Airline Industry Report | Oligopoly | Airlines

Alliance University

The Airline Industry
An Analysis

GROUP 12 SEC:C Amrita Singh Anshuprabha Singh Jeetu Jose Manash Verma Mudit Mathur Shuvendra kr. Mohanty

The Airline Industry

Contents

Page

Introduction Global Perspective Statistical facts about Indian Aviation Industry Structure of the airline industry in India PEST Analysis SWOT Analysis Conduct Performance analysis Analysis of competitiveness Future outlook Bibliography

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The Airline Industry

Introduction:
The history of the civil aviation industry in India can be traced back to the year 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. The Government of India nationalized nine airline companies vide the Air Corporations Act, 1953. Accordingly it established the Indian Airlines Corporation (IAC) to cater to domestic air travel passengers and Air India International (AI) for international air travel passengers.

The assets of the existing airline companies were transferred to these two corporations. This Act ensured that IAC and AI had a monopoly over the Indian skies. A third government-owned airline, Vayudoot, which provided services between smaller cities, was merged with IAC in 1994. These government-owned airlines dominated India's air travel industry till the mid-1990s. In 1994, IAC was renamed Indian Airlines (IA). In the same year, the Indian Government, as part of its “open skies” policy, ended the monopoly of IA and AI in the air transport services by repealing the Air Corporations Act of 1953 and replacing it with the Air Corporations (Transfer of Undertaking and Repeal) Act, 1994. Private operators were allowed to provide air transport services. Foreign direct investment (FDI) of up to 49 percent equity stake and NRI (Non Resident Indian) investment of up to 100 percent equity stake were permitted through the automatic FDI route in the domestic air transport services sector. However, no foreign airline could directly or indirectly hold equity in a domestic airline company. For many years since its inception the Indian Aviation Industry was plagued by inappropriate regulatory and operational procedures resulting in either excessive or no competition. Nationalization of Indian Airlines (IA) in 1953 brought the domestic civil aviation sector under the purview of Indian Government. Government's intervention in this sector was meant for removing the operational limitations arising out of excess competition. Air transportation in India now comes under the direct control of the Department of Civil Aviation, a part of the Ministry of Civil Aviation and Tourism of Government of India. Aviation by its very nature constitutes the elitist part of our country's infrastructure. This sector has substantial contribution towards the development of country's trade and tourism,

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The Airline Industry providing easier access to the areas full of natural beauty. It therefore acts as a stimulus for country's growth and economic prosperity. Currently there are 6 major domestic airlines catering to the needs of around 520.1 lakh passengers, with Jet Airways along with JetLite enjoys 25% market share and hence a leader in India.

Why Air transport?
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Air transport drives economic and social progress It connects people, countries and cultures It provides access to global markets It generates trade and tourism It forges links between developed and developing nations Aviation broadens people‟s leisure and cultural experiences via wide choice/affordable access to destinations across the globe

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Improves living standards and alleviates poverty through tourism Often serves as the only means of transportation to remote areas promoting social inclusion

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Fosters the conservation of protected areas Facilitates the delivery of emergency and humanitarian aid relief Swift delivery of medical supplies, organs for transplantation

Global Perspective:
Employment
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Air transport Industry generates 31.9 million jobs globally It directly creates 5.5 million jobs worldwide
o o

Airlines and airports employ 4.7 million people The civil aerospace sector employs 782,000 people

6.3 million indirect jobs are created via purchases of goods and services from companies in the air transport supply chain

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2.9 million jobs are induced through spending by industry employees 17.1 million direct and indirect jobs are created through air transport‟s catalytic impact on tourism

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235 jets and 5.5% of world GDP   25% of all companies‟ sales are dependent on air transport 70% of businesses report that serving a bigger market is a key benefit of air transport Air Transport Facts (2009)     1.6 million scheduled departures per year Air Transport Efficiency  Aviation occupancy rates of 75.715 airlines 27.2 billion/year) It is a net contributor to national treasuries through taxation Modern aircraft achieve fuel efficiencies of 3.5 litres per 100 passenger kilometres or 67 passenger miles per gallon 5 .024 aircraft (22.670 airports 28.The Airline Industry Economic benefits  Aviation provides the only worldwide transportation system which makes it essential for global business and tourism   Aviation transports around 2 billion passengers annually Aviation carries over 43 million tonnes of freight annually and 35% of interregional exports of goods by value   40% of international tourists travel by air Aviation‟s global economic impact is estimated at $ 3.789 turbo props) 3.7% (2009 industry load factor) are better than those of road and rail    Air transport entirely covers its infrastructure costs ($54.557 billion (2007) o That is equivalent to 7.

9 thousand crore. reason being that in India still the majority of travelers are 6 . The growth of airlines traffic in Aviation Industry in India is almost four times above international average. Aviation Industry in India have placed the biggest orders for aircrafts globally Aviation Industry in India holds around 69% of the total share of the airlines traffic in the region of South Asia .The Airline Industry Statistical facts about Indian Aviation Industry: • • • • • • The Total sales for the industry stands at 41.As the graph shows.31 thousand crore for 2010. Air Passenger Traffic in India The above data shows the trend in the passenger traffic movement in aviation industry from April 08 – September 10. In the present scenario around 12 domestic airlines and above 60 international airlines are operating in India. there is not much movement of passengers through International Airlines. Net Profit is at -3.

The Airline Industry domestic travelers. Air Freight Traffic Movement in India As we can see that there has been a constant growth in the freight movement through airline simply because of the time factor.September 2010 mainly because of the rise in petrol prices and because of which the rates of freight increased. 7 . There is a constant fluctuation in the passengers movement. It hampered not only the domestic but the international passengers‟ movement also.Then again in May 2010 there was a boom in the aviation industry mainly because of the rise in per capita income and increase in the no. The major downturn however came in 2008. Airlines are the fastest means of delivering goods. of flights scheduled. in this period the aviation industry suffered a major blow because of economic downturn. However there has been a slight slump in the movement from April 2010. The best time for the aviation industry was from October to December 2009.

