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Submitted by Farhan Khalid - PGDMB11/18 Sushant Vimal PGDMB11/53 M.Omkar PGDMB11/74

Executive Summary
Objectives The objective of this report is to study the external environment of the Aviation Industry in India. Subsequently, internal environment analysis is conducted for IndiGo Airlines. With the help of this comprehensive study, we have suggested recommendations that can be adopted by IndiGo to sustain its competitive advantage by utilizing its cost leadership strategy. Methods Used To understand the important factors responsible for the formulation of corporate strategy, we have utilized Strategic Management tools like Porters Five Forces model .Value Chain analysis & SWOT analysis. Limitations Due to confidentiality clause and corporate policies of the company, accurate financial data could not be obtained for IndiGo Airlines. However, most recent and reliable data sources have been referenced for the analysis of this case. Findings IndiGo airlines entered the low cost carrier market in aviation industry in 2006. It has been able to achieve its break even within two years of its launch. Despite the decline in the aviation industry and global economic slowdown, IndiGo has accelerated its growth rate. Also, IndiGo being a new entrant has managed to become a cost leader in its sector.

India is one of the fastest growing aviation industries in the world. Because of the introduction of liberalization policy in the Indian aviation sector, the industry has witnessed a vast difference with the entry of the privately owned full service airlines and low cost carriers. In 2010, the private carriers accounted for around 84% share of the domestic aviation market. Besides, there was significant increase in the number of domestic air travel passengers. Some of the factors that have resulted in higher demand for air transport in India include the growing purchasing power of middle class, low airfares offered by low cost carriers and the growth of the tourism industry in India. The growth in the aviation industry looked promising and hence attracted many low cost carriers like SpiceJet, GoAir and IndiGo after the success of Air Deccan in 2003(Exhibit 1) . On one hand, the booming opportunities incited players to expand capacity but on the other hand, rising fuel costs and taxation rates, increased the operational costs. Thus the low-cost players found it difficult to maintain their commitment. In their urge to survive, they were compelled to increase prices, add free refreshments and beverages on-board, etc. Some players sought refuge in mergers, whereas some survived by modifying their business model. However, amidst this aviation turmoil, IndiGo continued to fly high. In its endeavour to consistently maintain low costs and provide low fares, IndiGo resorted to measures like outsourcing and having a homogeneous fleet. IndiGo is the latest entrant as a low cost carrier in the aviation industry of India. It started its operations on August 4, 2006. InterGlobe Enterprises, a renowned travel corporation, is the owner of IndiGo. The IndiGo team uses all of these resources to design processes and rules that are safe and simple, that make sense, and that cut waste and hassles, which in turn ensures a uniquely smooth, seamless, precise, fares that are always affordable. IndiGo Airlines was named the Best Low-Cost Airline Central Asia / India for customer Product and Service Quality at the 2011 World Airline Awards The airline currently operates 259 daily flights with a fleet of 44 brand new Airbus A320 aircraft and flies to 26 destinations. This year Indigo has started operating international flights to Dubai , Muscat & Bangkok. Below are the key factors of the business model of IndiGo airlines: A single passenger class. Single type of airplane to reduce training and service cost. No frills such as free food/drinks, lounges. Emphasis on direct sale of ticket through Internet to avoid fee and commissions paid to travel agents. Employees working in multiple roles. Unbundling of ancillary charges to make the headline fare lower To know about the industry attractiveness of aviation and the factors that helped IndiGo enter this market, we used the Porters Five Forces model. SWOT analysis of the company was done to understand the current positioning of the company based on the analysis of external and internal environments. For internal analysis, we studied the criteria for sustainable competitive advantage as well as the Value Chain Analysis. Further, the analysis of government policies, competitors strategies and other variables like fuel prices, increasing domestic traffic, economic downturn etc will lead us to the external influences that affect the aviation industry of India. Thus all these analysis will help us in formulating a strategy for Indigo.

External Analysis
Airline Industry Attractiveness Foreign equity allowed: Foreign equity up to 49 per cent and NRI (Non-Resident Indian) investment up to 100 per cent is permissible in domestic airlines without any government approval Attraction of foreign shores: After five years of domestic operations, many domestic airlines too will be entitled to fly overseas by using unutilised bilateral entitlements to Indian carriers. Rising income levels and demographic profile: Demographically, India has the highest percentage of people in age group of 20-50 among its 50 million strong middle class, with high earning potential. Untapped potential of India's tourism: Tourist arrivals in India are expected to grow exponentially, especially due to the open sky policy between India and the SAARC countries and the increase in bilateral entitlements with European countries, and US. Glamour of the airlines: No industry other than film-making industry is as glamorous as the airlines. Airline tycoons from the last century, like J. R. D. Tata and Howard Hughes, and Sir Richard Branson and Dr. Vijaya Mallya today, have been idolized.

