Final Project All 11092010

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Civil Aviation Industry in

India



OVERVIEW OF THE INDUSTRY

Aviation Industry in India is one of the fastest growing aviation industries in the world. With the

liberalization of the Indian aviation sector, aviation industry in India has undergone a rapid

transformation. From being primarily a government-owned industry, the Indian aviation industry

is now dominated by privately owned full service airlines and low cost carriers. Private airlines

account for around 75% share of the domestic aviation market. Air transportation in India is

under the purview of the Department of Civil Aviation, a part of the India's Ministry of Civil

Aviation and Tourism.

India has an eminent position in the civil aviation sector with a large fleet of aircrafts. In all, 56

airlines are operating scheduled air services to and through India and 22 foreign airlines are over

flying Indian Territory. There are over 450 airports and 1091 registered aircrafts in the country.

There are also 41 non-scheduled air transport operators. Additionally 34 applicants have been

granted NOC by the Ministry of Civil Aviation for setting up non scheduled air transport

operation. Air Transport has a significant role to play in a vast country like India with major

industrial and commercial centers located far apart. Earlier air travel was a privilege only a few

could afford, but today air travel has become much cheaper and can be afforded by a large

number of people.



HISTORY OF INDIAN AVIATION:

After 2004 till date it has been an Oligopoly market



Remove this page Use the stats and combine with already present data.



CLASSIFICATION & TYPE

The Indian airline sector can be broadly divided into the following main categories:

1. Scheduled air transport service, which includes domestic and international airlines.

2. Non-scheduled air transport service, which includes charter operators and air taxi operators.

3. Air cargo service which includes air transportation of cargo and mail.

Scheduled air transport service: It is an air transport service undertaken between two or more

places and operated according to a published timetable. It includes: 1. Domestic airlines, which

provide scheduled flights within India and to select international destinations. Air Deccan, Spice

Jet, Kingfisher Airline and Indigo are some of the domestic players in the industry.

2. International airlines, which operate scheduled international air services to and from India.

Non-scheduled air transport service: It is an air transport service other than the scheduled one

and may be on charter basis and/or non-scheduled basis. The operator is not permitted to publish

time schedule and issue tickets to passengers.

Air cargo services: It is an air transportation of cargo and mail. It may be on scheduled or non-

scheduled basis. These operations are to destinations within India. For operation outside India,

the operator has to take specific permission of Directorate General of Civil Aviation

demonstrating his capacity for conducting such an operation. At present, there are 2 scheduled

private airlines (Jet Airways and Air Sahara), which provide regular domestic air services along

with Indian Airlines. In addition there are 47 non-scheduled operators providing air-taxi/non-

scheduled air transport services.

(Remove the below data as not that IMP)

Apart from this, the players in airline industry can be categorized in three groups:

y Public players

y Private players

y Start up players.



There are three public players: Air India, Indian Airlines and Alliance Air. The private players

include Jet Airways, Air Sahara, Kingfisher Airlines, Spice Jet, Air Deccan and many more. The

startup players are those planning to enter the markets. Some of them are Omega Air, Magic Air,

Premier Star Air and MDLR Airlines

TOP AVIATION COMPANYS IN INDIA:

y Air India: National Aviation Company of India Limited (NACIL) was the first Indianaviation company which led the way for other companies in the aviation sector. It was

initiated before the India gained its independence. Later it collaborated with Indian

Airlines and gained the reputation of being the largest airline in South Asian airline. Air

India Cargo, Air India Express and Air India Regional are its subordinates in aviation

market. It offers First class, Executive class and Economy class services and has code

sharing pacts with companies like Air France, Austrian Airlines, Aeroflot, Air Astana,

Emirates Airline, Air Mauritius, Kuwait Airways, etc.

y Indian Airlines: Indian Airlines was inaugurated on 1st August, 1953 and in

collaboration with its fully governed subordinate in aviation market Alliance Air, it takes

pride in being recognized as one of the biggest regional airline systems in Asia. It has a

fleet of 70 airplanes and covers 76 destinations, 58 Indian destinations and 18 foreign

Indian

Aviation

Full ServiceAirlines

Air India,

Jet Airways

etc.

Low CostAirlines

Air Deccan,

SpiceJet etc.

RegionalAirlines

Emric Air,

Air Dravida

etc.

Charter

Airlines

Club One Air,

etc.