There is a single seller and many buyers of a product. Let us analyse the Indian Aviation industry during that time on the above mentioned parameters:1. 2. There are barriers to entry. The firm is a price maker i. 3.e. 2. no other player could enter the market. The firm acts atomistically i. The supply of the product by the single firm constitutes the market supply. while taking its profit maximizing decisions it ignores the reaction of other firms( potential competitors) and 7. 8 . The firm faces the market demand curve for its product. 4. 4. The products produced and sold by the firm is homogeneous or non-homogeneous but it has got no close substitutes in the market. 5. 5.e. 6. up to 1986. Both the airways controlled the entire demand and supply of the airline services.The Airline Industry Structure of the airline industry in India: Monopoly: During pre and post nationalization i. 3.e. Government was the price maker and it did not take pricing decisions strategically. Let us look at the basic characteristics of the Monopoly market:1. Due to government regulations. it has substantial control over the market price of the product. The product was homogeneous as the air services were similar in the two airlines and though Railways was considered a competitor but it catered to entirely different market segment and was nowhere near to the air services considering the time and cost factor. Indian Airlines and Air India both under the same entity were the only suppliers of civil air services while there were buyers for the same. the only flights plying in the Indian sky were Air India and Indian Airlines both owned and controlled by the Government of India and as such the government enjoyed monopoly in the Indian Aviation Industry.

It is sometimes able to charge different prices to different consumers of the same commodity. The above graph applies to the Air India and Indian Airlines when they were enjoying monopoly status in the industry. average revenue(AR). His TR= P*GQ*0 and the profit earned is denoted by the area P*GFC*. This happens at the point E and accordingly the quantity supplied would be Q* and the price charged is P*. marginal cost(MC). The monopolist earns profit in the long run also as there is no competitor to enter the industry and take away his share of profits. The AC curve intersects Q at the point F. average cost(AC). As such his TC =C*FQ*0. MC Price. The monopolist faces a downward sloping demand curve and as such his MR curve is also downward sloping. In the Airline Industry also the consumers are categorized into different classes such as Business and Economy and accordingly the prices charged also differ in the two classes.The Airline Industry Price Discrimination When a monopolist discriminates between consumers the practice is called Price Discrimination. The monopolist will produce at the profit maximizing level which is the point where 1. MC cuts MR from below. Cost P* C* G F AC E AR 0 Q* MR Quantity In the above graph. MR=MC and 2. 9 . we measure quantity along the x-axis and price(P). marginal revenue(MR) along the y-axis.

10 .e. advertising. advertisements. 1994. Like when Air Deccan came up with a promotional scheme of Re 1 ticket. which repealed the Air Corporations Act of 1953 and came up with Air Corporations Act. Opening up of the Aviation industry to 41% FDI in the form of equity stake has also increased the competition in the economy. Product may or may not be homogeneous. price cutting strategy etc. the Indian Aviation Industry possesses the following:  There are 8 major airways in the current Indian aviation industry. economies of scale. air services is more or less homogeneous with minor differences. Out of the above mentioned characteristics of Oligopoly.The business strategy of each and every firm in respect of pricing. The various characteristics of an oligopoly market are:  Small number of sellers but it entirely depends on the size of the market.     There are barriers of entry due the high capital investment. A slight change in any type policy by a company will lead to the others to follow suit. the period after 1991 lot of private players entered the industry under the government policy of open sky.  The product offered by each and every airline i. By 1995. Private airlines occupied 10% of the domestic air traffic. Stabilized prices – The prices tend to stabilize because no player is willing to bring about a change in its prices. the customer loyalty is attached to a particular airline and they might not be willing to switch. Each and every player has a control on the prices and influences the market prices. resistance by existing firms.The Airline Industry Oligopoly: After the post privatization period i. Interdependence of decision making. Not only that. product modifications is closely watched by the rival firms. The business strategies of pricing of tickets. Hence the various players broke into the monopoly of IA and AI creating a situation of Oligopoly market.e. The consumer is the price taker and the industry players are the price makers.  The Indian Aviation Industry involves a huge capital investment and government regulation which acts as major reasons for any new player to enter. promotion schemes etc are in line with that of the competitors. its immediate competitor Spice Jet launched a scheme of 99p/ ticket.

Here the demand curve becomes relatively elastic. a firm A believes that if it increases its prices then none of the firms will follow suit so firm A will face considerable losses. Hence here lies the problem of indeterminacy. Here. all other firms follow suit to protect their market share. the price and output corresponding to it is 0PO and 0QO respectively. MR. Due to this reason firms prefer to maintain stable prices for particular periods.The Airline Industry  The prices in this industry are fixed by the players according to the segment of market they want to cater to. In Oligopoly market the profit maximization output and price is not determined by the profit maximizing criterion we saw in the monopoly market structure. MR and MC. As such we can describe the Indian Aviation industry‟s market structure through Sweezy‟s model of Oligopoly which talks about price stability/rigidity. Same is the case with Indian aviation players like reduction in price by Air Deccan will result in reduced prices of Spice Jet and an increase in prices of Air Deccan will cause them considerable losses. MC MC2 D MC1 E PO A D‟ B Kinked Demand Curve 0 QO MR Q In the above graph. This kind of asymmetrical price conjecture leads to kink in the demand curve. Hence in this context the demand is relatively inelastic. On the other hand when firm A reduces its prices. the x-axis shows Quantity and the y-axis shows the price. It is very unlikely that MC would pass through the discontinuous portion 11 . DE portion is relatively elastic while ED‟ is relatively inelastic. Demand curve faced by an oligopolist has a kink point at E. P.

