Thoughts on advantages as well as disadvantages: The concept of product bundling comes into play here. It involves offering customers the opportunity to buy a complete range of products at a single price. This increases the value of a companys product line because customers often obtain a price discount from buying a set of products and also become used to dealing with just one company and its representatives. It also supports the industry model of its core industry. However the model could not be sustained as mismanagement of funds and lack of expertise along with debt burden forced the company to sell of many of its assets. The airline is at present indulging in restructuring i.e. the process of divesting businesses and exiting industries to focus on core distinctive competencies.
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Entry Strategy
Acquisitions
As part of the merger process, a new company called the National Aviation Company of India Limited (NACIL) was established, into which both Air India (along with Air India Express) and Indian Airlines (along with Alliance Air) was merged. On 27 February 2011, Air India and Indian Airlines merged along with their subsidiaries to form Air India Limited. It was found that despite the touted advantages the merged entity still was making losses raising doubts as to whether it would be viable to sustain a national airline at the taxpayers expense. The debate still continues amid the fluctuating economy and high fuel prices.
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Restructuring
To attract passengers, the airline has come out with its latest print campaign titled Jaldi Jaldi, offering discounted fares for domestic travel on tickets bought in advance. It also introduced an extension of its short term promotion scheme Silver and Platinum pass in September this year. In addition the airline has launched ad campaign sin television and the Delhi Metro and also increased the frequency of its brand promotion in film, said Air India spokesperson, Mr. G. P. Rao.
Also according to a company statement, the airlines passenger carriage increased by 5 per cent and passenger revenue grew by 4.2 per cent in October. This has followed the restructuring at the management level as well as improved outlook displayed by the com
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Governance Mechanisms
Board of directors
Suresh Keswani
industrialist
Inder Sharma
Tourism
Jaya Bachchan
Actor
Hoteliers
Fig 1: BoD comprises people with very little knowledge about Indian aviation industryFinancial illiterates
Newly appointed
BoD's
Harsh Neotia
Fali Major
Amit Mitra
Anand Mahindra
Fig 2: New BoD comprises industrial stalwarts (Appointed on March 18th 2010) The current financial state of Air India has led to widespread speculation about the airlines ability to survive. While diehard loyalists are hopeful that the government, in its capacity as 100% owner, will never allow it to go bust, independent industry analysts are not as optimistic and are in fact willing to set a timeframe up to which the national carrier can possibly survive, or be allowed to survive.
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The governments response to the crisis in Air India has been ill thought-out and grossly inadequate. The action initiated does not reflect the sense of urgency that is warranted. The recent appointment of four independent directors Anand Mahindra, Amit Mitra, Air Chief Marshal Fali Major and Harsh Neotia is clearly a case of too little and too late. The new board consists of Men of equal integrity, competence and proven track record have in the past been appointed on the boards of Air India and Indian Airlines. Since the airlines have witnessed a gradual and sustained decline in service standards, market share, etc, over the years without showing signs of recovery, one should not expect too much from this exercise of appointing new directors. How much difference did their presence make to the fortunes of the airlines? A review of the recent past shows that eminent personalities from the private sector have been directors of one of the two airlines before their merger. Ajit Kerkar, the then head of the Taj Group of Hotels, industrialist Suresh Keswani, Inder Sharma of Sita Travels and actor Jaya Bachchan, to name a few, have been on the board of Air India at one time or the other. The national carriers have also had stalwarts like Ratan Tata, Rahul Bajaj and Russi Modi as chairmen. In all fairness to them, one can state with a certain degree of authority that most of the time the civil aviation ministry has been engaged in backseat driving. Internal resistance to much needed changes has also compounded the problem. What is needed is not new members (with no offence intended to the new appointees) but good corporate governance. The board cannot have members with little or no understanding of the airline industrys functioning and the ground realities that exist in Air India. It is one thing to take decisions that are deemed critical and imperative and another thing to ensure the implementation of such decisions. How much independence will the newly-appointed members exercise for approving and rejecting proposals for the sake of the companys well-being? One is tempted to raise this question because notwithstanding the pitiable financial state that the airline has been in for the past few years, decisions with enormous financial ramifications have been taken by the board, either voluntarily or under some compulsions thrust on them. Good corporate governance at the board level should also ensure that calls from ministry officials or the minister himself are not entertained during board meetings for diktats on what decisions the board must take on key agenda matters. This disdainful practice of tendering last minute advice (read: order) has been on for almost two decades. Needless to say, intervention comes in most cases where someone elses interests supersede that of the airline. What will be of significance, therefore, will be to see how the new board members approach the present crisis. In the past, most members of the board have played roles which can be broadly classified into three categories. (a) Guided Air Indias destiny with active participation; (b) Been indifferent and attended meetings more as a ritual; and (c) Used Air India for benefiting their respective companies. 23
