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KAVISH JAINIntroduction

low airfares offered by low cost carriers and the growth of the tourism industry in India. gimmick-free customer experience at fares that are always affordable. These efforts helped IndiGo to offer its passengers low air fares. a renowned travel corporation. Inter Globe Enterprises. Thus the low-cost players found it difficult to maintain their commitment.On one hand. and that cut waste and hassles. is the owner of IndiGo. which in turn ensures a uniquely smooth. IndiGo is the latest entrant as a low cost carrier in the aviation industry of India. It started its operations on August 4. that make sense. the booming opportunities incited players to expand capacity but on the other hand. 2006. rising fuel costs and taxation rates. etc. they were compelled to increase prices.  Emphasis on direct sale of ticket through Internet to avoid fee and commissions paid to travel agents. However. In addition to the liberalization policy. the private carriers accounted for around 75% share of the domestic aviation market. seamless. Some players sought refuge in mergers.  Single type of airplane to reduce training and service cost. IndiGo resorted to measures like outsourcing and having a homogeneous fleet. there was significant increase in the number of domestic air travel passengers. Some of the factors that have resulted in higher demand for air transport in India include the growing purchasing power of middle class. the deregulation policy has also played a major role to encourage private players in the aviation industry. lounges. amidst this aviation turmoil. IndiGo plans to serve approximately 30 Indian cities by 2010. In their urge to survive.  Employees working in multiple roles. add free refreshments and beverages on-board. Below graph shows the gradual growth in the domestic air traffic: The growth in the aviation industry looked promising and hence attracted many low cost carriers like Spice Jet. increased the operational costs. Go Air and IndiGo after the success of Air Deccan in 2003.  Unbundling of ancillary charges to make the headline fare lower. In 2006. with a fleet of approximately 40 A320s. Because of the introduction of liberalization policy in the Indian aviation sector. Below are the key factors of the business model of IndiGo airlines:  A single passenger class. whereas some survived by modifying their business model. Besides. It was awarded the title of ‘Best Domestic Low Cost Carrier’ in India for 2008.India is one of the fastest growing aviation industries in the world. In its endeavor to consistently maintain low costs. 2 | Page . The airline currently operates 120 daily flights with a fleet of nineteen brand new Airbus A320 aircraft and flies to 17 destinations. precise. the industry has witnessed a vast difference with the entry of the privately owned full service airlines and low cost carriers. The IndiGo team uses all of these resources to design processes and rules that are safe and simple.  No frills such as free food/drinks. IndiGo continued to fly high.

have been idolized. especially due to the open sky policy between India and the SAARC countries and the increase in bilateral entitlements with European countries. Airline tycoons from the last century. 5. 3. Untapped potential of India's tourism: Tourist arrivals in India are expected to grow exponentially. Tata and Howard Hughes. many domestic airlines too will be entitled to fly overseas by using unutilized bilateral entitlements to Indian carriers. Glamour of the airlines: No industry other than film-making industry is as glamorous as the airlines. like J. Rising income levels and demographic profile: Demographically. 3 | Page . and Sir Richard Branson and Dr. Attraction of foreign shores: After five years of domestic operations. 4. India has the highest percentage of people in age group of 20-50among its 50 million strong middle class. and US.External Analysis Airline Industry Attractiveness 1. with high earning potential. D. R. Foreign equity allowed: Foreign equity up to 49 per cent and NRI (Non-Resident Indian) investment up to 100per cent is permissible in domestic airlines without any government approval 2. Vijaya Mallya today.

