SVKM’s Narsee Monjee Institute of Management Studies

Microeconomics

Group Assignment – Industry Analysis

Submitted by: Division F Group 9 Date of Submission: August 17th, 2022

Submitted to: Prof. Sangita Kamdar
Industry Selected: Indian Aviation Industry
Group Members:

Name Roll No. SAP ID

Yashoraj Singh F061 80512201049

Anjuli Agarwal F029 80512200375

Angira Biswas F012 80512200148

Mayank Nauriyal F048 80512200778

P V Hari Narayanan F036 80512200535

Burugu Akhil Reddy F045 80512200703

 Flying High: Economic Analysis of the Indian Aviation Industry

Introduction
Being a fast-paced developing economy, India has witnessed a substantial rise in the average
per capita income. As more income is generated, it dictates the flow of expenditure. A sector
which largely has grown owing to the rise in spendings is the Aviation industry. Average
consumers seek to use airlines for travel, for both leisure as well as work-based purposes.
The aviation industry was considered for analysis as it is one of the fastest growing industries
in the country, and a series of market-based transformations took place in the sector in India
across its journey to facilitate a multibillion-dollar contribution to the country's gross
domestic income every year. The industry also was adversely affected by the pandemic, and
opening up of the market post covid has presented a series of economic growth opportunities
in this sector, becoming crucial to understand and analyse. The growth, which is primarily
fuelled by the rising disposable
incomes of the population has
led to continuous developments
throughout the journey aviation
has endured since its inaugural
phases in India, which now
contributes to an estimated
GDP of $35 Billion to the
country. Convenience and
comfort remain the two broad
parameters the sector seeks to
improve with these
advancements, following the
customer satisfaction-based approach.
Domestic as well as international travel has drawn upon the increasing demand for more and
more accessibility across destinations globally. The approach by the government has always
been to deliver to these expectations which has led to the country not lagging any behind in
terms of the quality of airports, aircrafts or any other such related services.

Objectives
In this report, we seek to understand the Indian aviation sector from an economic point of view,
broadly covering the following key objectives:

• To understand the evolution of the airline industry, considering the key developments and
the major policies and factors leading to the transformation.
• To determine the major players in the industry to understand the market structure and the
degree of competition prevalent in the market.
• To understand the major components and factors affecting the structure of the industry and
changes taken place in those factors and the market structure.
• To analyse the economic impact of the covid-19 pandemic on the aviation industry.
• To comprehend the opportunities, threats and future growth prospects of the airline sector
from the point of view of participant firms.

Evolution of the Indian Aviation Industry

The aviation industry kickstarted in the year 1932, when J.R.D Tata introduced the country to
the first airline, Tata Air Services. The company began as a small airmail carrier service and
they flew their first commercial flight from Karachi to Mumbai in October 1932. J.R.D Tata
was also India’s first licensed commercial pilot, and
under his supervision and leadership, the company
renamed itself to Tata Airlines and gradually
transformed into a commercial passenger airline. By
1938, they were flying to a number of domestic
destinations.
The next development came following Independence in
1947, with government being established and taking control over the large industries, Tata
Airlines was renamed as Air India with a 49% state stake. Soon later, they flew their first
international flight from Mumbai to London. In the 1950s era, the country witnessed several
airlines like Deccan Airways and Kalinga Airways operating in different parts of the country,
but the Jawaharlal Nehru government decided to establish monopoly government control over
the industry, and merged all these airlines into two companies: Air India and Indian Airlines.
Being the chairman of the industry, Mr. Tata ensured sufficient fund allocation towards
developments in the sector, and facilitated purchase of technologically upgraded aircrafts like
the Boeing 747, which ensured superior service and maximum efficiency in the 1970s.
However, being a period of war, notably the Indo-Pak war of 1971, the country and the industry
struggled to earn profits and continued operating on unprofitable routes with the same airline
base, with an increased cost and limited infrastructure till the 1990s where India was at its peak
of financial crisis.
After thorough analysis by the P.V. Narasimha Rao government, 1991 was the year when the
Indian economy was opened up with the Liberalisation, Privatisation and Globalisation
reforms, and being fully into effect in 1994 which was the period of the birth of modern Indian
aviation, with all laws pertaining to formation of airlines and introduction of private airlines
were amended, eliminating legal entry barriers. The deregulation led to the introduction of
various commercial airlines like ModiLuft and Jet Airways. More companies such as Air
Sahara, SpiceJet and Lufthansa kept entering the market throughout the 1990s, providing
intense competition to Air India and Indian Airlines.
2000s can be called the period of “Aviation Boom”, with the rapid entry of numerous low-cost
carriers challenging the established market leaders like Air India and Jet Airways. These
airlines had staggeringly low fares and allowed customers to fly conveniently and affordability.
Indigo being one of these airlines came in 2006 and is now the market leader in domestic
aircrafts in India. Other companies such as GoAir and Air Asia India also emerged as low-cost
airlines. Foreign giants such as Qatar Airways and Emirates have also emerged as premium
international travel aircrafts in the country. Across the last decade, more market fluctuations
have emerged, with Jet Airways dissolving and Air India being taken over by the Tata group,
owing to insolvency. Many efforts are being taken to ensure better technology and convenience
to the target market.

