Air India

Executive Summary The first assignment introduces us to the Indian National Carrier Air India, its overview, the aviation industry of India and also the rise and fall of the Flagship carrier. After a critical analysis of the first airline, we will also discuss about its competitor the Kingfisher Airlines, its overview and how both the airlines fell into a severe financial distress and also their financial statements which led to the financial distress. The global recession occurred in the 2008, but before that due to the merger of Air India with that of Indian airlines, the national carrier hit a huge debt

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ridden costs which led to failure of aircraft safety etc; thereby leading even to shut down due to huge costs arrived due to merger. And due to all factors Air India is facing the worst ever financial crisis where we shall discuss about their financial statements and give recommendations based on the understanding arrived at the end of the assignment and we shall also discuss about the airline’s competitor Kingfisher Airlines. . The Rise of Aviation industry in India According to March 2012 reports,

The Indian Aviation Industry has been going through a turbulent phase over the past several years facing multiple headwinds – high oil prices and limited pricing power contributed by industry wide over capacity and periods of subdued demand growth. Over the near term the challenges facing the airline operators are related to high debt burden and liquidity constraints – most operators need significant equity infusion to effect a meaningful improvement in balance sheet. Improved financial profile would also allow these players to focus on steps to improve long term viability and brand building through differentiated customer service.

Over the long term the operators need to focus on improving cost structure, through rationalization at all levels including mix of fleet and routes, aimed at cost efficiency. At the industry level, long term viability also requires return of pricing power through better alignment of capacity to the underlying demand growth. While in the beginning of 2008-09, the sector was impacted by sharp rise in crude oil prices, it was the decline in passenger traffic growth which led to severe underperformance during H2, 2008-09 to H1 2009-10.

The operating environment improved for a brief period in 2010-11 on back of recovery in passenger traffic, industry-wide capacity discipline and relatively stable fuel prices. However, elevated fuel prices over the last three quarters coupled with intense competition and unfavorable foreign exchange environment has again deteriorated the financial performance of airlines. During this period, while the passenger traffic growth has been steady (averaging 14% in 9m 2011-12), intense competition has impacted yields and forced airlines back into losses in an inflated cost base scenario. Source: (http://www. icra.

in/Files/ticker/Indian%20Aviation%20Industry%20(NEW). pdf) Introduction of Air India & its International Presence Tata Sons, a division of Tata Sons Ltd. (now Tata Group) was founded by J. R. D. Tata in 1932. The aviator Nevill Vintcent had an idea to run mail flights from Bombay and Colombo that connected with the Imperial Airways flights from the United Kingdom. He found a supporter for his plans from J. R. D. Tata of the Tata Iron and Steel Company. After three years of negotiations Vintcent and Tata won a contract to carry the mail in April 1932 and in July 1932 the Aviation Department of Tata Sons was formed.

On 15 October 1932, J. R. D. Tata flew a single-engined De Havilland Puss Moth carrying air mail (postal mail of Imperial Airways) from Karachi’s Drigh Road Aerodrome to Bombay’s Juhu Airstrip via Ahmedabad. The aircraft continued to Madras via Bellary piloted by Vintcent. Tata Airlines initially consisted of one Puss Moth aircraft, one Leopard Moth, one palm-thatched shed, one whole time pilot assisted by Tata and Vintcent, one part-time engineer and two apprentice-much Initial service included weekly airmail service with a Puss Moth aircraft between Karachi and Madras via Ahmedabad and Bombay, covering over 1,300 miles.

In its very first year of operation, Tata Airlines flew 160,000 miles, carrying 155 passengers and 10. 71 ton of mail. In the next few years, Tata Airlines continued to rely for its revenue on the mail contract with the Government of India for carriage of surcharged mail, including a considerable quantity of overseas mail brought to Karachi by Imperial Airways. The same year, Tata Airlines launched its longest domestic flight – Bombay toTrivandrum with a six-seater Miles Merlin. In 1938 it was re-christened as Tata Air Services and later same year was renamed as Tata Airlines. By this time Delhi and Colombo were also serviced.

After World War II regular commercial service was restored in India and Tata Airlines became a public limited company on 29 July 1946 under the name Air India. In 1948, after the independence of India, 49% of the airline was acquired by the Government of India, with an option to purchase an additional 2%. In return the airline was granted status to operate international services from India as the designated flag carrier under the name Air India International. On 8 June 1948 a Lockheed Constellation L-749A named Malabar Princess (registered VT-CQP) took off from Bombay bound for London Heathrow via Cairo and Geneva.

