aviation economics

8/3/2019 Aviation Economics

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Determinants of Market Share of Firms in

the Airlines Industry in the Domestic Sector

Project in Micro-Economics

Under Prof. H. Panda

Presented By:

Shanker Mohan (PGP27380)

ShiwangiSahu (PGP27381)

Shreeya Roy (PGP27382)ShreyaGarodia (PGP27383)

Soumo Deep Saha (PGP27384)

Subhrajit Chakraborty (PGP27385)

Sumit Singhal (PGP27386)

Suraj Shidaganal (PGP27387)

Sushant Singh (PGP27388)


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Introduction .................................................................................................................................................. 3

Major players in the Indian aviation industry ............................................................................................... 3

Kingfisher Airlines ..................................................................................................................................... 3

Jet Airways ................................................................................................................................................ 4

Market Structure and Implications ............................................................................................................... 6

Indian Aviation Market a differentiated Oligopoly .................................................................................... 6

Pricing Mechanisms ...................................................................................................................................... 7

Market Equilibrium through the Cournot Model ......................................................................................... 8

Factors determining market demand ........................................................................................................... 8

The Potential Market in India ................................................................................................................... 8

Elasticity of Demand ................................................................................................................................. 9

The Pricing Factor ................................................................................................................................... 10

How the prices are derived in a highly competitive market ............................................................... 10

Advertising .............................................................................................................................................. 13

In-flight Services ...................................................................................................................................... 16

Punctuality .............................................................................................................................................. 18

Market Demand and Supply (Charts).......................................................................................................... 21

CONCLUSION ............................................................................................................................................... 22

REFERENCES ................................................................................................................................................ 23

Table of Contents


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Introduction

India is one of the fastest growing aviation markets in the world. The Airport Authority of India (AAI)

manages a total of 127 airports in the country, which include 13 international airports, 7 custom airports,

80 domestic airports and 28 civil enclaves. There are over 450 airports and 1091 registered aircrafts in

the country. The genesis of civil aviation in India goes back to December 1912 when the first domestic airroute between Karachi and Delhi became operational. In the early fifties, all airlines operating in the

country were merged into either Indian Airlines or Air India. And, by virtue of the Air Corporations Act

1953, this monopoly continued for the next forty years.

The Directorate General of Civil Aviation(DGCA) controlled every aspect of aviation, including granting

flying licenses, pilots, certifying aircrafts for flight and issuing all rules and procedures governing Indian

airports and airspace. Finally, the Airports Authority of India (AAI) was assigned the responsibility of

managing all national and international airports and administering every aspect of air transport operation

through the Air Traffic Control.

In 1990s, aviation industry in India saw some important changes. The Air Corporations Act was abolished

to end the monopoly of the public sector and private airlines were reintroduced. With the liberalization ofthe Indian aviation sector, the industry has witnessed a transformation with the entry of the privately

owned full service airlines and low cost carriers. In 2006, the private carriers accounted for around 75%

share of the domestic aviation market. The sector has also seen a significant increase in the number of

domestic air travel passengers. Some of the factors that have resulted in higher demand for air transport

in India include the growing middle class and their purchasing power, low airfares offered by low cost

carriers like Air Deccan, the growth of the tourism industry in India, increasing outbound travel from India,

etc.

Increasing liberalization and deregulation has led to an increase in the number of private players. The

aviation industry comprises of three types of players:

Full cost carriers Low cost carriers (LCC)

Other start-up airlines

It is a phase of rapid growth in the industry with estimated growth of domestic passenger segment at 50%

per annum. This has led to intense price competition due to which full service carriers like Jet Airways, Air

India are giving discounts of up to 60-70% for certain routes to match the new entrants' ticket prices. The

customer has thus gained enormously as a result of liberalization of the sector.

Major players in the Indian aviation industry

Kingfisher Airlines

Kingfisher Airlines was a relatively late entrant to the airlines market and started its operation in May 2005

as a budget carrier in India. Within the first 6 months of its launch, KFA managed to take 6% of the

market share in domestic air travel. It has about 20% of the domestic market share currently. Key

strategies followed by Kingfisher to lead the air transport industry were:


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Launched Kingfisher Express to tap into Low Cost Carrier sector of domestic airlines

Provided best service through world class interiors, and in-flight entertainment systems

Came up with only one class to combine Business class experience into economy class fares.