Market Structure and Key Features

In economic terms, the airline industry can be classified as an oligopoly form of market under
imperfect competition. The basic feature or condition of an oligopoly is the existence of a small
number of large firms having significant control over the market, i.e., the price and output
decisions. The aviation industry can be called a differentiated oligopoly and its features can be
enumerated and understood as follows:

• The aviation industry is dominated by the existence of a few high net-worth companies or
firms, both from the public sector as well as the
private sector. Some of the key players include
IndiGo, Air India, Go Air, Emirates, etc.
• The scale of capital investment necessarily Company Total Assets (Rs. Cr.)
required to enter the airline industry is huge, which IndiGo 43,051.15
necessarily acts as a barrier for other new firms to SpiceJet 11,367.61
enter the sector, who cannot benefit from Air India 52,352.18
economies of scale by undertaking such huge Go Air 3,195.88
operations. The total asset base of some market
players in this industry is given in the box.
• The companies existing in the sector have a fair degree of interdependence while setting
airfares to be charged from customers. The base rates, which are obviously affected by legal
factors and prices of inputs like fuel, are collaboratively set and are less deviated within
different companies.
• As prices are determined interdependently, there is noticeable non-price competition in the
form of heavy expenditure on branding, marketing and advertising of the airline deals and
packages to communicate as effectively as possible with the target market.
• Apart from non-price competition, the industry also has firms selling slightly differentiated
services via the level of comfort offered in the aircrafts, offers and coupons on flight tickets,
upgradation facilities, etc as attempts to pull the customers to make a decision in their
favour.
• A classic trait of oligopoly reflected in the aviation industry is the element of mergers and
acquisitions and joint ventures by firms. Before the LPG model, all airlines apart from Air
 India were acquired and consolidated with Air India or Indian Airlines. Presently, Vistara
is a joint venture between Tata Sons Private Limited and Singapore Airlines. They are also
planning to merge Tata owned Air India into Vistara, as reported by news.
• The industry has an HHI index of 3,503, indicating it to be a highly concentrated market.
An industry with an HHI index under 1,500 is termed as competitive, while the aviation
industry is clearly concentrated among a small set of high capital firms who are able to be
profitable and sustain in the sector.

Key Participants

Market Share %

0.1
13.3
7.5
1.3
6.8
55
6.3
0.2
9

0.5

IndiGo Trujet Air India Vistara Star Air Air Asia Alliance Air Go Air SpiceJet Others

