Essay, 28 pages (7000 words)

100 years of aviation in india management essay

100 years of aviation in India came with a lot of surprises, some bad news, scams, etc. Three major helicopter crashes all in the northeast, one of which took the life of Dorjee Khandu, chief minister of Arunachal Pradesh. Air India’s reputation was tarnished when its pilot went on to strike in April-May over salary. Nine day strike disrupted several flights. This was not the only reason flights of Air India and Kingfisher were disrupted, as oil companies demanded daily cash payments for lifting fuel. The accumulate loss of major airlines were noted Rs. 15,000 crore in 2010-11 as compared to 7,038 crore of 2009-10 (Air News Times, 2011).IndiGo was the only profit maker in this market and also placed an order of 180 A-320s which is considered the largest aircraft order in the aviation history.The loss suffered by Air India was 6,995 crore while Kingfisher’s loss was even bigger Rs. 1,028 crore with a mounting debt of Rs. 7,057 crore (Air News Times, 2011).Indian carriers had to take several steps to cut costs. Jet Airways decided that it would run only single no-frill airline instead of both JetKonnect and JetLite, while Kingfisher also decided to stop its low-cost airline Kingfisher Red and continue with full-service brand.Why are airline companies making losses? The losses faced by airline companies are not only due the individual carriers but also some fundamental and structural problems in the Indian aviation sector. This research work looks at the possible factors which can affect the financial performance of any airline, main factor being considered in this research is customer service quality; in addition, some other internal and external factors which might have affected the Indian aviation industry have also been researched. Finally, based on this research work there are some recommendations which might help to improve the situation.Service quality describes the achievements in service. Customers, through word of mouth, past service experience, and their own assumptions form some service expectations. For example, if Singapore Airline tries to cut some service in a game of price war it can become a disaster for them. This report will show how Kingfisher which was following the business-model of Singapore Airline tried to do that and paid a huge price. On the other hand, IndiGo Airline which has a low-cost business model is the only airline generating profit despite its limited level of service quality (Harvey, 1998). This raises the question whether providing multiple services to improve customer service quality really affects the financial performance of a company or there are other factors which score higher than customer service quality.The work of Haskett(1994), Rucci(1998), Reichheld and Markey(2000), Vander Merwe(2000), Fredricks(2001), and Reichheld(2004) assumes that financial performance of service organizations very much depend on the generation of high levels of customer loyalty and satisfaction; however, it may be debatable but no one can disapprove it easily (Silvestro, 2010).High airport charges and high taxes on jet fuel are considered the other major reasons for the poor performance of airline companies; according to an estimate by IATA, fuel costs for Indian carriers account for 45 percent of total operating cost as compared to 30 percent world average. IATA suggested the government to set the aviation industry free from policy interventions such as checking airfares and slash taxes.In addition, heavy taxation, inefficient infrastructure, and inability to raise fares in highly competitive markets are few other reasons. Rising debt levels and depreciation in rupee are putting further pressure on airline business (CAPA, 2012).This research has been divided into two parts, first part contains the primary research and analyses the impact of customer service quality on the financial performance of airline companies. Second part contains secondary research and aims at finding out other factors affecting the financial performance of airline companies. For secondary research, information has been collected from the websites, articles, books, financial statements of airlines, etc.


2.1 Research Purpose

The main purpose of this research is very much clear from the topic to analyse the financial performance of aviation industry in India. The financial statement analysis is necessary for the assessment of a business; it helps in budgeting, monitoring, planning, forecasting, and improving all the financial details within an organization. The stringent financial requirement by government, regulatory authorities, investors require financial analysis to be consistent, should be useful and understandable to users. This research work will analyse the performance of three major airlines of India through financial analysis, why are they making losses, whether customer service quality makes a difference or there are some other factors which are more important, and finally what lessons can be learnt from this.

2.2 Research problem Statement

The analysis of the existing literature indicates that the aviation industry of India is currently going through a difficult phase but still growing at a rapid pace and the estimation by the industry expert suggests that the growth will continue at higher pace in the years to come. As a result of this, it provides an extensive opportunity for the airlines in the aviation industry of India to leverage on the opportunities that are available within such industry. However, it may not be so easy to achieve a higher level of growth for airline companies because of the presence of so many airlines in the market that leads to increasing rivalry. Some of these major players include Air India, Jet Airways, Kingfisher, IndiGo, GoAir, JetLite, Spice Jet, etc.As a result, it is essential for these airline companies that they should undertake certain extraordinary initiatives such as improving customer service quality, financial analysis of not only their own company but also their competitors to understand where they actually stand in the market, and try to find out the reasons which are affecting their financial results.Thus, the main research problem statement can be stated as the financial analysis of three major airlines to understand their position in the market, where they are going wrong, where they can improve, and what lessons airline industry can learn from this.