Cargo

Airlines

Blue Dart,

Aryan Cargo

Express etc.



destinations. Globally it covers Oman, UAE, Kuwait, Qatar, Singapore, Yangon,

Pakistan, Maldives, Bangladesh, Sri Lanka, etc.

y Jet Airways: Jet Airways was established on May 5, 1993. It earns yearly

revenue of Rs 2502.89 and total income of approx Rs. 117868.8 Million. At present it id

India's biggest private domestic airline with 62 aircrafts and a market share of 25%. It

covers 50 destinations with 340 regular departures. Jet Airways has pacts with foreign

airlines, such as Lufthansa, Swiss, Gulf Air, Austrian Airlines, Qantas and Thai.

y K ingfisher Airlines: It is the one and only 5-star airline in India which offers excellent

first class service on domestic itineraries also. A part of UB group, Kingfisher Airlines

has received 30 awards for its novelty and customer satisfaction. After its tie-up with

Deccan, the airline covers 64 cities and has 484 daily departures.

y Deccan Aviation Ltd.: The aviation company has its presence in 8 places namely,

Mumbai, Ranchi, Surat, Hyderabad, Bangalore, Katra, Colombo (Sri Lanka) and Delhi. It

has 350 daily departures and covers 65 destinations in India. It offers the benefit of no-

cost travel to infants, ticketing counters, lavish aircraft interiors and ticketing flexibility.

Now been merged with Kingfisher and operates as Kingf isher Red

y Indigo: Indigo is a utilitarian low-price domestic airline which offers feasible flying

alternatives for millions. The airline was facilitated by the Air Passengers Association of

India (APAI) as the ³Best Low-Fare Carrier in India for the year 2007´. Indigo has 120

daily departures and a fleet of 19 Airbus A320. The airline covers 17 destinations

namely, Agartala, Bangalore, Bhubaneshwar, Ahmedabad, Delhi, Chennai, Guwahati,

Hyderabad, Goa, Imphal, Kolkata, Mumbai, Vadodara, etc.

y Paramount airways: Paramount Airways is a business class airline which has its base in

India and headquarters at Chennai. Endorsed by Madurai-based Paramount Group and

Paramount Railways was inaugurated in 19th October 2005. Its fleet comprises 5 aircrafts

and it operates in 8 destinations.



y Go Air Airlines: Like SpiceJet, a Go Air airline is also a low price airline endorsed by

the Wadia group. It was inaugurated in Mumbai in June 2004. It operates in 11 cities with

61 daily departures. It has started its functions in Ahmedabad, Chennai, Bangalore,

Coimbatore, Goa, Cochin, Jaipur, Mumbai, Pune, Delhi, Srinagar, etc.

y Spice Jet: Spice Jet is basically a low cost airline which incorporates many Boeing 737-

800 airplanes in its fleet. It covers 14 destinations in India.

y Air Sahara: Air Sahara was inaugurated on December 3, 1993 with a fleet of only two

Boeing 737-200s. Now it comprise of 27 aircrafts, 135 daily departures and availability

of 16500 seats on regular basis. It reaches various Indian destinations like Bangalore,

Kolkata, Delhi, Lucknow, Mumbai, Chennai, etc. Now been merged with Jet Airways

and operates as Jet Lite.

y Air Charter Services Pvt Ltd: Air Charter Services Pvt. Ltd. performs its business

operations with private business aircrafts, executive and corporate air charters, helicopter

tours, VIP charter flights, and photo and video flights. Its client list incorporates VIPs,

corporate firms, tour co-ordinators, travel agents and air medical evacuation

professionals. It provides services such as relief, VIP, air ambulance and privacy services.



MAR K ET STRUCTURE:



TRAFFIC STRUCTURE

NATIONAL

CARRIERS

16%

PRIVATE

CARRIERS

83%

NON SCHEDULE

CARRIERS

1%

TRAFFIC STRUCTURE IN 2008-2009

NATIONAL

CARRIERS

56%

PRIVATE

CARRIERS

42%

NON SCHEDULE

CARRIERS

2%

TRAFFIC STRUCTURE IN 1999-2000



DEMAND & SUPPLY

The passenger traffic in the Indian aviation industry is growing day by day. The growth rate of the

passenger traffic is an indication of the growing demand of air services in India. This growth has evolved

over a number of years broadly speaking in the last 10 years. Let us analyze how the demand as well as

supply has changed. Over the last 10 years passenger traffic has grown by 125% and at present the annual

growth rate hovers around 12-13%

The following table shows the increase in domestic passenger traffic from 1999-00 to 2008-09.

