Airline Industry Report

GROUP 12 SEC:C

Amrita Singh

Anshuprabha Singh

Jeetu Jose

Manash Verma

Mudit Mathur

Shuvendra kr. Mohanty

Alliance University

The Airline Industry

An Analysis


Contents Page

Introduction 3

Global Perspective 4

Statistical facts about Indian Aviation Industry 6

Structure of the airline industry in India 8

PEST Analysis 17

SWOT Analysis 20

Conduct 23

Performance analysis 31

Analysis of competitiveness 37

Future outlook 40

Bibliography 42

Introduction:

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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,

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

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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?

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

Improves living standards and alleviates poverty through tourism

Often serves as the only means of transportation to remote areas promoting social

inclusion

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

Air transport Industry generates 31.9 million jobs globally

It directly creates 5.5 million jobs worldwide

o Airlines and airports employ 4.7 million people

o 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

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

Economic benefits

4


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 $ 3,557 billion (2007)

o That is equivalent to 7.5% 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)

1,715 airlines

27,024 aircraft (22,235 jets and 5,789 turbo props)

3,670 airports

28.6 million scheduled departures per year

Air Transport Efficiency

Aviation occupancy rates of 75.7% (2009 industry load factor) are better than those of

road and rail

Air transport entirely covers its infrastructure costs ($54.2 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

Statistical facts about Indian Aviation Industry:5


• The Total sales for the industry stands at 41.31 thousand crore for 2010.

• Net Profit is at -3.9 thousand crore.

• In the present scenario around 12 domestic airlines and above 60 international airlines

are operating in India.

• 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 .

Air Passenger Traffic in India

The above data shows the trend in the passenger traffic movement in aviation industry from

April 08 – September 10.As the graph shows, there is not much movement of passengers

through International Airlines, reason being that in India still the majority of travelers are

domestic travelers. There is a constant fluctuation in the passengers movement. The best time

for the aviation industry was from October to December 2009.Then again in May 2010 there

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was a boom in the aviation industry mainly because of the rise in per capita income and

increase in the no. of flights scheduled. The major downturn however came in 2008, in this

period the aviation industry suffered a major blow because of economic downturn. It

hampered not only the domestic but the international passengers’ movement also.

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. Airlines are the fastest means of delivering

goods.

However there has been a slight slump in the movement from April 2010- September

2010 mainly because of the rise in petrol prices and because of which the rates of freight

increased.

Structure of the airline industry in India:

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Monopoly:

During pre and post nationalization i.e. up to 1986, 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. Let us look at

the basic characteristics of the Monopoly market:-

1. There is a single seller and many buyers of a product.

2. The products produced and sold by the firm is homogeneous or non-homogeneous but

it has got no close substitutes in the market.

3. There are barriers to entry.

4. The firm is a price maker i.e. it has substantial control over the market price of the

product.

5. The supply of the product by the single firm constitutes the market supply.

6. The firm acts atomistically i.e. while taking its profit maximizing decisions it ignores

the reaction of other firms( potential competitors) and

7. The firm faces the market demand curve for its product.

Let us analyse the Indian Aviation industry during that time on the above mentioned

parameters:-

1. 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.

2. 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.

3. Due to government regulations, no other player could enter the market.

4. Both the airways controlled the entire demand and supply of the airline services.

5. Government was the price maker and it did not take pricing decisions strategically.

Price Discrimination

When a monopolist discriminates between consumers the practice is called Price

Discrimination. It is sometimes able to charge different prices to different consumers of the

8


same commodity. 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.

MC

Price,

Cost

P* G

C* F AC

E

AR

0 Q* Quantity

MR

In the above graph, we measure quantity along the x-axis and price(P), average cost(AC),

marginal cost(MC), average revenue(AR), marginal revenue(MR) along the y-axis. The

monopolist faces a downward sloping demand curve and as such his MR curve is also

downward sloping. The monopolist will produce at the profit maximizing level which is the

point where

1. MR=MC and

2. MC cuts MR from below.

This happens at the point E and accordingly the quantity supplied would be Q* and the price

charged is P*.

The AC curve intersects Q at the point F. As such his TC =C*FQ*0.

His TR= P*GQ*0 and the profit earned is denoted by the area P*GFC*.

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 above graph applies to the Air India and Indian

Airlines when they were enjoying monopoly status in the industry.

Oligopoly:

After the post privatization period i.e. the period after 1991 lot of private players entered the

industry under the government policy of open sky, which repealed the Air Corporations Act

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of 1953 and came up with Air Corporations Act, 1994. Opening up of the Aviation industry

to 41% FDI in the form of equity stake has also increased the competition in the economy.

By 1995, Private airlines occupied 10% of the domestic air traffic. Hence the various players

broke into the monopoly of IA and AI creating a situation of Oligopoly market. The various

characteristics of an oligopoly market are:-

Small number of sellers but it entirely depends on the size of the market.

