Essay: How Air India could seize the market

Executive Summary
Despite several problems they have faced to this day, Air India remains in the top 5 Domestic Airlines in India with respect to Market Share. Unfortunately, with a huge debt lying on top of its head, the company needs to make several changes in order to ensure sustenance in the market. With only a handful of problems that can be rectified, Air India remains a viable airline in India. Privatization of this airlines remains the ideal option to help the company. All the company needs is a new structure under a new leadership that can help it fly off and become top in the market once more!
Airline Industry in India
Seventh largest country and second most populous country in the world, India has a huge range of a democratic population with more and more technology and improvement happening in the country each day. And yet, it is very surprising to note that only about 4% of the population in India fly. However, at the same time, the Aviation Industry in India is considered one of fastest growing aviation industries in the world. In fact, statistics show the that the Indian aviation industry will be the 3rd largest market by 2025. Research shows that the country has a huge scope for growth in the Aviation Industry. By 2036, the country is predicted to have 478 million passengers using airlines. The country is soon expected to become the world’s leading aviation market in the world according to studies. (Jayant-Sinha).
A Study by the McKinsey Global Institute (2007) showed that the country’s middle class is growing in folds. It reached more than 50 million in 2005 and was estimated to have a 10 fold increase by the year 2025. It is important to note here that this is the segment of the country’s population who use extensively. And considering their economic status, the scope for low-cost carriers like Air India would be huge if they tapped into this population. But despite the low performing status of the Airline Industry in India now, air traffic in India continues to grow at unprecedented-rates.
To completely understand the scope of opportunity that is available in this market, it is first important to understand the reasons for the poor performance in recent years. Studies show that three core reasons have emanated.
Governmental policies and restrictions including the policy where the government allows only 49% equity participation as FDI by non-airline entities in the Indian carriers.
The excessive tax on fuel has made fuel about 45% to 50% of airlines operating cost in India leaving the cost of fuel about 50% to 70% higher than the international benchmark.
Overcapacity is one of the biggest problems in the Indian Aviation industry. Annual capacity growth exponentially increased to a 39% and the then doubled by 2008 as compared to three years prior. Cutthroat pricing to raise the passenger numbers has instead caused a decline in the revenue. This drop in the revenue has in turn impacted the financial performance.
Overall, while the aviation market in India has shown poor performance in recent years, it is clear that this was mainly due to government policies, cost and unsuccessful management and planning.
This has left the country with a market with extensive opportunity for growth with very few Airline companies actually optimizing the opportunity. It is also clear that proper management along with organization can optimize on the opportunity available in the Indian Market.
One of the Indian Airline Companies that has done poorly in recent times and yet, is still in a position from where it can grow to optimize this gap in the market in ‘Air India’.
Introduction to the Company
Air India was founded in 1948 as a joint venture between the Government of India and the Tata group. The company has its hub based in New Delhi, at the Indira Gandhi International Airport. The third largest carrier in India, Air India also became a member of the Star Alliance in 2014. Air India also acts as the flag carrier airline of India. Initiated in 2007 and completed in 2011, the Air India was merged with Indian Airlines. Today, the Airline is owned by Air India Limited, which as formed as the National Aviation Company of India Limited by the Government of India to facilitate the merger. Suggested by the Government, the merger was initiated with gaining profits as the main objective. As of 2017 January, the airlines flies to 52 destinations within the country and 37 destinations across 27 countries in four continents with a total of 89 destinations. On 28th June 2017, the Government of India announced the set-up of a committee that will oversee the privatization of the airline.
Complications and Problems for Air India
Financial Crisis: One of the major problems that Air India faces today is a financial crisis. The company resorted to borrowing money in an attempt to turn things around. However, this didn’t work well for Air India. The Airline suffers from a debt of about 22,000 crore Indian Rupees just for the expansion of its fleet. Simultaneously, the 2008 economic downturn which hiked oil prices to historic highs ended up increasing the fuel cost for Air India by multiples. To date, the company has a total debt of about 52,000 crore Indian Rupees. One of the main reasons that began the airline’s journey into this crisis was years of political patronage by the government.