This was the airline’s first long-haul international flight, soon followed by service in 1950 to Nairobi via Aden. On 25 August 1953 the Government of India exercised its option to purchase a majority stake in the carrier and Air India International Limited was born as one of the fruits of the Air Corporations Act that nationalised the air transportation industry. At the same time all domestic services were transferred to Indian Airlines (now renamed as Indian). In 1954, the airline took delivery of its first L-1049 Super Constellations and inaugurated services to Bangkok, Hong Kong, Tokyo and Singapore.

Air India International entered the jet age in 1960 when its first Boeing 707–420, named Gauri Shankar (registered VT-DJJ), was delivered. Jet services to New York City via London were inaugurated that same year on 14 May 1960. On 8 June 1962, the airline’s name was officially truncated to Air India. On 11 June 1962, Air India became the world’s first all-jet airline. Source: (http://en. wikipedia. org/wiki/Air_India) Codeshare agreements Air India has codesharing agreements with the following airlines (as of December 2012): Aeroflot Air India Express Air Mauritius Austrian Airlines

Ethiopian Airlines Kuwait Airways Lufthansa Singapore Airlines South African Airways SriLankanAirlines (Future Oneworld member) Swiss International Airlines Turkish Airlines Source: (http://en. wikipedia. org/wiki/Air_India ) Air India’s Market Share Source: (http://www. moneylife. in/site/userimage/image/roundtablechart(1). jpg) Financial Analysis The main reason for a financial analysis is that it determines how the organisation or the company is. Through financial analysis it also enables the investments budgeting from within the organisation and also from outside. It also enables the investors

Profitabiltiy Ratio Net Profitability Net profit, also referred to as the bottom line, net income, or net earnings is a measure of the profitability of a venture after accounting for all costs. Net profit: To calculate net profit for a venture (such as a company, division, or project), subtract all costs, including a fair share of total corporate overheads, from the gross revenues or turnover. Net profit = Sales revenue – Total costs Net profit is a measure of the fundamental profitability of the venture. “It is the revenues of the activity less the costs of the activity. The main complication is .

. . when needs to be allocated” across ventures. “Almost by definition, overheads are costs that cannot be directly tied to any specific” project, product, or division. “The classic example would be the cost of headquarters staff. ” “Although it is theoretically possible to calculate profits for any sub-(venture), such as a product or region, often the calculations are rendered suspect by the need to allocate overhead costs. ” Because overhead costs generally don’t come in neat packages, their allocation across ventures is not an exact science. Source: (http://en. wikipedia. org/wiki/Net_profit)

Net Profit Margin Ratio : Net Profit after Taxes Sales (Rs. In Millions) Financial Year 2011 2010 2009 Net Profit after Taxes 3919. 2 3606. 9 3396 Net Sales 1351. 6 1401. 8 1411. 6 Net Profit Margin Ratio 2. 899 2. 573 2. 405 IN the year 2011 its saw a growth of net profit at . 32% than the year 2012 because the airline after a large number of bailouts is coming back to normalcy mode. Liquidity Ratio Current Ratio : Current Assets Current Liabilities (Rs. In Millions) Financial Year 2011 2010 2009 Current Asset 7349 5261. 7 442. 8 Current Liability 9598. 6 7910. 6 2848. 9 Current Ratio

.765 .665 .155 The airline’s current ratios is 76. 5% percent which is more than 61% as compared to 2009. Return On Assets(ROA) Return on assets is an indicator of how profitable a company is before leverage, and is compared with companies in the same industry. Since the figure for total assets of the company depends on the carrying value of the assets, some caution is required for companies whose carrying value may not correspondence to the actual market value. Source: (http://en. wikipedia. org/wiki/Return_on_assets) Return on Assets: Net Profit after Taxes Total Assets (Rs in Million)

Financial Year 2011 2010 2009 Net Profit after Taxes 3919. 2 3606. 9 3396 Total Assets 33754. 6 37564. 8 35270. 3 Return On Assets .116 .096 .096 The Airline’s ROA is just 11. 6% which is little vital where it shows the airline’s growth is concentrated on. Return On Equity Ratio : Net Profit after Taxes Shareholder’s Equity (Rs in Millions) Financial Year 2011 2010 2009 Net Profit after Taxes 3919. 2 3606. 9 3396 Shareholder’s Equity (Total Assets-Total Liabilities) 24156 29654. 2 32421. 4 Return On Equity Ratio .162 .122 .104 The return on equity ratio is 16. 2; in 2011 as compared to 12.