There presentation of the foreign investing institution/entity on the Board of Directors of the company shall not exceed one-third of the total.R. Foreign equity participation up to 49 percent and investment by Non. Overseas Corporate Bodies (OCBs) up to 100% is allowed. Customers can easily choose other low cost carriers. Aviation was primarily a government owned industry. Chairman and at least two –thirds of its Directors are Indian citizens 6. Operator should be a citizen of India or a company or a body corporate which is registered in India and whose principal base of business is in India 5. there is not much differentiation in the basic service that is being provided to the customers.Porter’s Five Forces strategy for Airline Industry Threat of New Entrants Product differentiation: In low cost carriers. Private airlines account for around 75 per cent share of the domestic aviation market. In aviation industry the major entry barriers can be: Government regulations: 1. and “Q-Busters”. Indian Civil Aviation Policy: Private sector is allowed to operate scheduled and non-scheduled services 4. Switching cost: The switching cost is not high. stair-free ramps. The government's open sky policy has encouraged many overseas players to enter the aviation market. 3. IndiGo provides check-in kiosks. The switching cost of an airline company to other business/industry is high as the exit cost is high.I). 2. Hence this argument works in favor of IndiGo. 4 | Page . Due to liberalization Indian aviation industry is now dominated by privately owned full-service airlines and low-cost carriers. Differentiation can only be achieved by Value Added Services.Resident Indians (N.

An airline company will bear the cost of purchasing an aircraft if it wants to start or expand its fleet. the lease can be renewed or aircraft can be returned. The reasons are:1. to be replaced with more modern aircraft.  Setup costs: Nowadays. which is under their control. the government is unable to pass on the full impact of this rise to the consumer. As a result prices of ATF in India are much higher than some of the other Asian countries. foreign equity up to 100 percent is allowed through automatic approvals. For green field airports. 9. leasing allows the cost to be spread across several years. the operators must ensure compliance with relevant regulatory requirements stipulated respectively by the Director General of Civil Aviation (DGCA) and the Bureau of Civil Aviation Security (BCAS).  Resource: The aviation industry in India suffers a shortfall of pilots. For upgrading present airports. either owned or leased. instead they refine it from imported crude oil. In order to overcome the shortfall of aircrafts during the peak seasons.7. The aspirants can receive Commercial Pilot License (CPL) only if they undertake a training abroad 5 | Page . airlines can utilize an ACMI lease agreement for the extra aircraft. imports are becoming expensive day by day and at the same time.  Fuel prices: Domestic ATF prices have increased by over 160 per cent from the beginning of 2005 till last year and by over 80 per cent from a year-ago levels. foreign equity up to 74 percent is allowed through automatic approvals and 100 percent through special permission (from FIPB). a cost they are trying to somewhat make up by raising the price of ATF. venture capital of $10 million or less is enough to launch an airline. With rising crude oil prices. As a result. In India. kerosene and LPG at way below cost. At the lease term end. Foreign financial institutions and other entities who seek to hold equity in the domestic air transport sector shall not have foreign airlines as their shareholders. then they can offer their surplus aircrafts in their low season to another airline that is facing peak season. Foreign airlines are not permitted to pick up equity. 8. oil companies do not import ATF directly. the state owned oil marketing companies (almost 95 per cent of the market is with state owned firms) are forced to sell diesel. As regards safety and security arrangements. petrol. If the airline has many aircrafts.

Airlines can contract employees such as cabin crew.K etc. finding appropriate laborforce is very costly. In airline sector. Moreover.S. due to the liberalization of policies by government. ticketing and check-in staff members. Indian institutes provide training with the help of their training partners in the foreign countries like U. 6 | Page .3. Private airlines hire pilots.A.The reason being that in India. there is a lack of dedicated flight Instructors. foreign and private players often poach work-force of competitors which leads to talent-drain and thus losses. U. Canada and Australia. decade-old aircrafts and poor quality training offered at a price much higher than what is offered by flying schools in USA. get expatriates or retired personnel from the Air Force or PSU airlines in senior management positions.

