AN ASSIGNMENT ON Airline industry in India

Submitted To:Prof.Hitesh Manocha IIPM Faculty New Delhi

Submitted By:Uma Shankar Roy Roll No.:- 86 Year 2010-12

The Indian Institute of Planning & Management (NEW DELHI)

INTRODUCTION

Airline Industry in India is one of the fastest growing aviation industries in the world. With the liberalization of the Indian aviation sector, airline industry in India has undergone a rapid transformation. From being primarily a government-owned industry, the Indian airline industry is now dominated by privately owned full service airlines and low cost carriers. Private airlines account for around 75% share of the domestic aviation market. Earlier air travel was a privilege only a few could afford, but today air travel has become much cheaper and can be afforded by a large number of people.

The origin of Indian civil aviation industry can be traced back to 1912, when the first air flight between Karachi and Delhi was started by the Indian State Air Services in collaboration with the UK based Imperial Airways. In 1932, JRD Tata founded Tata Airline, the first Indian airline.

Airline organizations can be classified into a number of segments depending on the nature and degree of services they provide. Major Indian carriers are pressing their feet on the accelerator to reach an acme of service level by the year 2010 when their fleet strength will meet 500 to 550. In the previous two years more than 135 aircrafts have been introduced to keep up with the increasing number of passenger traffic in Indian aerospace. A number of domestic airline groups have emerged in a reasonably short span of time to make the market furiously competitive.

REASONS FOR:-

WHY INDIAN AIRLINE INDUSTRY IS NOT IN A GOOD SHAPE?

1) A capital intensive industry with high fixed costs: A business is considered capital intensive depending on the ratio of capital required to the amount of labor. The airline industry is considered among the top of the high capital intensive industries. Airline industry also has high fixed costs as compared to revenues. This puts the industry to higher risk because in case it is not able to attain an economy of scale or if there is a downturn in sales, the high fixed cost cant be covered and the business becomes unprofitable. Such a condition to some extent is also prevalent in automobile industry, but for an airline it becomes very critical.

2) Low profitability: Every time fuel costs rise, or a new tax is imposed, or a staff strike happens; or there is an inability to raise the fare proportional to the rising input costs, their profitability is hit hard. Such an unexpected hit hurts the expansion plans and the whole fiscal planning goes haywire. Due to combinations of high fixed costs, low profitability, and high competition, a lot of airlines have gone bankrupt and keep getting bankrupt. Also, this has resulted in new business structure: where there are holding companies or PE firms controlling them and airlines becoming merely operating units without much decision controls. In some markets very few airlines have remained without filing for bankruptcy.

3) High vulnerability to the state of the economy: global slowdown or recession: Airline industry is too much dependent on the global economic scenario. Every time an economic slowdown or recession happens, flyers go for cheaper options like trains or road; there are few tourists travelling; fewer business travels planned; and airlines have to run with empty seats. As a result, they face severe liquidity crisis. Fuel makes 35-40% of costs of an airline, higher than this for low-cost-airlines, and any global crisis impacts the fuel prices too. Like any political turmoil in the oil producing nations causes the prices to go high above the roof. E.g. Jet fuel

prices which were about USD 83 in August 2010 in Singapore are now USD 129 at around March 10, 2011 (Source: moneycontrol.com). This is 55.4% higher in only 8 months! Analysts are predicting that global airlines net profits will half this year in 2011, due to rising oil prices (due to crisis in Egypt, Libya and others).

4) Nationalization of Airlines: Many countries have national airlines. Governments own and operate these airlines. At times they have nationalized private airlines to be able to have a national carrier. For example in India, the airline industry was pioneered by Tata Airlines in 1932 as a division of Tata Sons. But after independence, the government of India acquired majority stakes in Air India. Air transportation industry was nationalized in 1953, with domestic operations transferred to Indian Airlines.

5) Frequent bailouts: A similar situation prevails in India where government supports the national carrier Air India, no matter how much loss it makes. Analysts have been critical of this practice of dumping tax-payers money into the airline industry just for the sake of preventing bankruptcy. But so far, governments have always come to the rescue of the industry. This is a unique thing with the airline industry.

6) High barrier to entry and regulations in the markets: Typically airlines are highly regulated due to political, economic and safety concerns. In such regulated markets, new airlines find it difficult to come up and establish them. Also, due to restrictive practices new airlines find it difficult to obtain slots at airports. The entry barriers are low in deregulated markets, with dozens of airlines starting up from nowhere in no time. Deregulation increases the competition and promotes more players to enter the market.