Interdependence of decision making- The business strategy of each and every firm in

respect of pricing, advertising, product modifications is closely watched by the rival

firms.

There are barriers of entry due the high capital investment, economies of scale,

resistance by existing firms, price cutting strategy etc.

Product may or may not be homogeneous.

The consumer is the price taker and the industry players are the price makers.

Stabilized prices – The prices tend to stabilize because no player is willing to bring

about a change in its prices.

Out of the above mentioned characteristics of Oligopoly, the Indian Aviation Industry

possesses the following:-

There are 8 major airways in the current Indian aviation industry. Each and every

player has a control on the prices and influences the market prices.

The business strategies of pricing of tickets, advertisements, promotion schemes etc

are in line with that of the competitors. A slight change in any type policy by a

company will lead to the others to follow suit. Like when Air Deccan came up with a

promotional scheme of Re 1 ticket, its immediate competitor Spice Jet launched a

scheme of 99p/ ticket.

The Indian Aviation Industry involves a huge capital investment and government

regulation which acts as major reasons for any new player to enter. Not only that, the

customer loyalty is attached to a particular airline and they might not be willing to

switch.

The product offered by each and every airline i.e. air services is more or less

homogeneous with minor differences.

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. Hence here lies the problem

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of indeterminacy. As such we can describe the Indian Aviation industry’s market structure

through Sweezy’s model of Oligopoly which talks about price stability/rigidity. Here, 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 in this context the demand is relatively inelastic. On the other

hand when firm A reduces its prices, all other firms follow suit to protect their market share.

Here the demand curve becomes relatively elastic. 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.

This kind of asymmetrical price conjecture leads to kink in the demand curve. Due to this

reason firms prefer to maintain stable prices for particular periods.

P, MR, MC

MC2

D

MC1

E

PO Kinked Demand Curve

A

D’

B

0 QO MR Q

In the above graph, the x-axis shows Quantity and the y-axis shows the price, MR and MC.

Demand curve faced by an oligopolist has a kink point at E, the price and output

corresponding to it is 0PO and 0QO respectively. DE portion is relatively elastic while ED’ is

relatively inelastic. It is very unlikely that MC would pass through the discontinuous portion

of MR, if Q<QO, then MC<MR, and the firm will increase its output to maximize profit.

Again if Q>QO then MC>MR

And the firm will increase its output to maximize profit. Hence, the profit of the firm is

maximized when Q=QO. Here, the equilibrium price- output combination (Po, QO) is

compatible with a wide range of costs. Thus, shifts in MC curve do not affect the equilibrium.

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We can see from the following data that prices in airline industry are same for the players

competing with each other. We take the fares charged by the major airlines flying along Delhi

–Mumbai route (busiest route- 44 flights/day).

1.

1. Oligopoly market tending towards Monopolistic characteristics

The future scenario of the Indian Aviation industry is tending towards monopolistic market

Characteristics, some of which are as follows:

Large number of buyers and sellers

Product is differentiated

No Barriers to entry.

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. As such the market may move towards monopolistic in the coming years.

Some of the Top international airlines are as follows:

1. Delta Airlines

2. United Airlines

3. Southwest Airlines

4. American Airlines

5. Lufthansa

6. China Southern Airlines

Players in the industry and market share

INDIAN PLAYERS MARKET SHARE

Kingfisher 18.6 %

12

High Cost Players Prices Charged

1. Jet

2. Kingfisher

Rs. 7760

Rs 7400

Low Cost Players Prices Charged

1. Go Air

2. Spice jet

Rs. 5000

Rs. 5148


Jet Airways + Jet lite 25.4 %

Nacil(I) 17.1 %

Indigo 18.6 %

Spice jet 13.8 %

Go Air 06.4%

Kingfish

er

Jet Airw

ays +

Jet li

te

Nacil(I)

Indigo

Spice

jet

Go Air0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

Series1

Herfindahl index =25.4^2+ 17.1^2 + 18.6^2 + 6.4^2 + 13.8^2 + 18.6^2 = 1861

This value of HHI dictates that the airlines industry in India is an oligopolistic market.

Barriers:

Barriers to entry are conditions such as high start up costs or obstacles that prevent new

entrants from easily entering the particular industry. These barriers benefit existing

companies who already operate in the industry by protecting their existing revenues from

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new competitors. They can be as a result of interventions by the government or a natural

occurrence in business. In the airline industry, there are number of barriers to entry that affect

new entrants.

Risk:

The high risk nature of the airline industry is a major barrier for new entrants. Airlines have

high cost that tends to be fixed in relation to revenues. Load factors or fare increases may

affect revenue, when this happens profits will be instantly affected. This makes airline

industry highly vulnerable to an economic slowdown.