2.3 Research Background

The Aviation Industry of India has been going through one of its worst phases. Increasing oil prices, depreciation of rupee, bad government policies has worsen the situation. The aviation sector in India is comprised of numerous market players that offer a wide range of services at highly competitive rates. Aviation sector in India is growing at a fast pace and this has posed significant opportunities and challenges for the airline companies. In order to ensure a higher level of growth and to sustain it in the growing aviation industry, it is essential for the airline companies in India to match their customer service quality standard with the global standard, analyse their financial situation and financial situation of its competitors, find out their weak areas, and rectify them.The major competition is being witnessed in case of low-cost airlines in the Indian aviation sector; as a result of this consumers have choices available to them, middle class people are becoming new customers. The research will show that in low-cost segment it is the volume which drives the margin, everything else take the back seat; however, company still need to have higher level of service quality than its competitors. For example, there are a number of low-cost airline in the Indian market but IndiGo is the top leader as not only it provides low-cost to customers but also has better on-time performance, very low cancellation rate, and young staff.The research in this paper is both qualitative and quantitative. The research is based on a review of various airline industry literatures and also on the personal reflections.

2.4 Extent of Investigation

The main areas of investigation in this research have been classified under the below mentioned headings:

Issue to be examined

The main issue which is being examined in the given research is to compare the financial performance of three major airlines in India, viz. Kingfisher, Spice Jet, and Jet Airways and the reasons of their success or failure, impact of service quality and other factors on the financial performance of the Indian aviation sector.The presence of large number of airlines with large number of products and services being offered by them, have resulted in greater competition among these airlines. It has become very important for these airlines to closely examine the financial position of their rivals. This will give them a better idea to identify major cost factors. By understanding the reason for these major cost factors, they might be able to find out some solutions to control and reduce these costs.


The most effective way of conducting the research is to find out the objective first, objectives can be very helpful to maintain the focus in research, these objectives also provide the scope and direction for the research as a result of that it becomes easier to complete the research in time and most effectively. In relation to the given research on the financial analysis of Indian aviation industry, the following objectives were considered appropriate for this research.To evaluate the performance of the entire Indian aviation industry.Identifying the success or failure factors for the airline industry.Impact of customer service quality on financial results.Few recommendations which can be undertaken to improve the performance of airline industry.Lessons for the airline industry.

Research Methodology

3.1 Choice of the subject

3.1.1 Personal Rationale

The reason for choosing the topic was quite simple for me as I was always fascinated by the aviation; since childhood I was interested in planes. Indian aviation industry is highly dynamic but very attractive industry. I expect to get a thorough knowledge of Indian aviation sector from this research and I believe that this research work will be very useful to increase my overall knowledge about the aviation sector, it will also provide me a real world idea of finance and what factors can affect the financial performance of a company.

3.1.2 Academic Rationale

Research work is one of the most essential parts of any business curriculum. The learning which a student gets from the research helps him to get the real world idea of any problem and how to look at it in a practical sense. The research work on Indian aviation sector would help me to satisfy one of the important criteria which the university requires in order to award a university degree to its students.

3.2 Research Paradigm and Philosophy

One of the important parts of the research methodology is research paradigm and philosophy. This is useful to collect data in effective and appropriate manner. Johnson and Christensen (2005) defined research paradigm as a perspective which is based on the set of shared values, concepts, assumptions, and practices. Research Paradigm involves two ideas which are related to the function of researcher and the nature of world. Research method and research philosophy both are part of research paradigm, researcher can develop the understanding and knowledge about the topic of research through this combination. Various factors such as time constraints, budget constraints, etc., affect the research to implement a method in effective way. Researcher can eliminate these factors by using the appropriate research paradigm and philosophies (Williams, 2011).There are three different types of research philosophies: Ontology, Axiology, and Epistemology. Ontology refers to the philosophical study of the nature of being or existence, Axiology philosophical research refers to the study of quality or value, ethics and values are the main concern in this type of research. Finally, Epistemology can be defined as the study of theory of knowledge along with the limitations that are associated with it.This research uses Epistemology research philosophy based on the type of research involved. In the given research our focus is to use the knowledge gained from the financial analysis to determine the financial performance of various airline industry, the philosophical research method of Epistemology can be highly effective to perform the research more effectively.

