Yayln Airlines Limited (YIAL) is an Indian airline, headquartered in Mumbai. Until the year 2024 YIAL was full service airline offering full service…

Yayln Airlines Limited (YIAL) is an Indian airline, headquartered in Mumbai. Until the year 2024 YIAL was full service airline offering full service (premium) flying experience to its guests. It primarily focussed on tourist travel to exotic locations. Premium flying required YIAL to focus on connectivity between tourist destinations like Srinagar, Gangtok, Lakshadweep Islands, Andaman and Nicobar Islands and Darjeeling. The number of routes were limited, primarily originating from Mumbai or Delhi. Passengers were mainly luxury travel guests, who could afford exotic travel vacations but have limited time therefore preferring to fly to these destinations. Premium flying service allowed YIAL the ability to charge premium (higher than economy class market rates) to passengers. Increased margin pressures – full service model In the recent years, the number of players in the aviation sector has increased, thereby increasing the competition including that on the routes to the destinations mentioned above. Most of the rivals are offering economy seat travel. While there is a difference in the service offering, high inflationary conditions in the country has lead air travel passengers to become more price sensitive. Therefore, aircraft capacity was not getting utilized fully due to this price sensitivity combined with intense competition. Profit margins were getting squeezed. Route viability assessment The network route development team, headed by Mr. Jithendra Singh develops route network and assesses its financial and operational viability. The team collaborates with the finance analysis team of YIAL, headed by CA Gopal Verma, to determine the financial viability of the route. Both Jithendra Singh and Gopal Verma then present their analysis to the Mr. Ravi Mehta, Director- Flight Operations, YIAL. Once a route is approved, the flight starts operating on that route after due regulatory approval. Every 6 months, a detailed analysis is done to look into the operational issues related to that route as well as consider whether the route should continue to be operated on based on its financial viability. In an effort to improve the company's performance, consideration is being given to cancel flight routes that appear unprofitable. Yayln airlines has the flexibility to cancel flight operations on particular routes after following due operational and regulatory procedures. The forthcoming meeting between Jithendra Singh, Gopal Verma and Ravi Mehta is scheduled to be held next week. The agenda is to decide whether to continue operations of Flight 7J6622 between Mumbai and Srinagar. YIAL has the data to compute the income statement for each flight that it operates. Please refer Annexure 1 for the income statement of flight 7J6622 operating on the Mumbai-Srinagar route. CA Gopal Verma would use this in the discussions next week. Change in business model into a low cost airline Due to increased margin pressures, the management realized that growth opportunities in the full service premium flying segment catering to tourist destinations alone, was not a sustainable business model. Increased competition due to rivals offering newer routes to passengers combined with price sensitive travellers, forced the senior management to rethink its strategy. Therefore, in March 2024, the senior management of the company took the decision to become a low cost airline instead. The flying experience would be similar to economy class travelled that is popular and being offered by other players in the market. The strategy to sustain profits was to build cost efficiencies into the operations along with expanding market reach. Mumbai and Delhi would serve as the main hub of operations, but there would be many more routes developed to cover other cities, not just to tourist destinations. This will result in Increase fleet size and expand the network of routes offered. The fleet will be of single type of aircraft to reduce maintenance and operational costs. Any future acquisition of planes will be leased rather than bought outright. In current market conditions, leasing was working out cheaper. Airfare will be charged at market competitive rates, attracting enough customers to ensure that flight capacity is fully utilized. In flight entertainment, food and beverage will be charged extra and not included in the ticket cost. Digitalize processes to make them efficient, error free and cost effective. Encouraging online booking and check in is one such process. Premium flying will be phased out completely. Operations as a low cost airline: New vision and mission of YIAL, increased scale of operation With the change in business model, the company had a new Vision and Mission statement as outlined below. Vision: "Yay! In for better connectivity at affordable rates!" Mission: "Our large fleet will fly guests across to destinations, new and old, on time, in comfort and at industry best fares." YIAL has based its success on three parameters using which it wishes to build a loyal customer base - (1) affordable rates, (2) on time performance and (3) courteous and hassle free service. These are reassurances that YIAL provides its customers (guests). In April 2024, YIAL executed a 12 year lease agreement with Airway Inc. for the lease of 5 aircrafts. Refer to terms of the lease in Annexure 2. With increase