Slots:

Since 1969, the Federal Aviation Administration has limited the daily number of takeoffs and

landings at key airports such as the Chicago O'Hare, Ronald Reagan Washington National

and New York's JFK and LaGuardia. As a result of new airlines entering the market, the

demand for access at these airports increased. This increase made it difficult for the takeoff

and landing slots to be equally divided.

Leases:

Airports in cities such as Charlotte, Cincinnati, Detroit, Minneapolis, Newark and Pittsburgh

permit airlines to lease the airport gates over a long period of time. This period can be

extended as long as 20 years. This gives them exclusive rights to use the gates and prevents

new airlines from acquiring the use of any airport facilities.

Perimeter Rules:

Perimeter rules at LaGuardia and National airports prohibit incoming and outgoing flights

that exceed 1,500 and 1,250 miles, respectively. These rules were implemented to promote

JFK and Dulles airports as the long-haul airports for the New York and Washington

metropolitan areas. Additionally, these rules limit the ability of airlines based in the west

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from competing, 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. Smaller airlines may

choose not to enter or quickly exit a market due to increased competition and financial loss.

Resources:

A company's control or ownership of a significant resource bars would-be competitors from

entering the market. For example, a monopoly that provides oil to local governments might

have access and exclusive rights to the land from which the oil comes. Government also

creates barriers to entry when it grants firm exclusive rights to certain resources through

grants, patents, copyrights and licenses.

Sunk Costs:

Sunk costs are unavoidable expenditures for a company. For example, some firms in a

competitive market have more money than others to spend on advertising. Marketing costs

must be spent, thus it's a sunk cost. 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.

Investment:

Businesses with a higher amount of start-up capital than other firms create barriers to entry.

Firms with high-yielding investments and those that show a good return for investors can

afford to spend much money on resources, thereby overshadowing the efforts of the

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competition.

Innovation and Research:

The high cost of investment in new technologies or research deters many firms from entering

the market. Firms with greater resources for research and development to create new

products, as well as capital to invest in equipment and in emerging technologies, can

dominate an industry that depends on Research and innovation to grow.

Regulations:

In order to maintain orderly growth of airline operation, to serve the needs of the country, in

an efficient and safe manner, the Civil Aviation Requirements, Section 3, Air Transport,

Series C, 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; or

A Company or a Corporate provided that:

o It is registered and has its principal place of business within India;

o Its chairman and at least two-thirds of its directors are citizens of India; and,

o Its substantial ownership and effective control is vested in Indian nationals.

Eligibility Requirements

Before the Scheduled Operator's Permit is issued, 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 40,000 kg and not less than Rs. 10 crores in respect of aircraft of maximum take-

off mass not exceeding 40,000 kg. A fleet of minimum five aircraft either by outright

purchase or through lease with maximum certified take-off mass more than 5,700 kg and type

certified meeting the requirements of transport category aircraft acceptable to DGCA. To

facilitate the start of operations, 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. The fourth aircraft should

be acquired within a period of six months and the fifth aircraft within a period of one year.

The aircraft shall be registered in India with current Certificate of Airworthiness in normal

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passenger category. Adequate number of AMEs and own maintenance and repair facilities for

maintenance of aircraft at least up to flight release or 500 hours, whichever is higher. For

higher maintenance, the operator should preferably establish his own maintenance facilities,

but can carry out such maintenance using facilities of reputed organisation approved by

DGCA. Sufficient number of flight crew and cabin crew but not less than three sets of crew

per aircraft. The flight crew should hold current licenses issued by DGCA and appropriate

endorsements on the type of aircraft operated.

PEST Analysis:

Political:

In India, one can never over-look the political factors which influence each and every

industry existing in the country. Like it or not, the political interference has to be present

everywhere. Given below are a few of the political factors with respect to the airline industry:

The airline industry is very susceptible to changes in the political environment as it has a

great bearing on the travel habits of its customers. An unstable political environment causes

uncertainty in the minds of the air travellers, regarding travelling to a particular country.

Overall India’s recent political environment has been largely unstable due to international

events & continued tension with Pakistan. The Gujarat riots & the government’s inability to

control the situation have also led to an increase in the instability of the political arena.

The most significant political event however has been September 11. The events occurring

on September had special significance for the airline industry since airplanes were involved.

The immediate results were a huge drop in air traffic due to safety & security concerns of the

people.

International airlines are greatly affected by trade relations that their country has with others.

Unless governments of the two countries trade with each other, there could be restrictions of

flying into particular area leading to a loss of potential air traffic (e.g. Pakistan & India)

Another aspect is that in countries with high corruption levels like India, bribes have to be

paid for every permit & license required. Therefore constant liasoning with the minister &

other government official is necessary. The state owned airlines suffer the maximum from

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this problem. These airlines have to make several special considerations with respect to

selection of routes, free seats to ministers, etc which a privately owned airline need not do.