3.3 Research Framework

As the given research analyses the relationship between the customer service quality and financial performance of Indian aviation industry, it needs to have important determining factors related to service quality which will act as independent variables. The framework for the primary research is given below:It has three sets of variables, independent, mediating, and dependent variables. As reliability, tangibility, assurance, responsiveness, and empathy are integral part of service quality and change in these variables affect the quality of service; therefore, these variables act as dependent variable in this research. The dependent variable will affect the level of customer satisfaction which is formed by core services, human element, service delivery, tangibility of services, and social responsibility. Consequently, customer satisfaction will determine the performance of any airline. Thus, Airline performance is the dependent variable in this research. The framework can be applied to almost all the service businesses with some modification; therefore, all three airlines in this research can be analysed with the help of this framework.

3.4 Methodology

Let us take the overview of the research method used in this paper. Research method is a combination of three popular methods, literature survey, questionnaire, and analytical study. First, this paper uses a comprehensive literature survey, three major airlines of India were chosen for this paper; secondly, a questionnaire having a wide range of questions was prepared and sent to a large number of people. In order to perform the analytical study, the author closely followed the issues and the current trends in Indian aviation sector going through in the last few months.

3.4.1 Literature Review

In the age of Internet, arguably one of the most comprehensive ways of literature survey is World Wide Web and internet. The internet provides a number of search engines which facilitate the search for a topic which can be very difficult and not possible through browsing hard copies of expensive books. The search engines are linked to various websites which are useful for searching lot of material.However, there are some challenges as well – in order to search properly, a specific keyword or phrase should be used. One word out of context may show thousands of irrelevant search references. This paper uses Du Toit(2002) five rules for effective searching.Using specific search words.Using many search engines.Trusting the web sitesStaying updated and have current knowledgeSometimes also use traditional resources.Most of the internet search was done through Google, the research paper also uses some journals available on the internet in the pdf format.In addition to the internet, a lot books and articles were also read, these articles and books not only provided useful information but also some keywords to search over the internet to find better and latest information.

3.4.2 Questionnaire

One of the important tools of any research is questionnaire, although not all the research paper contains questionnaire but if used in the research it can provide some useful information which is normally not available anywhere. Using a comprehensive questionnaire can be very time consuming. After a questionnaire has been compiled, questionnaire can be disseminated through hard copies, facsimile, or electronic mail. E-mail is the best method of disseminating questionnaire in this case.Following steps were used to prepare, send, and analyse the responses received for the questionnaire.Questionnaire setupPreparing an E-mail list:Sending out questionnaire:Receiving the responseRecording responsesProcessing results

3.4.3 Analytical Research

For analytical research on the Indian Aviation Industry, research paper uses financial statements of three major airlines of India. With the help of Microsoft Excel, worksheets were created for the analysis purpose. Information from the financial statements of these companies was taken manually.The purpose for choosing three airlines was simple as these airlines have been operating for a long time, privately run and have all the information available as per the GAAP. One major airline IndiGo was left out of this research as it is fairly new as compared to the airlines which have been chosen and not listed.

3.5 Research Approach Method

Researchers have two approaches available to them one is inductive and second approach is deductive. Both inductive and deductive methods of researches have their own importance depending upon the types of research. In case of inductive research, limited numbers of observations are taken and it makes a conclusion and generalization on the basis of these observations. Approach taken by researchers in case of inductive research is specific to general. Generalization is made on the basis of limited observations. Deductive research approach is quite the opposite of inductive research; researcher takes the approach from general to specific. The researcher in deductive research come to the conclusion that what has occurred in a sample of subjects is likely to occur in other people related to the subjects.This research uses the inductive research approach as it seems more appropriate in this case.

3.6 Service Quality

Customers often compare their expectation with performance which is also called service quality. A business can remain economically competitive yet meet customer needs if it has high service quality. This can be achieved by analysing and improving operational processes which include problem identification in a quick and systematic way to establish reliable service performance measures, and measure the customer satisfaction and performance result.Dimensions of service quality:(Harvey, 1998)Factors such as recommendations, past experiences, and personal needs determine the customer’s expectations. If the service perceived by customer is not equal to the service received, it leaves a gap. Parasuraman, Zeithaml, and Berry identified ten determinants which would influence the gap. These were competence, courtesy, credibility, security, access, communication, knowing the customer, tangibles, reliability, and responsiveness. Later these determinants were reduced to just five: Empathy, Tangibles, Responsiveness, Reliability, and Service Assurance.

3.7 Customer Service Quality Model or GAP Model

Parasuraman, Zeithaml, and Berry developed a GAP model, this model highlights the some important requirements for delivering superior service quality. There are five gaps which will cause unsuccessful delivery. Customers always compare the service they receive with the service they expect. Often experience does not match the expectations and creates a gap.