COMPARATIVE STATEMENT OF TOTAL DOMESTIC TRAFFIC CARRIED BY ALL SCHEDULED AND

NONSCHEDULED OPERATORS FOR LAST TEN YEARS

Y e a r

Passenger Traffic in No¶s

T o t a l

P a s s e n g e r

T r a f f i c

Percentageshare

Percentage

Changeover

Previous Years

Scheduled

N o n S c h e d u l e d

Scheduled


Scheduled


T o t a l

P a s s e n g e r

T r a f f i c

N a t i o n a l

C a r r i e r s

P r i v a t e

C a r r i e r s

N a t i o n a l

C a r r i e r s

P r i v a t e

C a r r i e r s

N a t i o n a l

C a r r i e r s

P r i v a t e

C a r r i e r s

1999-00 7289327 5421812 229391 12940530 56.3 41.9 1.8 - - - -

2000-01 7098944 6613271 249351 13961566 50.8 47.4 1.8 -2.6 22 8.7 7.9

2001-02 6420957 6432961 247272 13101190 49 49.1 1.9 -9.6 -2.7 -0.8 -6.2

2002-03 6247470 7703564 282432 14233466 43.9 54.1 2 -2.7 19.8 14.2 8.6

2003-04 6706521 8970427 241028 15917976 42.1 56.4 1.5 7.3 16.4-

14.711.8

2004-05 7845433 11599610 299565 19744608 39.7 58.7 1.5 17 29.3 24.3 24

2005-06 7763094 17441894 373719 25578707 30.3 68.2 1.5 -1 50.4 24.8 29.5

2006-07 7913065 27879682 444444 36237191 21.8 76.9 1.2 1.9 59.8 18.9 41.7

2007-08 8164619 36219683 483823 44868125 18.2 80.7 1.1 3.2 29.9 8.9 23.8

2008-09 6291685 33175387 575681 40042753 15.7 82.8 1.4 -22.9 -8.4 19 -10.8



FACTORS RESPONSIBLE FOR GROWTH OF AVIATION INDUSTRY

PESTE Analysis

This model proposes that the relevant factors should be divided into the categories of P olitical,

E conomic, S ocial, T echnological and E nvironmental. These factors are not mutually exclusive

but then the classification helps in understanding each ones influence. Following are the factors -

y Political factors

y Economic factors

y Social factors

y Technological factors

y Environmental factors

POLITICAL FACTORS

The political situation of the country has a direct impact over the aviation industry of the

country. The policies taken up at this level such as the nationalization of the carriers, open sky

policy, and taxation all have impact on the marketing policies of the carriers.

Open Sky Policy and Deregulations

Throughout its history, the airline industry has been constrained by decisions made by politicians

and governments. Governments have controlled where airlines can fly, and aspects of their

product planning and pricing policies. They have also had a major involvement in the industry

through the ownership of airlines. Finally, political decisions have often affected the extent,

nature and geographical distribution of demand.

In recent years India has open up its sky to the foreign players. It has signed up with nations all

over the world (though not all of them) to allow use of their respective airspace for the

commercial flights. It has led to increase in the number of players in the sector and has beefed up



the competition. Currently there are 76 carriers from 49 countries operating as an outcome of

µOpen Sky policy¶.

In 1953, the Air Corporation Act led to nationalization of the airlines. It changed the landscape

of the airline industry in India. It was in 1994 that the Air Corporation Act was repealed and thus

this allowed private operators to operate in the domestic airline and aviation industry. Today FDI

up to 49% into airlines and 100% for airports. A brief of the various decisions taken by the

government in deregulation of the sector and opening to the foreign policy

Aviation Policy

Many policies supporting infrastructure are now in place.

y 100 per cent FDI under automatic route is permissible for Greenfield airports.

y For existing airports, FDI up to 74 per cent is permitted through automatic approvals

and up to 100 per cent through special permission (from FIPB).

y Private developers allowed to setup captive airstrips and general airports 150 km away

from an existing airport.

y 100 per cent tax exemption for airport projects for a period of 10 years.

y 49 per cent FDI is permissible in domestic airlines under the automatic route, but not by

foreign airline companies. 100 per cent equity ownership by Non-Resident Indians(NRIs) is permitted.

y 74 per cent FDI is permissible in cargo and non-scheduled airlines.

In the initial years i.e. during the 1990¶s there were not many players in the market specifically

because of the government restriction. As such the supply was limited during those years.

History speaks for itself that during that time the air fares were exorbitant making air travel

affordable only by the rich and elite. Now the question arises whether the limited supply lead to

high air fares or the high air fares lead to low demand. It seems that it was both the ways. The

limited number of airlines was not able to cater to huge demand of India, thus leading to high

prices .and these high prices subsequently lead to reduction in demand.



EFFECT OF OPEN SK Y POLICY ON DEMAND AND SUPPLY OF THE INDUSTRY:

P D1 S1 P

D2 S2

P*

D1 P** D2

S1

0 Q*

Q 0 Q**

QGRAPH I GRAPH II

In the above graphs along the y axis we measure the price and along x axis the quantity

demanded and supplied. It can be seen from graph I that 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). As such the airline fares were quite high at P*.

However 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**.

It can also be stated otherwise that due to high

prices the demand for air services was previously low (Q*), with the reduction in fares, the

demand also increased (Q**

).

This also shows that Indian Aviation Industry is price elastic in nature as with the reduction in

the prices over the years, the passenger traffic has increased enormously. In 2003 when the low

cost airlines were introduced the passenger traffic had increased enormously, even the railways

were forced to revise their fares and come out with new schemes in order to face the stiff

competition it was getting from the Airways. This also proves the price elastic nature of Airlines.