Some of the Top international airlines are as follows: 1. Go Air 2. China Southern Airlines 12 . We can see from the following data that prices in airline industry are same for the players competing with each other. the equilibrium price. and the firm will increase its output to maximize profit. Kingfisher Prices Charged Rs. QO) is compatible with a wide range of costs. Southwest Airlines 4. Lufthansa 6. Oligopoly market tending towards Monopolistic characteristics The future scenario of the Indian Aviation industry is tending towards monopolistic market Characteristics.The Airline Industry of MR. American Airlines 5. Thus. Here. Spice jet Prices Charged Rs. Delta Airlines 2. As such the market may move towards monopolistic in the coming years. United Airlines 3. some of which are as follows:    Large number of buyers and sellers Product is differentiated No Barriers to entry. Hence. the profit of the firm is maximized when Q=QO. then MC<MR.44 flights/day).output combination (Po. if Q<QO. 5000 Rs. 5148 1. High Cost Players 1. shifts in MC curve do not affect the equilibrium. 7760 Rs 7400 Low Cost Players 1. It is being forecasted that around 8 – 9 new airlines would be starting their services in the next 2 years. As such we see that number of players is increasing and there would be cut throat competition. Jet 2. Again if Q>QO then MC>MR And the firm will increase its output to maximize profit. We take the fares charged by the major airlines flying along Delhi –Mumbai route (busiest route.

6 % 13.6^2 = 1861 This value of HHI dictates that the airlines industry in India is an oligopolistic market.1^2 + 18.00% 15.1 % 18.00% 0.00% 5.8^2 + 18.00% 25. 13 .6 % 25.4 % 17.00% Series1 Herfindahl index =25.00% 10.4^2+ 17.8 % 06.6^2 + 6.00% 20.4% 30.The Airline Industry Players in the industry and market share INDIAN PLAYERS Kingfisher Jet Airways + Jet lite Nacil(I) Indigo Spice jet Go Air MARKET SHARE 18.4^2 + 13.

They can be as a result of interventions by the government or a natural occurrence in business. 14 . the demand for access at these airports increased. Minneapolis. Detroit. Load factors or fare increases may affect revenue. This gives them exclusive rights to use the gates and prevents new airlines from acquiring the use of any airport facilities. This increase made it difficult for the takeoff and landing slots to be equally divided. In the airline industry. As a result of new airlines entering the market. This makes airline industry highly vulnerable to an economic slowdown. Risk: The high risk nature of the airline industry is a major barrier for new entrants. Newark and Pittsburgh permit airlines to lease the airport gates over a long period of time. when this happens profits will be instantly affected. Cincinnati. there are number of barriers to entry that affect new entrants. the Federal Aviation Administration has limited the daily number of takeoffs and landings at key airports such as the Chicago O'Hare. These barriers benefit existing companies who already operate in the industry by protecting their existing revenues from new competitors. Airlines have high cost that tends to be fixed in relation to revenues. This period can be extended as long as 20 years.The Airline Industry Barriers: Barriers to entry are conditions such as high start up costs or obstacles that prevent new entrants from easily entering the particular industry. Leases: Airports in cities such as Charlotte. Slots: Since 1969. Ronald Reagan Washington National and New York's JFK and LaGuardia.

Sunk Costs: Sunk costs are unavoidable expenditures for a company. For example. Smaller airlines may choose not to enter or quickly exit a market due to increased competition and financial loss. Government also creates barriers to entry when it grants firm exclusive rights to certain resources through grants. a monopoly that provides oil to local governments might have access and exclusive rights to the land from which the oil comes.250 miles. Additionally. copyrights and licenses. Resources: A company's control or ownership of a significant resource bars would-be competitors from entering the market. some firms in a competitive market have more money than others to spend on advertising. respectively. 15 . Business owners with little money budgeted to spend on marketing and advertising can find it difficult to enter an industry where another company has more money to put towards product promotion. patents. since those airlines are prohibited from serving LaGuardia and National airports where the western airlines are strongest. Marketing Strategies: Some marketing strategies such as booking incentives and frequent flier programs have been executed by established airlines to create loyalty among passengers and travel agents. This has made it increasingly difficult for new airlines to enter the market. These rules were implemented to promote JFK and Dulles airports as the long-haul airports for the New York and Washington metropolitan areas. thus it's a sunk cost. For example.500 and 1.The Airline Industry Perimeter Rules: Perimeter rules at LaGuardia and National airports prohibit incoming and outgoing flights that exceed 1. these rules limit the ability of airlines based in the west from competing. Marketing costs must be spent.

Part II were issued in 1994 which stipulates the minimum requirements for grant of permit to operate scheduled passenger air transport services Scheduled Operator's Permit is granted only to:   A citizen of India. in an efficient and safe manner. and.700 kg and type 16 . the Civil Aviation Requirements. Its substantial ownership and effective control is vested in Indian nationals. Innovation and Research: The high cost of investment in new technologies or research deters many firms from entering the market. Regulations: In order to maintain orderly growth of airline operation.000 kg. Firms with greater resources for research and development to create new products.The Airline Industry Investment: Businesses with a higher amount of start-up capital than other firms create barriers to entry. Its chairman and at least two-thirds of its directors are citizens of India. Series C.000 kg and not less than Rs. thereby overshadowing the efforts of the competition. can dominate an industry that depends on Research and innovation to grow. Firms with high-yielding investments and those that show a good return for investors can afford to spend much money on resources. 10 crores in respect of aircraft of maximum takeoff mass not exceeding 40. as well as capital to invest in equipment and in emerging technologies. to serve the needs of the country. Eligibility Requirements Before the Scheduled Operator's Permit is issued. A fleet of minimum five aircraft either by outright purchase or through lease with maximum certified take-off mass more than 5. or A Company or a Corporate provided that: o o o It is registered and has its principal place of business within India. an applicant should have: A subscribed equity capital of not less than Rs. 30 crores in respect of aircraft of maximum take-off mass exceeding 40. Section 3. Air Transport.