Primary Research

4.1 Literature Review

One of the most important sections of the research is Literature review. Literature review critically analyses the existing literature on the studies which have been conducted in the past. The extensive analysis of existing literature benefits the researcher by providing insight about the research topic and ultimately provides better and authentic research findings. In case of current research on financial analysis of Indian aviation industry, the analysis of the existing literature provides knowledge about the factors which affect the financial performance of Indian aviation sector. This will lead to the identification of areas which need special attention to achieve higher recognition within the industry.Customer service quality is assumed to be an important factor contributing positively to the financial performance of an airline. A lot of researches have investigated the relationship between customer satisfaction, customer service, and firm performance. A company is assumed to increase customer satisfaction by improving its customer service which further leads to the better performance of the company. Several research papers in operation management, marketing, accounting, logistics and transportation have investigates these links (Forness and Anderson 2000: Anderson et al. 1997; Mittal and Anderson 2000; Riley and Behn 1999, Capon et al. 1990). On the other hand, some researchers have found inconsistent relationship between customer service, satisfaction, and performance (Ittner and Larcker 1998; Johnston, 1995; Mersha and Adhlaka, 1992, Jonston et al, 1990).Dresner and Xu(1995) investigated the link between customer service and customer satisfaction in the transportation and logistics field using the data from the airline industry. According to them, customer service measures like mishandled baggage, on-time performance, ticket over-sales were positively affect customer complaints which was a measure for customer satisfaction in their research. Especially, reducing mishandled baggage and ticke over-sales, higher on-time performance all contribute to lesser complaints by customer as recorded by the US Department of Transportation. Similar links between service quality and firm performance were found by Park et al.(2004) in their research on the Korean airline industry. Babakus et al(2004) in his research on retail industry using the subjective data also found that the higher service quality leads translates into higher firm performance.The empirical work in the transportation and logistics found the linear link between the customer service quality and firm performance (Sim et al 2010, Nagar and Rajan 2005, Homburg et al. 2005, Behn and Riley 1999, Yee et al 2010), but it is not always true and often the relationship can be nonlinear because of the diminishing marginal returns to customer service quality. The linear relationship is likely to be true at the initial stage but finally diminishing marginal returns will set in. This view was supported in the work of Anderson and Mittal 2000, Slevitch 2010, Matzler et al. 2004, and Finn 2011.

4.2 Data Analysis and Findings

One of the important part of any research work is data analysis, the data which is collected through the research work is analysed in this part to make the research more effective. Data collected for this research work came through primary and secondary methods. The primary data consists of the surveys responses collected from the 50 back end staff and managers in aviation sector; while, secondary data was collected through literature review techniques. The survey had a questionnaire which consisted of eight simple questions. Viewers were supposed to respond by selecting one option for each question ranging from 1-5. ‘1’ for completely disagree while ‘5’ for strongly agree.For analysis purpose, research uses pearson correlation with the following formula:The responses for each survey question have been evaluated as follows.

4.2.1 Better service quality leads to a better financial performance. This philosophy is true in Indian aviation industry as well?

The above figure suggest that many people believe that better service quality leads to a better financial performance; hence there is higher level of importance in maintaining service quality in Indian aviation industry. The findings suggest that 30% of respondents strongly believe that service quality is very important; while 38% respondents have given a rating of 4. This implies that total 68% of respondents agree that service quality is important to improve the financial performance of any company. 16% of respondents were unsure and could not decide whether service quality is really important. Rest of the respondents believe that service quality is not so important and there are other factors in addition to service quality which affect the financial performance of any company.

Correlations between service quality and financial performance

VAR00001VAR00002VAR00001Pearson Correlation1.533**Sig. (2-tailed).000N50VAR00002Pearson Correlation.533**1Sig. (2-tailed).000N5050**. Correlation is significant at the 0.01 level (2-tailed)

4.2.2 The products which are reliable have better chance to succeed. Is it applicable in case of Indian aviation industry that on-time performance scores high in selecting a particular airline?

Reliability is an important factor of service quality. However, the relationship between the reliability (on-time performance) and customer purchase is very weak. The scores in this were very unbalanced. Only 36% of the respondents accept that on-time performance is an important factor while selecting an airline by customers, 6 respondents gave strong agreement and 12 respondents agree up to some extent. 22% of the respondents have given a rating of 3.Total 42% of the respondents, out of which 24% gave a rating of 2 while 18% gave rating of 1, believe customers don’t give so much preference to on-time performance while selecting an airline and there are other factors which weigh high for customer.

