For a turnaround strategy to work, all

the measures being undertaken need to

work at the same time, and in sync with

each other.

Turnround Strategy for Air India Group 7

E004 Mayank Agrawal E017 Prakhar Goyal E019 Satyajit Hoskote E030 Rahul Mehta E036 Prasad Nambiar E050 Tejas Shah

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TABLE OF CONTENTS

1 Project Description .............................................................................................................. 3

1.1 Background.................................................................................................................. 3

1.2 Current Scenario .......................................................................................................... 3

2 Project Methodology ........................................................................................................... 4

3 Industry Analysis ................................................................................................................. 4

3.1 Domestic traffic ............................................................................................................ 5

3.2 International Traffic ...................................................................................................... 5

3.3 Freight Traffic ............................................................................................................... 5

3.4 Competition.................................................................................................................. 5

4 Data .................................................................................................................................... 7

4.1 Industry Stats ............................................................................................................... 7

4.1.1 Domestic Traffic .................................................................................................... 7

4.1.2 International Traffic ............................................................................................... 7

4.2 Financials .................................................................................................................... 7

4.3 Market Share ............................................................................................................... 8

4.4 Fleet Size ..................................................................................................................... 9

4.5 Cost Structure of an Airline .......................................................................................... 9

4.6 Driving Factors ............................................................................................................. 9

5 Findings .............................................................................................................................10

5.1 SWOT .........................................................................................................................10

5.2 Customer Satisfaction .................................................................................................12

5.3 Operations ..................................................................................................................13

6 Conclusion .........................................................................................................................13

7 Recommendations – Turnaround Plan ...............................................................................14

7.1 Crisis Stabilization.......................................................................................................14

7.2 New Leadership ..........................................................................................................14

7.3 Stakeholder Management ...........................................................................................14

7.4 Strategic Focus ...........................................................................................................15

7.5 Critical Process Improvement .....................................................................................16

7.6 Partial/Full disinvestment ............................................................................................16

8 References ........................................................................................................................17

9 Insights ..............................................................................................................................18

9.1 Sri Lankan Airlines ......................................................................................................18

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9.2 South African Airlines ..................................................................................................18

9.3 Continental Airlines .....................................................................................................18

9.4 Malaysian Airlines .......................................................................................................18

9.5 From the archives .......................................................................................................19

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1 PROJECT DESCRIPTION

Formulate a turnaround strategy for the ailing national airline, Air India.

1.1 BACKGROUND Air India had borrowed some INR 21,412 crore towards acquisition of new aircraft, another INR 22,368 crore towards working capital and owes around INR 2,000 crore to oil retailers, besides facing accumulated losses worth INR 22,000 crore. In April, 2012, the government of India announced a Turnaround plan (TAP) and a Financial restricting plan (FRA) to revitalize the ailing national airline. The government granted the state-owned carrier a performance-linked bailout package of over INR 30,000 crore. The airline was expected to turn profitable by FY22.

1.2 CURRENT SCENARIO To fully factor the immediate requirement of Air India, the government has allocated INR 1,713 crore funding from the Government for FY17, against a total demand of INR 4,300 crore. The government-run carrier has till date received INR 22,280 crore as part of the bailout package. The Government has pegged Air India's losses at INR 3529.80 crore for this fiscal, down from a net loss of INR 5,859.91 crore in FY 15. Its debt burden stood at INR 51,367.07 crore in the financial year ended March 2015.

While Jet fuel price has declined to a rock bottom, and many airlines

including Jet Airways have become profitable, Air India is still losing money

every second. Most of the losses come from operational inefficiencies

including high turnaround time, flight cancellations, cabin crew delays and

poor fleet planning. Of its 370 daily flights, only nine are profitable, of

these, six are on domestic routes, while three are on overseas sectors. Of

the 20 A320s in Air India's total fleet of 103 aircraft, six are in service since

26 years and seven since 21 years.

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2 PROJECT METHODOLOGY

We plan to do a comprehensive external and internal analysis of Air India and the airline industry in general. Building up on the strengths and capitalizing on the opportunities, we will formulate a turnaround strategy.