Adequate number of AMEs and own maintenance and repair facilities for maintenance of aircraft at least up to flight release or 500 hours. 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. The aircraft shall be registered in India with current Certificate of Airworthiness in normal passenger category. Like it or not. operators will be permitted to operate with three aircraft and will be given one year's time to have the fleet size of five aircraft. whichever is higher. the political interference has to be present everywhere. For higher maintenance. The events occurring on September had special significance for the airline industry since airplanes were involved. The flight crew should hold current licenses issued by DGCA and appropriate endorsements on the type of aircraft operated. The Gujarat riots & the government‟s inability to control the situation have also led to an increase in the instability of the political arena. Overall India‟s recent political environment has been largely unstable due to international events & continued tension with Pakistan. The fourth aircraft should be acquired within a period of six months and the fifth aircraft within a period of one year. regarding travelling to a particular country. To facilitate the start of operations. An unstable political environment causes uncertainty in the minds of the air travellers. The immediate results were a huge drop in air traffic due to safety & security concerns of the people. the operator should preferably establish his own maintenance facilities. The most significant political event however has been September 11. 17 . one can never over-look the political factors which influence each and every industry existing in the country. but can carry out such maintenance using facilities of reputed organisation approved by DGCA.The Airline Industry certified meeting the requirements of transport category aircraft acceptable to DGCA. Sufficient number of flight crew and cabin crew but not less than three sets of crew per aircraft. PEST Analysis: Political: In India.

Even the SARS outbreak in the Far East was a major cause for slump in the airline industry. The state owned airlines suffer the maximum from this problem. Unless governments of the two countries trade with each other. which has been discussed later. the world economy plunged into global recession due to the depressed sentiment of consumers. which further fuelled the recession as spending decreased due to the rise in unemployment.g. Economic: Business cycles have a wide reaching impact on the airline industry. Therefore constant liasoning with the minister & other government official is necessary. 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. After the September 11 incidents. 18 . etc which a privately owned airline need not do. During prosperity phase people indulge themselves in travel & prices increase. there could be restrictions of flying into particular area leading to a loss of potential air traffic (e. 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. This prompted the industry to lay off employees. & the heavy control &interference of the government. During recession. which increased after the WTC bombing. 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. free seats to ministers. These airlines have to make several special considerations with respect to selection of routes. Pakistan & India) Another aspect is that in countries with high corruption levels like India. airline is considered a luxury & therefore spending on air travel is cut which leads to reduce prices.The Airline Industry International airlines are greatly affected by trade relations that their country has with others. The loss of income for airlines led to higher operational costs not only due to low demand but also due to higher insurance costs. bribes have to be paid for every permit & license required. the labour regulations which make the management less flexible in taking decision due to the presence of a strong union. In India. The state owned airlines also suffers from archaic laws applying only to them such as the retirement age of the pursers & hostesses.

low fare. The major element of its success was the augmented marketing mix which it used very effectively. Air Sahara had introduced a service. 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. 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. navigation. The airlines have to recognize these individuals and should serve them accordingly. What South West did was it made the environment inside the plane very consumer friendly. Technological: The increasing use of the Internet has provided many opportunities to airlines. updated flight information & handling of customer complaints. surveillance. and no frills airline. 19 . 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. Another good example would be the case of South West Airlines which occupies a solid position in the minds of the US air travellers as a reliable and convenient. Air India also provides many internet based services to its customer such as online ticket booking. fun. which indirectly reduces the costs and makes the consumers feel comfortable. In a country like India. kind of food etc all has to be chosen carefully in accordance with the tastes of their major clientele. The Authority is developing modern communication. 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. For e.The Airline Industry Social: The changing travel habits of people have very wide implications for the airline industry. through the internet wherein the unoccupied seats are auctioned one week prior to the departure.g. The destination.g. The crew neither has any uniform nor does it serve any lavish foods. For e. there are people from varied income groups. Especially. Air India needs to focus on their clientele which are mostly low income clients & their habits in order to keep them satisfied.

This will help in attracting investments in improving the infrastructure and services at these airports. wherein with the help of technology it has converted its obsolete and unused hangars into profit centers.The Airline Industry A proposal for restructuring the existing airports at Delhi. Tourism growth: Due to growth in tourism. Setting up of new international airports at Bangalore. Mumbai. Hyderabad and Goa with private sector participation is also envisaged. SWOT Analysis: STRENGTHS Speed and Comfort Air mode of transportation is the fastest and most comfortable form of transport. Geographical barriers not a constraint Geographical barriers like mountains. A good example of the impact of technology would be that of AAI. It also facilitates more flights to such destinations. These technological changes in the environment have an impact on Air India as well. which can help reduce maintenance cost. AAI is now leasing these hangars to international airlines and is earning huge profits out of it. 20 . means better handling of airplanes. Chennai and Kolkata through long-term lease to make them world class is under consideration. Better airport infrastructure. sea etc are constraints for land and water mode of transport but Air travel is not constrained by such issues. The estimated growth of domestic passenger segment is at 50% per annum and growth for international passenger segment is 25%. there has been an increase in number of the international and domestic passengers. AAI has also tried to utilize space that was previously wasted installing a lamination machine to laminate the luggage of travellers. This activity earns AAI a lot of revenue. Airlines is the most preferred mode of transportation by the foreign tourists as the convenience provided by the airlines is higher.