Major Investments

y Over the past year, various companies have shown an interest in the Indian aviation

industry. Investment in airport infrastructure was over US$ 5 billion in 2008 and will go

up US$ 9 billion by 2013, of which close to US$ 6.8 billion is expected to come through

public private partnerships (PPP) model, according to a study by research firm Frost &

Sullivan.

y Tata Advanced System Limited (TAS), a unit of the Tata Group, will set up a US$

113.63 million helicopter manufacturing unit at the Aerospace Special Economic Zone

(SEZ) in Adhibatla village near the Hyderabad international airport. Further, the

company has formed a joint venture with US-based Sikorsky Aircraft to make aerospace

components in India.

y US aircraft maker, Boeing Co, will deliver 100 planes worth US$ 17 billion over the next

four to five years to India.

y Changi Airports International is ready to enter into joint ventures with more Indian

companies in developing airports. The company, which has picked up a 26 per cent stake

for US$ 20 million in Bengal Aerotropolis Pvt Ltd (BAPL) is looking at other

opportunities.

y State-owned aerospace firm Hindustan Aeronautics Limited (HAL) has signed anagreement with Boeing to supply flaperons for the Boeing's 777 series commercial

jetliners. It is understood that HAL will supply 600 units of flaperons to Boeing which

will be delivered in phases by 2019.

y European passenger plane maker Airbus SAS will move 20 per cent of its engineering

and design activities to low-cost countries, a majority of it to India, by 2012.

Airport Infrastructure

y Mumbai and Delhi airports have already been privatized and are being upgraded at an

estimated investment of US$ 4 billion over 2006-16.Greenfield airports are operational at

Bangalore and Hyderabad. These are built by private consortia at a total investment of over US$

800 million.



y A second Greenfield airport being planned at Navi Mumbai is going to be developed

using public-private partnership (PPP) mode at an estimated cost of US$ 2.5 billion.

y 35 other city airports are proposed to be upgraded. The city side development will be

undertaken through PPP mode. Over the next five years, AAI has planned a massive investment

of US$ 3.07 billion²43 per cent of which will be for the three metro airports in Kolkata,

Chennai and Trivandrum, and the rest will go into upgrading other non-metro airports and

modernizing the existing aeronautical facilities.

y An investment of US$ 623 million will be made by industries in the Aerospace and

Precision Engineering Special Economic Zone at Adibatla, Ranga Reddy district.

y The country's first special economic zone (SEZ) dedicated to the aerospace industry has

been inaugurated in Belgaum district, Karnataka. The SEZ²promoted by Quest Global, an

aerospace engineering and manufacturing company²was undertaken at an investment of US$

32.5 million. [Nov 16]

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 w.e.f from January 9, 2004 to reduce fares.

Reduction on Excise DutyFrom January 9, 2004, 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.

Landing Charges abolished

Landing charges for aircraft with less than 90 seats were abolished and landing charges for larger

aircraft have been reduced by 15% with effect from February 11, 2004.



E CONOMIC FACTORS

The demand for air travel is characterized by very high income elasticity. Therefore, as the world

economy grows, so the demand for air travel can be expected to increase too. This continuing

growth gives both enormous opportunities and great challenges to the airline industry. The

opportunities come with the chance to exploit a growing market, something which would be theenvy of managers in many other industries. The challenges are to accommodate the growth

through suitable infrastructure development and without unacceptable environmental

consequences, and to exploit the demand whilst achieving the stable profits which the industry

has so often found elusive. Besides a clear pattern of growth, growth rates are uneven through

time. Just as one would expect, air transport industry growth rates are tied closely to those in the

world economy. If growth in the economy is rapid in a particular year, so is the increase in air

travel demand. Periods of economic stagnation see a significant slowing of the rate of increase in

demand. This pattern has immense strategic and marketing implications. It is not sufficient for

carriers to implement policies which allow for profits during prosperous periods if these same

policies result in heavy losses or bankruptcy during the downturns in the trade cycle. The rising

income of the Indians will see a rise in the air travelers, however the recent recession showed up



off and move in even during the low visibility hours. But then some of the technological

development have posed to be fierce competitors.

Video Conferencing

Video conferencing has enabled to make real time meetings possible at the minimum of cost.

This has helped the organizations to cut down on the cost. But that leaves the aviation industry of

greater challenge to attract the business travelers.

Internet

Internet has enabled to provide real time information of flight schedules and availability. It has

also enabled check in facility. Even some of the airlines are providing internet facility over the

flight however internet has raised questions over the distribution channel commission.

Surface Transport Investment

The investment in the surface transport has lead to major losses of domestic passengers. With the

plans in anvil to launch high speed bullet trains in some corridors, if that comes to reality that

shall take away a major portion of the revenue.

Please add the points we discussed««««.on transport

E NVIRONM E NTAL FACTORS

As the concerns for the environment grows with the rise in global temperatures. It becomes

obvious that the airlines are criticized all over the world by the pro environmentalists.