As shown in the above table enlisting the companies participating or forming a part of the
Indian aviation industry, IndiGo emerges as a market leader holding majority share of 55%,
followed by Spice Jet at 13.3%. Air India, Go Air, Air Asia and Vistara Airlines also are among
the market followers each having around 5-10% of their own share in the industry.
IndiGo: Interglobe Aviation, popularly called Indigo is a late entrant
in the Aviation Industry of the subcontinent. Making its mark in 2006
as a low-price airline service, IndiGo has successfully captured the
largest share of the market through its reliable quality aircrafts (1500+ flights daily) and
increasing accessibility across 96 locations throughout the world. It has been reported to be the
fastest growing airline in the world, which carries approximately 2 million passengers per
month. They have attractive advertising, symbolic with the blue colour and offer a wide range
of offers and deals to their customers. They have positioned themselves as superior quality
affordable airlines, fulfilling a plethora of Indian needs and wants. The company earned a net
revenue of Rs. 15,677 crores, substantially lower than the expenses of Rs. 21,483 crores,
thereby incurring a net loss of Rs. 5,806 crores.
 SpiceJet: Headquartered in Delhi, SpiceJet also is one of the lost
cost airlines operating in India since 1994. It has 630 operating
flights on a daily basis and covers 64 locations internationally. The
airline also uses the colour red to symbolise its brand identity and seeks to satisfy consumer
needs and wants with affordable services and facilities. In the previous year, they earned a
revenue of Rs. 6,072 crores compared to total expense costs of Rs. 7,102 crores, resulting in a
net loss of Rs. 1,030 crores, which is obviously due to the covid-19 pandemic.
Air India: As discussed earlier, Air India remains the oldest airline in the country since 1932.
They serve 60 locations across the world and use traditional advertising methods to attract
customers. They also boast of differentiated
features like extra legroom and extra free baggage
which induce the Indian buyer into making a
choice. The 90-year-old government company
recently got acquired by Tatace Pvt Ltd, a
subsidiary of the Tata group. The company earned
a revenue of Rs. 12,104 crores in 2020 but incurred
losses of Rs. 6,979 crores during the same period
due to an increase in expenses amounting to Rs. 17,083 crores.
Go First: Go First or Go Air is a relatively new entrant in this well-established oligopoly
industry structure, commencing operations in 2005 as an ultra-low-cost airline. Being a new
firm with limited initial investment, they had to use the strategy of risking losses by lowering
price to take off the market share of existing market leaders and as a result, Go First soon
blended in using this approach. The airline now operates as
many as 325 daily flights across 39 global locations, which
is considerable growth in itself. Owing to small size and the
covid impact, Go First reported a loss of Rs. 1,279 crores
despite an income of Rs. 7,203 crores.
Vistara: Catering to the high-income individuals, Vistara
boasts of unmatched quality services for their consumers.
They commenced operations in 2015 and use a premium
pricing approach where they seek to fulfil every customer
need through their services. Operating with this approach,
they cater to 34 locations and indulge in non-price
competition to cater to their own niche market, creating a
high standard identity. Vistara revealed total sales of Rs.
4,738 crores and expenses of Rs. 6,551 crores resulting in a
net loss of Rs. 1,813 crores in 2020-21.
Major Factors influencing the Aviation Sector
1) Market Size: These has been an upward trend in the compounded annual growth rate of
passenger traffic every year, especially by 59% this year indicating an opportunity for
airline operators to intensify its measures and forecast demand to estimate the degree of
customer centric activities to boost their total
revenue.
2) Disposable Income of Households: The
significant increase in customer willingness to
spend more as compared to savings gives an
opportunity for the airline industry to maximize
growth through leisure-based sales. Airlines
such as Go First target the customers with less
Household Disposable Income Trend
disposable income by offering relatively lower
prices to increase their demand.
3) Tourist Inflow: Especially post the pandemic, it has become a blessing for airline carriers
to witness an influx of both domestic and foreign tourists which is a major revenue
component for the market segment. An attractive rate of tourist inflow was what once
persuaded now market leader IndiGo to enter this sector.
4) Government Policies: Essentially under the LPG model, government has allowed 100%
Foreign Direct Investment in Aviation. Such elimination of entry barriers led to foreign
companies entering the industry gradually. Moreover, the government promotes
technological upgradation continuously encouraging firms to upscale their existing
operations and optimize the quality of services offered to consumers. They set policies and
standards, and also aid in designing and outsourcing airports to ensure proper regulation as
well as quality service of passenger traffic throughout the country. Kingfisher Airlines is a
perfect example of a company not adhering to government policies, committing financial
frauds and running into debts and eventually being forced to discontinue operations in
2012.
5) Fuel Prices: A recent hike in fuel prices has led to an increased operating cost. In simple
economic terms, as price of factor inputs rises, the existing supply price is not profitable to

meet the demand, forcing companies to increase the rates to have the same profit margins
at the existing demands. The fuel price trends for the previous year are shown in the box.
 Owing to heavy operational costs, it was not long ago that the once market giant Jet
Airways had to discontinue operations in 2019 and exit the industry.
6) Manpower based factors: Aviation sector provides employment to over 70,000 personnel
and seeks to benefit from specialization in its operations by employing trained workforce,
trying to maximise allocation and service efficiency and minimize costs of operations.
Being a service sector industry, profits are largely dependent on the level of service
rendered, thereby necessitating for high quality trained personnel.