Lack of basic facilities at the airport. Huge investment requirement for physical infrastructure for airports. When international airports offer such services like free transportation facilities. This is one of the reasons that make a tourist disheartened Infrastructural constraints: The infrastructure development has not kept pace with the growth in aviation services sector leading to a bottleneck. private lounge facilities at airports.05 trips per annum as compared to developed nations like United States have 2. food etc.02 trips per annum. Secondly frequent strikes by the pilots and maintenance problems are a major cause of concern. As the tourism industry 21 . OPPORTUNITIES Expecting investments: Indian Airlines industry is expecting investment of about US $30 billion in 2011. the disposable income is also higher which are expected to enhance the number of flyers. it sometimes become impossible to find a clear toilet in our international airports. Inefficiency of the domestic airlines: There are number of instances of flight being cancelled or delayed. Expected Market Size: In Indian airlines industry average growth of aviation sector is about 25%-30% and the expected market size is projected to grow upto100 million by 2010.The Airline Industry Rising income levels: Because of the rise in income levels. WEAKNESSES Under penetrated Market: The total passenger traffic was only 50 million as on 31st Dec 2005 amounting to only 0.

22 . Shortage of Airports: There is a shortage of airport facilities. majority of the population is still not able to fly to other destinations. Government policies: Changing government policies also affect the Indian airlines industry it is regulated by the DGCA which is in turn controlled by the Aviation Ministry. India's geographic location makes it an ideal location to serve as a link between the East and the West Untapped Air Cargo Market: Air cargo market has not yet been fully taped in the Indian markets and is expected that in the coming years large number of players will have dedicated fleets. THREATS Shortage of trained Pilots: There is a huge shortage of trained pilots. High oil prices mainly affect the airlines in this regard bringing up the operational cost. because of payment delay. High Fuel prices: Though enough number of low cost carriers already exists in the industry. parking bays. air traffic control facilities and takeoff and landing slots. co-pilots and ground staff which is severely limiting growth prospects.The Airline Industry expands the airline industry is also in for a boom and development and up gradation of the present airports.

23 . and. the worldwide sale of air tickets reached an estimated US$275 billion.  Proprietary websites are by far the most important distribution channel for LCCs. accounting for between 70% and almost 100% of ticket sales. Most tickets continue to be sold by traditional third-party channels (travel agents and GDSs).and offline. the International Air Transport Association (IATA) plays an important role in the billing of transactions. only the low-cost carriers (LCCs) have succeeded in distributing the greater part of their tickets via their proprietary websites. by and large.The Airline Industry Conduct: Distribution: Air ticket distribution is carried out both directly by airlines via their websites.including global distribution systems (GDSs) and travel agents . Key statistics   In 2007. following a four-year campaign led by the IATA. As the trade association for the international air travel industry.both on. E-ticketing became universal as of mid-year 2008.   Premium tickets accounted for 7% of the total issued in 2007. the accreditation of travel agents worldwide and the implementation of e-ticketing. Major legacy carriers generally succeed in selling between 10-30% of their tickets via their own websites. call centres or dedicated ticket sales offices and via third-party intermediaries . Most of the major legacy (traditional) airlines continue to sell the majority of their tickets via traditional intermediaries such as GDS.

Low-cost Pricing: The low-cost airlines in the Indian aviation industry. This accredits the airline to achieve good levels of profit on the basis of established reputation. 24 . APEX Fares: Apex fare is when. Value for Money Pricing: The value for money pricing is to charge the average price for the product and it represents excellent value for money at this price.The Airline Industry Pricing strategies: Premium Pricing: The airlines may set prices more than the market price either to reflect the image of quality or the different status of the product. Also. a different low-cost flying concept has come up. before at least one month). In low-pricing strategies. the airlines provide very low prices for the flight tickets. they prices are made cheaper by booking the tickets long before the flight date. a substantial amount of money is not refund.g. Since these low-cost airlines are trying to attract the customers by providing air travel in exceptionally low prices. The product features are not shared by its competitors or the company itself may enjoy a strong reputation like that the 'brand image' is only sufficient to charge a premium price. people are paid very cheap rates only if tickets are booked at least before the specified time period (e. But the draw-back here is that if the booking is cancelled.

travelers are provided with added value and entertainment. art. Malaysia Airlines. health.The Airline Industry Marketing Strategies: In-flight advertising In-flight advertising is the use of personalised spaces or objects such as headrests. Lufthansa and Eva Air were delivered with a gift set of the company‟s cosmetics. technology. The first is a lifestyle magazine reflecting the cosmopolitan character of its readership. Portfolio is a business magazine aimed exclusively at First Class and Business Class passengers including interviews and profiles related to business topics and current affairs. trays as well as magazines and audiovisual messages for advertising purposes and for advertisers it can represent an ideal opportunity to reach a highly receptive audience that is literally captive. such as the campaign carried out by La Prairie where first class passengers travelling with Qantas. 25 . including stories from around the world covering such diverse topics as travel. on the contrary. food. Emirates publishes three magazines. The advertising included in these publications is not invasive. Other promotional options are also possible. Open Skies. TV & Radio is an entertainment guide providing listings for the in-flight entertainments programs available on the different routes operated by the airline. Portfolio and TV & Radio with the idea of making contact with its more sophisticated readers. the environment. business and adventure. Swiss International Air Lines. culture.