7) Low switching costs for customers: It is very hard for airlines to develop a loyal customer base, particularly in markets like India. This is why all major airlines have been enthusiastically running Frequent Flyer Programs and other customer loyalty schemes. For a flyer, it is just a click of a button to go book on a

competitors flight. And airline customers are often very sensitive about service. Once the flight is delayed or service is unsatisfactory, they can make a resolve of not flying by that airline again. This is because the high competition in the airline market has given the flyers too many options and almost no switching costs. The customers also gain because of the prevailing price wars.

8) Being central to globalization: Due to its central role, the airline industry has grown with and can be identified with globalization. It facilitates global trade, international business, tourism, and hence helps economic growth of all nations. It is hard to imagine if todays world would be as much globalised, or localized, without fast, efficient and convenient airlines.

9) Unprecedented safety concerns: Because of the nature of air travel, the risks are high and in case of accidents the human casualty mounts. So the airline industry has to maintain strict safety standards and cant be relaxed even for a moment. In many accidents the reason is found to be human error, which makes the case for stringent norms very strong. The 9/11 terror attacks in the New York in the year 2001 brought another angle to the already stringent safety concerns. The airlines have to maintain very high personal checking system to avoid repeat of terror activities. Even before 9/11, airplanes were used for terror activities many a time. For example the hijacking of aircrafts has been a common tactics used by terrorist groups, and they even try to bomb or blast the planes. (e.g. Kandahar hijack of IC-814 in 1999 and Air India Emperor Kanishka bombing in 1985) Apart from accidents and terror threats, the air route has also been used by criminals, smugglers and traffickers for their activities and hence safety and security is always a concern for airlines.

10) Alliances and optimization: If we look at the competition in the US market which was deregulated quite early, we would realize how smaller players have found it too hard to survive competing against big airlines. For example, Midway Airlines was a small carrier tried to compete against US Airways and Eastern Airlines and it failed miserably. Ultimately it had to file for bankruptcy. It is said that Southwest survived because it avoided the markets dominated by big players like American and United.

SWOT ANALYSIS OF THE INDIAN AIRLINE INDUSTRY

SWOT means the strengths, weakness, threats and opportunities. This is one of the essential requirements of any organization and the foundation for understanding the industry of that particular organization. The continuous volatile environment of the aviation industry has been analysed with respect the extended marketing mix ( product, price, place, promotion, process, people and physical evidence). While individual airlines each analyze and make decisions based on their own situations, there are overall industry similarities that all airlines face, with each endeavoring to maximize strengths and opportunities while minimizing weaknesses and threats.

STRENGTH A major strength of any airline is the product itself (air travel). Despite downturns, over time air travel continues to grow, not only due to population growth, but also due to an increased propensity to fly. The entry of low-cost carriers pioneered by Air Deccan helped greatly reduce the costs involved in flying. This helped attract consumers for whom air travel was only a dream. Now a number of low-cost airlines are operating in India, namely Go Airways, Spice Jet, and Kingfisher Air, and they have a major share of the Indian aviation industry. Indian labour costs are an advantage, at $30-35 per man-hour. This compares with $55-60 in South-East Asia and Middle East and even higher in the USA and Europe. The change in lifestyle of people and growth in the disposable income has resulted in an increase in leisure travelers for the past few years; 5 years back 85% were business travelers.

WEAKNESS

All the major players in the aviation industry focus on particular regions rather than focusing on India as a country. For example Air Deccan focuses exclusively on south Indian market while Go Air focuses on southern and western India. The unplanned location of airport and the lack of proper infrastructure facilities at the airport. Though the government has tied up with private companies such as GMR and has upgraded airports such Delhi and Banglore but still there is a long way to go. Airlines have a high "spoilage" rate compared to most other industries. Once a flight leaves the gate, an empty seat is lost and non-revenue producing.

OPPORTUNITIES

Government allows 100% FDI via the automatic route for the green field airports. Also, foreign investment up to 74% is permissible through direct approvals while special permissions are required for 100% investment. Private investors are allowed to establish general airports and captive airstrips while keeping a distance of 150 km from the existing ones. About 49% FDI is allowed for investment in domestic airlines via the automatic route. However, this option is not available for foreign airline corporations. Complete equity ownership is granted to NRIs (Non Resident Indians). Foreign direct investment up to 74% is allowed for non-scheduled and cargo airlines. Thus, all these policies promote foreign investment in this industry.