2; in 2010 where it shows a good return on the equity. Quick Ratio or Acid Test Ratio: An indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company. Source: ( http://www. investopedia. com/terms/q/quickratio. asp#ixzz2EdOOfAvR) Current Assets-Inventories Current Liabilities (Rs in Millions) Financial Year 2011 2010 2009 Current Assets-Inventories 6913. 6 4877. 3 45. 4 Current Liabilities 9598. 6 7910. 6 2848. 9 Quick Ratio .720 .616

.015 The airline’s quick ratio is 72% when compared to 62% compared to 2010 where its recovering from all the liabilities. Financial leverage analysis Debt to Total Asset The debt to total assets ratio is an indicator of financial leverage. It tells you the percentage of total assets that were financed by creditors, liabilities, debt. A debt ratio greater than 1. 0 means the company is technically bankrupt. Source: (http://www. investopedia. com/terms/t/totaldebttototalassets. asp#axzz2Ee2icXmk) Total Debt Total Assets (Rs in Millions) Financial Year 2011 2010 2009 Total Debt 383. 2 729. 9 287. 3

Total Assets 33754. 6 37564. 8 35270. 3 Debt to Total Asset .011 .019 .008 The Airline’s Debt keeps on reducing except for the yearv 2010 where it is 1. 9% as it is getting more bailouts from the government it will come out of debts and become the same old big flagship carrier of India. Debt to Equity Ratio A measure of a company’s financial leverage calculated by dividing its total liabilities by stockholders’ equity. It indicates what proportion of equity and debt the company is using to finance its assets Source: (http://www. investopedia. com/terms/d/debtequityratio. asp#ixzz2Ee5aKPrZ) Total Debt

Shareholder Equity (Rs in Millions) Financial year 2011 2010 2009 Total Debt 383. 2 729. 9 287. 3 Shareholder Equtiy 24156 29654. 2 32421. 4 Debt Equity Ratio 0. 015 0. 024 .008 The Debt Equity is more in 2010 with 2. 4% with that of 1. 5% in 22011 which is showing a considerable reduction of the debt by the company. Financial activity analysis Total Asset Turnover Ratio Net Sales Total Assets (Rs in Millions) Financial Year 2011 2010 2009 Net Sales 1351. 6 3606. 9 3696 Total Assets 4709. 9 4739. 7 4124. 7 Total Asset Turnover Ratio 0. 286 0. 760 0. 896 The airline’s asset had a good value in 2010 with 76%.

But in the year 2011 it slipped to 29% but it would be back soon with all the debt ridden off. Receivables Turnover Ratio Net Sales Account Receivables (Rs in Millions) Financial Year 2011 2010 2009 Net Sales 1351. 6 3606. 9 3696 Account Receivables 898. 3 1180. 3 1491. 8 Receivables Turnover Ratio 1. 504 3. 05 2. 477 The reveivables was good in 2010 at 3. 5 and is expected to be more in the forthcoming years except for the year 2011. Interest Coverage Ratio EBIT Interest Charges (Rs. In Millions) Financial Year 2011 2010 2009 EBIT -14370. 1 -14172. 5 -13784. 1 Interest Charges 2025. 1 1931. 8

1604. 2 Interest Coverage Ratios -7. 095 -7. 336 -8. 592 The Interest is negative in all the years as it was over debt ridden in all the years from 2007. But as the airline is getting bailouts it will become the top national flagship carrier. Kingfisher Airlines Kingfisher Airlines Limited is an airline group based in India. Its head office is in Andheri (East), Mumbai and Registered Office in City, Bangalore. Kingfisher Airlines, through its parent company United Breweries Group, has a 50% stake in low-cost carrier Kingfisher Red. The airline has been facing financial issues for many years.

Until December 2011, Kingfisher Airlines had the second largest share in India’s domestic air travel market. However due to a severe financial crisis faced by the airline at the beginning of 2012, it has the lowest market share since April 2012. The airline has temporarily shut down its operations when on October 20, 2012 the DGCA suspended its flying license. This suspension had been due to failure to give an effective response to the show-cause notice issued by DGCA. However, The airline had locked out its employees for several days before this suspension. On 25 October 2012, the employees agreed to return to work.

Source:(http://en. wikipedia. org/wiki/Kingfisher_Airlines) Financial Statement Analysis Profitability Ratio Net profit, also referred to as the bottom line, net income, or net earnings is a measure of the profitability of a venture after accounting for all costs. Net profit: To calculate net profit for a venture (such as a company, division, or project), subtract all costs, including a fair share of total corporate overheads, from the gross revenues or turnover. Net profit = Sales revenue – Total costs Net profit is a measure of the fundamental profitability of the venture.