The results showed that in terms of generation of brand recall.1% of the investment.The Airline Industry Online Marketing Attracting potential customers to airline websites is the first step towards boosting the sale of flight tickets online.com managed to attract 11. it was the more creative. linked to the willingness to receive information on special flight offers. One of the several possibilities available is email marketing. over 35 million Internet users made a travel reservation after receiving information on offers or promotions by email. In order to start up online marketing campaigns. with a strong interest in the services offered by the airline. At the same time this type of actions will contribute to brand notoriety. It is also important to reach persons forming part of the target audience who will receive the offer favorably. Even though only 3 out of 100 euros are destined to this format. a 23. The latter was centered on the prize draw of a trip to Venice. Over half (54%) of the ads mentioned were dynamic. 26 . There is wide variety of online marketing methods. layers and pop-ups were found to the most effective formats. In this context the email marketing campaigns conducted by Austrian Airlines (which according to organiza. the definition of the goals to be attained and the performance of prior segmentation of the data bases to be employed are both crucial. The second most effective format turned out to be online video. dynamic ads that generated greater recall. its effectiveness on generating brand recall is proportionally much higher. aged between 15 and 50 and who had been online for at least one hour before accessing the survey on which the research was based.000 new customers) or Vueling are of special interest. According to a survey conducted by the Travel Industry Association of America (TIA). The same study also found that in 2003 ten million people were influenced by email marketing to make a trip or journey that they otherwise would not have made. With only 3. As could be expected.4% recall rate was attained (+655%). According to a survey on the Effectiveness of Display Publicity conducted by IAB and the Cocktail Analysis in April 2009 on a sample of 1035 Internet users of both sexes. Almost 2 out of 10 of the commercials associated to the brands recalled by the persons surveyed were linked to this format.

Other companies such as the Dutch airline KLM have developed their own social network. aimed both at young people looking for cheap flights and the business community. Airlines such as American Airlines and Virgin Atlantic already have a presence in Facebook. Within the first six months of its launch. Myspace. Fotolog. the China Club. KFA managed to corner a 6% market share in the domestic air travel mark.KFA was promoted by UB group and offered a single class. Other promotional strategies can be studied in the context of Kingfisher airlines as they are a prime example owing to their prolific marketing campaign. Badoo). one of the points to be included in this online plan would be the analysis of presence in social networks. Marketing strategies of Kingfisher Airlines Kingfisher airlines launched its domestic air service operations in May 2005. Twitter. KFA started its operation in May 7. Tuenti.The Airline Industry In this direction. positioning itself as a budget carrier and not as Low Cost Carrier (LCC). KFA successfully leverage the youthful and vibrant image of its kingfisher beer brand and called its airlines as „Funliners‟ to emphasize the fun-filled experience. On Twitter. Sonico.“Kingfisher Class”. It is clear that these communities provide an opportunity for spreading information on airlines‟ special offers. 27 . 2005. The same study found that 78% of the persons surveyed belonged to one of the social networks under analysis (Facebook. however it is not as simple to find a way to do so successfully. some airlines such as Vueling only offer corporate information to their users whereas other such as JetBlue offer a more a more active service where customers are provided with access to exclusive offers. Hi5. this will entail the analysis of what moves our future customers.

celebrity golf matches. free refreshments at airports.The Airline Industry As part of its promotional strategy the marketing team of KFA showcased the airline as “the new flying experience”. which conveyed youthful. KFA launched “Chill Times Offer” in the month of August 2005 and September 2005.   KFA also launched Kingfisher express in order to tap into the growing LCC segment.   The company started addressing its customers as “GUEST” rather than passengers. The UB groups monthly magazine called “Pegasus” published information about KFA along with other information related to UB group.    In October. 28 . Economy Class the idea was to combine Business Class experiences and Economy Class experiences in one.    KFA made use of various fashion shows.  The company came up with only one class airlines rather than other airlines that had Business Class. KFA was the official travel airlines for the cast and crew of “Mangal Pandey”.the movie. special invites for lifestyle shows. and world class image. access to 180 golf clubs across India. restaurants.  Advertisements hoardings at airports depicted the stylish interiors of the “Funliners”. The following initiatives were taken as part of its promotional strategy  It came up with a very appealing promotional line “Fly the good times” and it reflected in the experience the company offered to its passengers. and in-flight entertainment systems. The company made its mark by providing its guests with more legroom and bigger seats so as to provide better comfort. fun-filled. Having a single class freed up more leg space for passengers when compared to normal economy class flights. The company gave best services to its customers that were like providing world class interiors. INOX multiplexes in Mumbai publicized KFA‟s special offers for a month. KFA launched many attractive offers to promote its sales like the “King Card” in association with ICICI Bank. New Year parties all to build its “Kingfisher” brand. This was meant to create loyal customers for KFA by providing benefits like privileged access to lounges. in August 2005.

don‟t play like one”. As is evident the % of advertising has increased steadily over time pointing at the aggressive attempt by Kingfisher to turn the lose making concern into a profit making organization by leveraging on the funds from the Kingfisher group. Leverage ratio The debt-equity structure of firms might have an effect on its financial performance. By offering a “King Saver Booklet”.Passengers could avail off this offer if they showed there Jet Privilege Member (Gold or Platinum) card. which was dominated by Jet Airways. 26.999. Leverage of the firm:.The Airline Industry  In October they launched the “King Saver Offer” which said “Fly like a King. This booklet contained six free flight tickets and was presented as a free gift if the passenger bought two such booklets each worth Rs. Advertising Intensity 14 12 10 8 %6 4 2 0 2010 2009 2008 2007 2006 The graph is a plot of the Advertising Intensity of Kingfisher Airlines from the year 2006 to 2010 as percentage.Debt / Equity 29 .  KFA targeted the frequent fliers business traveller segment.

Working capital ratio:.00 0.Total current asset/Total current liabilities 30 . The equity goes to negative as the value of its assets where of lower value than the debt amount to be repaid.32 3.47 0. In 2005 leverage ratio of king fisher airlines was high then after that its yearly goes down and in2009 and 2010 leverage ratio is zero because of Equity is in negative. the economic slowdown and the group‟s financial backing of the airlines. And the leverage ratio of jet airways yearly goes up.50 16 14 12 10 8 6 4 2 0 2010 2009 2008 2007 2006 2005 JET AIRWAYS KING FISHER Here we see the leverage ratio of jet airways and king fisher airlines for five years.58 2.24 9.The Airline Industry year 2010 2009 2008 2007 2006 2005 JET AIRWAYS KING FISHER 14.01 4.29 2. Working capital ratio Long term solvency position of a firm usually measured in terms of its working capital (current assets-current liabilities) over sales indicates the ability of a company to weather difficult financial periods.57 2. this came as a combined effect of Kingfisher taking over Air Deccan.02 3.00 3.20 11.

