1. Which market structure best characterizes the Indian Aviation Sector?

Explain the features of that market structure. The number of airline player in
the Indian aviation declined by nearly half between 2005 and 2014. Can this
statement be taken to conclude that the degree of market power within the
Indian aviation increased/doubled during the period? (15 Marks)

Vision: Air Asia To be the largest low cost Airlines in Asia.

Strategy:

 Safety First
 High Aircraft Utilisation
 Low Fare, No Frills
 Streamline Operations
 Lean Distribution System
 Point to Point network

India's airline industry can be categorized as Oligopoly in nature.

The term oligopoly is derived from two Greek words: ‘oligi’ means few and ‘polein’ means to sell.

In an increasingly globalized economy like India, air transport is a vital element of the transport
infrastructure. The sector plays an integral role in the development of the economy by facilitating the
growth of business, tourism, with significant multiplier effects across the economy.

India is the 9th largest civil aviation market in the world, In FY17, domestic passenger traffic witnessed a
growth rate of 21.5 per cent.

The below graph showcases the increase in the passenger traffic over the past decades.

Passenger traffic over the past decade (2017-18)

The market structure of the aviation sector has changed over the last few decades. The sector has
evolved from a market, tightly controlled by the government with two air carrier service providers to a
relatively competitive regime. Post deregulation, the civil aviation industry in India has an oligopolistic
structure.

Air traffic is measured by Revenue Passenger Kilometers (RPK) or Revenue Passenger Miles (RPM) as an
airline industry metric that shows the number of kilometers traveled by paying passengers. It is
calculated as the number of revenue passengers multiplied by the total distance traveled.

Market share 2017-18

With above statistics, it’s safe to conclude that India's airline industry is an oligopoly, with six major
players in the market.

Characteristi cs of the oligopoly

Following are the characteristics of the oligopoly market structure when compared to the India Aviation
Sector:
 Entry and Exit barriers: Capital investments are high for purchase or leasing of aircrafts.
 Additionally, there are government regulations which further add to the challenges:
 On route dispersal guidelines to reserve a fix part of their capacities for routes where
passengers are less.
 Restriction of minimum 5 years of domestic airline industry experience and minimum fleet
size of 20 aircrafts to operate internally.
 Minimum equity and fleet restriction apply for domestic operations too.
 Unavailability of required operating slots resulting in high expenses and low passenger
traffic.
 Production Cost: Aviation Turbine Fuel (ATF) is the most expensive fuel in India when compared
to other nations, also adding the taxes on the import of ATF which have made air travel
expensive. Carriers have started charging a congestion fee from travelers for the additional fuel
consumed waiting for a green flag to land at a congested air terminal.
 Capacity: Airline companies must make their demand years ahead for acquiring an aircraft of up
to 3 to 5 years. Capacity comes at a cost with excess capacity if airlines charging excessive or full
passenger loaf if prices are rationally fixed.
 Replaceability: No other faster mode of transportation available and consumers are dependent
on Air travel.
  Interdependence: With a few firms holding a significant share in the industry in an oligopoly, a
firm considers its competition to determine ticket prices. At the same time, selling costs are
deciding factor for larger market share. Hence predicting pricing behaviors are impossible and
lead to pricing situations.
 Adverse effect of Cartels: Cartels not just create monopoly over the market price but also
restrict other private players to enter the market. Such agreements are illegal when the motive
is to maximize profits, dividing markets adversely affecting prices and quality.

Indian Aviati on Sector between 2005 to 2014:

Only Jet Airways and Air Sahara existed as the only two airlines in 2005 who maintained their prices as
they want. With Air Travel as the fastest mode of transport and Indian per capita income growth,
Market shifted from FSC (Full-Service Carrier) to a LCC (Low-Cost Carrier). Several airlines now prevalent
due to this scenario and this to an extend controlled the price manipulation due to severe competition.

Even with this increased amount of air traffic, some of the airline companies were going through some
major challenges. Indian Airlines, one of the major airlines in India merged and started operating under
Air India in 2007. Kingfisher Airlines enjoyed second largest market share in India ceased its operations
in 2012 due to losses and debt.

Excess demand also caused a price hike of more than 300% during festival times. Some airlines like
GoAir and SpiceJet reduced the prices considerably too. Government stepped in to arrest this unhealthy
scenario and implemented rate-monitoring.

These scenarios showcase the market power, which is defined as the ability of a company in
manipulating the price of a product or service by manipulating the level of supply or demand.

Also based on the above, it’s clear that the degree of market power was not doubled/ increased during
this period.

2. Analyze the demand supply dynamics within the Indian aviation market.
How do these dynamics impact Air Asia India? (15 Marks)
Supply and demand theory explains the interaction between the sellers of a resource and the buyers for
that resource. The theory defines the relationship between the price of a given good or product and the
willingness of people to either buy or sell it. Generally, as price increases, people are willing to supply
more and demand less and vice versa when the price falls. The two interact to determine the actual
market price and volume of goods on the market.

In 2010, 79 million people traveled to/from/or within India. By 2017 that doubled to 158 million, and
this number is expected to triple to 520 million by 2037. With the air passenger traffic projected to
increase, the Indian aviation industry is on a high-growth path. India witnessed double digit growth in
domestic air cargo of 12.1% in 2018-19 over 2017-18.

To satisfy the current and projected rise in demand for commercial air travel, Indian airlines have placed
large orders for aircraft. The nation’s airplane fleet is projected to quadruple in size to approximately
2500 airplanes by 2038.
This is one of the examples of how the airline companies are trying to gear-up for the increased demand
and align their supply. The demand and supply increase were not parallel however with the ever-
deviating aviation industry in India, the gap is narrowing.