in fleet size and corresponding increase in passenger traffic, the scale of operations is slated to increase manifold. The entire project of change in business model was completed in September 2024. Hub-spoke model versus point to point model Yayln now works on a hub-spoke model, where flights on different routes pass through either Mumbai or Delhi and then onward to their destination. The passengers have to disembark from their original flight when it reaches the hub and then reboard the next fight that will take them to their final destination. The idea was to club together passengers travelling to a final destination from different origins, to group together at the hub that will take them to their final destination in a different aircraft. This will maximize the capacity utilization of the aircraft. Fixed costs form a major portion of the cost structure of this business. Hence, if capacity utilization is better, it enable YIAL to offer competitive ticket price to the passengers. Therefore, the price sensitive passengers are satisfied due to cheaper airfare. On the other hand, the hub-spoke travel model explained above increased the travel time by at least twice as compared to a point-to-point model. This model results in longer queues at the check-in counter, security check and results in a crowded airport. However, the price sensitive passenger is willing to bear the wait and hassle since the ticket is available at a more affordable rate. The hub-spoke model attracts huge crowd, due to which there is enormous pressure on the limited infrastructure and staff resources at each of these airports (check-in-counter staff, CISF security staff, ground crew handling luggage etc). The point-to-point model involves the aircraft flying non-stop (directly) from its origin to its destination. Many business travellers and some passengers who prefer hassle free travel, prefer this model. Recently the feedback taken from such type of passengers showed that they were dis-satisfied with inordinately long travel time under the hub-spoke model. With increasing wealth and booming business environment, the chunk of such travellers in slowly increasing. However, operating a point-to-point model from Mumbai or Delhi works out costlier. Streamlining operations: Ever since the low cost airline operations have begun, Mr. Ravi Mehta has been insisting on building cost efficiencies into the company's operations. He has encouraged employees to imbibe lean thinking strategies as part of their roles. He has approached the network route development team and the financial analysis team to find a solution to the above problem. Jithendra's network development team has suggested that efficient management of queue management at the check-in counter and boarding gates at the airport by allowing for online web-check in. Bring uniformity to the size and type of luggage that can be carried by the passengers. With proper regulatory approval from the authorities like DGCA, passengers must carry check-in and hand luggage of specified dimensions. Else, the passengers have to bear an extra cost for handling non-uniform luggage. Start point-to-point travel for travellers who prefer convenient and faster travel. Since their numbers are smaller, use smaller aircrafts so that (a) capacity utilization is faster and (b) the aircraft turnaround time due to maintenance and repair work by the ground staff can be done faster. Due to lesser passengers the queues will be shorter and there will be minimum disruption to travel time. The team led by CA Gopal Verma has proposed that to have different pricing structures for hub-spoke model travellers and the point-to-point model travellers. To maintain profitability in operations resort periodic to across-the-board reduction of staff of ground staff in order to reduce costs of operations. Mr. Prem Chabbra, a director of YIAL was appointed as its Managing Director on 1st April 2023. One of the terms of appointment was that in the absence of adequacy of profits or if the company has no profits in a particular year, he will be paid remuneration in accordance with the provisions contained in the Companies Act, 2013. As per the financial results for FY 2024-25, YIAL has incurred a heavy loss of 55 crores. However, these losses are primarily due to the extensive change in business model that was undertaken during the year. The company was not in a position to pay any remuneration to Mr. Chabbra but he was paid 2 crore for the year. This payment was approved by a special resolution passed by the shareholders. The effective capital of the company is 215 crores. Tax Deduction at Source (TDS) on passenger service fee (PSF): Passenger service fee (PSF) is a charge that airlines collect from passengers to cover the cost of airport security and passenger facilities. Facilities include security, baggage trolleys, escalators, air-conditioning etc. All these contribute towards enhancing passenger experience and makes flying comfortable and secure. The airport operators at Mumbai and Delhi, who manage the airports and their infrastructure would collect this fee from the airline. Mayank Saxena has joined the vendor payment team of the accounting department at YIAL recently. He is making his very first payment to the airport operators at Mumbai and Delhi for PSF. These payments are made along with rental payments to the airport operators that YIAL pays for use of the airport space for operating its business. He is confused whether