Future Challenges For the Indian. Market. CEO Centre for Asia Pacific Aviation. Andrew Miller. April 2006

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1 Future Challenges For the Indian Market Andrew Miller CEO Centre for Asia Pacific Aviation April 2006

2 Environmental Drivers Governments focus on tourism growth and regional dispersal stimulate economy Rapid liberalisation of markets LCC start-ups entering Flag carriers limited ability to respond (culture, cost structure, decision-making, ownership) New international routes from secondary ports Travellers embrace the LCC model LCCs grabbing significant market share Lower fares stimulating more air travel LCCs growing the market: bus/train/car travellers flying - 2 -

3 Retain customers Potential low fare switchers Premium pax Feeder traffic for med/long haul network viability What strategies can airlines pursue.? Capture share of market growth Enhance shareholder value Growth Basis for Strategy Defensive Offensive Contain the growth of competitors LCC Others? Take control of market Distinct brands Price leadership Lowest costs - 3 -

4 and why do they find it so hard? Growth Speed Capital Barriers to Implementation Defensive Offensive Competency - 4 -

5 What are the market impacts on Legacy Full Service Carriers around the world? Loss of home domestic market to LCC start-ups Loss of inbound international market share to other New World Carriers due to deregulation, e.g. Emirates Pressure on home flag carriers to keep pace in investing in new capacity Movement away from single home carrier international hub with resultant network spread in demand Reduction in yields coupled with higher legacy costs (labour controlled) - 5 -

6 Growth of Non Hub Airports Passenger growth (year-on-year) at India s top 11 airports (Apr-05 to Feb-06) 7 40% 6 35% % 25% 20% 15% 10% Millions 1 5% 0 0% Hyderabad Amristar Bangalore Ahmedabad Delhi Kolkata Cochin Trivandrum Goa Mumbai Chennai International Pax Growth - 6 -

7 How are home legacy flag carriers restructuring? Regaining control of their home domestic market by introducing LCC operations, e.g. Qantas with Jetstar Restructuring the cost base of the legacy carrier domestic operation into Legacy Lite, e.g. Air Lingus and Air New Zealand Restructuring the international cost base (non-fuel) to 20-30% lower than current costs, e.g. SQ, CX, BA Protecting secondary ports as well as primary hubs, e.g. QF, LH, NZ Merging operations to strip out costs, e.g. MH and Air Asia Merging airlines to achieve benefits of scale, e.g. AF/KLM and Air Sahara/Jet Airways - 7 -

8 Full Service Carrier Seat Density 2 Where will the cost compression come from for legacy carriers? 1 Around half of the cost differential comes from more seats and better aircraft utilisation 3 Newer aircraft (less maintenance, better fuel burn, etc) can also help Innovative approaches to direct selling 4 Simple structure; few steps to customer Aircraft Utilisation People Sales & Marketing User Charges Aircraft related Overhead Low Cost Carrier - 8 -

9 What does this mean for Air India and Indian Airlines and the Indian Government as a shareholder? The Indian market has tremendous growth opportunities The government policies support long-term growth The Indian legacy carriers are not well placed to create value from this deregulation Duplication of government capital in the domestic and international market as some/most customers are the same The Government investor needs to rationalise its application of capital in the domestic and international markets not only to stop losses but grow the market - 9 -

10 Air India Losing Ground in International Growth International passenger growth, Air India vs Total India 20% 15% 10% 5% 0% 2000/ / / / /05-5% Total international Pax Air India Pax

11 What does the Indian Government do? Merge the domestic and international operations at a lower cost base (2+2=3) with higher revenue potential (2+2=5) Many historical precedents: BOAC/BEA = BA, Qantas/Australian Airlines = Qantas, NAC/Air New Zealand All mergers took too long and didn t give quick wins The Indian Government will benefit from hindsight from these global mergers The balance sheet stress on the national carrier will be alleviated A coordinated aircraft, network and brand positioning will be achieved which will be good for tourism

12 The work of CAPA Consulting Products Legacy Carrier Restructuring LCC Start-ups Airline Mergers, Acquisitions and Joint Ventures Geographies Africa - Australia India - Indonesia Japan - New Zealand Malaysia - Singapore Skills CEO/MD/COO All consultants have hands-on aviation experience CAPA data base provides unrivaled market intelligence

13 The End