Merger: The government’s decision to merge Air India with India Airlines was another major reason for the downfall of the airline company. The merger was approved on 1st March 2007. This was a strategic Acquisition in an attempt to increase connectivity, maximize profit and optimize schedule better. Unfortunately, one of the biggest consequences of this merger was that the company ended up being overstaffed. By making the decision to not let go of any employees as a result of the merger, the company ended up instead increasing unnecessary costs for itself. Moreover, as a result of the merger, there ensued several problems amongst the staff. For instance, there were several problems that even led to strikes amongst the pilots from IA and AI over who would get the opportunity to fly or have to end up being trained for the newly bought Dreamliner’s (Ratna Sen, 2012). Flights were canceled, employees dismissed and then reinstated and there were several more consequences of the merger. In fact, the decision to keep the name of the merged entity as Air India created more problems for the company.
Despite having problems like these, there is still huge scope for Air India to take the opportunity and seize the market. In fact, of the existing low-cost carriers currently, Air India is in the best position to be able to reform and make changes and thereby use these changes in order to attract the growing market and optimize the revenue available in the Aviation Market in India.
The Solution
With several intervening factors like this, we believe that best way to save Air India and bring it back from that side of the balance is Privatisation. Privatisation will allow for the introduction of finance that will be able to bring the company out of debt and to a position where it can begin to start developing itself. To this day, the government of India has avoided the idea of Privatisation because of its insistence to retain a national carrier in the case of a National emergency or for rescue missions and so on. With this now being an option, it is the best option for interested companies to step in.
Another benefit of this privatization would be to allow the Airline to give better service to the population and give the Airline the chance to finally develop and in turn earn higher revenues. That is, the company will finally have a chance to develop from a Market-Driven company (due to its lack of scope for development and at the same time, the lack of revenue for the same) to a Market Driving Company (by having the opportunity to introduce, develop and provide new services and become market leaders in the Indian Aviation Market) under the tutelage of the new owners.
In today’s situation, with the huge debt that the Airline has amassed, they are in desperate need for a company with the funds to bring them out of debt and help them then optimize the market by making the company, the product, and the service better.
One of the biggest conglomerates in India, the Tata group is a global enterprise headquartered in India with over 100 operating companies that service out to more than 150 countries across the globe. Founded by Jamsetji Tata in 1868, the conglomerate was responsible for setting up Tata Airlines in 1932. In fact, JRD Tata flew the first flight from Karachi to Bombay. This airline was then renamed Air India in 1946 which they were then forced to relinquish to the government. The Tata group already runs two joint ventures in the Indian Aviation Market with Malaysia’s AirAsia Bhd and Singapore Airlines.
A company with backing and experience in the Airline Industry and responsible for the beginning of Air India as an Airline, the Tata Group represent the best option for the Airline to be restructured, reorganized and be all set to take over the skies. Over the years, the government has spent huge amounts of money in an attempt to keep the Airline afloat. Money that could have instead been spent on developing the country. By allowing for the privatization of the airline, the Government would be able to free money saved for the Airline and also earn an amount in the process. At the same time, the Tata group would repossess ownership of their first venture into the Airline Industry, therefore, providing a Value Proposition to both parties involved.
At the same time, another option for privatization would be to include more companies within the process. Reports show that several companies including IndiGo, Singapore Airlines, Jet Airways are interested in bidding for Air India. With the government now allowing 49% foreign stake in Air India, this opens up the opportunity for the Singapore Airlines-Tata combine (Vistara Airline) to bid for and participate in the process.
With the government planning to break up Air India into four parts to speed up the process, the decision by a company like the Tata group or Vistara Airline to bid for Air India will allow for the Airline to remain together and in turn, utilize the opportunities available through the new ownership. After all, it is no new fact that Air India owns several prime slots in airports in several places across the globe.
Ultimately, this decision will allow for two things that will be a combines Value Proposition for both parties involved.
One the one hand, this suggestion will allow the Airline to finally come out of debt and to a position from where it can begin to concentrate on becoming better and thereby providing better service.
At the same time, by buying the airline, the Tata group will be able to repossess their first Aviation Market venture and reap in the revenue that the Airline is sure to make through its transformation and by optimizing the growing market. Even if the company decided to go for privatization with the Singapore Airlines-Tata combine (Vistara Airline), the Tata Group will be able to hold on to ownership of the Airline with a 51% stake and at the same time, utilize on Singapore Airlines existing connection and experiences to succeed in the development of Air India.