This also helped in freeing up more space as compared to other low cost carriers

Increased comforts through more leg room and bigger seats.

Kingfisher Airlines low cost class on domestic routes is flown under the name of Kingfisher Red. It was

formerly owned by Air Deccan but after the merger with Kingfisher was renamed to Kingfisher Red.

Kingfisher Red operates flights to about 64 varied destinations across India. Important destinations

covered by the airline include Delhi, Jaipur, Mumbai, Bangalore, Srinagar, Ahmedabad, Ranchi, Kolkata,

Guwahati, Bhopal, Hyderabad, Goa, Chennai, Coimbatore, and Port Blair. Operating about 337 flights

daily, Kingfisher Red is gaining popularity owing to its scheduled flights; reach to important destinations,

and classy but cheap in-flight services. In spite of being a budget airline, Kingfisher Red ensures

customer satisfaction and comfort. Snacks and beverages are served aboard the airline as part of

affordable in-flight meal services. Reading materials are also available, which includes a special edition of

Cine Blitz published exclusively for the carrier and a fun-filled magazine from Disney.

The airlines strategy of cutting into the market share includes providing more services by increasing thenumber of routes covered. They intend to add single cabin aircrafts to the fleet in order to invest in a

lesser amount of initial fixed cost to enable more passengers converting to Kingfisher Red. As compared

to other services Kingfisher provides more in-flight services including the in-flight entertainment and free

meals.

Kingfishers strategies to balance the financial decrease caused by low cost services are as below:

Quick Turnaround: Aircrafts are utilized more often by not using the hangar for too long. This

helped reduce the capital and crew costs involved.

High Frequency: Routes which had the maximum number of demand were flown in higher

frequency. This helped in targeting the high demand in these areas as well as promoting loyalty

to Kingfisher brand. Lean Staffing: In order to keep costs down and ticket prices low, they followed a policy of

maintaining a low aircraft to employee ratio.

Reduced Expenses on Cabin crew: Inspections and cleaning stuff were kept minimal.

Utilization of aircrafts: The smaller models were maintained for the regional routes while the

airbuses were used for the routes with higher demand.

In all by cutting down rates on all domestic sectors, Kingfisher Red is a preferred and accepted option for

air travel because of their luxurious on-board facilities and their services on ground.

Jet Airways

Jet Airways is India's largest airline and the market leader in the domestic sector. It operates over 400flights daily to 67 destinations including 15 international destinations.The first private Indian carrier to fly

to international destinations, Jet Airways operates daily international flights to Kathmandu, Singapore,

Kuala Lumpur and London (Heathrow) among others.It has interline agreements with 126 international

airlines which allow passengers to use interline documents on Jet Airways for their travel.

Buyout of Air Sahara by Jet Airways: Jet Airways attempted to takeover Air Sahara on 19 January

2006, offering US$500 million in cash. Market reaction to the deal was mixed, with many analysts


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suggesting that Jet Airways was paying too much for Air Sahara. The Indian Civil Aviation Ministry gave

approval in principle, but the deal was eventually called off over disagreements over price and the

appointment of Jet chairman Naresh Goyal to the Air Sahara board. Following the failure of the deal, the

companies filed lawsuits seeking damages from each other.

A second, eventually successful attempt was made on 12 April 2007 with Jet Airways agreeing to

pay $340 million. The deal gave Jet a combined domestic market share of about 32%. On 16 April 2007Jet Airways announced that Air Sahara will be renamed as JetLite. The takeover was officially completed

on 20 April, when Jet Airways paid 400 crore.

In October 2008 Jet Airways and rival Kingfisher Airlines announced an alliance which primarily includes

an agreement on code-sharing on both domestic and international flights, joint fuel management to

reduce expenses, common ground handling, and joint utilization of crew and sharing of similar frequent

flier programs.