Porters Five Forces strategy for Airline Industry 1.

Product differentiation: In low cost carriers, there is not much differentiation in the basic service that is being provided to the customers. Differentiation can only be achieved by Value Added Services. IndiGo provides check-in kiosks, stair-free ramps, and Q-Busters. Hence this argument works in favour of IndiGo. Switching cost: 1. The switching cost is not high. Customers can easily choose other low cost carriers. 2. The switching cost of an airline company to other business/industry is high as the exit cost is high. In aviation industry the major entry barriers can be: Government regulations: The government's open sky policy has encouraged many overseas players to enter the aviation market. Aviation was primarily a government owned industry. Due to liberalisation Indian aviation industry is now dominated by privately owned full-service airlines and low cost carriers. Private airlines account for around 84 per cent share of the domestic aviation market. Private sector is allowed to operate scheduled and non-scheduled services. Operator should be a citizen of India or a company or a body corporate which is registered in India and whose principal base of business is in India. Chairman and at least two thirds of its Directors are Indian citizens.

Threat of New Entrants

Foreign equity participation up to 49 percent and investment by Non- Resident Indians (N.R.I), Overseas Corporate Bodies (OCBs) up to 100% is allowed. The representation of the foreign investing institution/entity on the Board of Directors of the company shall not exceed one-third of the total. Foreign airlines are not permitted to pick up equity. Foreign financial institutions and other entities who seek to hold equity in the domestic air transport sector shall not have foreign airlines as their shareholders. As regards safety and security arrangements, the operators must ensure compliance with relevant regulatory requirements stipulated respectively by the Director General of Civil Aviation (DGCA) and the Bureau of Civil Aviation Security (BCAS). For green field airports, foreign equity up to 100 percent is allowed through automatic approvals. For upgrading present airports, foreign equity up to 74 percent is allowed through automatic approvals and 100 percent through special permission (from FIPB). Setup costs: Nowadays, venture capital of $10 million or less is enough to launch an airline. In order to overcome the shortfall of aircrafts during the peak seasons, airlines can utilize an ACMI lease agreement for the extra aircraft. If the airline has many aircrafts, either owned or leased, then they can offer their surplus aircrafts in their low season to another airline that is facing peak season. An airline company will bear the cost of purchasing an aircraft if it wants to start or expand its fleet, leasing allows the cost to be spread across several years. At the lease term end, the lease can be renewed or aircraft can be returned, to be replaced with more modern aircraft. Fuel prices Domestic ATF prices have increased by about 157% from the beginning of 2006 till September,2011. In India, oil companies do not import ATF directly; instead they refine it from imported crude oil. With rising crude oil prices, imports are becoming expensive day by day and at the same time, the government is unable to pass on the full impact of this rise to the consumer. As a result, the state owned oil marketing companies are forced to sell diesel, petrol, kerosene and LPG at way below cost, a cost they are trying to somewhat make up by raising the price of ATF. As a result prices of ATF in India are much higher than some of the other Asian countries. Resource: The aviation industry in India suffers a shortfall of pilots. The reasons are: The aspirants can receive Commercial Pilot Licence (CPL) only if they undertake a training abroad. The reason being that in India, there is a lack of dedicated flight Instructors, decade old aircrafts and poor quality training offered at a price much higher than what is offered by flying schools in USA, Canada and Australia. Indian institutes provide training with the help of their training partners in the foreign countries like U.S.A, U.K etc. Private airlines hire pilots; get expatriates or retired personnel from the Air Force or PSU airlines in senior management positions. Airlines can contract employees such as cabin crew, ticketing and checkin staff members. In airline sector, finding appropriate labour-force is very costly. Moreover, due to the liberalization of policies by government, foreign and private players often poach workforce of competitors which leads to talent-drain and thus losses.