Correlations between on-time performance & customer satisfaction

VAR00001VAR00002VAR00001Pearson Correlation1.135**Sig. (2-tailed).349N50VAR00002Pearson Correlation.135**1Sig. (2-tailed).349N5050**. Correlation is significant at the 0.01 level (2-tailed).The correlation between on-time performance and customer purchase is only .135 and shows a weak link. This goes against the belief that reliability which is an important part of customer service quality will have positive impact on the sales.

4.2.3 Adequate sympathy is essential in airline industry on services like baggage charges on which airlines charges extra from customers. Do you agree that sympathy builds higher level of satisfaction among customers and benefit financial performance of airline?

Findings between sympathy and customer satisfaction shows moderate level of results. 20% of respondents have given a rating of 5 and 30% of respondents gave a rating of 4, total 52% people believe that sympathy is important to build the satisfaction among customers. 32% people were unsure and don’t see much relationship between sympathy and customer satisfaction. Total 16% of respondents believe that sympathy does not help in building customer satisfaction as many customers have no issues if the rules are followed strictly.

Correlations between sympathy and customer satisfaction

VAR00001VAR00002VAR00001Pearson Correlation1.451**Sig. (2-tailed).000N50VAR00002Pearson Correlation.451**1Sig. (2-tailed).000N5050**. Correlation is significant at the 0.01 level (2-tailed).Pearson correlation score of .451 suggest that the relationship between sympathy and customer satisfaction is moderate. That means sympathy which another important factor of customer service quality is less likely to have an impact on revenue.

4.2.4 The better in-flight services and fast customer service are some of the essential prerequisites in satisfying customers and result in better financial performance?

The findings between in-flight services and revenue suggest that in-flight services and responsiveness are regarded as an important feature by the respondents. 26% respondents gave the rating of 5 whereas 34% respondents gave a rating of 4.This implies that total 60% respondents give importance for creating better in-flight services and responsiveness in order to generate more revenue.24% respondents neither accept nor reject this point whereas 14% respondent gave disagreement to this point and 1 respondent gives strong disagreement to this point.

Correlations between better in-flight services, responsiveness and customer satisfaction

VAR00001VAR00002VAR00001Pearson Correlation1.514**Sig. (2-tailed).000N50VAR00002Pearson Correlation.514**1Sig. (2-tailed).000N5050**. Correlation is significant at the 0.01 level (2-tailed).Based on these responses, the relationship between in-flight services and customer satisfaction gives a positive correlation of .514; this indicates that there is a strong relationship between the two. This strong relationship implies that companies should focus on improving in-flight services and responsiveness of its staff which will ensure a higher level of customer satisfaction.

4.2.5 If you are satisfied with the service quality, are you likely to travel from the same airline?

The finding between customer satisfaction and retention of customers is very useful as satisfied customer are very much likely to travel from the save airline. 40% respondents strongly believe that satisfied customers will prefer to travel from the same airline. 28% respondents gave a rating of 4 on this scale. Total 68% respondents believe that satisfied customers can be retained. 12% gave a rating of 3, 14% people gave rating of 2, and 6% people gave a rating of 1 in the five-point likert scale.

Correlation between customer service quality and retention

VAR00001VAR00002VAR00001Pearson Correlation1.772**Sig. (2-tailed).000N50VAR00002Pearson Correlation.772**1Sig. (2-tailed).000N5050**. Correlation is significant at the 0.01 level (2-tailed).These results show that there is a strong relationship between the customer satisfaction and retention. The correlation of .772 is strong evidence to this fact. This implies that customer satisfaction is very important for any airline company and no company should take it lightly as it has an indirect impact on the financial performance of airline companies.

4.2.6 If you are satisfied with the service quality, would you recommend the airline to other customers?

The result between customer satisfaction and advocacy was very much similar to the result between customer satisfaction and retention. 36% respondents strongly agree that satisfied customers recommend the airline to other customers. Further, 38% respondents agree for this point and this makes total 74% respondents agree for this fact that satisfied customers are likely to bring more customers. Only 16% respondents gave a rating of 3 whereas total 10% respondents do not agree to this point.

Correlation between customer service quality and advocacy

VAR00001VAR00002VAR00001Pearson Correlation1.784**Sig. (2-tailed).000N50VAR00002Pearson Correlation.784**1Sig. (2-tailed).000N5050**. Correlation is significant at the 0.01 level (2-tailed).Pearson score of .784 shows even stronger relationship between customer satisfaction and advocacy than customer satisfaction and retention. This further stresses the fact that satisfied customer have indirect positive impact on the financial performance of airline.

4.2.7 Better service quality is no guarantee to better financial performance as it can be affected by internal and external factors?