The suppliers are few and thus in better position to bargain as they always finds customers for their aircrafts. IOC. [Exhibit 2] Thus. hence increasing their power.e. Fleet Forecast for the India-Region 2006-2011 shows that there will be approx. Hindustan Petroleum Corporation. The proof of evidence for high power enjoyed by ATF suppliers lies in the fact that the ATF prices constitute 35-40% of the costs in India compared to 20-25% globally. The brand value of suppliers is high due to their less number and results in higher bargaining power for them. There are other suppliers like Dauphin. 7 | Page . IndiGo fleet comprise of Airbus-A320 and the switching cost is high due to the limited number of suppliers. Dronier .Bargaining Power of Suppliers Any airlines in general face a duopoly of two major suppliers of aircrafts i. particularly IndiGo airlines. 85% growth in the order rate of air carriers. Bell. Bharat Petroleum and ONGC and since their number is limited. they possess more power. Airbus and Boeing. ATR-42 but do not meet the requirements to serve the low cost commercial aircraft carriers. supplier’s are few and thus in better position to bargain as they always finds customers for their aircrafts. There are only four suppliers for ATF (Aviation Turbine Fuel). The airlines also face a threat of forward integration since the suppliers are in close contact and are familiar with the knowhow of the aviation industry. Due to shortage of commercial aircraft pilots in India the supply of pilots is concentrated.

It is not difficult to move from one airline to another or to switch to a substitute.Bargaining Power of Buyers Buyers in airlines industry are large in number and highly fragmented thus lowering their power . the buyers have increased and so have the growth opportunities. Backward integration from the buyers end is very difficult and next to impossible. The switching cost is minimal since there are multiple alternatives available.With the growing Indian economy and increasing low cost carriers. Furthermore the players in the particular strategic group do have minimalistic differentiating points. 8 | Page .

.e. i.e. Switching cost of customers is high for low cost carriers. Below are the major reasons for the high competition in the low-cost carrier airlines: Very little scope for differentiation between competitors’ products and services Aviation is a mature industry with very little growth..Competitive Rivalry The aviation industry is a highly competitive industry because of which it is difficult to earn high returns in this sector. there is no brand loyalty. Closest competitor of IndiGo is SpiceJet followed by GoAir. 9 | Page . Boeing and Airbus. Hence supplier’s bargaining power is high. i. The only way to grow is by stealing away customers from competitors Suppliers of aircrafts are the same.

Spice Jet currently flies to 11 destinations. Thus. to sustain in this cutthroat competition. GoAir is looking at ‘commoditizing air travel' by offering airline seats at marginally higher train prices to all cities in India. SpiceJet has chosen a single aircraft type fleet which allows for greater efficiency in maintenance. we can summarize from above data that all the three players are trying to follow cost leadership strategy by bringing down the ticket rates to the minimum possible value. and plans to expand its fleet to 33 aircraft in three years. is a low-cost budget airline based in Mumbai. SpiceJet's new generation fleet of aircraft is backed by cutting edge technology and infrastructure to ensure the highest standards in operating efficiency. each player will have to come up with different strategies to improve the non price factors of Availability Substitutes The substitute for low cost 10 | P a g e . India. it is clear that. It has been showcased as “The People's Airline”. It has a fleet of 6 Boeing 737-800 in single class configuration with 189 seats. Go Air operates four A320 aircraft with a single class. Its vision is to ensure that flying is no longer confined to business travelers. However. and supports the low-cost structure. to price sensitive consumers. Spice Jet’s mission is to become India’s preferred low cost airline. GoAir Airlines Owned by Wadia Group. but is affordable for everyone and thus the tagline ‘Flying for everyone’ Spice Jet airways began its operations in May 2005. affordability and convenience' model.Below is brief description about each of them: SpiceJet Is a low-cost airline based in New Delhi. The Airline’s theme line is “Experience the Difference” and its objective is to offer its passengers a quality consistent. quality assured and time efficient product through affordable fares. delivering the lowest air fares with the highest consumer value. GoAir's business model has been created on the 'punctuality. 180-seat configuration. India.

11 | P a g e . Customers use airline transport as it is convenient and saves travelling time. So if we consider IndiGo airlines. the direct substitutes are the other low cost carriers like SpiceJet and GoAir. many customers use airlines as a status symbol.airline company is the railways. So trains cannot work as a substitute to save time. Secondly. So again. threat of substitutes is high as the switching cost between low cost carriers is low. 2. But this substitute is not very powerful due to the following reasons: 1. trains cannot substitute for prestige. So in this case.