2. Bargaining Power of Suppliers Any airlines in general face a duopoly of two major suppliers of aircrafts i.e. Airbus and Boeing. There are other suppliers like Dauphin,Dronier,Bell,ATR-42 but do not meet the requirements to serve the low cost commercial aircraft carriers, particularly IndiGo airlines. Fleet Forecast for the India-Region 2004-2014 shows that there will be approx. 388% growth in the order rate of air carriers [Exhibit 2]. Thus, suppliers are few and thus in better position to bargain as they always finds customers for their aircrafts. IndiGo fleet comprise of Airbus-A320 and the switching cost is high due to the limited number of suppliers. Due to shortage of commercial aircraft pilots in India the supply of pilots is concentrated, hence increasing their power. There are only four suppliers for ATF (Aviation Turbine Fuel); IOC, Hindustan Petroleum Corporation, Bharat Petroleum and ONGC and since their number is limited, they possess more power. The proof of evidence for high power enjoyed by ATF suppliers lies in the fact that the ATF prices constitute 35-40% of the costs in India compared to 20-25% globally. The brand value of suppliers is high due to their less number and results in higher bargaining power for them. The airlines also face a threat of forward integration since the suppliers are in close contact and are familiar with the knowhow of the aviation industry. The suppliers are few and thus in better position to bargain as they always finds customers for their aircrafts. 3. Bargaining Power of Buyers Buyers in airlines industry are large in number and highly fragmented thus lowering their power .With the growing Indian economy and increasing low cost carriers, the buyers have increased and so have the growth opportunities. The switching cost is minimal since there are multiple alternatives available. It is not difficult to move from one airline to another or to switch to a substitute. Furthermore the players in the particular strategic group do have minimalistic differentiating points. Backward integration from the buyers end is very difficult and next to impossible. 4. Competitive Rivalry The aviation industry is a highly competitive industry because of which it is difficult to earn high returns in this sector. Below are the major reasons for the high competition in the lowcost carrier airlines: Very little scope for differentiation between competitors products and services. trategic Management Aviation is a mature industry with very little growth. The only way to grow is by stealing away customers from competitors Suppliers of aircrafts are the same, i.e., Boeing and Airbus. Hence suppliers bargaining power is high. Switching cost of customers is high for low cost carriers, i.e., there is no brand loyalty. Closest competitor of IndiGo is SpiceJet , Kingfisher followed by GoAir [Exhibit 3]. 5. Availability of Substitutes The substitute for low cost airline company is the railways. But this substitute is not very powerful due to the following reasons: Customers use airline transport as it is convenient and saves travelling time. So trains cannot work as a substitute to save time.

Secondly, many customers use airlines as a status symbol. So again, trains cannot substitute for prestige. So if we consider IndiGo airlines, the direct substitutes are the other low cost carriers like SpiceJet and GoAir. So in this case, threat of substitutes is high as the switching cost between low cost carriers is low.

Opportunities IndiGo airlines have not ventured into the huge air freight market which can contribute a sizeable portion of the revenue. A study by Centre for Asia Pacific Aviation or CAPA, an aviation consulting firm estimates the cargo services of more than 3.4 million tonnes per annum. The huge untapped international sectors can be explored IndiGo currently does not have too many long haul aircrafts and as per CAPA study by 2020, Indian Airports are expected to handle more than 100 million passengers.IndiGo airlines should focus on long haul aircrafts both for domestic and international sectors. The chartered flight services still remain an area not exploited by Indian aviation industry and IndiGo airlines can play a major role in tapping the potential in that particular market Threats ATF (Aviation Turbine Fuel) prices have increased radically since 2008. [Exhibit 4 ]. Foreign and private players often poach work-force of competitors. Extensive Government Interference can affect the accountability of the organization.In aviation industry, government has control over fuel prices, foreign investments (e.g. FDI policies), tourism laws, taxes etc. This can greatly affect the day to day business in the airline industry. Like every other industry, recession has hit aviation industry as well. People have cut down on tourism and corporate travels have also been slashed down. The shortage of trained pilots, co-pilots and ground staff is severely limiting the growth prospects of all the airline companies. Barriers to exit in aviation industry are high because of high capital investment, no government restrictions and loss of brand image.

Internal Environment Analysis

Resources, Capabilities and Core Competencies are the key elements of the Internal Environment. The resources are tangible and intangible.

Tangible resources
Aircrafts: The airline currently operates 120 daily flights with a fleet of nineteen brand new Airbus A320 aircraft and flies to 17 destinations. Human Resources: The human resources are the pilots, crew members and ground staff. No airline can recruit a trainee pilot and directly assign him to fly an airplane carrying around 500 passengers. The labour-force has to be trained and then assigned with tasks to perform after proper evaluation. Fuel: Porters five forces model does not cover the importance of complementary product. ATF is the complementary product for airplane and it constitutes approximately 35% of the production costs.