3 INDUSTRY ANALYSIS

The Indian aviation was characterized by just two private players and the Air

India group up to 2002-03. The entry of low cost carriers from 2005 to 2007

changed the landscape of the Indian aviation. Companies competed on

prices, resulting in profitability pressures for many airlines. However, with the

industry undergoing consolidation in 2007-08, competitive intensity

moderated, and by 2013-14 just five players were left in the industry following

the exit of Kingfisher Airlines. In 2014-15, competition has again intensified

with new entrants - Air Costa, Air Asia and Vistara.

Fig: Porter’s five forces analysis – Airlines Industry

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Growth in the Indian economy, low fares and enhanced connectivity are

expected to drive passenger traffic in the near term. Steep decline in crude

oil prices supported by strong demand and high PLF are expected to boost

operating profit of airline companies.

3.1 DOMESTIC TRAFFIC Strong growth in air passenger traffic in India is expected to be driven by

better economic growth, low air fares and enhanced connectivity to smaller

cities. Plunge in fuel price is expected to keep a check on air fares. Strong

demand growth and a disciplined approach to capacity expansion are

expected to result in healthy passenger load factor (PLF) over the long term.

3.2 INTERNATIONAL TRAFFIC During 2015-16 to 2020-21, International passenger traffic in India is

expected to improve, thanks to better economic growth and increase in trade.

The UAE-India agreement is likely to boost bilateral trade by 60% over this

period. Indian airlines' share in international passenger traffic is estimated at

33-35% as Indian carriers are likely to focus on short-haul international

routes by operating direct flights and minimizing travel time on routes which

were so far catered to by foreign carriers with layovers.

3.3 FREIGHT TRAFFIC Domestic air cargo traffic growth is expected to be driven by e-commerce.

Revival in global economies and resultant pick-up in India's exports would

improve international air freight traffic. Efforts to enhance cargo handling

capacity across airports and the new AFS guideline are expected to lend

additional support.

3.4 COMPETITION Owing to low fuel prices, entry of new airlines and tussle over market share,

the domestic aviation industry has become a fierce battlefield in terms of

fares, quality of service and enhanced connectivity. As a result, flyers are all

set to benefit from varied options at attractive prices.

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4 DATA

4.1 INDUSTRY STATS

4.1.1 Domestic Traffic

In 2014-15, domestic passenger traffic grew strongly by 16 per cent y-o-y on

account of improvement in the economy and discounting on ticket prices.

4.1.2 International Traffic

International passenger traffic reported a steady CAGR of 8 per cent, during

2009-10 to 2014-15. Both domestic and foreign carriers have expanded their

networks to and from India, which has supported growth in international

passenger air traffic. However, due to competition from foreign players, the

share of domestic carriers continues to remain low over the last few years.

4.2 FINANCIALS

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4.3 MARKET SHARE

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4.4 FLEET SIZE

4.5 COST STRUCTURE OF AN AIRLINE

ATF (Airline Turbine Fuel) - 40-60% Maintenance - 20-30% Lease rentals 15-20% International Marketing 2-3% GDS. Reservation, Online Sales 3-8% International Stations and network upkeep costs 3-5% Navigation, over flight and international routing charges 1-3% HR - 2-10% depends on training, expat pilots, outsourcing

4.6 DRIVING FACTORS

Rupee value against Dollar - If rupee is weak against dollar then more cost to airlines, as they have to buy ATF in dollars

Price of ATF - A decrease of 10% in ATF price may lead to increase in EBITDA by 3-5%

Debt, interest on debt Higher profits help reduce the debt pile Expat pilot salaries

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Seat occupancy(PLF) Taxes Airport Fee Metro and Non metro routes, can be an advantage or disadvantage Insurance cost

5 FINDINGS

5.1 SWOT

Strengths

Weaknesses

1. Only Indian Airline with the

elite Star Alliance Membership

2. Widest network with 48 Domestic and 36 International destinations

3. Financial support from government

4. Brand recognition of the national airline

5. Employee cost per available seat kilometer (ASKM) is about half the global average

6. Passenger load factor has increased to 82%

1. High maintenance cost due to

high average age of fleet 2. Indiscipline in employees out

of complacence 3. High turnaround time leading

to poor customer experience and a ripple effect delaying subsequent sector connections