Government too in order charges higher taxes in order to dissuade the short distance travelers

from taking the air routes. There are high ATF charges. On the other hand the available

infrastructure is not conducive to handle the burgeoning airlines



ANALYSIS OF BAD TIMES IN THE DOMESTIC AVIATION

INDUSTRY:

The above article primarily highlights the gloomy conditions the domestic aviation sector faced

during the September of 2008.During this period the domestic airlines passed through a low

demand phase & were forced to decline air traffic operations. The average load factor for

domestic airlines during this period fell to 55% in Sep.2008 against over 65% in Sep.2007.

The first question arises is that how did these airlines came to such a bad phase wherein, despite

reducing the air traffic operations they were experiencing a fall in their load factors? The demand

of consumers for air travel went down steeply from what it was a year back then. What had

actually happened? Before we move ahead with detailed analysis let us have a look on the

prominent news during this period from domestic aviation industry. This news clearly

exudes one of the major reasons about the downward trend in the airlines demand. This

news have been taken from Economic Times and arranged in chronological order in the table

below.



If possible type this matter«««.

As the article suggests that the domestic air traffic had crashed to 5 year low. One of the major

factors for this crash was the decline in consumer demand for air travel. The decline in

consumer demand was primarily due to slowdown in global economy and rise in airfares.

The major happenings of these phenomena have been brought out in the following points:



SLOWDOWN IN THE GLOBAL ECONOMY

y The slowdown in economy had made a negative shift in the consumer demand as mentioned

in the graph below. This shift was due to decline in demand due to prevailing negative

sentiments among consumers and companies.

R ISE IN BASE FARE AND FUEL SURCHAR GES:

y The rise in the base fare and fuel surcharges together was ranging from 30% to as good as

100% from June 08 to Sep.08 (annex-4, 6). This had directly hit the demand in economy

class where economy class had a hefty portion in the total domestic aviation business. The

rise in air fares has made a movement along the demand curve leading to decline in demand

as per the ³Law of Demand´.



INCREASE IN PRICE OF AVIATION TURBINE FUEL (ATF):

y The ATF accounts for nearly 30% of the input cost of airlines (Annex.-3). From Oct.07 to

Jun08, due to the spiral rise in the international crude oil prices and consequent rise in the

ATF prices the domestic airlines were forced to increase their fares to either maintain their

profit margins or even to sustain their businesses. The rise in Input costs (ATF primarily) has

made a fall in supply or cut in operations by service.



The rise in these fares directly affected the demand in the sector. After this period, the major

decline in the demand started from June 2008 onwards when the consumers directly felt the heat

of the hike in air fares. The passenger load factors dropped to 77.6 percent in June 2008, down

from 78.8 percent recorded for June 2007 (Annex.-5). The situation further worsend in the foll

months. The average load factor for these airlines had fallen to 55% in Sep.2008 against over

65% in Sep.2007 (Annex.-8). This scenario clearly follows the Demand curve ± the

relationship between Price and Quantity demanded. No doubt, the decline in demand was not

only due to hike in fares but also due to slowdown in the international economy & financial

crisis. However, the hike in the air fares was one of the major reasons resulting a decline in the

consumers demand. Due to this sudden decline in demands in Jul.-Sep.2008, The airlines took

serious steps to tide war the crisis and regenerate the demand. These measures were primarily

focused to reduce overhead costs to sustain any declining demand scenario.

To absorb the rise in the input costs the airlines took serious measures to improve

efficiency and cut the operation expenses. Few of the measure are as below:

y Airlines, struggling to combat the rising costs went for joint operations to synergize their

resources. This lead to serious consolidation and mergers in aviation industry Eg Joint

Operations by Kingfisher & Jet Airways, Kingfisher and AirDeccan, merger of Air India &

Indian Airlines, Acquiring of Sahara by Jet Airways (Annex.-8).

y There was drive to cut the operations to decrease the losses. The airlines ceased their flights

in unviable, highly competitive and seasonal routes (Annex.-9).

y During the last two month, the main private companies of aviation sector tried to lay off their

employees to reduce the operation costs (Annex-10). The govt. owned company like Air

India came up with novel concepts like voluntary leave for few years for their employees

(Annex-10).



y The airlines ceased or deferred their plans to buy new air planes to control the current

operational costs. Also, they used small aircrafts for operation to reduce operational costs

and meet the changed demand.

These moves were clearly to cut the expenditure and a way to absorb the rise in input costs.

HOW DOES DEMAND AND SUPPLY ANALYSIS TAK ES PLACE IN THE

INDUSTRY?

Average Seat K ilometers (ASK M)««.Measure of Capacity / Supply:

It is a measure of an airline flight's passenger carrying capacity. It is equal to the number of seats

available multiplied by the number of miles flown. This measures an airline's capacity for

transporting passengers. For example, an aircraft configured to fly 100 seats flying 160 km

would give the carrier 16,000 ASKMs for that particular flight.