Intangible resources Brand Equity/Reputation: IndiGo is the most reputed low cost carrier due to the following reasons: On time arrivals is the key differentiating factor for IndiGo Airlines. IndiGo keeps implementing new and innovative ideas to increase the quality of customer service. Recent example is: IndiGo has roving check-in counters where passengers with only cabin baggage can check-in with an IndiGo official with a handheld device, rather than lining up at the check-in counter. It gives the customers the freedom to carry their own eatables and snacks on board. Social Capital: Indigo has amicable relationship with the other organizations that contribute to the value addition for the service provided to the customers. Indigo has engaged many Travel web-portals and regional travel agents with incentives like booking commissions, etc. There have been no instances of distress between IndiGo and its other collaborators, that is, suppliers. Collaboration with hotels. IndiGo flyers can avail up to 25 per cent discount on published room tariff, 10 per cent discount on holiday stay packages and 10 per cent discount on restaurant dining at select hotels. Hence Indigo has a remarkable Social Capital. Brand Awareness: Indigo is a well known Low Cost Carrier in India. The following points contribute to the brand awareness of Indigo: Advertising using print media like newspapers, billboards, etc. It may not pay for an advertisement in a newspaper, but has been covered in news for its low cost strategy implementation. As IndiGo provides better value added services to the customers, Word of Mouth promotion also works in its favour. Employee Relationship: Good Employee Relationship is a key factor to sustain competitive advantage. IndiGo provides several incentives to its employees. At a time when several domestic airlines were looking to prune their staff strength, the Delhi-based low cost airline, IndiGo, was on the lookout for more pilots, cabin attendants, customer service and airport service agents.In the recent past, both Kingfisher Airlines and Jet Airways have asked their staff to leave. Jet Airways also offered a voluntary retirement scheme to its staff. The above facts show that IndiGo has taken a positive approach while dealing with its loyal employees at the time of economic slowdown. Four Criteria of Sustainable Competitive Advantage:



IndiGo has high brand awareness and brand equity. Cost leadership: Successful implementation of low cost strategy. Highly efficient management that ensures high rate of on- time arrivals. Continuous innovation to improve on non price factors. Tie-up with hotels. Ease of ticket booking for customers.

Scope of product differentiation is less. Benefits of the innovations implemented by IndiGo to provide better services to the customers are short-lived, as these can be easily imitated by the competitors. IndiGo is not exploring the untapped domestic air cargo market.


Freight market Increase in domestic air traffic International market Chartered flight services Promotion of regional air connectivity Development of airport infrastructure

Rising ATF prices Increasing competition Economic slowdown Poaching Government interference Scarcity of trained pilots

Feasible Alternatives 1. Increase domestic operation There are a number of initiatives taken up by government to encourage aviation industry, e.g., promotion of regional air connectivity, Open Sky policy and policy of Greenfield airports. In addition to this, government has also made plans for the development of airport infrastructure. 35 airports have been selected for this purpose, of these 24 airports would be taken up for city side development through PPP including maintenance and operation of the terminal buildings, cargo operations and real estate development. All these factors indicate towards a favorable environment for growth in the domestic aviation sector. Hence it would be a wise option for IndiGo to increase its domestic operations. IndiGo must increase the number of destinations and can start long haul aircrafts. 2. Extension Currently, IndiGo is concentrating only in domestic passenger flights. However, the freight/cargo market and charted plane service are the areas that can prove to be good potential market for IndiGo. Industry experts have predicted that not less than 50 million passengers will be served by the India aviation industry by 2015. Widening opportunities in India will create room for over 69 foreign airlines entering the Indian aviation sector from about 49 countries. Besides, chartered flight services are an untapped market for IndiGo. Thus, IndiGo has a huge opportunity to expand in both these arenas. Final Recommendation As inferred from the above two solution analysis, we recommend that IndiGo must increase its domestic operations by starting flights connecting to new destinations and long haul flights. As the opportunities are vast for this purpose, the other low cost carriers may also venture in this area. So using the cost leadership strategy, IndiGo can gain competitive advantage over its competitors as the first mover. Once the above strategy is successful and results in promising revenue growth, IndiGo can use extension to freight and chartered services as the next objective for further expansion.





1. 2. India Ministry of Civil Aviation - 3. India Directorate of Civil Aviation - 4. Airport Authority of India - 5. Bureau of Civil Aviation Security (India) 6. Centre for Asia Pacific Aviation 7. 8. 9. 10. 11. 12.