Investment opportunities of US$ 110 billion are being envisaged up to 2020 with US$ 80 billion towards new aircraft and US$ 30 billion towards the development of airport infrastructure, according to the Investment Commission of India.

Technology advances can result in cost savings, from more fuel efficient aircraft to more automated processes on the ground. Technology can also result in increased revenue due to customer-friendly service enhancements like in-flight Internet access and other value-added products for which a customer will pay extra.

THREATS

One of the basic weaknesses in the aviation industry is the fuel costs which are 70% higher than International standards. The fuel bill is 40% of operating cost. Aviation Turbine Fuel (ATF) prices in India is around Rs. 37,800 per kilo litre against Rs.21,800 in the Average International Markets.

Also 20% of the Operational Budget is spent on training pilots. Furthermore, landing and parking charges are 78% higher than the international average.

There is a shortage of skilled manpower which includes pilots, cabin crew and ground staff. Also there is high attrition rate among the skilled manpower within the aviation industry.

PEST Analysis: The Indian Airline Industry

A PEST analysis is an analysis of the external macro-environment that affects all firms. P.E.S.T. is an acronym for the Political, Economic, Social, and Technological factors of the external macro-environment. Such external factors usually are beyond the firm's control and sometimes present themselves as threats. For this reason, some say that "pest" is an appropriate term for these factors. Let us look at the PEST analysis of the Indian aviation sector:

Political Factors In India, one can never over-look the political factors which influence each and every industry existing in the country. Like it or not, the political interference has to be present everywhere. Given below are a few of the political factors with respect to the airline industry: The airline industry is very susceptible to changes in the political environment as it has a great bearing on the travel habits of its customers. An unstable political environment causes uncertainty in the minds of the air travellers, regarding travelling to a particular country. Overall Indias recent political environment has been largely unstable due to international events & continued tension with Pakistan. The Gujarat riots & the governments inability to control the situation have also led to an increase in the instability of the political arena.

The most significant political event however has been September 11. The events occurring on September had special significance for the airline industry since airplanes were involved. The immediate results were a huge drop in air traffic due to safety & security concerns of the people. International airlines are greatly affected by trade relations that their country has with others. Unless governments of the two countries trade with each other, there could be restrictions of flying into particular area leading to a loss of potential air traffic (e.g. Pakistan & India). Another aspect is that in countries with high corruption levels like India, bribes have to be paid for every permit & license required. Therefore constant liasoning with the minister & other government official is necessary. The state owned airlines suffer the maximum from this problem. These airlines have to make several special considerations with respect to selection of routes, free seats to ministers, etc which a privately owned airline need not do. The state owned airlines also suffers from archaic laws applying only to them such as the retirement age of the pursers & hostesses, the labour regulations which make the management less flexible in taking decision due to the presence of a strong union, & the heavy control &interference of the government. This affects the quality of the service delivery & therefore these airlines have to think of innovative service marketing ideas to circumvent their problems & compete with the private operators.

Economic Factors Business cycles have a wide reaching impact on the airline industry. During recession, airline is considered a luxury & therefore spending on air travel is cut which leads to reduce prices. During prosperity phase people indulge themselves in travel & prices increase.

After the September 11 incidents, the world economy plunged into global recession due to the depressed sentiment of consumers. In India, even a company like Citibank was forced to cut costs to increase profits for which even the top level managers were given first class railway tickets instead of plane tickets. The loss of income for airlines led to higher operational costs not only due to low demand but also due to higher insurance costs, which increased after the WTC bombing. This prompted the industry to lay off employees, which further fuelled the recession as spending decreased due to the rise in unemployment.

Even the SARS outbreak in the Far East was a major cause for slump in the airline industry. Even the Indian carriers like Air India was deeply affected as many flights were cancelled due to internal (employee relations) as well as external problems, which has been discussed later.

Social Factors The changing travel habits of people have very wide implications for the airline industry. In a country like India, there are people from varied income groups. The airlines have to recognize these individuals and should serve them accordingly. Air India needs to focus on their clientele which are mostly low income clients & their habits in order to keep them satisfied. The destination, kind of food etc all has to be chosen carefully in accordance with the tastes of their major clientele.