4. Predatory pricing by domestic players hurts the load factor

5. Political interference hinders the culture of professionalism

6. A messy merger with Indian Airlines has left Air India with poor organizational structure

7. Lower revenue per kilometer travelled (RPKM) due to fewer business class seats and occupancy

8. On time performance stood at 73% which well below the industry average

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Opportunities

Threats

1. Establish a hub in India

leveraging increasing India-China trade, replicating Abu Dabhi and Dubai

2. India is the ninth largest civil aviation market in the world having a potential of becoming third largest aviation market by 2020

3. Estimated air traffic in India to be 60 million international passengers by 2017

4. Airline market is estimated to have 800 aircrafts by 2020

1. Competition due to increase

in FDI, Jet-Etihad Deal 2. Competition from new

entrants - Vistara and Air Asia

3. A sudden increase in oil prices may worsen the financials

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5.2 CUSTOMER SATISFACTION Air India has the worst customer satisfaction performance across all airlines

recording 4.3 complaints per 10,000 passengers. Go Air is next, but has only

1.5 complaints per 10,000 passengers. The industry leader IndiGo reported

0.5 complaints per 10,000 passengers. In fact, the number of complaints has

risen significantly during the last 24 months.

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5.3 OPERATIONS Air India’s passenger load factor (PLF) has improved significantly. But, a

poor On Time Performance (OTP) has been a cause of worry. Poor customer

experience causes loss of trust and hence lower future passenger load factor.

Air India has a Hub and Spoke model with Mumbai and Delhi as its two major

hubs.

6 CONCLUSION

With a Turnaround plan and a financial restructuring plan already in place,

Air India have had enough funds from the taxpayer’s wallet. Although senior

management at Air India is optimistic of going profitable in a couple of years,

they should not see it as the ultimate goal.

For a turnaround strategy to work, all the measures should be implemented

in sync with each other. A company becomes successful when it uses its

core competency as a competitive advantage.

Air India needs to understand its core competency and communicate the

same to the employees at all levels. Employees need to work at a level no

less than that of employees at a private airline.

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7 RECOMMENDATIONS – TURNAROUND PLAN

We have put in our recommendations in a Turnaround framework:

7.1 CRISIS STABILIZATION

Identify the loss making routes, find their feasibility and strategize to

breakeven on those routes, within a year. Failure to do so should be

followed by opting out of those routes with immediate effect.

Restructure employee payment structure, increasing bonus

component at cost of fixed salary. Complacence among the employees

would only increase if they are sure of their fixed compensation every

month. They should be positively reinforced so as to work towards the

greater good of the organization, while taking home incentives.

7.2 NEW LEADERSHIP Air India was in good shape even in turbulent times till it was headed by Mr.

J.R.D. Tata. A professional organization needs professional management,

which in this case was taken away due to political interference.

Air Vistara recently inducted Mr. Sanjeev Kapoor, the former CEO at Spicejet

to its management. Air India also needs to bring in people with industry

experience from either abroad, or from the country. Although, due to

government interference, it may take time, but such a move is very important

for a new plan to work.

7.3 STAKEHOLDER MANAGEMENT The only stakeholder’s of Air India whose interest has been managed well,

are the politicians and bureaucrats of the country. More importantly, it’s a

public company and hence it should take the interest of all its stakeholders

into consideration. Immediate recognition of all the stakeholders is

necessary:

Employees

Public (Taxpayers)

Customers

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Government of India

Board of directors

7.4 STRATEGIC FOCUS Air India should focus on gaining ground through operational efficiency. Also,

since it’s a full service carrier, customer loyalty is an essential success factor.

Fig: Strategic focus

Strategic Route Optimization and Planning

Operational Efficiency

High Aircraft

Utilization

Least Turnaround

time

Young aircraft

fleet

Efiicient MRO

Customer satisfaction

On time performance

In flight Services

Loyalty incetives

Establish New Delhi as a global hub and target emerging destinations

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7.5 CRITICAL PROCESS IMPROVEMENT

Recruitment – Air India should move away from traditional hiring

practices. Private carriers around have tailored recruitment drives,

suited to the organization and market scenario.

