L3' Analysis of Industry II

1
L3. Analysis of Industry II

• Hanif Kanjer
• MBA (London Business School), BE (Production)
• Director, Rustomjee Cambridge International
  School
• Director, Rustomjee International School

2
Index

• PEST Analysis
• Airlines Revenue Streams
• Airlines Cost Structure
• Porters Five Forces Analysis Airline Industry
• Case Jet Airways and Air Sahara
• Naresh Goyals High Bid
• Saharas Entreprise Value
• Issues at Sahara
• Saharas Way Forward
• Air Transport Industrys Value Chain
• Airport Operators Revenue Stream
• Porters Five Forces

3
PEST

• Industry Growth rate 20 25
• Infrastructure Constraints
• Technological advances
• Fuel shortages
• Large populace
• Air Seats
• 40m in 2004-05
• 51m in 2005-06 (growth of 28)
• Rail passengers 15m per day
• Low Cost Carriers (LCCs) versus Full-Service
  Carriers (FSCs)
• Aviation Industry is losing Rs. 6 crores daily.
• 200 planes x Rs. 10 crores per plane Rs. 2000
  crores loss this year
• 50 of Air Traffic is Mumbai -Delhi

4
Airlines Revenue Stream
Advertising
Passengers
Cargo

• Leisure
• Business Traveller
• Private Jets

• Express
• Regular

• In-flight magazines
• Duty Free
• In-flight advertising (seats, trays,
  entertainment systems)
• Ticket dockets
• Tourism Guides

Loyalty-Base Frequent flier Air-miles, Volume
Discounts
No. of Aircrafts
Flying hours per day
Price of seat
X
Load Factor
X
X
5
Airlines Cost Structures
High Fixed Costs
FSC
LCC
Fuel
40
Salaries
Aircraft Leasing costs
Parking Charges
Government Taxes
Volumes and Economies of Scale Business
To fill seats they are disposing off their extra
capacity at rock bottom prices
6
Aviation is one of the hardest businesses to
manage
- Warren Buffet
Capital Intensive
Economies of Scale
Low RoC
January 2006
7
Naresh Goyals High Bid
Enterprise Value (Rs. crores)
Market Share
EV per unit of market share
Jet Airways
4,420
37
119
Air Sahara
2,125
11
195
8
Saharas Enterprise Value
Enterprise Value (Rs. crores)
Market Share
EV per unit of market share
Jet Airways
4,420
37
119
Air Sahara
2,125
11
195
Jet's actual bid
What Jet should have bid
Excess Paid
2,125
Rs crore
38
1,314
811
(119 x 11)
472
292
180
USm
9
Issues at Sahara
Sahara was a Loss Making airline Employee
strength at 4,500
1. Overstaffing 33 higher staff per aircraft
than Jet
2. EBITDAR was 8 lower
3. Asset utilization was 31 lesser
(Source Page 22, BW, 6February 2006)
Routes not planned properly
Inefficiency in cost management
Aircraft Leases not negotiated well
10
Saharas Way Forward

• Form strategic alliances for Code Sharing and
  Employee sharing
• Routes Rationalisation, aircraft utlisation
• Raise Debt for funding its expansion plans
• Launch International Destinations Bangkok, KL
• Can they buy Oil Futures to cushion increases in
  fuel costs?
• Expiry of seats. routes-rationalisation
• Can they start a Banking business, because the
  lease costs would be lower?
• e.g. Ashok Leyland Finance
• Airline staff uniforms can have branding of other
  goods.
• e.g. Samsonite suitcases, perfumes, etc.
• In-flight promotions/launch of products, give
  samples along with tickets, at travel agents,
  etc.

11
M Porters Five Forces
New Entrants
Barriers to entry
Industry Competitors Intensity of Rivalry
Bargaining Power
Bargaining Power
Suppliers
Customers
Threat of Substitutes
Substitutes
12
Air Transport Industry Value Chain
16
11 14
10 13
10
gt30
15
4 - 6
Return on Capital
13
Airport operators Revenue Stream
Aeronautical
Aero-related
Non-aeronautical
Commercial

• Aircraft Refuelling
• Advertising fees
• Revenue from concessionaires
• Rental- airlines, businesses, shops
• Car parking, public admission fees

• Landing Charges
• Parking Charges
• Passenger Service Fees

• Cargo Handling
• Aircraft Maintenance
• Catering Services

• Real estate development
• Hotel
• Business Industrial park
• Retail Entertainment
• Residential