Especially, since India is a land of extremes there are people from various religions and castes and every individual travelling by the airline would expect customization to the greatest possible extent. For e.g. A Jain would be satisfied with the service only if he is served jain food and it should be kept in mind that the customers next to him are also Jain or at least vegetarian.

Another good example would be the case of South West Airlines which occupies a solid position in the minds of the US air travelers as a reliable and convenient, fun, low fare, and no frills airline. The major element of its success was the augmented marketing mix which it used very effectively. What South West did was it made the environment inside the plane very consumer friendly. The crew neither has any uniform nor does it serve any lavish foods, which indirectly reduces the costs and makes the consumers feel comfortable.

Technological Factors The increasing use of the Internet has provided many opportunities to airlines. For e.g. Air Sahara has introduced a service, through the internet wherein the unoccupied seats are auctioned one week prior to the departure. Air India also provides many internet based services to its customer such as online ticket booking, updated flight information & handling of customer complaints. USTDA (US trade & development association) is funding a feasibility study and workshops for the Airports Authority of India as part of a long-term effort to promote Indian aviation infrastructure. The Authority is developing modern communication, navigation, surveillance, and air traffic management systems for India's aviation sector that will help the country meet the expected growth and demand for air passenger and cargo service over the next decade. A proposal for restructuring the existing airports at Delhi, Mumbai, Chennai and Kolkata through long-term lease to make them world class is under consideration. This will help in attracting investments in improving the infrastructure and services at these airports. Setting up of new international airports at Bangalore, Hyderabad and Goa with private sector participation is also envisaged. A good example of the impact of technology would be that of AAI, wherein with the help of technology it has converted its obsolete and unused hangars into profit centers. AAI is now leasing these hangars to international airlines and is earning huge profits out of it. AAI has also tried to utilize space that was previously wasted installing a lamination machine to laminate the luggage of travelers. This activity earns AAI a lot of revenue.

PORTER's 5 FORCES ANALYSIS 1. Threat of New Entrants. At first glance, we might think that the airline industry is pretty tough to break into, but don't be fooled. We'll need to look at whether there are substantial costs to access bank loans and credit. If borrowing is cheap, then the likelihood of more airliners entering the industry is higher. The more new airlines that enter the market, the more saturated it becomes for everyone. Brand name recognition and frequent fliers point also play a role in the airline industry. An airline with a strong brand name and incentives can often lure a customer even if its prices are higher. 2. Power of Suppliers. The airline supply business is mainly dominated by Boeing and Airbus. For this reason, there isn't a lot of cutthroat competition among suppliers. Also, the likelihood of a supplier integrating vertically isn't very likely. In other words, we probably won't see suppliers starting to offer flight service on top of building airlines. 3. Power of Buyers. The bargaining power of buyers in the airline industry is quite low. Obviously, there are high costs involved with switching airplanes, but also take a look at the ability to compete on service. Is the seat in one airline more comfortable than another? Probably not unless we are analyzing a luxury liner like the Concord Jet. 4. Availability of Substitutes. What is the likelihood that someone will drive or take a train to his or her destination? For regional airlines, the threat might be a little higher than international carriers. When determining this we should consider time, money, personal preference and convenience in the air travel industry. 5. Competitive Rivalry. Highly competitive industries generally earn low returns because the cost of competition is high. This can spell disaster when times get tough in the economy.

Consumer Analysis

Reliability is most important to customers. Reliability is performing promised service dependably and accurately. If we don't deliver on our promise we can lose customers and our credibility will be damaged. It takes a long time for a company to build up a reputation for reliability, and only a short time to be branded as "unreliable".

Security in airline industry is a very important issue. Terrorist threats and narcotics are the main threats in Indian airports. The airlines and the security screening people they contract with have a simple choice employ more staff so as to process their passengers more efficiently, or lay off staff and cause their passengers to spend more time waiting to check in than they actually spend on the flight itself.

Tangible - Tangibles refers to physical facilities and facilitating goods. Examples of tangibles would be distinctive materials such as brochures and the cleanliness of the facilities. Tangible is what makes you different than competitors. Customer can see for themselves and then decide whether to go for the service or not.

Responsiveness -

Responsiveness is the willingness to help customers promptly.