This was an interesting question which shows that there are other factors which weigh higher that customer service quality and better service quality will not guarantee better financial performance.The survey shows that total 74% respondents believe that other factors will be more important in deciding the actual performance of any company than the excellent service quality, 36% of the respondents gave rating of 5 and 38% respondents gave a rating of 4 to this point in the five-point likert scale.12% respondents gave rating of 3 and only a total of 14% respondents favour customer service quality than the other internal and external factors.

Correlation between other factors and financial performance

VAR00001VAR00002VAR00001Pearson Correlation1.729**Sig. (2-tailed).000N50VAR00002Pearson Correlation.729**1Sig. (2-tailed).000N5050**. Correlation is significant at the 0.01 level (2-tailed).Pearson correlation score of .729 gives strong support to this argument that better service quality will not guarantee strong financial results; it must be supported by other factors.

4.2.8 Do you think price is still the deciding factor than the better customer service quality in the Indian aviation market?

Here comes the most important question for the Indian market as the Indian customers have always been price sensitive. The survey between pricing vs customer service quality stresses the fact that price still rules in the Indian market. 40% respondents strongly believe that price is still the deciding factor when it comes to purchase. Further, 26% respondents agree with this point. 16% respondents were unsure and had a difficulty in choosing between price and customer service quality. However, total 18% respondents do not agree with this and believe that customer service quality matters more than the price, 16% out of this gave a rating of 2 and only 1 person strongly supported the service quality.

Correlation between customer purchase and price

VAR00001VAR00002VAR00001Pearson Correlation1.685**Sig. (2-tailed).000N50VAR00002Pearson Correlation.685**1Sig. (2-tailed).000N5050**. Correlation is significant at the 0.01 level (2-tailed).Pricing got a Pearson correlation score of .685 suggesting a strong relationship between the pricing and customer purchase. This also suggests that when customer has to chose between service quality and price, they prefer price more than the service quality.

4.3 Findings

The conduct of the research work between customer service quality and financial performance of Indian aviation industry was successful in attaining the main aim of the research which was to evaluate the effect of customer service quality on the financial performance of Indian aviation industry.The above figure shows the satisfaction and how it can affect other things which can translate into revenue for a company. Although, customer satisfaction does not guarantee that it will translate into strong financial performance as many external factors affect the performance; however, satisfied customers are more likely retain and come back and bring more customers through advocacy.There was less correlation between satisfaction and revenue; however, a strong negative correlation exists between dissatisfaction and revenue. As the number of dissatisfied customer increases the revenue will start to decline.The relationship between loyalty and revenues was very confusing as the Indian aviation industry is still ruled by price very much. Success of low-cost airline IndiGo proves the fact that Indian customers are very sensitive about price and give it more priority as compared to the service quality.

Secondary Research

First part analyses the impact of service quality on the financial performance of an airline. It was very much clear from the above discussion that there are more important factors which affect the entire industry. The second part looks at the macroeconomic picture of Indian aviation sector and tries to find out what are the other factors which affect the financial performance of an airline company.

