STREAM – MBA

SECTION – B

SUBMITED BY GROUP NO. 9

NAME Reg. No.
AKASH THAKUR PROV/AAC-MBA/08-22/028
ADITYA JAISWAL PROV/AAC-MBA/08-22/103
NAVEEN KUMAR KANDENA PROV/AAC-MBA/08-22/062
PRIYANKA PRAMANIK PROV/AAC-MBA/08-22/040
MITHALI PAI PROV/AU/MBA/22/15338
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).

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 the lower its competition). If, for example,
there were only one firm in an industry that 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.

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concluded that few airlines have withdrawn from the services.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.
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 take-off 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 ranges 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 adequately trained and
skilled work force would pose a challenge.

Can the Indian aviation market be termed as a contestable

market?

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.

Q3. Analyse 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
Kilometre and the demand is Revenue Passenger Kilometre. 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 somewhat
similar pricing strategy to sustain the competition, Air Asia
might face problems such as price war or it may perish.

What strategies should Air Asia India follow to survive and to grow in the
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 turnaround time of 20 minutes there by beating
competitors on operational parameters.

Improve passenger service quality : Air Asia