Strategic Alliances And Joint Ventures In Civil Aviation – A Case Study

Strategic Alliances and Joint Ventures in Civil Aviation – A case study

Abstract

The New Economic policy Reforms 1991 has paved way for almost all Indian industries to undergo a radical change. The traditional and restrictive Aviation industry is no doubt a part of it. Infact, Indian civil aviation had to immediately nod to liberalization due to its poor and pathetic financial numbers. Airline, being a service industry is facing intense competition after liberalization. As a result, the various airlines are engaged in consolidation, strategic alliance and privatization, with an aim of improving their competitive positions.

The case attempts to present the growth potential in the aviation industry and the reasons which give a clear indication towards the growth potential. What drives the aviation dream is the growth potential, estimated to be 25 percent with domestic players like Indian Airlines, Jet Airways, Kingfisher Airlines, SpiceJet, Air Deccan, GoAir and Air Sahara carrying 25 million passengers every year. In spite of the downturn, key players are ramping up to fight the battle. The aviation industry is a glutton for investment that may be difficult to come by now. The crux of strategy for aviation companies is how best to source funds to drive growth.

Growth in India's civil aviation sector, for many years stunted by bureaucracy and political interference, is now booming at an estimated 25 percent per year. This expansion is being fuelled by annual economic growth of about 8 percent, rising incomes, a reformist government and an ambitious plan to modernise the country's aviation infrastructure

The Indian aviation industry is growing at a rapid pace, thanks to air transport deregulation, emergence of new operators, lower fares and large untapped demand for air travel. A study conducted by KPMG suggests that the air passenger traffic is likely to reach 100 million in 2009-10. The main drivers of air traffic are economic upswing, concentration of population, industries and liberalisation leading to higher propensity to travel.

The case also throws light on some initiatives in the right direction which aids the growth of aviation industry such as strong political will and improved policy environment: Electricity Act, Draft Maritime Policy, Draft Civil Aviation policy, etc, ring fencing of funds earmarked for infrastructure, nomination of implementation authorities, urgency to bring about commercial viability is apparent, momentum of private participation picking up, with innovative financing concepts like ‘Public Private Partnerships’ and ‘Viability Gap Funding’.

The aviation industry is almost an under penetrated market with total passenger traffic being only 50 million as on 31st Dec 2005 amounting to only 0.05 trips per annum as compared to developed nations like United States have 2.02 trips per annum. Air Cargo has not yet been fully taped in the Indian markets and is expected that in the coming years large no of players would have dedicated fleets

The paper would also highlight the Infrastructure Constraints like shortage of airport facilities, parking bays, air traffic control facilities and takeoff and landing slots, limited number of airports having more than one daily service etc This case would discuss the features of airline industry and the factors which forced the industry into some form of alliances amidst various options. The salient features that favoured the alliances and joint ventures in airlines are as follows: Capital intensity, service orientation, Limited manufacturers, High level of regulation, declining yield, low margins and tendency to consolidate and outsource. Adding to the salient features, the following reasons contributed for consolidation in Indian airline industry: Weak financials, high cost of operation, poor brand image, lower fleet capacity and inability for differentiation.

The paper would present a scenario of civil aviation before and after privatization with special focus regarding the impact on consumers, airlines, airports and finally the economy. From the consumers perspective; choice of airlines have increased, fares have reduced significantly, and increased routes are the major advantages. From the airlines perspective; Commercial freedom is the biggest advantage along with increased foreign investment. From the airport perspective; increased number of air passengers and aircraft contributing to increased revenue in form of landing charges and consumer spending at airport is the great advantage. All these factors have directly and indirectly contributed to the economy in form of increased tax revenues, increased employment opportunities and increased inflow of FDI, increased tourism etc.

The paper would predominantly discuss the case of Air India and would also throw lighter focus on other airlines. The paper would discuss the path taken by Air-India with secondary data about its financials, fleet size, route details, operational performance, inter-firm comparison etc. The paper also discussed about the strategic alliance between Air-India and European airline major Lufthansa which paved the way for joint development of air services on India- Europe-USA route. The paper would finally conclude with recommendations in respect of strategic alliances considering the case of Air-India in specific and other airlines in general.

Key words: Civil Aviation, Liberalisation, Strategic Alliance, Joint venture

Name of authors: ____ 1. K. RAMYA MBA., M.Phil., Ph.D Lecturer (SS) and Research Scholar (Bharathiar University), Department of Management Sciences, DJ Academy for Managerial Excellence, Coimbatore – Pollachi Highway, Othakkalmandapam post, Coimbatore – 641 032 Ph. No. – 098430 70208 e-mail – [email protected]

2. Mrs. Smitha Siji MBA, M.Phil Lecturer SCMS School of Technology and Management (SSTM) SCMS New Campus Prathap Nagar, Muttom, Aluva Cochin – 683 106 Ph. No. – 9446869515 e-mail – [email protected]