5.1 Brief Context of Indian Aviation Industry

The history of Indian Aviation Industry begins with the birth of Tata Airlines. Mr. JRD Tata and Mr. Nevill Vintcent joined hands to form Tata Airlines. Mr. JRD Tata was the first Indian who got the A-license. In Aug 1946, a year before the Indian independence, Tata Airlines was renamed and it became what is today known as Air India. All the airline assets were nationalized in the year 1953 through Air Corporation Act. This act also established Indian Airline to cover domestic air services while Air India for International services (Ventursol, 2007).Both airlines enjoyed monopoly until 1991. In order to boost tourism in India, government allowed private operators to run charter and non-scheduled services under ‘Air Taxi’ system. Thus private players like Air Sahara, Jet Airways, NEPC airlines, Damania Airways, and East West Airlines began their domestic operations, however, they were not allowed to issue air tickets to passenger or fly scheduled flights. Finally, private players were allowed to operate scheduled services from 1994 through the repeal of the Air Corporation Act. By 1997, only Air Sahara and Jet Airways were able to survive due to their efficient operations and strategies (Ventursol, 2007).Airline industry of India revolutionized in 2003 with the launch of no-frill airline Air Deccan in 2003. The fare offered by Air Deccan at that time were as low as 500 (app. 10 USD) as compared to Rs. 3000 by a full service fare by other airlines.YearMilestoneBefore 1953Total number of airlines 9, included Air India & Indian Airlines1953Air Corporation Act; Nationalization of airlines1986Permission granted to private airlines to operate Air Taxi service1994Permission granted to private airlines to operate scheduled services1995Scheduled carrier status granted to East West, Jet, Modiluft, Sahara, Damnia1997Except Jet and Sahara, other airlines shut operations2001ATF prices decontrolled2003India’s first LCC starts operation2005SpiceJet, Go Air, Kingfisher, IndiGo, Paramount started operations2007Consolidation of Industry; Kingfisher-Air Deccan, Jet-Sahara2010SpiceJet granted the status to fly international flights2011IndiGo gets the status to fly international; Kingfisher faces trouble2012Direct import of ATF allowed, FDI proposal to approve 49% stake by foreign airlines under consideration; Kingfisher Airlines licence suspendedAviation industry of India is one of the most important industries which are growing at a very fast pace and it has a significant contribution towards the overall economic development of the country as well. Although, the researches on the aviation sector of India are very few among the past researchers, yet some of these studies discovered most important facts about the performance of the aviation sector.The Indian Flight business sector developed by 12.1% (and a CAGR of 14.5%), which was flatter than the past year. Household travellers conveyed around for the present year stood at 60.61 million. The leading part of the budgetary year saw development in supply because of abundance limit and the second part of the year saw stability in the supply side.The low-cost air transport saw a sizable build at the expense of the full-service airlines. The piece of the overall industry of the LLC expanded to 57%. This doubtlessly demonstrates that the business division offer development is resolved more by the cost conscious diversion and travel voyage as the business voyage remained stagnant due to the moderate growth of economy.The market share of the airline is as illustrated between the two financial ending 2011 &2012. In the duration of the financial year the Spice Jet has increased its market share from 13.5% to 17.1%. The market share of Jet + Jetlite also increased to 28.20 from 25.40. On the other hand, the biggest looser has been KFA, the market share of KFA has reduced drastically from 19.90 to a dismal 6.40%.Financial performance of almost all the airlines was affected by increased fuel prices and sliding Indian rupee more than anything else. The international price of the crude oil went beyond USD 120 per barrel and this coupled with the increase in dollar rates, the cost of the fuel become high to 56%. The profit of the airline is based on the fuel and dollar rates because they mostly stressed on these fields, this will affect the profitability of the airline in a large extent.

5.2 Kingfisher Airlines

Kingfisher, which everyone thought at one time, will become the biggest airline of India, despite making losses investors believed that it will overcome all the challenges and provide them good returns in the future. Unfortunately, that was not to happen and despite the continuous red flags from the financial statements, chairman, management, employees, investors, and even the customers all loved Kingfisher. Company’s license was recently suspended due to the shortage of cash; Kingfisher was not even able to pay the salary of its employees on time. Kingfisher one time had become the favourite airline among business class people because of its highest standard of service. Kingfisher girls were among the most attractive girls in the industry and airline was popularly known for that. In very short period of time, Kingfisher won numerous awards for its highest standard of service till 2011. The brand Kingfisher had become a synonym for the excellence in the airline sector India. However, Kingfisher was never able to generate make much money and please its shareholder. Let us analyse the performance of Kingfisher in past five years and understand why Kingfisher had to face such a situation.2005: The operation of Kingfisher Airline began on May’ 09, 2012. The first flight flew to the Indian capital Delhi, from the financial centre of India, Mumbai. Kingfisher recoded an income of Rs. 13.5 billion with a net loss of Rs. 3.4 billion.2006: Kingfisher became popular among business class travellers due to its five star services. In the same year, Kingfisher started providing live in-flight entertainment in partnership with Dish TV India Ltd. Kingfisher was the first to provide this kind of facility in India. This year Kingfisher Airline loss accumulated to Rs. 4.19 billion.2007-08: Everything turned to green this year; Kingfisher carried about 17 million passengers this year with more than a schedule of more than 250 and a fleet of 40 aircraft. Kingfisher acquired 46% stake in Air Deccan, income rose to 15.4 billion and losses reduced to less than Rs. 1.8 billion. These years may be termed as the best years for Kingfisher airline till now. Finally, fleet count increased to 77 aircrafts.2009: Kingfisher acquired a market share of 23% and became largest passenger carrier in India. Aircraft count reduced to 68 and domestic flights also reduced to 360 but positively international operation increased to 12 flights every day. This year Kingfisher airline received numerous awards for various agencies around the world and rated as India’s only five star airlines consecutively third time in a row by Skytrax. However, even after four years of operations shareholders were still awaiting to receive first dividend. Income marginally decreased to Rs. 52.7 billion.2010: Jet Airways which was much more stable and sustainable took over as the largest passenger airline with 25.5% market share, while, the market share of Kingfisher decreased to 19.8%. This was a sign of bad things Kingfisher had to face in future. There was only one player this year which was being noticed, ‘Indigo’ which is low-cost carrier, was rapidly eating the market share of other airlines and reported 90% seats being filled. However, for Kingfisher airline international operation were increased and reached to 28 flights daily with no change in the number of domestic flights. Despite the increase in the number of flights there was no increase in the market share but overall it was a an average year for Kingfisher as the losses of Rs. 10.2 billion were reduced and income increased to Rs. 64.9 billion (Khattar, 2012).2011: Kingfisher airline was left with no option and had to declare that there were some serious cash flow problems with the airline. Kingfisher simply blamed everything on the rising fuel prices. But if we notice Kingfisher had not paid its dues to oil companies then how come it could have blamed cash flow problem on rising fuel costs. Many pilots quit Kingfisher airline to join rival airlines as Kingfisher was not even able to pay their salaries. The income dramatically reduced to mere Rs. 13.4 billion with a loss of Rs. 4.4 billion (Khattar, 2012).2012: Finally, the worst year arrived. It started from the beginning of the year when State Bank of India announced KFA as non-performing asset. This announcement was not very shocking but it seemed as if a mother was announcing to the entire world that her child is useless. Things were completely out of control of Kingfisher Airline management. More than 2000 workers were laid off and working hours were increased for rest of the employees. 28th February, 2012, Mr. Mallya himself announced that airline was not doing very well and it badly needed cash in order to continue its operations, most of the flights were grounded and Kingfisher was flying only 28 aircrafts with a schedule of 175 flights daily. SBI led consortium of banks denied issuing more debt to Kingfisher (Khattar, 2012).