2905 1.5 0 2010 2009 2008 2007 2006 2005 KING FISHER Here we see the working capital ratio of Jet airways and King Fisher airlines.2088 1.9859 1. Performance analysis of some of the major players The performance of any industry is based on a few parameters.9763 2. Thus.5 3 2.9168 1.6015 2.8402 0.7414 0.The Airline Industry year 2010 2009 2008 2007 2006 2005 JET AIRWAYS KING FISHER 1.5 2 JET AIRWAYS 1. the performance can be analyzed by finding out the: GROWTH ANALYSIS  The growth of the companies in the industry was analyzed on the basis of the Sales Growth Rate. As you can see Jet is consistently able to keep the ratio above 1 displaying their capacity to meet their immediate debts . 31 .6213 0. however as KF is running in loses for several years their WC ratio drops down until 2008 when it goes below 1 after takeover of Air Deccan.2573 0.5921 3.01734 1.5 1 0.

209 2007 23.622 2006 30.The Airline Industry Sales Growth Rate (annual growth rate) = Sales in the current year.849 2008 25. YEAR JET AIRWAYS KINGFISHER 2010 -9.Sales in the previous year Sales in the previous year  The trend in the Profit (%) for the companies is analyzed over the period as given.142 31.735 2009 30.245 385.625 2005 25.833 -3.771 450 400 350 300 250 200 150 100 50 0 2010 2009 2008 2007 2006 2005 JET AIRWAYS KINGFISHER -50 32 .197 305.467 -11.265 263.

2010 -5.69 -16. PROFITABILITY TREND • Profitability gives us the earnings available to the investors and owners of the company after taking into account all the expenses incurred during the business operations.62 -7. they have run the business well running into huge profits on the account of their amenities and services provided.48 -43.87 33 . The sudden growth in 2009 is contributed by Kingfisher consolidating with Air Deccan in 2008. This gave Jet an extra 27 flights along with airport gates for INR 1450 crores. Profitability is calculated as: Profitability (%) = Profit after Tax (PAT) / Net Sales • YEAR JET AIRWAYS KINGFISHER -24.03 2009 -15. Later after an economic slowdown.The Airline Industry Jet Airways has been a premium brand in the Airline Industry ever since its origin in 1995. This was a very strategic merger for Kingfisher as Air Deccan had just acquired its international flying license which was eyed upon by the UB Group.65 -30. Ever since the inception of Kingfisher Airlines.67 -31.89 The trend in the Profit (%) for the companies is analyzed over the period as given.31 2007 -2. it changed its strategy and merged with Sahara towards the end of 2007 thereby buying out Sahara for $340 million. But after encountering stiff competition with the LCCs and Sahara Airlines.22 2008 -7. the price of oil had increased from $73 a barrel to $96 a barrel. It all started with huge growth in 2005 and 2006.32 2005 8. due to which prices of the tickets rose but the demand from the customers decreased.48 2006 4. Jet has been doing nominally well in terms of growth.

The Airline Industry 20 10 0 2010 -10 -20 -30 -40 -50 2009 2008 2007 2006 2005 JET AIRWAYS KINGFISHER Kingfisher and Jet Airlines have been market Leaders in the business. But as depicted in the graph.0517 2007 0.0899 2009 0.1902 2005 0. and if the costs are not recovered then the company is in loss.2604 -0.0129 2008 0.3512 -0. Same is the case with Kingfisher as well as Jet.2859 -0.4362 -0. the higher the costs of maintenance. RETURN ON ASSETS (ROA) Profits before interest. The more premium the brand. recession had hit the world and economic slowdown had led to cost cutting all across organizations which resulted in decreased profitability. It invested so much in the brand building that it has not been able to recover the costs.085 2006 0.0254 2010 0. the airline industry has been in losses since the last 5 years or so.2598 34 . depreciation and tax/Total assets gives ROA YEAR JET AIRWAYS KINGFISHER -0. Just when the strategic merger with Air Deccan hinted at a good move. Same happened with Jet Airways.5221 -0.

3 -0.1007 2006 2005 0.2357 -0.5 -0.3 0.29801 35 .4 2010 2009 2008 2007 2006 2005 JET AIRWAYS KINGFISHER -0. As a result.0978 2007 0.The Airline Industry 0. RETURN ON SALES (ROS) Profits before interest.2 0.2072 -0.2286 -0. depreciation and tax/Sales gives ROS YEAR JET AIRWAYS KINGFISHER -0. LCCs of these brands were trying to sustain the competition and declining consumer demand.6 Kingfisher has always banked on quality service ever since its inception. Thus.4068 -0. kingfisher had invested a lot in Boeing and Airbus aircrafts.02197 0. the Indian Aviation Industry had ordered 400 Boeing and Airbus jetliners worth of $37 million during 2006-2010.2418 0.1435 0.1 -0.On the other side.2 -0. Jetkonnect by Jet Airways have stood up to the storm by slashing airfare rates as low as 40% which Kingfisher Red was not able to do.2373 -0. in this case. According to reports.1 0 -0.0248 2010 2009 2008 0. “To keep it big and stylish” is Mallya‟s style.

the Indian Aviation Industry has reported losses worth $230 billion in the year 2006-2010.1 0 -0.4 0.5 The return on investment has not been too good for Kingfisher even though Jet Airways is clearly a winner in this case.4 -0. The sales of Kingfisher have not been able to overcome its high investment costs.3 0. According to reports.2 0.The Airline Industry 0.2 -0.1 -0. 2010 2009 2008 2007 2006 2005 JET AIRWAYS KINGFISHER 36 .3 -0.

