Indian Aviation Industry

- An Economic Perspective

Presented By –
Group – 2 and 3
Section H4
Objectives
 Background
 Phases of Evolution
 Factors of Production
 Demand & Supply
 Price Elasticity
 Cross Elasticity
 Pricing Strategies
 Road Ahead
Indian Aviation Industry – A Background
 Fastest growing aviation industry in the world
 Transition : Government-owned industry  Private-owned industry
 12 domestic airlines and above 60 international airlines are operating in
India

Factors affecting Growth:

 Low-cost service Providers
 Better Connectivity
 Economic Prosperity of India
 Rise in purchasing power of the Indian middle class
 Growth of Tourism Industry
 Emphasis by Govt. of modernization of non-metro airports
 Fleet expansion by operators
 Opening new international routes by the Govt.
Facts ::
Facts
Compound annual
 Compound
 annual growth
growth rate
rate (CAGR)
(CAGR) of
of 18
18 per
per cent
cent and
and 454
454 airports
airports and
and
airstrips in
airstrips in place
place in
in the
the country,
country, ofof which
which 16
16 are
are designated
designated asas international
international
airports,
airports,
The Indian
The
 Indian Civil
Civil Aviation
Aviation market
market grew
grew at
at aa CAGR
CAGR ofof 18%,
18%, being
being valued
valued round
round
US$ 5.6
US$ 5.6 billion
billion in
in 2008
2008
Approximately 29.8
 Approximately
 29.8 million
million passengers
passengers traveled
traveled to/from
to/from India
India in
in 2008
2008
showing aa surge
showing surge ofof 30%
30% from
from 2007.
2007.
 Phases of Economic Evolution :
Pre-Nationalization
• Tata Airlines
• Later taken over by Govt.
Post –Liberalization and
Privatization
• Private-players multiplied
• restrictions alleviated
• Air Corporation Act
repealed
Post-Nationalization
and Pre-
Liberalization
• Monopoly market – Only
2 Govt. owned players
• Air Corporation Act -
1953
Liberalization
• Air taxi system : to boost
tourism
• de-regulated fare,
restriction on seating
capacity, airports, timings
• Open sky policy
Entry of Low-cost
Carriers
• Low-cost carrier fleets fuelled
by Air Deccan
• Air travel feasible for new-class
of passengers
• High connectivity with
tier-1 and 2 cities
Major Domestic Airlines
Market Share
Factors of Production
 Labour
 Fuel
 Passenger Food
 Advertising and Promotion
 Landing Fees
 Infrastructure like aircraft lease rentals
 License fee
 Interest, Taxes, Passenger Traffic commission

Nature of Aviation Market

Monopoly  Oligopoly  Competitive

DEMAND & SUPPLY
 In the initial years i.e. during the 1990’s the
aviation market was monopolistic
specifically because of the government
restriction.
 The limited number of airlines was not able

to cater to huge demand of India.

 The limited supply led to high air fares and

the high air fares led to low demand.

DEMAND & SUPPLY
 When there were not too many players in the
market the supply curve was steep showing
less elastic supply (S1S1). However the demand
curve is relatively elastic (D1D1).
D1 S
1

P*

D1

S
1
Q*
DEMAND & SUPPLY
 With the entry of more players specially the low
cost airlines the supply increased and became more
elastic than before (S2S2) and the demand has also
grown over the years (D2D2) , as such the air fares
are low represented by P**
D2 S2

P** D2
S2

Q*
Elasticity Analysis
 Supply and demand price elasticity of airline
carriers may vary depending on the nature of the
industry.
 There exists a steep price elasticity of demand for
civil aviation services.
 There is a price elasticity of demand for low cost
as well as short destination flights
 The elasticity of demand is based purely on
current market conditions, the customer's
purpose for travel, and available substitutes.
 Externalities continue to influence the elasticity
of demand.
Elasticity Analysis

 Events such as inflation, terrorist attacks, and the price of

oil have greatly influenced the demand for airline tickets
throughout the years.
 Competition/ Substitutes consistently affects the price of

airline tickets because it gives the customer other options.

 The elasticity of demand is greatly affected by the

customer's purpose for travel.

 Lastly the aviation industry is affected by elasticity in

supply and demand depending on the size of the industry

and how long it has been in operation.
Cross Elasticity Analysis

 Supply and demand of airline carriers may also vary depending

on the pricing of the related industries such as railways.
 For civil aviation services, there exists a cross price elasticity
of demand on basis of price charged for same distance in
railways.
 It has been noticed that if travelling cost reduces in railways,
demand reduces for civil aviation carriers with corresponding
increase in demand for railways.
 cross-price elasticity of demand :- Percentage change in the
quantity demanded of civil aviation carriers resulting from a 1-
percent increase in the price of railways
Cross Elasticity Analysis

 Note that Civil Aviation And Railways acts as substitutes. It

means increase in price of one will lead to increase in quantity
demanded of another.
 Cross price elasticity of civil aviation carriers is negative, as
civil aviation and railways act as substitutes
 The cross price elasticity of demand is greatly affected by the
customer's income. Higher the income of consumers, less is
the cross price elasticity of civil aviation carriers.
COST STRUCTURE OF THE INDIAN
AVIATION INDUSTRY
Pricing Strategy - Monopoly

MC
Price

P*
C* AC

AR

Q* Quantity
M
R
Pricing Strategy - Oligopoly
P,MR,M
C
MC
2 MC
D 1

P Kinked Demand Curve

0

Q Q
0 M
R
Road Ahead
 Passenger traffic is projected to grow at a CAGR of over 15 per cent in the
next 5 years.

 The Vision 2020 statement announced by the Ministry of Civil Aviation,

envisages creating infrastructure to handle 280 million passengers by 2020.

 Investment opportunities of US$ 110 billion envisaged up to 2020 with US$

80 billion in new aircraft and US$ 30 billion in development of airport
infrastructure.

 Associated areas such as maintenance repair and overhaul (MRO) and

training offer high investment potential. A report by Ernst & Young says the
MRO category in the aviation sector can absorb up to US$ 120 billion worth
of investments by 2020.
Road Ahead
 Aerospace major Boeing forecasts that
the Indian market will require 1,000
commercial jets in the next 20 years,
which will represent over 3 per cent of
Boeing Commercial Airplanes’ forecasted
market worldwide.

 It is being forecasted that around 8 – 9

new airlines would be starting their
services in the next 2 years.
Road Ahead
Assuch we see that number of players is increasing and there would be cut throat
competition. As such the market may move towards monopolistic in the coming
years.
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