“It is the revenues of the activity less the costs of the activity. The main complication is . . . when needs to be allocated” across ventures. “Almost by definition, overheads are costs that cannot be directly tied to any specific” project, product, or division. “The classic example would be the cost of headquarters staff. ” “Although it is theoretically possible to calculate profits for any sub-(venture), such as a product or region, often the calculations are rendered suspect by the need to allocate overhead costs. ” Because overhead costs generally don’t come in neat packages, their allocation across ventures is not an exact science.

Source: (http://en. wikipedia. org/wiki/Net_profit) Net Profi Net Profit Margin Ratio:Net Profit after Tax Net Sales (Rs. In Million) Financial Year 2011 2010 2009 Net Profit after Tax -1027. 40 -1647. 22 -1608. 83 Net Sales 6233. 38 5067. 92 5269. 17 Net Profit Margin Ratio -0. 16 -0. 33 -0. 31 When compared to Air India, Kingfisher airline always shows a negative balance Liquidity Ratio Current Ratio:Current asset Current Liability (Rs. In Million) Financial year 2011 2010 2009 Current asset 1734. 76 1343. 35 329. 19 Current liability 4463. 86 3908. 03 3814. 63 Current Ratio 0. 39 0. 34 0. 09

When compared to Air India, Kingfisher airline always shows a negative balance Return on Assets Return on assets is an indicator of how profitable a company is before leverage, and is compared with companies in the same industry. Since the figure for total assets of the company depends on the carrying value of the assets, some caution is required for companies whose carrying value may not correspondence to the actual market value. Source: (http://en. wikipedia. org/wiki/Return_on_assets) Net profit after tax Total Assets (Rs. In Million) Financial Year 2011 2010 2009 Net Profit After Tax -1027. 4 -1647. 2 -1608.

83 Total Assets 4105. 89 4024. 17 3540. 21 Return on Assets -0. 250 -0. 409 -0. 454 When compared to Air India, Kingfisher airline always shows a negative balance Return On Equity Ratio : Net Profit after Taxes Shareholder’s Equity (Rs in Millions) Financial Year 2011 2010 2009 Net Profit after Taxes -1027. 40 -1647. 22 1608. 83 Shareholder’s Equity (Total Assets-Total Liabilities) 3. 79 3. 79 3. 79 Return On Equity Ratio -271. 08 -434. 62 -424. 49 When compared to Air India, Kingfisher airline always shows a negative balance Quick Ratio or Acid Test Ratio: An indicator of a company’s short-term liquidity.

The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company. Source: ( http://www. investopedia. com/terms/q/quickratio. asp#ixzz2EdOOfAvR) Current Assets-Inventories Current Liabilities (Rs in Millions) Financial Year 2011 2010 2009 Current Assets-Inventories 528. 71 373. 40 279. 25 Current Liabilities 4463. 86 3908. 03 3814. 63 Quick Ratio 0. 12 0. 10 0. 07 When compared to Air India, Kingfisher airline always shows a low liquidity Financial leverage analysis Debt to Total Asset Debt to Total Asset

The debt to total assets ratio is an indicator of financial leverage. It tells you the percentage of total assets that were financed by creditors, liabilities, debt. A debt ratio greater than 1. 0 means the company is technically bankrupt. Source: (http://www. investopedia. com/terms/t/totaldebttototalassets. asp#axzz2Ee2icXmk) Total Debt Total Assets (Rs in Millions) Financial Year 2011 2010 2009 Total Debt 7057. 08 7922. 60 5665. 56 Total Assets 4105. 89 4024. 17 3540. 21 Debt to Total Asset 1. 72 1. 97 1. 60 When compared to Air India, Kingfisher airline always shows a larger debt balance Debt to Equity Ratio

A measure of a company’s financial leverage calculated by dividing its total liabilities by stockholders’ equity. It indicates what proportion of equity and debt the company is using to finance its assets Source: (http://www. investopedia. com/terms/d/debtequityratio. asp#ixzz2Ee5aKPrZ) Total Debt Shareholder Equity (Rs in Millions) Financial year 2011 2010 2009 Total Debt 7057. 08 7922. 60 5665. 56 Shareholder Equtiy 3. 79 3. 79 3. 79 Debt Equity Ratio 1862. 02 2090. 39 1494. 87 When compared to Air India, Kingfisher airline always shows a larger debt balance FINANCIAL ACTIVITY ANALYSIS Total Asset Turnover Ratio