5.2.1 Business Failures/Sickness

Recent years have shown an alarming rate of business failures. Sickness is very close to business failure and can be temporary or long-term (often results in business failure). A business failure can often result into the wastage of capital assets, locking up of financial resources, loss of production, and most importantly unemployment. Prediction about a business failure or sick unit can be done by the analysis of financial statement analysis. If we could develop a forewarning system needed to detect potential business failure as early as possible, timely action can be taken to can be initiated to intervene the process of business failures (Yadav, 1986).The intervention process may often involve a change in management of the firm, grant of additional funds from government, or funding by other organizations to halt or reverse the process of business failure. First of all, time and effort is required to identify the cause of the sickness in an organization then we can take steps to diagnose the problem (Yadav, 1986).There are several ways to look at the sickness/failure in an industry. Walter and Donaldson define it as technical insolvency when a firm cannot meet its maturing obligation; while, some restrict the term of sickness/failure to the real insolvency case, in such case total value of an organization’s asset is smaller than its liabilities. Some people restrict business failure in the strict legal sense of bankruptcy or liquidation when the organization is unable to run its operations anymore (Yadav, 1986).Keeping above views in mind there can be three different views of sickness/failure from the point of view of different stakeholders.From a government’s point of view, it recognizes sickness/failure only when an organization is on the brink of bankruptcy or closing its doors, and throws a large number of people out of the employment.Lending institutions recognize the sickness/failure when an organization is unable to pay its dues or instalments on the money lent on time and it continues for 2-3 intervals. Recovery of money lent for the lending institution becomes uncertain at this point of time.Shareholders recognize the sickness/ failure when an organization is unable to pay reasonable dividends, share value falls down drastically, and future looks bleak.Looking at all the three views, we realize that third view is very close to the economic sense of failure, it is directly related to the earning potentiation of the firm. Second view is much closer to the business term and directly related to the liquidity of a company.If a company is not able to pay the dividends, it is quite possible that it will be soon followed by the non-payments of dues, and finally operations will be ceased. Thus, different points of views discussed above represent the different stage of sickness.Sickness in business term is very much like an organic process, sometimes a healthy business may turn sick for short period then recover. There could be various reasons of sickness which can be classified into two internal and external. External factors will affect the entire industry and thus gets more attention by everyone, other industries and even the government are also concerned in such situation. On the other hand, internal factors affect a particular organization and not the entire industry. Severe steps should be taken if internal factors are found to be the reason of sickness (Yadav, 1986).The above figure shows the process of sickness due to internal reasons, first a healthy unit shows a good cash profit, and positive values of working capital and net worth. At a later stage, this healthy unity starts having shortage of cash or losses due to some external or internal reasons. If this state is temporary, unit may return to a healthy state; however, if the unit is not able to meet its cash requirement for longer time or company does not make profit for longer time incipient of sickness occurs where at least two criteria goes into negative territory, this stage requires careful monitoring and if taken seriously company may avoid sickness. On the other hand, if the steps are not taken at this stage, unit falls sick where all the criteria goes into negative territory. Only a drastic change can bring the unit back to a normal stage otherwise if the sickness continues for longer time, it results in closure of the unit (Yadav, 1986).

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