Railways.The Airline Industry Analysis of competitiveness Porter‟s five forces model for aviation industry Threat of substitution: 1. Private Transport: Roadways. 37 . Railways . of players Rivalry within an industry: Spicejet Jetairways Indigo Go Air Air India Threat of new entrants: Liberal Policies Easy loans Untapped Market Bargaining power of suppliers: Very few manufacturers No substitutes Availability of Substitutes: Purchasing power of customers has increased: As the purchasing power of the customers has increased they have more options. Private transport are the major substitutes for the airlines. However this is not a threat if the distances are long.Private Transport Bargaining power of customers: Substitutes Increased income No.Roadways 2.Railways 3. from high fare to low cost airlines they can travel from any airlines. Roadways.

and services. platform.The Airline Industry Competition rivalry within an industry: Many players of about the same size. Government restrictions or legislation: The restrictions which were there earlier are not there now. High fixed cost: The fixed cost involved in the entry or setup is very huge. companies can only grow by stealing customers away from competitor: The only way to grab the customer share is to snatch the customers from the competitors. but these days the funds are available and the credits are available easily so the entry is no more a worry. But as the competition will increase they may switch over to some other players. Indian airlines market is not fully trapped . it’s underdeveloped: The Indian market is still not fully trapped. Fuel is a major resource for the aviation industry and the rising prices of it is a major concern. After liberalization the entry of new player has become much easier. This can be done by differentiated pricing. Scarcity of resources: The resources are scares. A mature industry with very little growth. Little differentiation between competitor’s products and services: There is not much difference between the services provided by all the airlines. so customers have a wide choice with them. The only difference being the fares and the meals that are provided. there is no dominant firm: There are 6 major domestic firms and there is a major competition between them. Threat of new entrants: Existing loyalty to major brands: Till now the customers are loyal to their brands. Besides there are very few restrictions by government in terms of the fees . There is a shortage in the supply as compared to demand. frequencies of flights etc. 38 . frequencies. Besides the infrastructure is also not fully developed.

The supplying industry has a higher profitability than the buying industry: The supplier has the high margin or profitability in supplying the aircrafts. There are no substitutes: for airlines the only source of income is the aircraft. a customer can always switch to some other player. So the bargaining power is not there for the firms. The product is extremely important to buyers . The product is not extremely important to buyers. They can‟t substitute this with any other thing and because of this they can‟t bargain with the suppliers.can't do without it: Aircrafts are the only source of income for the buyers. Switching to another (competitive) product is simple: As there are many buyers with same product the switching from one firm to another is easier for the customers.The Airline Industry Bargaining Power of Suppliers: There are very few suppliers of a particular product: There are only 2 suppliers of aircrafts currently. But for the buyers the profitability is low. They can do without the product for a period of time: Even if there are no airline services the domestic passengers can do without it because for domestic travelling they can use the other alternatives as mentioned earlier. they can‟t do anything without it. They are pricing sensitive and an change there preferences if there is even a slight fluctuation in the prices. because it‟s a onetime affair for them. of buyers or customers. 39 . They can‟t bargain much and cost is also very high. As said earlier the market is still untapped. Bargaining power of customers: Small number of buyers: There are not many no. Customers are price sensitive: If one competitor increases the price. So the customers have the upper hand and he can bargain with the seller.

during a time of escalating costs. Modernization of airports • The Airports Authority of India (AAI) is undertaking the development and modernization of all 35 non-metro airports in the country.3 years. While a start has been made to upgrade the infrastructure.may soon be on the modernization path. India is expecting to add aircraft worth about US$80 billion by 2020.2 per cent. Growth in MRO Segment • Growth in the MRO segment in India is estimated at 10. • LCCs and other entrants together now command a market share of around 46%. • • The Ministry of Civil Aviation would handle around 280 million passengers by 2020.Chennai. Increasing growth prospects have attracted & are likely to attract more players. US$ 110 billion investment is envisaged till 2020 with US$ 80 billion solely for new aircraft and US$ 30 billion for developing the airport infrastructure. Kolkata -. the results will be visible only after 2 . and is expected to outpace growth in Asian and global markets. Legacy carriers are being forced to match LCC fares. 40 . • The other two metro airports .The Airline Industry Future outlook: • Passenger traffic is estimated to grow at a CAGR of over 15% in the coming few years. which will lead to more competition. Augmentation of fleets • • Kingfisher has also ordered five Airbus A380 aircraft. • Airport and air traffic control (ATC) infrastructure is inadequate to support growth.

000 maintenance staff in 2011. The industry would create 2.000 jobs by 2017 in India.00. • Sector will require 2. Job opportunities • The aviation sector in India is likely to create more jobs in future as the sector is growing rapidly.000 more pilots and 10. India's contribution to Asia's MRO market is expected to grow to seven per cent.06 billion by 2014. 41 . • By then.The Airline Industry • The total MRO market in the country is around $500 million and is likely to touch $1.

com/Trends_in_the_US_airline_ticket_distribution_200 http://www.html CAPA SITA white papers ICAO Annual Report 2010 Capitaline Database 42 .aspx http://www.iata.com/index.org/pressroom/facts_figures/Pages/index.org/whatwedo/Documents/economics/Industry-Outlook-PresentationDecember2010.flykingfisher.livemint.iata.com/index.pdf http://www.org/pressroom/facts_figures/Pages/index.org/pressroom/pr/Pages/index.aspx http://www.iata.aspx http://drypen.html http://www.atag.iata.flykingfisher.in/marketing/kingfisher-airlines-marketing-hr-financial-strategies.The Airline Industry Bibliography: http://www.mckinseyquarterly.aspx http://www.com/2010/01/02000041/Kingfisher-in-deals-for-bio-je.pdf http://www.org/files/ATAG%20brochure-124015A.aspx http://www.

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