On 8 May 2009 Jet Airways launched its low-cost brand, JetKonnect. The decision to launch a new brand

instead of expanding the JetLite network was taken after considering the regulatory delays involved in

transferring aircraft from Jet Airways to JetLite, as the two have different operator codes. The brand was

launched on sectors that had 50% or less load factor with the aim of increasing it to 70% and above. Jetofficials said that the brand would cease to exist once the demand for the regular Jet Airways increases.

Consolidation of Indian Aviation Sector

Jet Airways takeover of Air Sahara and rebranding it as JetLite has resulted in the combined entity

having a domestic market share of approximately 32%, making it the largest airline group in the country.

The merger has resulted in potential cost and efficiency gains through network optimization, operational

rationalization and fleet simplification. It also provides the group with an opportunity to segment the

market more effectively, as well as access to pilots, engineers and valuable airport slots.

The Centre for Asia Pacific Aviation last year predicted that consolidation of the Indian airline industry is

necessary and inevitable as a second (but not final) phase of domestic Indian airline evolution. The

financial realities of the sector are becoming more visible, as it struggles in the absence of pricing power.In the financial year ended 31-Mar-07, Indian carriers have posted combined losses of USD400-500

million. Air Deccan alone posted a loss of USD53 million for the quarter ended 31-Mar-07, on revenue of

USD108 million a net margin of -49%.

The ultimate outcome of the merger has been to usher in more consolidation down the line (Kingfisher

Airways taking over Deccan Airlines), which resulted in restoring some market discipline as market power

shifts to fewer stronger players. This is certainly a strategy which Jet will have considered.
http://en.wikipedia.org/wiki/Indian_rupee_sign


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Market share of various operators

Market Structure and Implications

The aviation industry in India, especially with regard to passenger airlines, follows a strictly oligopoly-type

structure with the characteristics.

1. An industry dominated by a small number of large firms (see market shares, above)

2. Firms sell either identical or differentiated products (the only differentiation here being in service

quality and frills offered), and

3. The industry has significant barriers to entry (which holds true both with respect to regulations

and huge capital investment required)

One sees the following characteristics with respect to the Indian passenger airlines market

Few number of firms contributing to majority of the market share Products are differentiated in terms of service quality and offerings

MR=MC

p>MC

Entry Barriers

Firm is a price-setter

Long run profit >= 0

Strategy dependent on individual rival firms behaviour

Indian Aviation Market a

differentiated Oligopoly

Each seller in an imperfectly competitive market faces

a negatively sloped demand curve for his product,

permitting him some control of the price of his product.

In an oligopoly, a few firms produce the same product,

while in monopolistic competition, many firms produce


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differentiatedbut similar products. In a differentiated oligopoly, a few firms produce products different

enough for each firm to have its own downward sloping demand curve. As with a perfectly competitive

firm or a monopoly, the differentiated oligopoly firm produces at a profit maximizing level of output where

marginal cost equals marginal revenue. The firm finds the price it will charge customers at the profit

maximizing level of output (Qm) from the demand curve, and sets price to P m. As we can see, the firm is

earning economic profits since price exceeds average total cost at the profit maximizing level of output.

Pricing Mechanisms

Price and quantity are determined by

the interaction of demand and supply in

the market. However, given the large

number of buyers, firms can decide

prices at which they will sell tickets. In

fact, in the airlines sector, firms go in for

third degree price discrimination and

segment the market, charging a higher

price to the market with a relatively

inelastic demand (such as fares

between business and economy class

travelers, or between emergency travel

and leisure travel by providing apex fares). The low cost airlines follow this different pricing strategy.

Customers booking early with carriers such as Air Deccan will normally find much lower prices if they are

prepared to commit themselves to a flight by booking early, on the justification that consumers demand

for a particular flight becomes more inelastic the nearer to the time of the service.

The term revenue management is commonly used to describe most aspects of airlines pricing andseat-inventory control decisions; but in reality, revenue managers primarily practice seat-inventory control.

Formally, revenue management describes a process of setting fares for each route (origin and destination

pair) and each set of restrictions (nonstop, time-of-day, day-of-week, refundable, advance purchase, first

class or coach, and Saturday-night stay over) and limiting the number of seats available at each fare. In

the language of economics, revenue management increases airlines profits in three ways

Implements peak-load pricing.

