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A REPORT ON AIR ASIA INDIA: CLASH FOR


THE INDIAN SKIES
Published on January 12, 2016

vibin das Follow


I Team Manager @ Amazon I Alliance University I 0 0 1
8 articles

1) What is the market structure prevailing in the Indian aviation sector?

A market structure that falls between the two extremes - perfect competition and
monopoly - is an Oligopoly. In an oligopoly there are few suppliers who control a
significant share of the market.Pricing in an oligopoly falls between a perfectly
competitive markets where the market players have no pricing power and a monopoly
where a single producer can fix the highest price possible, subject to demand.

The aviation industry in India, especially with regard to passenger airlines, follows a
strictly oligopoly-type structure with the characteristics.:

(1) An industry dominated by a small number of large firms (Jet airways, Air India,
Spice jet, Go Air, Indigo)

(2) Firms sell either identical or differentiated products

(3) The industry has significant barriers to entry (which holds true both with respect to
regulations and huge capital investment required).

MARKET SHARE [%] OF VARIOUS AIRLINES IN THE INDIAN


AVIATION MARKET

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AIRLINE 2005- 2011-Try
2013-
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06 12 14

Messaging

NACIL 30.8 14.6 19.1

JET AIRWAYS 36.1 18.2 17.1

JETLITE ------- 7.9 5.4


-

AIR SAHARA 11 -------

AIR DECCAN 12.1 -------

KINGFISHER 4.9 19.6

SPICE JET 4.4 14 19.8

GO AIR 0.7 6 9

PARAMOUNT 0.1 -------

INDIGO 19.7 29.5

Herfindahl-Hirschman Index - HHI

A commonly accepted measure of market concentration. It is calculated by squaring the


market share of each firm competing in a market, and then summing the resulting
numbers. The HHI number can range from close to zero to 10,000. The HHI is
expressed as:

HHI = s1^2 + s2^2 + s3^2 + ... + sn^2 (where sn is the market share of the ith firm).

The closer a market is to being a monopoly, the higher the market's concentration (and
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the lower its competition). If, for example, there were only one firm in an industryTrythat
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firm would have 100% market share, and the HHI would equal 10,000 (100^2),
indicating a monopoly. Or, if there were thousands of firms competing, each would have
nearly 0% market share, and the HHI would be close to zero, indicating nearly perfect
competition.

Year 2005-06 2011-12 2013-14

AIRLINE Market Market Market Market Market Market


share share^2 share share^2 share share^2

NACIL 30.8 948.64 14.6 213.16 19.1 364.81

JET AIRWAYS 36.1 1303.21 18.2 331.24 17.1 292.41

JETLITE 7.9 62.41 5.4 29.16

AIR SAHARA 11 121 0 0

AIR DECAN 12.1 146.41 0 0

KINGFISHER 4.9 24.01 19.6 384.16 0

SPICEJET 4.4 19.36 14 196 19.8 392.04

GOAIR 0.7 0.49 6 36 9 81

PARAMOUNT 0.1 0.01 0 0

INDIGO 19.7 388.09 29.5 870.25

Herfindahl- 2563.13 1611.06 2029.67


hirschman index

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From Herfindahl-hirschman index we can measure market concentration , from the


table it is noticed that there is a decline from year 2005-06 to 2013-14, and an increase
to 2013-14. It can be concluded that few airlines have withdrawn from the services. We
can notice the value is between 0 and 10,000 thus it is a oligopoly.

Concentration Ratio:
The concentration ratio is the measure of the percentage market share in an industry
held by the largest firms within that industry.

The concentration ratio is the percentage of market share held by the largest firms (m)
in an industry.

CRm= Σmi=1 si

Therefore it can be expressed as:


CRm = s1 + s2 + .... + sm where si is the market share and m defines the ith firm

The most common concentration ratios are the CR4 and the CR8, which means the
market share of the four and the eight largest firms. Concentration ratios are usually
used to show the extent of market control of the largest firms in the industry and to
illustrate the degree to which an industry is oligopolistic.

CR4 - CONCENTRATION RATIO2005-06 2011-12 2013-14

AIRLINE Market shareMarket shareMarket share

JET AIRWAYS 36.1 18.2 17.1

NACIL 30.8 14.6 19.1

SPICEJET 4.4 14 19.8

GOAIR 0.7 6 9

CONCENTRATION INDEX 72 52.8 65

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The market share of major four airlines constitute 72%, 52% and 65% in year 2005-06,
2011-12 and 2013-14. This shows four constitute the major share of the market hence it
is observed the Indian aviation market is Oligopoly market.