Price elasticity: Excessive fuel price rise in 2008 and falling value of rupees compared to US Dollars,
created a major imbalance between supply and demand in Indian airline industries in recent years. Due
to these external factors, Indian oligopoly aviation market, had to increase airfares in many folds and
some low-cost carriers (LCC) took a short run decision to shut down the operation in a few short
distance routes to avoid huge losses. Increase in number of the railways passengers was observed as a
Substitution effect. With fuel prices reduction in 2008, competition in the market returned and airline
industries started slashing their airfares.

Demand elasticity: Income elasticity measures the sensitivity of demand for a service or commodity to
changes in individual or aggregate income levels. The elasticity of air travel demand varies according to
the coverage and location of the market in which prices are changed and the importance of the air
travel price within the overall cost of travel.

Elasticity of Demand by Price indicates the impact of price fluctuation on product sales. A price elasticity
value of greater than 1 denotes the product demand sensitivity to increase in price. An inelastic
condition applies to a value of less than 1, demand of product not changing after a price increase.

Elasticity of Demand by Income: Per capita income of the target audience is a vital influential
component in the demand for goods or services. An income elasticity of demand greater than 1
is considered a luxury item. A zero denotes normal and below Zero an inferior product.

Cross elasticity of Demand measures the quantity demand of goods or services in terms of
relative change in price of a similar goods or service. A cross elasticity of demand value greater
than zero are said to be substitutes. Two goods are independent to each other if zero and
complementary if less than zero.
AirAsia founded in 2001, have grown to service 150+ destinations in 25 markets, using 274 aircraft to
operate 11,000+ weekly flights from 23 hubs across the region. While the airline is known as a provider
of low-cost airfares to locations across Asia, it also aims to deliver innovative, personalized products and
services that meet the needs of each of its passengers.

AirAsia understood the importance of data analysis and began a 5-year program in 2016 to become a
data-first business and a digital airline. AirAsia realized the dynamics of the Indian Aviation industry as
supply heavy and thereby started presenting itself as a low-cost airline to cater to a larger segment of
customers.
 AirAsia RPK from fiscal year 2014 to 2020

The approach was well received by Indian Customers and the below graph shows the exponential
growth achieved by AirAsia from 2014 onwards. With the Pandemic making a small dent to AirAsia like
every other airline company, its slowly urging back to its strength to understand the varying demand for
the masses and catering to a country just rising from another economic slowdown.

3. What are the barriers to entry faced by new entrants such as AirAsia India in
the Indian aviation Market? Can the Indian Aviation market call a
contestable market give reasons? (10 Marks)

Government regulations

The major challenge for new entrants to Indian aviation market is the government rules and regulations.
Entry pre-requisites in terms of equity and number of aircraft as well as certification and operating
regulations would be graded depending upon the size of aircraft and complexity of operations with
greater flexibility being provided to commuter and smaller aircraft.

Additionally, Route Dispersal Guidelines (RDG) are applicable especially for Jammu & Kashmir, Andaman
& Nicobar, and Northeastern states.

Requirements again vary for internal carriers. In October 2004, the Union Cabinet stipulated that for
Indian carriers to fly abroad, they must fly on domestic routes for 5 years and have a fleet of 20 aircraft.

Lack of adequate airport infrastructure:

Due to this the company often faces congestion at the airport which negatively affects their turnaround
time and reduces the average aircraft utilization. However, it increases their costs significantly in the
form of fuel wastage.

Government is taking an active role in developing Maintenance, Repair and Overhaul (MRO) to develop
India as a HUB for Asia attracting foreign airline investments. While there are challenges with MRO
regulations like providing proof of requirements of parts and orders and restriction of duty free parts
within three years, add to the worry.

Investment and maintenance costs:

Initial investment for buy or lease of an aircraft is substantially higher compared to international
markets due to taxes and fees.

Indian airport handling and services charges are among the highest in Asia.

Aviation Turbine Fuel (ATF) prices as again the highest in India compared internationally. ATF costs
contribute to up to 50% of the operating cost for an airline.

Lack of Skilled workforce:

Civil Aviation especially is experiencing an acute scarcity of trained and skilled manpower. These not just
include pilots, but engineers, technicians, cabin crew and ground handling staff to name a few.
Although there are large number of private institutions in the country providing aviation education and
training, the courses and infrastructure facilities need to be improved to meet the demands of industry.

This scarcity effects both operating costs and more importantly the safety aspects of flying.

Indian Aviation market call a contestable market

In a contestable market, there are one or several firms which profit the most compared to the rest. In
such a market, entry and exit costs to the industry are relatively low. The existence of potential entrants
into the industry will tend to keep profits to their normal level even in the short run, because existing
firms will want to deter new entrants from coming into the market. Contestable markets are both
productively and allocatively efficient and are likely to be efficient in the short run as well.

India was one of the fastest growing domestic aviation markets in the world, but growth turned negative
in April 2019 mainly on account of Jet Airways crisis. Full-service airlines in India are facing some
challenges while low-cost carriers are doing better. Air India and Vistara are the two full-service carriers
operating currently. High operating costs, fluctuation in rupee against the US dollar and strong
competition are putting additional pressure on the profitability of airlines. With India moving forward to
become the world's third largest civil aviation market by 2024.

Indian airline industry is very competitive and dynamic. Performance depends a great deal on the
economy. The rise in major airliners over the last decade suggests that more firms have entered the
market and made it more contestable.

However, with the Indian not so friendly governing rules and regulations, operating costs and various
other barriers make the industry hard to enter and even harder to survive.