The state owned airlines also suffers from archaic laws applying only to them such as the

retirement age of the pursers & hostesses, the labour regulations which make the management

less flexible in taking decision due to the presence of a strong union, & the heavy control

&interference of the government. This affects the quality of the service delivery & therefore

these airlines have to think of innovative service marketing ideas to circumvent their

problems & compete with the private operators.

Economic:

Business cycles have a wide reaching impact on the airline industry. During recession, airline

is considered a luxury & therefore spending on air travel is cut which leads to reduce prices.

During prosperity phase people indulge themselves in travel & prices increase.

After the September 11 incidents, the world economy plunged into global recession due to

the depressed sentiment of consumers. In India, even a company like Citibank was forced to

cut costs to increase profits for which even the top level managers were given first class

railway tickets instead of plane tickets.

The loss of income for airlines led to higher operational costs not only due to low demand but

also due to higher insurance costs, which increased after the WTC bombing. This prompted

the industry to lay off employees, which further fuelled the recession as spending decreased

due to the rise in unemployment.

Even the SARS outbreak in the Far East was a major cause for slump in the airline industry.

Even the Indian carriers like Air India was deeply affected as many flights were cancelled

due to internal (employee relations) as well as external problems, which has been discussed

later.

Social:

The changing travel habits of people have very wide implications for the airline industry. In a

country like India, there are people from varied income groups. The airlines have to

recognize these individuals and should serve them accordingly. Air India needs to focus on

their clientele which are mostly low income clients & their habits in order to keep them

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satisfied. The destination, kind of food etc all has to be chosen carefully in accordance with

the tastes of their major clientele.

Especially, since India is a land of extremes there are people from various religions and

castes and every individual travelling by the airline would expect customization to the

greatest possible extent. For e.g. A Jain would be satisfied with the service only if he is

served jain food and it should be kept in mind that the customers next to him are also Jain or

at least vegetarian.

Another good example would be the case of South West Airlines which occupies a solid

position in the minds of the US air travellers as a reliable and convenient, fun, low fare, and

no frills airline. The major element of its success was the augmented marketing mix which it

used very effectively. What South West did was it made the environment inside the plane

very consumer friendly. The crew neither has any uniform nor does it serve any lavish foods,

which indirectly reduces the costs and makes the consumers feel comfortable.

Technological:

The increasing use of the Internet has provided many opportunities to airlines. For e.g. Air

Sahara had introduced a service, through the internet wherein the unoccupied seats are

auctioned one week prior to the departure.

Air India also provides many internet based services to its customer such as online ticket

booking, updated flight information & handling of customer complaints. USTDA (US trade

& development association) is funding a feasibility study and workshops for the Airports

Authority of India as part of a long-term effort to promote Indian aviation infrastructure. The

Authority is developing modern communication, navigation, surveillance, and air traffic

management systems for India's aviation sector that will help the country meet the expected

growth and demand for air passenger and cargo service over the next decade.

A proposal for restructuring the existing airports at Delhi, Mumbai, Chennai and Kolkata

through long-term lease to make them world class is under consideration. This will help in

attracting investments in improving the infrastructure and services at these airports. Setting

up of new international airports at Bangalore, Hyderabad and Goa with private sector

participation is also envisaged.

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A good example of the impact of technology would be that of AAI, wherein with the help of

technology it has converted its obsolete and unused hangars into profit centers. AAI is now

leasing these hangars to international airlines and is earning huge profits out of it. AAI has

also tried to utilize space that was previously wasted installing a lamination machine to

laminate the luggage of travellers. This activity earns AAI a lot of revenue.

These technological changes in the environment have an impact on Air India as well. Better

airport infrastructure, means better handling of airplanes, which can help reduce maintenance

cost. It also facilitates more flights to such destinations.

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, sea etc are constraints for land and water mode of

transport but Air travel is not constrained by such issues.

Tourism growth:

Due to growth in tourism, there has been an increase in number of the international and

domestic passengers. The estimated growth of domestic passenger segment is at 50% per

annum and growth for international passenger segment is 25%. Airlines is the most

preferred mode of transportation by the foreign tourists as the convenience provided by the

airlines is higher.

Rising income levels:

Because of the rise in income levels, the disposable income is also higher which are

expected to enhance the number of flyers.

WEAKNESSES

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Under penetrated Market:

The total passenger traffic was only 50 million as on 31st Dec 2005 amounting to only 0.05

trips per annum as compared to developed nations like United States have 2.02 trips per

annum.

Inefficiency of the domestic airlines:

There are number of instances of flight being cancelled or delayed. Secondly frequent

strikes by the pilots and maintenance problems are a major cause of concern. 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. Huge investment requirement for physical infrastructure for

airports. Lack of basic facilities at the airport. When international airports offer such

services like free transportation facilities, private lounge facilities at airports, food etc, it

sometimes become impossible to find a clear toilet in our international airports.