Implements third-degree price discrimination. That is, fare restrictions screen customers and

segment them by their sensitivity to price and potentially by their demand uncertainty. For

instance, Indian Airlines apex fares (for booking one week or three weeks in advance).

Implements an inventory control system for coping with uncertain demand.

Limited Entry

Virgin Group founder Richard Branson once famously said: "The safest way to become a millionaire is to

start as a billionaire and invest in the airline industry."


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The mortality rate in the airline business is very high. That's equally true for any low-cost airline model. It

requires adequate staying power to buy aircraft and take losses in the initial years. Experts say it takes

nearly $60 million-70 million (Rs 270 crore-315 crore) to float a full-service airline.Entry costs are not

recoverable and incumbents have the ability to respond quickly to entry of a new competitor. Capacity

constraints, absence of freedoms to compete on a route, investment constraints, and restrictions on

codesharing can all be important barriers to entry.

Market Equilibrium through the Cournot Model

The Cournot model assumes that each firm takes the

output of the other firm as given. If Indian Airlines

output is assumed to stay the same, Jet will maximize

profits by setting MR=MC. The result is shown. In the

Cournot framework the equilibrium is at the intersection

of the two reaction functions. These are just the profit-

maximizing conditions rearranged.

The revenue of both a competitive firm and of a

monopolist depends only on the firm's own output: for a

competitive firm we assume that the firm's output does

not affect the price, and for a monopolist there are no

other firms in the market. For a duopolistic, however,

revenue depends on both its own output and the other

firm's output.

We conclude that the firms' outputs and the price are different in Cournot-Nash equilibrium than they are

in a competitive equilibrium. As the demand curve slopes down, price exceeds marginal cost, so that, as

for a monopoly, the total output produced by the firms is less than the competitive output. An implicationis that, as for a monopoly, the Nash equilibrium outcome in a Cournot duopoly is not Pareto efficient.

Factors determining market demand

The Potential Market in India

While formulating the national strategy one must remember a few aspects of Indian Passenger Aviation

Market -

India is a large potential market for corporate and luxury travellers.

India is also a low fare market.

India also has largely blocked but significant markets in the north in China.

Unlike other major travel hubs in the region, India is an original market both for originating as well

as turnaround traffic.

India is also a potential transit hub in more than one direction.

In Aviation circles India has become Asia's hot growth market and in the words of SIA CEO it is, along

with China, one of the two "locomotives" for growth in the continent. Thus to enter in to an open skies

agreement when India has nothing more to offer than land for airports and the so called cheap blue


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and white collar labor will tantamount to accepting a second class economic citizenship in the comity

of nations.

The demand drivers of the airline industry:

Ticket prices

Passenger income levels

Access to and suitability of other modes of transportation

Frequency of services

Safety

Random factors such as terror threat

The supply drivers of the aviation industry

Behaviour of competition

Government regulation

Cost of resources (fuel, labour, maintenance, technology)

SWOT Analysis:

Strengths:

1. Creation of new airports, revamp of older ones and modernization of major International airports

2. Low fares due to immense competition

3. Large number of Low cost Carriers in the market and their increasing share

4. Growing Tourism market in India

5. Airlines flying to new destinations

Weaknesses:

1. Shortage of trained personnel including Pilots and trainers

2. High Operational Costs for the Airlines

3. Security threat from anti social elements and terrorists

4. Infrastructural constraints and lack of proper infrastructure at many airports

Opportunities:

1. Civil aviation passenger growth at 20% is one of the highest in the world

2. Anticipation of doubling the number of passengers in the next decade

3. High disposable income for the first time flyers and Indian Middle Class in general

4. Under penetrated markets; huge potential for expansion

5. Growth in Tourism

Threats:

1. Low Profit margins and high operational costs

2. Over regulated market with a lot of intervention from the Government

3. Shortfall in infrastructure with high time for construction and revamp activities

Elasticity of Demand

The airline industry is an extremely unstable industry because it is highly dependent upon current market

conditions. Events such as inflation, terrorist attacks, and the price of oil have greatly influenced the


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demand for airline tickets throughout the years. Competition consistently affects the price of airline tickets

because it gives the customer other options. Substitutes that are existence is traveling by train, car, or

avoiding travel whenever possible. Customers have resorted to all named substitutes during turbulent

times in our economy. The elasticity of demand is greatly affected by the customer's purpose for travel.

