You are on page 1of 44

Domestic Airlines

:Price Leveraging

 Group Member :
 Ishan Sodi
 Priyanka Babar
 Prateek
 Rajeshwari
 R.Guruprasad
 Rohit Bebarta
 Rubina
 Sahil
Introduction To Indian Aviation Sector

 In 1932, JRD Tata, a visionary launched India’s
first scheduled airline, Tata Airline .
 In early 1948, a joint sector company, Air India
International Ltd. was established by the
Government of India and Air India (earlier
Tata Airline) .
 By 1962, eight erstwhile private airlines
were merged to form Indian Airlines Corp.,
namely Deccan Airways, Bharat Airways, Air
India, Himalayan Aviation, Kalinga Airlines,
Indian National Airways, Air Services of India
and Air-Services India.
The Change
 There has been a marked change in the civil
aviation scenery in India.

 . Whereas prior to 1992 when the two public sector
airlines, namely Air-India and Indian Airlines enjoyed
a monopoly in the domestic sector, today a dozen
airlines are competing for a market share.

 The domestic passenger and cargo traffic recorded a
growth rate of 44.6% and 8.7%, and the
international passenger and cargo traffic recorded
growth rates of 15.8% and 13.8% respectively
during 2006-071.
The substantial growth of customer traffic in
Indian aviation industry is mostly due to:

 low fares offered by Low Cost Carriers (LCC).
 Scheduled domestic air services are now
available from 75 airports as against just 50
earlier.
 International Players making a beeline to
enter this emerging market.
 Numbers of Flights operating: 2500 per day.
THE PLAYERS
 Domestic air market can be divided into 2 major
segments:
- Premium- x y z
Start up players -
- No frills: e r t Omega Air, Magic Air,
Premier Star Air and
MDLR Airlines.
Current Market Share
Indian Aviation Timeline
Contd…
DETERMINANTS OF PRICING
1.ATF

ATF refers to air turbine fuel
which is used by airlines in its
operations.
ATF contributes to the 40 % of
operation cost

It includes freight charges from gulf to
India ,Customs Duty, Domestic
Transportation and various taxes.
India usually Pay higher ATF charges as
compared to other countries.
2.Lease Rental
 Private operators except Air India have leased
aircraft from USA and Europe.

 They pay on average $375000 to $500000 per
month depending on the aircraft

 They contribute almost 33 % of operational
cost.

 They generally have to pay their rents in
dollar terms.
3.Airport Charges
 It is the basic fees that is charged by airports
from airlines

 This include parking fees, landing fees , stop
paging fees and aero bridge expenses

 New airport charges more than established
one to cover up all the cost incurred
4.Other factors
 Advertising and Promotional Expenses
 Technology employed by the airlines
 Current Financial position
 Prices set by other airlines competing in the
present environment.
 Pilot fees
 Government regulation.
Airfare

WAR
INTENSIFYING
THE
C E COMPETITION
PRI

A R
W
No Frills- Air Deccan
 The credit for triggering this price offensive goes to
Air Deccan.
 Inspired by the Irish carrier Ryan Air, Air Deccan
offered airfares as low as Rs 500 plus taxes on the
Mumbai-Delhi sector.
 Air Deccan's normal fares are much lower than what
passengers are used to paying for air travel on Jet
Airways, Indian Airlines or Air Sahara.
It is a 'no frills airline', meaning that the airline has cut
out all the add-on costs of travel and focuses on getting
people from one location to another safely.

This seems to have sent the leading domestic carriers — Indian
Airlines, Jet Airways and Air Sahara into a tizzy and each airline is now
going all out to ensure they it doesn't lose out to the new low-cost
airlines — or to each other.
Indian Airlines
The airlines worked on
upgrading their frequent fliers programmes (FFP)
and apex.

Indian Airlines has revised its frequent flier programme to
enable those with even a single boarding pass to qualify
to enter the frequent flyer club.

The Indian Airlines FFP has been merged with Air-India's
programme, which will allow international passengers to
earn mileage points. If you fly Indian Airlines, you'll get
Air-India mileage points.