OPPORTUNITIES

Expecting investments:

Indian Airlines industry is expecting investment of about US $30 billion in 2011.

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. As the tourism industry

expands the airline industry is also in for a boom and development and up gradation of the

present airports, 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

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the coming years large number of players will have dedicated fleets.

THREATS

Shortage of trained Pilots:

There is a huge shortage of trained pilots, co-pilots and ground staff which is severely

limiting growth prospects. because of payment delay.

Shortage of Airports:

There is a shortage of airport facilities, parking bays, air traffic control facilities and takeoff

and landing slots.

High Fuel prices:

Though enough number of low cost carriers already exists in the industry, majority of the

population is still not able to fly to other destinations. High oil prices mainly affect the

airlines in this regard bringing up the operational cost.

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.

Conduct:

Distribution:

Air ticket distribution is carried out both directly by airlines via their websites, call centres or

dedicated ticket sales offices and via third-party intermediaries - including global distribution

22


systems (GDSs) and travel agents - both on- and offline. Most of the major legacy

(traditional) airlines continue to sell the majority of their tickets via traditional intermediaries

such as GDS, and, by and large, only the low-cost carriers (LCCs) have succeeded in

distributing the greater part of their tickets via their proprietary websites.

As the trade association for the international air travel industry, the International Air

Transport Association (IATA) plays an important role in the billing of transactions, the

accreditation of travel agents worldwide and the implementation of e-ticketing.

Key statistics

In 2007, the worldwide sale of air tickets reached an estimated US$275 billion.

E-ticketing became universal as of mid-year 2008, following a four-year campaign led

by the IATA.

Premium tickets accounted for 7% of the total issued in 2007.

Major legacy carriers generally succeed in selling between 10-30% of their tickets via

their own websites. Most tickets continue to be sold by traditional third-party

channels (travel agents and GDSs).

Proprietary websites are by far the most important distribution channel for LCCs,

accounting for between 70% and almost 100% of ticket sales.

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. The product features are not shared by its

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competitors or the company itself may enjoy a strong reputation like that the 'brand

image' is only sufficient to charge a premium price.

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. This accredits the airline to achieve

good levels of profit on the basis of established reputation.

Low-cost Pricing:

The low-cost airlines in the Indian aviation industry, a different low-cost flying concept

has come up. Since these low-cost airlines are trying to attract the customers by providing

air travel in exceptionally low prices. In low-pricing strategies, the airlines provide very

low prices for the flight tickets. Also, they prices are made cheaper by booking the tickets

long before the flight date.

APEX Fares:

Apex fare is when, people are paid very cheap rates only if tickets are booked at least

before the specified time period (e.g. before at least one month). But the draw-back here

is that if the booking is cancelled, a substantial amount of money is not refund.

Marketing Strategies:

In-flight advertising

24


In-flight advertising is the use of personalised spaces or objects such as headrests, 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.

Emirates publishes three magazines, Open Skies, Portfolio and TV & Radio with the idea of

making contact with its more sophisticated readers.

The first is a lifestyle magazine reflecting the cosmopolitan character of its readership,

including stories from around the world covering such diverse topics as travel, technology,

health, the environment, art, culture, food, business and adventure.

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.

TV & Radio is an entertainment guide providing listings for the in-flight entertainments

programs available on the different routes operated by the airline.

The advertising included in these publications is not invasive; on the contrary, travelers are

provided with added value and entertainment.

Other promotional options are also possible, such as the campaign carried out by La Prairie

where first class passengers travelling with Qantas, Swiss International Air Lines, Malaysia

Airlines, Lufthansa and Eva Air were delivered with a gift set of the company’s cosmetics.

Online Marketing

25


Attracting potential customers to airline websites is the first step towards boosting the sale of

flight tickets online.

One of the several possibilities available is email marketing. According to a survey conducted

by the Travel Industry Association of America (TIA), over 35 million Internet users made a

travel reservation after receiving information on offers or promotions by email.

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.

In order to start up online marketing campaigns, the definition of the goals to be attained and

the performance of prior segmentation of the data bases to be employed are both crucial. It is

also important to reach persons forming part of the target audience who will receive the offer

favorably, with a strong interest in the services offered by the airline. At the same time this

type of actions will contribute to brand notoriety.

In this context the email marketing campaigns conducted by Austrian Airlines (which

according to organiza.com managed to attract 11,000 new customers) or Vueling are of

special interest. The latter was centered on the prize draw of a trip to Venice, linked to the

willingness to receive information on special flight offers.