Airline customers typically fly for business or pleasure. With the wave of technology, a large percentage

of business travel has been eliminated to conserve spending.

The Pricing Factor

The following factors affect pricing decisions in the aviation industry:

Survival: Airlines plagued with over-capacity, intense competition, or changing consumer wants

pursue survival strategies.

Maximum current profit: Many Airlines try to set a price that maximizes their current profits and

delivers a high return on investment.

Maximum market share: In this, Airlines believe in higher passenger volume that will lead to

lower costs per passenger and higher long-run profits and hence maximize their market share.

Product-Quality Leadership: Many firms pursue the ambition to be product-quality leader.

Traditional ways of setting prices:The legacy carriers have long had an exotic, almost incomprehensible

pricing system. However, these days, with the Internet allowing travelers to shop for the cheapest tickets

easily, and low-cost airlines offering uncomplicated set prices, traditional carriers have to follow suit or risk

losing more and more passengers.Ticket prices are also determined by prices of fuel which consists of

75% of the operational costs of an airline.

Dynamic Pricing

JetLite tries to sell maximum number of tickets through dynamic pricing. The tickets are priced according

to the availability and demand of tickets. In airline industry, the marginal cost of flying an additional

customer is very low. Thus, JetLite tries to maximize its revenue by selling the maximum number of

tickets possible. It earns its revenues not only from the sale of tickets but also from the sale of food itemsand any other service for which it charges over and above the price of the ticket.

How the prices are derived in a highly competitive market

Consider the cost function of an airline (total cost versus passengers carried between two points). There

is a small increase in cost for each additional passenger and a big discontinuous increase when an

additional plane has to be put into service. An incorrect interpretation of the marginal cost-pricing rule

would suggest that for economic efficiency the passengers should be charged the negligible cost of

carrying one more passenger on a partially filled plane or the enormous cost of putting another plane into

service. The correct interpretation of the marginal cost pricing principle is that for economic efficiency the

passengers should be charged the average cost per passenger of another planeload of passengers.

We can divide the costs of flying into three parts-

Internal factors

External factors

Government policies

Airlines use a formula of combining their yield and inventory costs to determine ticket prices. While it is

imperative to focus on the idea of being profitable, the focus is to maximize the cost of the flight revenue.


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One huge factor that encourages an increase in the cost of tickets relates to a customer ordering a ticket

close to the departing date, define this as a risk factor because they need to make up for all unsold seats.

A high percentage of the revenue is dedicated to overhead costs such as fuel and labor. When a ticket

price is higher with one airline than the other, the customer interprets this as being an excessive cost. The

demand is greatly affected by the external market conditions that are in existences such as taxes; by law

it is legal to add taxes to airline tickets since they are considered a luxury good.

Impacts of external costs

In many cases external costs can affect the lifespan of many airlines. The airlines are dependent on

customers to buy their tickets in order to survive the external cost of fuel, labor, and advertising. The

external costs are set depending on the current condition of the market. According to FRBSF Economic

Letter (2002), over the last 20 years airlines such as PanAm, Texas Air, and TWA have gone out of

business. Externalities such as tragedies (in some cases crashes) as well as over-head costs left these

airlines in turmoil. Two notable airlines United and Delta went bankrupt, but they managed to climb out by

making changes. Delta and United escaped bankruptcy by cutting back on employee pay, pension plans,

and in-flight meal service. The rate of transaction affects the livelihood of current employees, retirees,

customers, and each individual airline.

Effect of negative and positive externalities

Many airlines fail to survive when negative externalities strike the airline industry directly. Positive

externalities allow people to take future changes for granted and unrealistic expectations are developed.