Needless to say, most private members, based on their performance, would see themselves classified in the last two categories as they have generally failed to make an impact that is expected of them. As the new members have been appointed at a time when Air Indias ability to survive is being questioned, it is only to be hoped that they will play a role, notwithstanding the infirmities in the system, which can help save the national carrier. With time being the greatest factor, the four new members should play their parts fearlessly with the airlines interest being the sole guiding force. Indians, particularly Air Indians, serving or retired, will watch their performance with keen interest because Air India is not just any company but has been an institution which in the yester years had evoked a lot of national pride. Heres wishing the new members from the private sector all the best and hoping that they will reverse the historical trend which is heavily loaded against them and help steer the airline out of turbulence. Financial statement and Auditor:
CAG blasts ministry for Air India mess: Excerpts summarizing the tussle between CAG and AI:
The national auditor said Accenture, the consultant asked to prepare the merger plan, did not do enough work on the move's financial implications. CAG did not agree with the theory that the merger was initiated by AI or IA in April 2006. 'Top down'; the ministry directed the erstwhile AI to appoint a consultant for the process. The ministry failed to do a good monitoring job.
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Poor Leadership Since 2003, Air India has been run by IAS officers with no experience of running a complex, global business. The last incumbent, Arvin Judah, was secretary of industries in Karnataka and his predecessor V. Thulasidas was the chief secretary of Tripura. Rivals like Jet Airways hired expat management. The AI chiefs looked to their super boss, the secretary of civil aviation, for direction. Ministers Ananth Kumar, Sharad Yadav, Shahnawaz Hussain and Praful Patel, who were at the helm when the decline was the steepest, have never been able to put the airline on the course to recovery. People Trouble Union Grip: 19 unions with political links have wrested control from the management over the years. Bad Agreements: Lopsided agreements make it impossible to push for higher productivity. Poor Work Ethics: Over the years, little pride in working for the airline and a sense that the politicians (and management) are responsible for all problems. Pilots struck work in May 2011 for more pay, even as accumulated losses were touching Rs. 20,000 crore. No New Hires: No fresh hiring (except pilots and crew) has taken place for about 18 years. Wrong Commercial Calls New Planes: Brand new, well-fitted B777s and A320s could never be leveraged for higher fares. The nonstop flights connecting India and the US had the best timings but flights were losing money until recently. Low Fares: Lost its image for business and first class passengers. Began morphing into an airline focused on labor traffic between India and the Middle East. Wrong Routes: Wrong calls on routes with many of them being operated because of political reasons. Merger Mishap: Integration between AI and IA is still a distant dream.
Unethical business practices: Some notable unethical behaviors of Air India are: Cancellation of booked tickets without any prior information. Freezing employees salaries for a considerable duration of time without any prior notice. Air India has first right for overseas flights. Air India is neither using the rights nor allowing other players to operate planes using those rights. There is no mechanism by which Air India can sell those rights at a fixed cost. This is bad for Industry which is already sick. Further if such practices are followed by other public sector Industries it would become bad for the Nation. An Air India flight crash landed at the Mangalore airport during 2010. Most of the 166 passengers abroad were killed. But Air India restrained from paying a petty compensation of Rs. 75 lakhs in total to all the passengers. Air India appealed against the high court order for compensation. 25
Conclusion
Due to the above followed strategies by Air India, the following results have been obtained in the FY 2011-2012: Key performance indicators (Pax revenue) for the month of October 2011 showed an increase of 5.2% even after reduction of capacity by 2.9 % as compared to last year (Oct2010). Whilst passenger carried increased by 4.9%, the passenger load factor improved by 2.6%. The yields per RPKM improved by 4%.
On a cumulative basis April-October11 the passenger revenue increased by 4.2%, Passenger Load factor by 2.3% and yield by 4%.
FRP would provide a saving of Rs 1000 crore per annum by way of interest cost. As per the plan approved for the company by the committee of officers the company is trying to achieve an overall load factor of 73% in the near future.
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