Avoid having customers waiting for no apparent reason. Responsiveness is very important because if we provide customers with what they need in a timely fashion they will be satisfied. Nobody likes to wait. Replying to a customer request

promptly is a good example of responsiveness. If customers see that the company is willing to help, this will cause loyalty and it will let them know that we are concerned about them.

Assurance is the ability to convey trust and confidence. Being polite and showing respect for customers will create trust. Also having professional and

knowledgeable staff will create trust and confidence in customers. People enjoy meeting pleasant, knowledgeable people. By being pleasant and knowledgeable to everyone a business will present the kind of business image that draws new business.

Empathy is the ability to be approachable. Empathy involves treating customers as individuals. When a customer has a problem they should not be afraid to ask questions. A company should adapt to the specials needs of a customer. Listening to customers concerns and proving them with a positive solution is how you show empathy.

Recommendations 141 should be outsourced to a call center to deal with the enquiries. Nonavailability of help lines has been the most common complaint of agents and passengers. IVRS should be provided for the agents/passengers waiting for their call to be attended by the operator. Some of the government organizations have successfully done outsourcing help lines. With the oncoming of the Private Airlines on the country the customer awareness and aspiration of quality of service has been enhanced considerably. So Indian Airlines should emphasis on providing more efficient services both on the ground and in the air as done by Jet Airways to a large extent. Dedicated counters should be made to handle last minute preferably for reservations being done on the day of the flight. reservation,

Ticket counters can be placed at major corporate houses which have a substantial amount of travel budget: wherein all the information about the schemes is available. These ticket counters are to be maintained at the expense of Indian Airlines. There should be internal and external audits to look in to the working of various departments. An incentive scheme should be launched for the people at the front desk of the agency such as the ticketing agents. The ticketing agents should be provided with a unique identity number that they would have to quote on the tickets. The points would automatically credited to their account. On the accumulation of certain number of points they will be given FOCs. This will also help in checking false ticketing. Apex-7and Apex-21fare (scheme) should be continued on popularity. account of its

Scheme like Smart Apex fare scheme for business class passengers can be introduced. Flexibility in Smart Apex fare scheme should be increased.

 All the promotional schemes and services should be extensively advertised to bring awareness to make itself better known to the potential customers. They should be advertised through e-mails, corporate presentations and through road shows. Executive class bonanza scheme should be started again. Holiday packages should be sold only through Indian Airlines booking offices and not through agents, as there is every chance of the agents offering parallel deals to the customers. Indian Airlines should schedule more number of flights to and from stations like Mumbai, Delhi, Chennai, andKolkat a as these sectors account for high Pax load. Indian Airlines can introduce late bird/night bird flights between metros. The check-in time should be minimal. Wherever there is likely to be long cues more counters should be opened. Indian Airlines as introduced by Sahara Airlines should adopt the of valet services and it should be extended to all classes. facility

Tele reservation and computerized check-in procedure should be made mandatory. The process of ticketing and cancellation should be made more easy, smooth and as flawless as possible as most of the respondent are not happy with the present ticketing procedure. Delayed flight, which is a very painful experience for the travelers, should be attended to as top priority because the main clientage is business men and they are time bound. Indian Airlines should acquire (induct) new aircraft to upgrade quality in order to build brand image and retain passengers. product

AASL should be given more autonomy so that it could conduct some of the activities related to marketing at its own to add up

 Innovative schemes and generate in revenues. Alliance Air authorities should be made in easy approach to the passengers for the grievance handling and complaints. The flight of Alliance Air should be made more attractive that can be in the form of a booklet as it is of the Jet Airways. It is necessary for Alliance Air that it should reconcile the sectors and the frequency at which it is operating so that it could reduce costs and earn more profit. Alliance Air is required to add up more and more places, which have the status of tourist places. Service innovations like automated flight schedules, over the phones, provision for customizing meals, in-fight mail order shopping etc. should be introduced to lure the passengers. Indian Airlines needs to undertake aggressive marketing.

Alliance Air should consolidate its market share by further improving its service standards and adding more routes to its network . Indian Airlines should undertake customer satisfaction surveys. IA should make provisions to add up more financial benefits for its Passengers.

International desk of Indian Airlines should be made more accessible. Flight status should be made available through SMS.

REFRENCE

Books:-

Principles of Services Marketing by Adrian Palmer, third edition, McGraw Hill, London.

Marketing Management by Philip Kotler.

Strategic Marketing Management by Wilson and Gilligan

Strategic Marketing by David Cravens.