The elasticity of demand is determined by competition, which would be other sources of transportation

such as cars, buses, boats, and trains. The current market conditions affect the overall demand for airline

tickets and the base-price per ticket. Vulnerabilities that are existent in the airline industry are not realized

until a tragedy takes place.

Entry of new carriers and effect on market share

Even casual observers of the airline industry are familiar with the significant consumer benefits that can

result when an upstart airline enters a market -- fares drop and capacity and frequencies increase,

sometimes dramatically. It is not unusual for a deep fare cut to double the demand for airline service on a

city pair. This not only confirms that competition is good for consumers, but also demonstrates that actual

competition enhances consumer welfare far more than the threat of potential entry.

It is not surprising that incumbent carriers respond to new entry. The combination of low fares and

increased demand may prompt an Incumbent to increase its own service. If it matches the entrant's fares

across the board, Incumbent may increase its capacity to handle profitable new traffic generated by the

lower fares; and if Incumbent only lowers fares selectively, Upstart may grow, perhaps eventually building

a competing hub and spoke network of its own. Either way, the consumer is better off. This is the essence

of the competitive process.

In some cases, Upstart's lower operating costs and high load factors allow it to survive and even prosper;

in other cases, too many passengers decide that the new lower fares offered by Incumbent, combined

with other amenities such as better schedules, frequent flier programs, passenger lounges and in-flight

service, are a better value than Upstart offers. The higher frequencies and network efficiencies of

Incumbent sometimes more than counterbalance the lower operating costs of Upstart; Upstart fails to


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maintain profitability and must exit. After Upstart's exit, Incumbent's fares and service offerings quickly

move back toward pre-entry levels, much to the chagrin of passengers.

The claims of predation that we find most credible involve not only price cuts, but also significant capacity

expansion by incumbents. Our starting presumption is that Incumbent's pre-entry schedules are optimal

for efficiently operating its network. And if the existing network is optimal, the added cost of carrying an

additional passenger on the existing network can be quite small.

Entry by Incumbent into a route it was not currently serving would seldom be a normal competitive

response to a rival. If the route were not profitable for Incumbent before Upstart entered, why would it be

profitable afterwards? On the other hand, expansion of capacity by Incumbent on a route it already serves

might be a normal response if the new entrant forced prices down enough to greatly increase demand.

It is quite evident that the low cost airlines have gained in terms of market share which substantiates the

above analysis.

Untapped opportunities

Under penetrated Market :Total Passenger Traffic 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

High Level of potential demand with growth in Indian economy Untapped Air Cargo Market

Air Cargo has not yet been fully taped in the Indian markets and is expected that in the coming

years large no of players would have dedicated fleets.

Break up of costs for any airline The following pie charts shows us the breakup of the costs faced by

any airline under particular heads like food, advertising & promotion, labor, etc. As can be seen from this

the highest cost faced by the airlines comes due to labor. Advertising and Promotion has only a small

percentage of 1.6% of the total expenses.

Indian Aviation industry is cyclical. Brands must be structured in such a manner so that they can

withstand the lean period and this cyclical nature. Maintaining core values are important.


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AdvertisingAdvertisement for the Indian Aviation Sector is done across various mediums. Television is not used that

frequently for the promotion in this industry but there are some exceptional advertisements that come up

in this space, the latest being the hot meals ad for Spice Jet on the TV. Primarily the ads are sent

across in the form of mailers or shown as part of space bought on the web pages. The promotions are

generally to bring out the new features being introduced by the airlines, new routes being introduced,promotional fares, new routes being operated, etc. Some of the advertisements have been included

below

This Air India promo was done to attract the customers to the low air fares on a particular International

Route. Indian customers are some of the most price conscious passengers in this world and promotionfor low fares attracts the customers a lot more than other features.

Similar to the Air India advertisement about low fare on International route, the above advertisement from

Spice Jet pulled in a lot of customers. This pricing strategy was specifically followed by Spice Jet when it

entered the market. It offered 9000 seats for 99 INR for the first 99 days. The result is obvious with

SpiceJet being one of the leaders in the LCC (Low Cost Carrier) category in the present scenario. The

focus on the fares is quite evident for the airlines in the LCC category, as this segment has been trying to

position itself as an alternative for people presently travelling in the Indian Railways AC segment. By

trying to focus on the fares Spice Jet did itself a world of good.