Economic Impact of Covid-19 on the Aviation Industry

The covid-19 pandemic hit the country like a storm, and definitely had devastating effects on
almost all sectors of the economy. One of the worst hit industries was airlines. As an industry
largely dependant on travel, and travel being as restricted as possible during the covid-19
pandemic, it became extremely difficult for players in this sector to sustain. There was almost
no revenue in the initial stages, with travel being restricted to health as well as legal reasons.
And numerous waves of the virus and lack of vaccination essentially meant a close to non-
existent demand for the services of civil aviation.
It also becomes important to understand that an industry with such huge scale investments and
heavy fixed costs in the form of depreciation on aircrafts, fuel reserves, salaries to a huge
workforce, the financial impact of a lockdown is extremely detrimental to the sustainability of
firms operating in this oligopoly, and there is certainty that the break-even point was impossible
to reach, as there was minimum revenue.
Speaking in economic terms, the industry as a whole reported a mammoth loss of Rs. 19,564
crores due to the catastrophic effects of the pandemic in the financial year 2020-21. Airports
too reported a total loss of Rs. 5,116 crores during the same period.
The dismal state was also reflected in the individual financial performances of all the airline
service companies controlling the market. These companies moreover have accumulated
outstanding dues of approximately Rs. 3,000 crores to the government owing to the inability
to sustain during the pandemic.

Profit (Rs. Crores) FY 2020-21

0.00
IndiGo SpiceJet
-2,000.00 Air India Vistara

-4,000.00

-6,000.00

-8,000.00

IndiGo SpiceJet Air India Vistara

Profit (Rs. Crores) FY 2020-21 -5,806.43 -1,029.89 -6,979.28 -1813.38
As clearly evident from the chart, the top market share holders have been unable to earn profits
in the year of corona virus. Not only did policies become stricter for airline travel, but the costs
also increased owing to the requirements to wear and provide PPE kits, gloves and masks even
when travel was relaxed during covid. The costs of maintenance and sanitization were also
increased. Owing to such high operating costs, many firms operated close to their shut down
points and barely survived one of the darkest periods of their journeys.
It is much of a relief that the worst is over and airlines are operational with full fledged capacity
and can recover the economic losses incurred during the period.

Present Scenario and Future Opportunities and Threats

Being a well-established oligopoly, firms have endured a tough time during the past two years
owing to the covid-19 pandemic. The present scenario is one of the more ideal market situations
for firms to operate under. Not only have the restrictions regarding travel been lifted, but the
firms have also mastered the way to function in this ‘new normal’ environment. They could
benefit from the learning curve of such an experience and work on optimum utilisation of
manpower and material factors to achieve cost minimization and revenue maximization
objectives.
This unprecedented growth in air traffic can be viewed as a two-edged sword for firms in the
aviation industry. It presents an opportunity to maximize sales revenue from operations by
meeting the demand and boosting their own supply, introducing more flights and advertising
and promoting effectively. However, they should be cautious in their potential heavy
expenditures, especially on aircrafts owing to the uncertainty in the dynamic market.
A huge opportunity is for firms is to collaborate in a collusive oligopoly-based framework
while determining prices and airfares, so that each firm is able to earn similar high profits and
recover their losses. On the other hand, a major threat remains the continuous rise in import
costs of jet fuel. Being an unavoidable expense, the firms need to regulate their flights and
distances reached considering the possible forecasted fluctuations in these prices. Not only
does it increase the operating costs significantly, but a rise in fuel costs leads to a direct rise in
airfares which might not be well received by the end customers who in turn reduce the market
demand, considering travel unaffordable.
From a government point of view, there is a need to develop air infrastructure continuously to
reach unmatched standards, and from the operating firm’s point of view, it becomes crucial to
continuously enhance technology and the level of services offered to make air travel as
luxurious as possible. Despite unforeseeable turbulence ahead, the future of the aviation
industry in India looks bright and should keep boosting economically as time passes.
Conclusion
What once began as a government monopoly in the mid- 20th century, the Aviation industry
has transformed into a huge oligopoly of both Indian and foreign participants. The
liberalisation, privatisation and globalization reforms have been instrumental in not only
eliminating barriers to enter the market, but also encouraged significant investments and
participation which facilitated upgradation of the industry as a whole.
Being an industry of such nature, individual firms face immense difficulty to sustain in the
market and as seen with Jet Airways or Kingfisher Airlines, remaining profitable is no piece
of cake. A large variety of factors influence the way the players in the market operate, making
it extremely crucial to monitor changes to ensure business viability. Despite lack of significant
price competition, it also becomes crucial to monitor competitors moves and decisions in an
oligopoly like the aviation industry to ensure no loss of customer share takes place.
The main players in the industry, namely IndiGo, SpiceJet, Air India, Go First, Vistara and Air
Asia all have suffered losses owing to the covid-19 pandemic and it therefore becomes crucial
to take full advantage of the favourable market situation now. While some factors remain
beyond control, the decisions regarding price and output need to be carefully taken by each of
these market players to maximize profits and use their resources as efficiently and effectively
as possible.
Being a large industry with heavy investment, it becomes necessary to achieve some for of
economies to ensure a bright future of both the industry as well as the market participants
“flying high” in the future Indian economy.
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