Net Sales Total Assets (Rs in Millions) Financial Year 2011 2010 2009 Net Sales 6233. 38 5067. 92 5269. 17 Total Assets 4105. 89 4024. 17 3540. 21 Total Asset Turnover Ratio 1. 52 1. 26 1. 49 When compared to Air India, Kingfisher airline always shows a lesser assets balance Receivables Turnover Ratio Net Sales Account Receivables (Rs in Millions) Financial Year 2011 2010 2009 Net Sales 6233. 38 5067. 92 5269. 17 Account Receivables 440. 53 322. 49 229. 84 Receivables Turnover Ratio 14. 15 15. 71 22. 93 When compared to Air India, Kingfisher airlines receivables gives a good hope of getting the airline back to normalcy

OUTLOOK ( Domestic & International) Air India The flag carrier which continues to flounder, operating an unviable business model that is kept alive by the generosity of India’s tax payers, is expected to enter a defining period. The merger between Air India and Indian Airlines is defined by the fact that the most critical issue, namely that of the integration of human resources has been ineptly handled and almost will fully ignored, with nobody within the airline senior management or at the level of the government having taken responsibility.

This has been a constant source of tension within employee ranks and after years of neglect a committee was established in 2011 under Justice Dharmadhikari to look into staff grievances. The committee submitted its report to the Ministry of Civil Aviation in early 2012. In the absence of any strategy of its own to deal with the issues at hand, the government is left with virtually no option but to implement the report’s recommendations. Although the proposed actions have not yet been made public, CAPA expects that the outcomes will meet with a mixed response from the unions and industrial action is likely.

The government appears to be preparing to adopt a firm stance, limiting discussions with the unions and it may not shy away from a watershed moment in the next 2? 3 months after the report is accepted by the government, which could include a temporary shutdown of the airline. But a key concern is the fact that at this critical juncture the management at Air India could be set for change at the most senior levels, including the position of Chairman and Managing Director. The new team could be faced with a highly charged and complex situation. Similarly the Board has not been strengthened following a couple of high profile non?

executive departures last year, while there will be new appointments in a number of senior government roles as well. All of this further compounds the fact that there is nobody taking ownership of the turnaround of Air India, which in itself is unrealistic and unachievable without resolution of the personnel issues. For the last two years CAPA has strongly advocated that Air India should be placed in special administration, similar to that adopted for Satyam, if any meaningful progress is to be achieved. Source: (http://www. capaindia. com/PDFs/CAPA-India-Aviation-Outlook2012-13-Highlights. pdf) Kingfisher Airlines

Facing severe financial difficulties, Kingfisher has deliberately downsized over the last six months to conserve cash and has now declined to become India’s smallest domestic airline by market share. CAPA estimates that Kingfisher has a funding requirement of close to USD1 billion, of which USD500? 600 million is needed immediately and a further USD300? 400 million in the next fiscal year. The airline is surviving on the basis of bare minimum infusions by the promoter, while it seeks external investors. So far there is no known serious interest and the longer it takes the more difficult it will become to turn the airline around.

The most likely suitor for Kingfisher is thought to be a strategic foreign airline investor. Current regulations prohibit investment by foreign airlines although proposal to permit 49% is currently under consideration. Kingfisher appears to be holding on in anticipation of the restriction being lifted however the timing of such a development remains uncertain. Source: (http://www. capaindia. com/PDFs/CAPA-India-Aviation-Outlook2012-13-Highlights. pdf) Risks &Socio Cultural Risks As the airline is facing a very huge debt, the aircraft’s are not serviced properly leading tto a risk in passengers’ lives.

As the Rule in Aviation Industry says that the headcount of the employees must be at the fixed ration of 170:1, but Air India has 200:1 ratio which is considered to be the big ratio that leads to financial crisis by the airline as it operates l27 air crafts and 115 jets. AS the management was asked to trim the emloyee count, the union went back on strike in order to prevent reiteration of the employees . Therefore, leading ti the grounding of aircrafts constantly leading to a fallout in services and thereby leading to the increase in debt.

This airlines is deeply ingrained in corruption. This cash strapped airline has losing millions of dollars due to corruption and mismanagement Despite government is pumping in the money to bring the airlines to its normalcy, this corruption is not helping out the airline to come back to its full fleet. Even though there is a change in the management, the airline is unable to get off its debt ridden phase and come back to normalcy. Conclusion We, have analysed the financial statement of Air India as well as Kingfisher Airlines.

On analysing both the statements we can clearly say that both the airlines do not have proper management and proper handling of accounts etc; The management authorities don’t bother to take up the responsibility of bringing back the airlines to normalcy profit mode. They are busy indulging in different activities for their personal interest. As the taxpayers money go in for these bailouts, I strongly recommend a closure of both the airlines or the sale of shares of the airlines to a third party or otherwise allo FDI procedure to save the airline Recommendations