 Indian Airlines came up with a new apex fare
slab for purchase of tickets in eight sectors, 28
days in advance — two days less than those
offered by Air Sahara and Jet Airways.
 The D-28 fares would be available for sale on
one way or round trips as against round trip
fares offered by Air Sahara.
SAHARA—A DIFFERENT
JOURNEY
• Began operations on with two Boeing 737-200
aircraft on 3December 1993 .
• Revamped and Rebranded in 2000.
• Boosted the Fleet in 2002 and Introduced New Price
Schemes
 Price Schemes :

• First Airlines to start innovative Pricing model rather
than APEX Model.
• Sixer and Super Sixer Schemes in 2002 – Six refers to
the six zones for 25k.These schemes offered more to the
customers than their competitors.
• Square Drive Scheme – ( Family Pack) 4k-2.5k
 “Steal a Seat” - Bidding process started from Base price
– Re 1/-


Air Sahara offered to accept frequent flier miles earned on
other airlines in its own rewards program. Users had to earn an
equal number of miles on Air Sahara, however, before they
could be exchanged for free travel or consumer goods.
According to the company, 1,000 people signed up for the
program in the first two weeks.
 Air Sahara brought a live acoustic band on board certain long-
haul flights during February 2002. In another marketing
scheme, the company teamed with Standard Chartered Bank to
offer fliers the "Instabuy" program providing interest-free credit
for air travel.
 Air Sahara is also planning to launch a 'dynamic fare' model.
Under this model, fares will be based on the daily market
demand. In short, Air Sahara, too, will sell vacant seats at lower
fares
JET AIRWAYS

•Started commercial airline operations on 5th May

1993

•Headed by Mr Naresh Goyal

•India’s third largest airline

•Operates three airlines-Jet Airways,Jet Lite and Jet

Airways konnect

•Jet Lite was earlier Air Sahara which was taken over

by Jet Airways in 12th April 1997
>>>>
 Jet Airways a premium class carrier

 Jet Lite and Jet Airways konnect are low cost carriers

Schemes Offered By Jet Airways :

 Frequent Flyer Scheme

 APEX pricing Scheme

 Cash Back Offer

 Jet Privilege Scheme : Extended its points partnerships

to Accor Hotels and Langham Hotels International.
THE STRATEGIES

Some of the methods that were used are
as follows:
 APEX fares
 Low price tags
 Internet auctions.
 Bulk purchases.
 Last day fares.
WHAT IS APEX?
 Apex IS ADVANCE PURCHASE EXCURSION FARE. It is a non-

cancellable return fare offered at a heavy discount on the

conditions:

• Tickets are purchased at least 21 days in

• advance

• Minimum gap between departures range from one to six

weeks.

• Maximum gap between departures is 12 to 24 weeks.

• There are no stopovers.
Advantages of APEX
 Planning of operations for airline

companies.

 Profit of the airline companies increased.

 Helped in modernization of airports.

 Led to the introduction of new LCC’s.
Disadvantages of APEX
 Planning air travel three weeks in advance was not

very convenient

 The tickets in this scheme were non refundable.

 No flexibility as tickets under this scheme could not

be rescheduled.

 Very few tickets were offered by aircraft companies

under this scheme.

 It led to the congestion of airports.
Effects of APEX

 Led to increase in the number of customers.

 Loss of airline companies minimized as with the increase

of passengers the aircraft ran to their full capacity.

 It brought a veritable boom in tourism sector.

 It was able to lure the middle class people who preferred

to travel by trains.
Dynamic Price
 Maximise the number of seats sold, airlines divide the

seats in an aircraft into several classes and sell them

at different prices.

 Pay only a fraction of what passengers who book last

will pay. Fares are based on the daily market demand.

 Ticket allocations per fare block are made purely on

daily demand.
BULK PURCHASE
 One can save an additional 20% - 70% by buying

“Bulk/Negotiated Airfares” also known as "Consolidator

Airfares", without most of the advance  purchase restrictions

(70% savings apply to one-way airfare).

  “Bulk purchase" sells directly to the public as well, in addition

to wholesaling to travel agencies . The "Bucket Shop" often

would be a "Consolidator" on one-hand, negotiating their own

deals directly with Airlines, and also buy from other

Consolidators in their country and or from other counties.
FACTORS WHICH HELPED TO
BRING DOWN THE PRICE IN 2002
1. Open Sky Policy:

The signatories are allowed to fly over the skies of India.