Revenue passenger kilometers (RPK M)««.Measure of Demand

It is a measure of a passenger traffic for an airline calculated by multiplying the total number of revenue-paying passengers aboard the vehicle by the distance traveled measured in km The

calculation can be more complex for some planes where passengers may board and disembark

at intermediate stops This excludes passengers travelling under fares available only to airline

employees and babies and children who do not have a seat of their own.



If possible put above data in excel«««..

Load Factor (Seat Factor) or Passenger Load Factor (PLF):

Load Factor = RPK M / ASK M

It is a measure of the amount of utilization of the total available capacity of a transport vehicle. It

is useful for calculating the average occupancy on various routes of airlines. Using this

information, airlines determine the profitability and revenue potential of various routes. Analysts



state that once the airline load factor exceeds its break-even point, then more and more revenue

will trickle down to the bottom line. During holidays and summer vacations load factor can be

significantly higher due to higher demand. In technical terms, the PLF is defined as the number

of passenger-kilometers travelled as a percentage of the total seat-kilometers available. So, if an

airline with 100 seats flies a distance of 1000 kilometers, the available seat-kilometers are

100,000. If 60 passengers travel the entire distance, the passenger-kilometers travelled is 60,000

and the PLF is 0.6



COST STRUCTURE OF THE AVIATION INDUSTRY

y Aviation Turbine Fuel is far higher than global rates, it is accounted for 35-40% of operating

cost, as against global average of 20-25%.The industry has to adjust its operating cost

depending upon the varying crude oil price of the world. In order to adjust to the changing

oil prices aviation companies go for fuel hedging.

36

30

3.5

1.6

2.2

12.7

14

Labour

Fuel

Passenger Food

Advertising and Promotion

Landing fees

Infrastructure like aircraft

lease rentals

Interest, Taxes, Passenger

Traffic Commission



Fuel Hedging: Is a contractual tool some airlines use to stabilize jet fuel costs. A fuel hedge

contract commits an airline to paying a pre-determined price for future jet fuel purchases.

Airlines enter into such contracts as a bet that future jet fuel prices will be higher than

current prices or to reduce the turbulence of confronting future expenses of unknown size. If

the price of jet fuel falls and the airline hedged for a higher price, the airline will be forced

to pay an above-market rate for jet fuel.

The cost of fuel hedging depends on the predicted future price of fuel. A company that does

not hedge its fuel costs generally believes one, if not both, of the following:

1. The company has the ability to pass on any and all increases in fuel prices to their

customers, without a negative impact on their profit margins.

2. The company is confident that fuel prices are going to fall and is comfortable paying a

higher price for fuel if, in fact, their analysis proves to be incorrect.

Typically, airlines will hedge only a certain portion of their fuel requirements for a certain

period. Often, contracts for portions of an airline's jet fuel needs will overlap, with different

levels of hedging expiring over time.

y LABOUR:

Labour accounts for the major cost incurred by the industry because large number of operators required and due to shortage of technical personnel.

"India needs 4000 pilots by 2012!" or "Aircraft deliveries on hold due to shortfall of

pilots!" pilots are the need of the hour in the aviation industry.

y Interest repayments on foreign currency loans acts as a burden on the industry.

The industry has to take huge loans in order to fund their infrastructural costs such as

purchase of aircrafts, maintenance of airports etc.

y Advertisements:

Due to Intense competition in the industry the airline has to incur substantial advertisement

and promotional costs in order to create awareness and allure the consumers. Eg of heated

advertisement war within the Indian Aviation industry is given below.



HOW IS THE COST CALCULATED IN THE INDUSTRY?

Cost per Available Seat Mile (CASM)

A commonly used unit cost used to compare airlines. CASM is expressed in cents to operate

each seat mile offered, and is determined by dividing operating costs by Available Seat Miles.

This number is frequently used to allow a cost comparison between different airlines. In theory,

the lower the CASM the more profitable the airline should be.For instance, Southwest flies from

Baltimore Washington International (BWI) to La Guardia International (LGA) and the distance

is 185 Miles / 161 Nautical Miles between the origin and destination. Southwest is operating this

flight with a B737-700 (140 seat max) aircraft, and it cost Southwest $2,700 for this flight

(Direct Operating Cost) often referred to as DOC in aviation. To calculate the CASM.

CASM = Direct Operating Cost / Available Seat Mile

= $2, 700 / (140 x 161 = 22,540)



Where 140 is the number of available seats and 161 is the distance in miles.

= $2,700 / 22,540 = 0.1197 or 0.12 cents per mile

It would cost Southwest $0.12c per seat per mile for a flight to New York. In addition,

the cost for each seat for total miles would be

Seat Cost = $0.12 cents x 161 miles = $19.32

It would in turn cost Southwest $19.32 per seat to New York.