There is wide variety of online marketing methods. 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, 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. The

results showed that in terms of generation of brand recall, layers and pop-ups were found to

the most effective formats. With only 3.1% of the investment, a 23.4% recall rate was

attained (+655%). The second most effective format turned out to be online video. Even

though only 3 out of 100 euros are destined to this format, its effectiveness on generating

brand recall is proportionally much higher. Almost 2 out of 10 of the commercials associated

to the brands recalled by the persons surveyed were linked to this format. As could be

expected, it was the more creative, dynamic ads that generated greater recall. Over half (54%)

of the ads mentioned were dynamic.

26


In this direction, one of the points to be included in this online plan would be the analysis of

presence in social networks. The same study found that 78% of the persons surveyed

belonged to one of the social networks under analysis (Facebook, Fotolog, Tuenti, Myspace,

Hi5, Twitter, Sonico, Badoo).

It is clear that these communities provide an opportunity for spreading information on

airlines’ special offers, however it is not as simple to find a way to do so successfully; this

will entail the analysis of what moves our future customers. Airlines such as American

Airlines and Virgin Atlantic already have a presence in Facebook.

On Twitter, 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.

Other companies such as the Dutch airline KLM have developed their own social network,

the China Club, aimed both at young people looking for cheap flights and the business

community.

Other promotional strategies can be studied in the context of Kingfisher airlines as they are a

prime example owing to their prolific marketing campaign,

Marketing strategies of Kingfisher Airlines

Kingfisher airlines launched its domestic air service operations in May 2005.KFA was

promoted by UB group and offered a single class- “Kingfisher Class”. 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. Within the first six months of its launch,

KFA managed to corner a 6% market share in the domestic air travel mark.

KFA started its operation in May 7, 2005, positioning itself as a budget carrier and not as

Low Cost Carrier (LCC).

27


As part of its promotional strategy the marketing team of KFA showcased the airline as “the

new flying experience”. 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.

KFA also launched Kingfisher express in order to tap into the growing LCC segment.

The company gave best services to its customers that were like providing world class

interiors, and in-flight entertainment systems.

The company came up with only one class airlines rather than other airlines that had

Business Class; Economy Class the idea was to combine Business Class experiences

and Economy Class experiences in one. Having a single class freed up more leg space

for passengers when compared to normal economy class flights.

The company started addressing its customers as “GUEST” rather than passengers.

The company made its mark by providing its guests with more legroom and bigger

seats so as to provide better comfort.

Advertisements hoardings at airports depicted the stylish interiors of the “Funliners”,

which conveyed youthful, fun-filled, and world class image.

INOX multiplexes in Mumbai publicized KFA’s special offers for a month.

KFA was the official travel airlines for the cast and crew of “Mangal Pandey”- the

movie.

KFA made use of various fashion shows, celebrity golf matches, New Year parties all

to build its “Kingfisher” brand.

The UB groups monthly magazine called “Pegasus” published information about

KFA along with other information related to UB group.

KFA launched many attractive offers to promote its sales like the “King Card” in

association with ICICI Bank, in August 2005. This was meant to create loyal

customers for KFA by providing benefits like privileged access to lounges,

restaurants, free refreshments at airports, access to 180 golf clubs across India, special

invites for lifestyle shows.

In October, KFA launched “Chill Times Offer” in the month of August 2005 and

September 2005.

28


In October they launched the “King Saver Offer” which said “Fly like a King, don’t

play like one”.

KFA targeted the frequent fliers business traveller segment, which was dominated by

Jet Airways. By offering a “King Saver Booklet”, This booklet contained six free

flight tickets and was presented as a free gift if the passenger bought two such

booklets each worth Rs. 26,999.Passengers could avail off this offer if they showed

there Jet Privilege Member (Gold or Platinum) card.

Advertising Intensity

2010 2009 2008 2007 200602468

101214

%

The graph is a plot of the Advertising Intensity of Kingfisher Airlines from the year 2006 to

2010 as percentage. 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.

Leverage of the firm:- Debt / Equity

29


year 2010 2009 2008 2007 2006 2005

JET AIRWAYS

14.24 9.01 4.57 2.58 2.02 3.47

KING FISHER

0.00 0.00 3.29 2.32 3.20 11.50

2010 2009 2008 2007 2006 20050

2

4

6

8

10

12

14

16

JET AIRWAYS KING FISHER

Here we see the leverage ratio of jet airways and king fisher airlines for five years. 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. And the leverage ratio of jet airways yearly goes up. The equity goes to negative as the value of its assets where of lower value than the debt amount to be repaid, this came as a combined effect of Kingfisher taking over Air Deccan, the economic slowdown and the group’s financial backing of the airlines.

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.

Working capital ratio:- Total current asset/Total current liabilities

year 2010 2009 2008 2007 2006 2005

30


JET AIRWAYS

1.01734 1.2573 0.9859 1.6015 2.9168 1.8402

KING FISHER

0.7414 0.6213 0.9763 2.2088 1.2905 1.5921

2010 2009 2008 2007 2006 20050

0.5

1

1.5

2

2.5

3

3.5

JET AIRWAYS KING FISHER

Here we see the working capital ratio of Jet airways and King Fisher airlines. As you can see

Jet is consistently able to keep the ratio above 1 displaying their capacity to meet their

immediate debts , 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.