tax has to be deducted for payments made for PSF to airport operators under the relevant sections of the Income Tax Act, 1961. Pursuing two business models simultaneously YIAL has been successfully operating as a low cost airline for the past few years now. In the recent years, the tourism travel industry has been promoting many locations within India as vacation spots. Hence, YIAL's original operating routes like Srinagar, Gangtok, Lakshadweep Islands, Andaman and Nicobar Islands and Darjeeling are gradually becoming popular again. Again, there are different customer segments, some preferring affordable travel while others preferring comfortable premium experience. Mr. Chabbra has been working with YIAL for the past 25 years. From his experience, he feels that YIAL can re-start its full service premium flying to these locations again. The rest of the management team is not convinced about this proposal. Their primary concern is that YIAL has switched to low-cost, affordable travel model in the recent years. By restarting premium flying, YIAL will be catering to different customer segments at the same time. While price sensitive travel flyers will not be willing to pay higher ticket fare, the prospective premium flying passengers will not be happy to experience the economy class flight experience (affordable, but reduced service travel offering). Hence, there will be a lot of confusion about YIAL's brand offering. They feel that a single model namely the low cost affordable travel model that YIAL is currently following should be maintained, there is no confusion in the minds of passengers about the service to expect. Yayln acquired an aircraft from Boeing (Boeing 767) on 1st April, 2019 for 400 crore. Over a period of four years, the aircraft was used in operations and depreciated accordingly. By the end of this four-year period, the aircraft had a carrying amount of 255 crore, which reflected its estimated value in use. This value was arrived at after charging cumulative depreciation of 110 crore and an impairment loss of 35 crore. On 1st April, 2023, the company decided to classify the aircraft as “held for sale” due to a proposed transition towards acquiring new-generation aircraft (Boeing 787 Dreamliner). At the time of classification, the carrying amount of the existing aircraft was 255 crore. However, the fair value less costs to sell was assessed at 250 crore, indicating a shortfall in recoverable value. At the next reporting date, 31st March, 2024, market conditions improved and the fair value less costs to sell of the aircraft was reassessed at 265 crore. By 1st October, 2024, the market for aircraft had continued to strengthen, and the fair value less costs to sell rose further to 300 crore. Annexure 1: Income statement of Flight 7J6622 operating from Mumbai to Srinagar (per flight) Particulars ₹ ₹ Ticket Revenue (200 seats * 40% occupancy * 22,500 ticket price) 18,00,000 Less: Variable expenses per person (200 Seats * 40% Occupancy * 15,000 Variable expense) (12,00,000) Contribution margin (Ticket revenue less variable expense) 6,00,000 Flight expenses: Salaries, Flight crew 2,00,000 Salaries, Flight Assistants 80,000 Baggage Loading and Flight Preparation 70,000 Overnight costs for flight crew and assistants at destination 80,000 Fuel for aircraft 2,50,000 Depreciation of aircraft * 75,000 Liability insurance 1,50,000 Flight promotion 50,000 Hanger parking fee for aircraft at destination 25,000 Total flight expenses (9,80,000) Net Gain/ (Loss) (380,000) * Based on obsolescence The following additional information is available about flight 7J6622 from Mumbai to Srinagar. Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are paid by the flight.The baggage loading and flight preparation expense is an allocation of ground crew's salaries and depreciation of ground equipment.One third of the liability insurance is a special charge assessed against flight 7J6622 because in the opinion of insurance company, the destination of the flight is in a “high-risk" area.Flight promotion expense is specific to the route, in this case relate only to flight 7J6622.The hanger parking fee is a standard fee charged for aircraft at all airports.If flight 7J6622 is dropped, YIAL Airlines has no authorization at present to replace it with another flight. Annexure 2: Lease agreement terms for 5 aircrafts Lease Agreement This Lease Agreement is made and entered into as of 01/10/2024, by and between YIAL (YayIn Airlines Limited) and Airway Inc. for five aircrafts. The following were the terms of the lease: Lease commencement date for each of the aircraft would be October 1,2024.YIAL must pay Airway Inc. the first monthly rental payment of 10 lakh per aircraft upon execution of the lease.Airway Inc. will pay YIAL 50 lakh per aircraft cash incentive to enter into lease payable upon execution. YIAL incurs an initial direct cost of 1 lakh per aircraft, which is payable on October 1, 2024. YIAL has calculated the initial lease liability as the present value of the lease payments discounted using incremental borrowing rate because the rate implicit in the lease could not be readily determined. Thus, the initial lease liability is arrived at as 8.50 crores per aircraft. YIAL has to undertake a planned check after every 100,000 flight hours for each aircraft. At the end of lease period, that is 12 years YIAL must have a check performed (or refund the costs to Airway Inc.), irrespective of the actual number of flight hours.