Revenue per Available Seat Mile (RASM)

A commonly used unit cost used to compare airlines. The revenue, expressed in cents received

for each seat mile offered which is determined by dividing operating income by Available Seat

Miles. This number is frequently used to allow a cost comparison between different airlines. In

theory, the higher the RASM the more profitable the airline should be. Revenue is not limited to

ticket sales revenue

RASM is more comprehensive than yield as it takes into account all revenue not just passenger,

but that is not the reason airlines have adopted it. Their reason relates to the fact that when the

load factor is rising, RASM grows faster than yield because it is a function of both load factor

and yield. Thus, during these times, RASM presents a more favorable picture of company

operations than would a yield to unit cost comparison. (A declining load factor produces the

opposite effect and when that happens we may see less use of this term.) As this suggests,

RASM is not an independent variable in airline economics, so using it without looking at trends

in the two underlying components can lead to erroneous conclusions, particularly about the trendof passenger air fares.

DIVISION OF FARES:



Once the cost for a seat is f ixed by the company the cost is transferred to the customer The final

fares charged to the passengers include the following components:

y Basic fares

y Insurance

y

Inland Aviation Travel Tax (IATT).y Passenger Service Fee (PSF)

The basic fares include the operating cost incurred and the profit margin. The major constituents

of the operating cost in respect are the Aviation Turbine Fuel (ATF) the basic raw material for

this service industry, Navigation, Landing & Parking costs; Repair and Maintenance, manpower,

depreciation & Insurance and balance other expenses.

PRICING STRATEGIES

To understand pricing in the airline service industry, we should perceive the product unit to be sold as

an airline seat on an aircraft. Each seat is potentially a differentiated product appealing to different

market segments and it is priced differently. Pricing for each seat should be at, or above, the average

cost for that seat.

Alternatively, if the average cost per flight is determined on a given route or network, then the

focus must be on the average total revenue generated per aircraft. Airline decides price

considering the costs allocated across the unit of measurement be it unit seat or each

scheduled aircraft, and the break-even load factor for the flights.

Pricing can be categorized as

1. Uniform Pricing.

2. DiscriminatoryPricing.(Used in airline industry)

The Airline Industry have developed extensive tools to wring out as much revenue from a flight

as possible through discriminatory pricing the practice of charging different prices to

different consumers for similar products. Even though customers buy similar seats on an

aircraft they essentially are buying different products, because of the associated restrictions on

ticket. For the airline firm, while it is imperative to be profitable, the focus is to maximize the cost of the

flight revenue. Airlines focus revenue management to understand, anticipate and influence customerbehavior in order to maximize revenue from a fixed, perishable resource the unit seat that needs to

be sold.

The objective is to sell the right resources to the right customer at the right time for the right price by

applying suitable the pricing strategies as discussed next



PRICE DISCRIMINATION:

Airlines use several different types of price discrimination:

Bulk discounts to wholesalers, consolidators, and tour operators Incentive discounts for higher

sales volumes to travel agents and corporate buyers Seasonal discounts, incentive discounts, andvariance in price by location.

Timing of the purchase: Air price varies with time as shown below.

Airlines mostly practice the third degree of price discrimination that involves dividing customers

into segments based on some distinguishing characteristic, thereby allowing the charging of

different rates to different groups.

Segmentation of Customers:

The airlines traditionally divide their customer base primarily into customer groups - business

and leisure travelers. This allows an airline to vary the fare charged for a ticket based on the

elasticity of demand for that ticket in relation to the marginal cost of providing that ticket. The

more inelastic the demand for a ticket, the greater the premium charged for the ticket

above the marginal cost. The more elastic the demand (that is, the more sensitive the

market is to the price), the closer the price is to the marginal cost. The airlines use lower



fares to fill empty seats, continuing to generate revenue for the firm once the less elastic demand

has been fully met.

Thus high fares are charged to the business travelers, while the leisure segment customers

enjoy low fares. The airlines enforce the scheme by making the tickets non-transferable thus

preventing a tourist from buying a ticket at a discounted price and selling it to a business

traveler (arbitrage).

TRAVEL CLASSES

Carriers often accomplish price discrimination by dividing each cabin of the aircraft into a

number of travel classes for pricing purposes. Airlines typically have three travel classes as

shown in the above picture, although many airlines are eliminating first class replacing it with

business class as the highest level of service:

FIRST CLASS - generally the most expensive and most comfortable accommodations available.

BUSINESS CLASS OR EXECUTIVE CLASS - high quality, traditionally purchased by

business travelers

PREMIUM ECONOMY - slightly better Economy Class seating (greater distance between

rows of seats; the seats themselves may or may not be wider than regular economy class)

ECONOMY CLASS (ALSO K NOWN AS COACH CLASS OR TRAVEL CLASS) - basic

accommodation, commonly purchased by leisure travelers With in each travel class there are

often different fare classes, relating to ticket or reservation restrictions and used to enhance

opportunities for price discrimination. This is done by assigning capacity to various booking

classes, which sell for different prices and which may be linked to fare restrictions. The

restrictions help ensure that customers buy in the booking class

range that has been established for their segments.