Aircraft Procurement – Delays in procurement of aircraft, like in the

case of Boeing Dreamliners, hurt operations and planning. When in

shortage of funds, they should adopt sale-and-leaseback model.

Training – A flawed training process using rejected simulators was

recently exposed. A cost cut in training department may compromise

on the safety. They should match global standards.

Route Optimization - A loss making route should be shelved if it does

not start making profits within a year.

Tourism as an opportunity – Partner with the tourism ministry/state

ministries.

Fleet management – Induct new aircrafts and retire aircrafts with

average age above 15 years. Old aircrafts have poor fuel efficiency

and higher maintenance costs. Induct fuel efficient aircrafts like A320

neo on a dry lease to prevent further debt pile up.

Restructure compensation and appraisals - Restructure employee

payment structure, increasing bonus component at cost of fixed salary.

Complacence among the employees would only increase if they are

sure of their fixed compensation every month. They should be

positively reinforced so as to work towards the greater good of the

organization, while taking home incentives.

7.6 PARTIAL/FULL DISINVESTMENT Disinvestment of the national airline has been a debatable issue. Previous

senior management have raised doubts over the feasibility of a

disinvestment. Politicians would not want to lose control over the airline.

Sri Lankan airlines turned around to profitability within a span of 7 years,

after a disinvestment of 40% to Emirates in 1998. Air India could seek

potential buyers or may offer shares to public and employees. Disinvestment

will make the management more liable to their actions. Stake holder

management would thus become more meaningful.

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8 REFERENCES

https://www.crisilresearch.com.ezproxy.svkm.ac.in/industryasync.jspx?serviceId=

564&State=ECONOMY#storyId#114901#sectionId#1453#newsFeedId#undefine

d

https://www.mindtools.com/community/pages/article/turnaround-

management.php

http://www.bangaloreaviation.com/2015/10/infographics-india-domestic-airlines-

performance-for-august-2015.html

http://www.dailyo.in/politics/air-india-indian-airlines-civil-aviation-spicejet-indigo-

kingfisher-airlines-dreamliner-jet-airways/story/1/8887.html

CAPA Aviation

http://www.thehindubusinessline.com/opinion/can-privatisation-work-for-air-india-no/article5305498.ece?homepage=true - V. SUBRAMANIAN( was Secretary to the Government of India and served in the Aviation Ministry)

http://www.thehindubusinessline.com/opinion/can-privatisation-work-for-air-india-yes/article5305500.ece?homepage=true -V. THULASIDAS( former CMD, Air India)

http://www.khaleejtimes.com/article/20131012/ARTICLE/310129970/1002 -Jitender bhargava, Air India’s executive director for 13 years

http://india.blogs.nytimes.com/2012/10/15/when-air-india-was-efficient-profitable-and-growing-fast/?_r=0

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9 INSIGHTS

Insights from successful turnarounds:

9.1 SRI LANKAN AIRLINES

40% disinvestment to Emirates in 1998 20% reduction in staff with a restructuring exercise partnership with the tourism ministry

9.2 SOUTH AFRICAN AIRLINES

Third party consultant Mot MacDonald brought in for analysis, review and recommendations

9.3 CONTINENTAL AIRLINES

The turn-around plan — the Go Forward Plan 'A' — had four different elements each of which were given an inspirational title :

Fly to win — product improvement and network redesign;

Fund the Future — cost control and cash flow management;

Make Reliability a Reality — punctuality and reliability; and

Working together — incentivizing the staff.

9.4 MALAYSIAN AIRLINES

Inadequate yield management, an inefficient network, and poor cost control finally brought it to its knees in 2005

A large number of stakeholders, intense public scrutiny, competing priorities, insufficient freedom to operate commercially, and a host of legacy personnel challenges

Solution in 3.5 months - Cost cutting, yield management fixing, cut the loss making routes

Sell assets which could be done without Research laboratory to analyze routes and check their viability. Either

fix or cut the loss making routes Reward people for doing things differently, like linking pay increases and

bonuses to their performance and contribution to the P&L, you find that they deliver results that impact the P&L. They get out from the complacency of not delivering. They discover that they can do a lot more than they ever dreamed possible

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9.5 FROM THE ARCHIVES