2.What are the barriers of entry faced by new entrance, such as Air Asia India in
the Indian aviation market?

Barriers faced by Air Asia India for entering in the Indian aviation market are:

Government regulation- air operators permit (AOP): Fleet, equity and experience
requirements: According to the civil aviation requirements (CAR), domestic scheduled
operators had a minimum fleet requirement of five aircraft and a minimum equity
requirement ranging from INR 200 million to INR 500 million (based on the takeoff
mass of aircraft). Such regulatory requirements meant a restriction on the number of
new markets entrance as well as their size, since only firms which could raise the
requirement capital could enter. The ‘5/20’ rule also meant that Indian carriers which
did not possess the mandatory five years operational experience and 20 aircraft fleet
size could not operate on international routes. Such restrictions, which are binding only
on Indian carriers, affected their competitiveness further.

Restriction on FDI by foreign carriers: FDI by international carriers was restricted to


49 per cent. Such FDI restrictions limited the potential sources of low-cost capital, as
well as expertise. It also restricted access to technology and management know-how.

Route dispersal guidelines: Aviation route in India is divided in to three categories


based on their profitability. Category I routes were the profitable routes, Category II
consisted of loss-making routes and Category III comprised the remaining routes.
Additionally, Category IIA routes consisted of routes exclusively within the North
Eastern region, Jammu and Kashmir , Andaman and Nicobar and Lakshadweep.
Airlines were required to deploy a minimum percentage of their capacity deployed on
profitable (category I) routes on other routes. This range from 10 per cent in the case of
category II and IIA to 50 per cent in the case of category III routes. Such deployment of
aircraft on unviable routes affected profitability adversely.

Lack of skilled manpower: with passenger and aircraft fleets likely to triple by 2025,
there was a need for skilled man power. According to a KPMG analysis, the total man
power requirement of airlines was estimated to rise from 62,000 in 2011 to 117,000 by
2017. This included pilots , cabin crew ,aircraft engineers and technicians, ground
handling staff , cargo handling staff, administrative and sales staff etc. Lack of adequate
trained and skilled work force would pose a challenge.

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1. Can the Indian aviation market be termed as a contestable market? Try Premium
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No, as Indian aviation market is an oligopoly market, it is not a contestable market as


contestable market has no barriers for entry and exit. Overseas airlines wanting to start a
new carrier in India may find it difficult to do so because they will require a local permit
—which may not be easily issued—before approaching the foreign investment board.
India in September ended a 15-year-old rule that prevented international airlines from
investing in a local carrier. In September 2012, the FDI

Norms in the sector were relaxed. Foreign carriers were allowed to invest up to 49
percent of the paid up capital of an Indian carrier under the government approval route
in scheduled air transport services. Several foreign airlines sought to enter India in
response to these relaxed norms. These include Singapore airlines Ltd., Abu-Dhabi’s
Etihad airways and Malaysia’s Air Asia Berhad.

Q4. Analyze the demand- supply dynamics within the Indian Aviation Market.
How do these dynamics impact Indian Air Asia Market?

The supply for the Indian Aviation Market is the Available Seat Kilometer (ASK) and
the demand is Revenue Passenger Kilometer (RPK). A comparative graph can be shown
as below:

It is evident from the above values that the supply is higher than the demand.

As Air Asia has promised 35% cheaper rates to enter as a Low cost carrier. With the
current players following a some what similar pricing strategy to sustain the
competition, Air Asia might face problems such as price war or it may perish.

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1. What strategies should Air Asia India follow to survive and to grow in theTry Premium
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Indian aviation market?

The strategies Air Asia India should follow to survive and grow in the Indian aviation
market are;

Cutting fares: Air Asia’s founder had announced that the company would revolutionize
air travel in India by offering fares 35% cheaper than the competition. this would
increase the market share and bring new to company customers towards Air Asia India.

Reducing operational costs : Air Asia’s founder announced that air asia would achieve
an air craft utilization rate of 16 hours and a turn around time of 20 minutes there by
beating competitors on operational parameters.

Improve passenger service quality : Air Asia

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