The technological advances in computers and communications have enabled the airlines to

more closely match their fare prices to the actual demands of the traveling consumer. Everyone

on a flight pays a different fare, hence we can say that the airlines are approaching or at least

trying to accomplish the first degree of price discrimination however, it is very difficult to

determine the reservation price of each customer to achieve first degree discrimination.

CODE SHARING:

In the airline industry informal cartels are said to have been formed through the use of

computerized airline reservation systems (CRS) while more formal relationships are formed

through CODE SHARING. The Code Sharing is an arrangement between airlines to allow the

placing of their code on another airline's flight, thereby allowing their passengers the ability to

book through apparently only one airline.

The Indian airline industry must adopt code sharing in the future as they expand and venture

into newer markets so as to minimize the costs of operating services. By selling seats on a flight

operated by another carrier, code sharing enables an airline to make direct cost savings by

rationalizing services or establishing market presence on a route without actually operating on

it. Thus, both airlines may be able to save on fuel, labour and other variable costs, as well as

making more effective use of aircraft and other overheads.



Why not Uniform Pricing:

The benefits of differential and higher price being charged to business travelers can be

understood in the light of economic theory of long run demand-supply. Consider the example of

an airline that sells all its seats at uniform price with no benefits to business travelers. As such,

the fare charged to business travelers paying higher would be reduced, while the fare paid by

passengers currently paying less would have to rise to uniform level reflecting the end of the

existing cross subsidy of the low payments by those currently paying higher prices.

In such a situation it is most unlikely that in the long run, the leisure travelers would pay the

extra in order to continue traveling with the same airline concerned. Most leisure travelers

have high price elasticity, reflecting the fact that they are paying fares out of their own pockets.

Because of this a sudden steep increase in ticket prices, some customers would opt not to

travel at all. A much greater number will continue to travel but will choose a competitor airline

or substitute that offers attractive lower fare. Thus, overall, an airline changing over from such

a fare structure to one of uniform pricing might easily find a drop in the number of passengers

it carried.

The first reaction of business travelers to uniform pricing might be positive due to the reduction

of cross subsidy burden, however, in the long run, due to large number of drops in the number

of leisure travelers, the frequent business traveler will have to provide for the cover of the

higher proportion of the airline¶s increased overhead, variable costs which will in turn lead to

higher rather than lower fares.

Overall uniform pricing will result in frequently travelling business segment customer paying

still higher prices for a worse product than they received. Thus an airline¶s decision to adopt

differential pricing though results in higher unavoidable costs of implementing complex pricing

systems, it also brings significant benefits both to the airlines and its customers in terms of

profit and performance. It allows airlines to maintain their network and frequency, use larger

aircraft to achieve economies of scale (by lower seat-kilometer costs) leading to the variable

and overhead costs to be spread more widely and allowing fares to be lowered across all

customer segments.



Airlines have to be concerned with their break-even load factors, that is, the number of

passengers paying a sufficient fare to enable the airline to break even on the flight. If an airline

is selling seats above its average variable cost, but is not selling a sufficient number of seats,

then the airline continues to lose. In the rational economic view, airlines price their tickets

differently for each customer so as to meet their break-even load based on projections of

demand. This is done by projecting the expected minimum fill rate on the aircraft, and then

assigning prices to meet the break-even costs for that flight.

SWOT Analysis (If required)

Strength

Lower air fares

Tourism in India

Growing outbound travel in India

Growth potential Liberalization of sector

Modernization of non metro airports

Rising share of low cost carriers

Fleet expansion by state owned carriers

The opening up of new international routes by Indian government

Establishment of new airports and restructuring of old airports

Weakness

Poor infrastructure at airports.

Acute shortage of trained pilots and technicians.Stiff rules and regulations for operation.

High operational cost for airlines.

High security threats in the subcontinent.

Training infrastructure incompatible both in terms of quality and quantity.

Shortage of qualified instructors due migration to schedule operation.

Pressure on quality standard of inducted pilots.

Infrastructural constraints.



Opportunities

The number of air travelers is about 0.8 per cent of the population

India's civil aviation passenger growth, at 20 per cent, is among the highest in the

world.

India's civil aviation ministry expects 100 million passengers by 2020.

India anticipates doubling of passenger traffic over the next decade.Economic Growth

Vibrant middle class: Increasing Consumerism and Affordability common man

Under-penetrated markets

Growth in Tourism

Currently domestic passenger market is growing at 50%

Threats

Government Regulations; though the govt. is making changes in the regulations, it

needs to move at a much faster pace on this.

Aviation in India is over regulated and needs to free itself from govt. shackles.

Inadequate infrastructure.

Acute shortage of Pilots and maintenance engineers.

Security and safety.

Low profit margins and high operating costs.

Other faster means of transportation



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