Performance analysis of some of the major players

The performance of any industry is based on a few parameters. Thus, 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.

Sales Growth Rate (annual growth rate) =

31


Sales in the current year- 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.

YEAR 2010 2009 2008 2007 2006 2005

JET

AIRWAYS

-9.735 30.849 25.209 23.622 30.625 25.833

KINGFISHE

R

-3.265 263.46

7

-

11.142

31.197 305.24

5

385.77

1

2010 2009 2008 2007 2006 2005-50

0

50

100

150

200

250

300

350

400

450

JET AIRWAYSKINGFISHER

Jet Airways has been a premium brand in the Airline Industry ever since its origin in 1995.

Jet has been doing nominally well in terms of growth. But after encountering stiff

competition with the LCCs and Sahara Airlines, it changed its strategy and merged with

32


Sahara towards the end of 2007 thereby buying out Sahara for $340 million. This gave Jet an

extra 27 flights along with airport gates for INR 1450 crores.

Ever since the inception of Kingfisher Airlines, they have run the business well running into

huge profits on the account of their amenities and services provided. It all started with huge

growth in 2005 and 2006. Later after an economic slowdown, the price of oil had increased

from $73 a barrel to $96 a barrel, due to which prices of the tickets rose but the demand from

the customers decreased.

The sudden growth in 2009 is contributed by Kingfisher consolidating with Air Deccan in

2008. 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.

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. Profitability is calculated as:

Profitability (%) = Profit after Tax (PAT) / Net Sales

• The trend in the Profit (%) for the companies is analyzed over the period as given.

YEAR 2010 2009 2008 2007 2006 2005

JET

AIRWAYS

-5.03 -15.22 -7.31 -2.48 4.32 8.87

KINGFISHE

R

-24.65 -30.69 -16.48 -43.67 -31.62 -7.89

33


2010 2009 2008 2007 2006 2005

-50

-40

-30

-20

-10

0

10

20


Kingfisher and Jet Airlines have been market Leaders in the business. But as depicted in the

graph, the airline industry has been in losses since the last 5 years or so.

The more premium the brand, the higher the costs of maintenance, and if the costs are not

recovered then the company is in loss. Same is the case with Kingfisher as well as Jet. It

invested so much in the brand building that it has not been able to recover the costs. Just

when the strategic merger with Air Deccan hinted at a good move, recession had hit the

world and economic slowdown had led to cost cutting all across organizations which resulted

in decreased profitability. Same happened with Jet Airways.

RETURN ON ASSETS (ROA)

Profits before interest, depreciation and tax/Total assets gives ROA

YEAR 2010 2009 2008 2007 2006 2005

JET

AIRWAYS

0.0899 0.0129 0.0517 0.085 0.1902 0.2598

KINGFISHE

R

-

0.2859

-

0.3512

-

0.5221

-

0.2604

-

0.4362

-

0.0254

34


2010 2009 2008 2007 2006 2005

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4


Kingfisher has always banked on quality service ever since its inception. “To keep it big and

stylish” is Mallya’s style. As a result, kingfisher had invested a lot in Boeing and Airbus

aircrafts. According to reports, the Indian Aviation Industry had ordered 400 Boeing and

Airbus jetliners worth of $37 million during 2006-2010.On the other side, LCCs of these

brands were trying to sustain the competition and declining consumer demand. Thus, in this

case, 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.

RETURN ON SALES (ROS)

Profits before interest, depreciation and tax/Sales gives ROS

YEAR 2010 2009 2008 2007 2006 2005

JET

AIRWAYS

0.1435 0.0219

7

0.0978 0.1007 0.2418 0.2980

1

KINGFISHE

R

-

0.2286

-0.2373 -

0.4068

-

0.2072

-

0.2357

-0.0248

35


2010 2009 2008 2007 2006 2005

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4


The return on investment has not been too good for Kingfisher even though Jet Airways is

clearly a winner in this case.

According to reports, the Indian Aviation Industry has reported losses worth $230 billion in

the year 2006-2010. The sales of Kingfisher have not been able to overcome its high

investment costs.

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Analysis of competitiveness

Porter’s five forces model for aviation industry

Availability of Substitutes:

Purchasing power of customers has increased: As the purchasing power of the customers

has increased they have more options, from high fare to low cost airlines they can travel from

any airlines.

Roadways, Railways, Private Transport: Roadways, Railways , Private transport are the

major substitutes for the airlines. However this is not a threat if the distances are long.