EFFECT:

--Tourist arrivals in India are expected to grow

exponentially,

-- The increase in number of international tourists will

percolate down to increase in domestic passengers.
2. Deregulation:

Requirements to become a scheduled operator air carrier in

India have being reformed, the reduced restrictions on foreign

direct investment is 49% for flights and 100% for airports.

EFFECT:

Entry into the air travel industry is not only cheaper, but also

affordable to new operators

 
3.Modernization of Airports
 The Indian Cabinet has approved a

proposal mandating the state-run

airport operator to modernize 35

airports in second-tier cities within

the next two years.
Effect:

Improved infrastructure would lead to rise

in no. of travelers and also so

would encourage more operators.
4. Abolishment of
Taxes

 Foreign Travel Tax (FTT) Rs500 and 15% inland

air travel tax (IATT) charged on Basic airfare

has been abolished by the government to

reduce fares.
5. Reduction on Excise
Duty

The excise duty on ATF was reduced from
16 to 8 per cent
 The average domestic price of ATF is 99 per cent higher than prices in foreign
countries and affects domestic airlines drastically as ATF accounts for 30 to 40
per cent of operating costs

 Effect :
 It would lead to low fares thus giving a boost to air travel
 The government has reduced the average age of aircraft being imported into India for
commercial airline operations by five years.
 Effect: It would lead to increase in imports of aircraft thus can discourage more
 operators coming in and improve services
6. Landing Charges abolished
 Landing charges for aircraft with less than 80

seats were abolished

 Landing charges for larger aircraft have been

reduced by 15% with effect from February

11,2004.

 Effect: Reduction in cost.
Economic Prosperity Of India
 Effect:
The rise in income levels along with introduction
of no-frills flights will lead to
 Rise in no of travellers,
 ·More investments in aviation,

 ·More competition and

 ·Rise in industrialization leading to more need
of air transport..
PRICING & THE ECONOMIC CONCEPTS
First degree Price Discrimination: Professor Baumol
shows that effective competition does not necessarily
impose uniform prices. More provocatively,competitive
pressures can force all firms to adopt discriminatory
prices if consumers cannot easily resell a product.
rice Price,Cost per unit
First Degree Discrimination • The method taken here is to dynamically modulate
P1
prices over time by adjusting the number of seats
P2 available in each pre-defined fare class. Advantage
P3 is taken of a natural segmentation in the
consumers: business travelers for whom the
flight dates and timings are primary and fares
are secondary; casual travelers for
whom prices are
important prices are important and
the B dates/timings are flexible;
and hybrids for whom
P0 MC=AC

both factors are at an equal level of
importance.

Q1 Q3

O Q2 QD Quantity Per Period
PRICING . . .
 A restricted model was estimated, where price

discrimination is assumed not to vary with market

concentration.

 The regression equation comes out to be:

 P = 8922.81 – 1629.9 DAYS - 831.1273 DEPTIME –

26.9095 DUR

 The coefficient of determination or R2 comes out to be is

0.9283
PRICING …
 The adjusted R2 is 0.8746. This means that variation in

the duration of journey and departure time and advance

purchase explains 87.46% of the variation in air fare

 While performing the t test, the value of the calculated t

statistic for departure time Duration of flight and

advance purchase is more than the critical t value of

3.182. This shows that the three parameters are

statistically significant and shares significant relationship

with the airfare. Means they have a great impact on the

variation in prices
PRICING

 The study proved that not only price discrimination

can work well in monopolistic competition but also

in imperfect completion Also price discrimination

works well only when price elasticity of demand are

different in different situations. Here we have

studied for Airlines with with more firms in the

market, price discrimination can increase or

decrease.
Conclusion
Some FAQ’s:
Were the schemes effective?? Does the price
cutting undermine firm's viability in the long
run??

Ø There are may factors which determine the
price of an air ticket.
 The innovative schemes initiated by the airlines
way back in 2002 were definitely effective in
increasing the customer base.
 The price cutting schemes are in tandem with
government policies and are viable as long as
the external factors for pricing are under
control.
Thank You