37

Rivalry within an industry:Spicejet

JetairwaysIndigoGo Air

Air India

Threat of substitution:1.Roadways2.Railways3.Private Transport

Threat of new entrants:

Liberal PoliciesEasy loans

Untapped Market

Bargaining power of suppliers:

Very few manufacturersNo substitutes

Bargaining power of customers:

SubstitutesIncreased income

No. of players


Competition rivalry within an industry:

Many players of about the same size; there is no dominant firm: There are 6 major

domestic firms and there is a major competition between them, so customers have a wide

choice with them.

Little differentiation between competitor’s products and services: There is not much

difference between the services provided by all the airlines. The only difference being the

fares and the meals that are provided.

A mature industry with very little growth; 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. This can be done by differentiated pricing, frequencies, and

services.

Threat of new entrants:

Existing loyalty to major brands: Till now the customers are loyal to their brands. But as

the competition will increase they may switch over to some other players.

High fixed cost: The fixed cost involved in the entry or setup is very huge, but these days the

funds are available and the credits are available easily so the entry is no more a worry.

Scarcity of resources: The resources are scares. Fuel is a major resource for the aviation

industry and the rising prices of it is a major concern.

Government restrictions or legislation: The restrictions which were there earlier are not

there now. After liberalization the entry of new player has become much easier. Besides there

are very few restrictions by government in terms of the fees , platform, frequencies of flights

etc.

Indian airlines market is not fully trapped , it’s underdeveloped: The Indian market is

still not fully trapped. There is a shortage in the supply as compared to demand. Besides the

infrastructure is also not fully developed.

38


Bargaining Power of Suppliers:

There are very few suppliers of a particular product: There are only 2 suppliers of

aircrafts currently. So the bargaining power is not there for the firms. They can’t bargain

much and cost is also very high.

There are no substitutes: for airlines the only source of income is the aircraft. They

can’t substitute this with any other thing and because of this they can’t bargain with the

suppliers.

The product is extremely important to buyers - can't do without it: Aircrafts are the

only source of income for the buyers; they can’t do anything without it.

The supplying industry has a higher profitability than the buying industry: The

supplier has the high margin or profitability in supplying the aircrafts, because it’s a

onetime affair for them. But for the buyers the profitability is low.

Bargaining power of customers:

Small number of buyers: There are not many no. of buyers or customers. As said earlier

the market is still untapped. So the customers have the upper hand and he can bargain

with the seller.

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 product is not extremely important to buyers; 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.

Customers are price sensitive: If one competitor increases the price, a customer can

always switch to some other player. They are pricing sensitive and an change there

preferences if there is even a slight fluctuation in the prices.

39


Future outlook:

• Passenger traffic is estimated to grow at a CAGR of over 15% in the coming few

years.

• The Ministry of Civil Aviation would handle around 280 million passengers by 2020.

• 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.

• LCCs and other entrants together now command a market share of around 46%.

Legacy carriers are being forced to match LCC fares, during a time of escalating

costs. Increasing growth prospects have attracted & are likely to attract more players,

which will lead to more competition.

• Airport and air traffic control (ATC) infrastructure is inadequate to support growth.

While a start has been made to upgrade the infrastructure, the results will be visible

only after 2 - 3 years.

Modernization of airports

• The Airports Authority of India (AAI) is undertaking the development and

modernization of all 35 non-metro airports in the country.

• The other two metro airports - Chennai, Kolkata -- may soon be on the modernization

path.

Augmentation of fleets

• Kingfisher has also ordered five Airbus A380 aircraft.

• India is expecting to add aircraft worth about US$80 billion by 2020.

Growth in MRO Segment

• Growth in the MRO segment in India is estimated at 10.2 per cent, and is expected to

outpace growth in Asian and global markets.

40


• The total MRO market in the country is around $500 million and is likely to touch

$1.06 billion by 2014.

• By then, India's contribution to Asia's MRO market is expected to grow to seven per

cent.

Job opportunities

• The aviation sector in India is likely to create more jobs in future as the sector is

growing rapidly. The industry would create 2,00,000 jobs by 2017 in India.

• Sector will require 2,000 more pilots and 10,000 maintenance staff in 2011.

41


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http://www.mckinseyquarterly.com/Trends_in_the_US_airline_ticket_distribution_200

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http://www.iata.org/pressroom/pr/Pages/index.aspx


http://www.iata.org/whatwedo/Documents/economics/Industry-Outlook-Presentation-

December2010.pdf


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Capitaline Database

42

http://www.livemint.com/2010/01/02000041/Kingfisher-in-deals-for-bio-je.html


http://www.iata.org/whatwedo/Documents/economics/Industry-Outlook-Presentation-December2010.pdf

http://www.iata.org/whatwedo/Documents/economics/Industry-Outlook-Presentation-December2010.pdf


http://www.iata.org/pressroom/pr/Pages/index.aspx

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http://www.mckinseyquarterly.com/Trends_in_the_US_airline_ticket_distribution_200

Airline Industry Report

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