The advertisements are also based on the point of differences that the airline has when compared to the

rest of the industry. Specifically these ads are brought out as comparative study and try to show theairline in a higher category than its peers. One such advertisement by Spice Jet follows.


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The advertisements can also be based on the special deals/ packages offered to certain category of

passengers. Spice jet often promotes the free air tickets that it offers from time to time. Air Deccan

(previous avatar of Kingfisher Red) promoted its fares of Re.1, which was successful to generate huge

volumes for the airlines. Spice Jet has corporate deals and also has concessional fare strategy for

students. Jet Airways had a similar promotion for a student which has been given in the followingadvertisement.

For the Full Service category the ads are positioned on the service features and the added benefits. The

above ad from Jet Airways tries to show it in a different light from the competitors focusing on the fact that

what the others are going to do in future it is implementing it presently.


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Kingfisher used the following ad when it was about to introduce the Airbus A380 fleet in the country. This

not only brought to the notice of the customer that Kingfisher was the only player in India to use the new

jumbo jet but also attracted them to try it out as it was part of a contest.

Finally some advertisements can take a direct dig at the competition and bring out some hilarious results

as shown below.


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The airlines to boost their sales have also come out with some other promotional strategies. LCCs

generally have these promotional sales of merchandise as a part of in flight service (Indigo sells these

merchandise tagging them as lowest priced in the air). Airlines are also having tie ups with banking

institutions to issue co-branded credit cards, which offer added benefits to the customer in the terms of

ticket purchase and entertainment expense. Additionally there can be cash back options that can be

linked with these cards. Airlines also have frequent flyer numbers for their most frequently flying clients

and offer flying miles which can be redeemed when a certain number of flights/miles have been flown by

the client. All this is part of the advertisement and promotional strategy of any airline to increase sales

and market share in the long and short run of the business.

In-flight ServicesA crucial factor which governs the choice of one flight over another is the value a passenger gets for his

money. For two companies offering the same route using the same airplane the distinguishing factor

becomes the in-flight services involved. Since all these are included in the cost of flight, customers see

these services as added features for which they are paying for. Thus they consider the effective cost of

the actual flight to be relatively cheaper. Thus a twofold method of capturing the market is seen with more

comfort associated with cheaper effective prices. Full service airlines provide their passenger with many

attendant services like hot meals, frequent flyer programs, spacious legroom etc. While low cost carriersdo not provide all these facilities and work with the minimum number of air hostesses on the flight.

Removing business class, storage space for the meals and limited seat pitch (maximum inclination of the

seat) makes space for additional seats which can increase the seat capacity of the plane by 20%. All the

same the increasing competition in the airlines industry has caused operators to add their flight services

so as to attract the passengers to choose one service over the other.

In-flight services can be broadly classified into three:

1. Generic services

2. In-flight catering

3. In-flight entertainment

Generic Services

Airline industry is more than just a transportation service. Unlike other normal modes such as trains and

buses, customers tend to attach a lot of the importance on services rendered to them by the service

provider. This does not just limit to the services provided within the flight. It begins right from ease of

booking a ticket till the customer checks out of the airport. Smoothness of check-in process, efficiency

and accuracy of baggage handover, personal services provided at the airport all play an important role in

enhancing these services. Understanding the need to woo customers as early as possible, many airline

services have offered pick-up shuttles from locations to the airport for their customers. Online check -in

services are also offered to passengers so that they can reduce the delay spent on domestic travel. Since

most of these services are accounted as fixed costs, the fare charged to passengers can be distributed

and minimized. All these enhance the flying experience offered to the customers by low cost airlines.

In-Flight Catering

In-flight meals are the meals provided to on board customers prepared by the Airlines catering services.

The quantity and type of meal provided depends largely on the airline service, the time of the day and the

flight route. Recognizing that the time involved for domestic travel is less, most flight operators have

managed cost effectiveness by offering only optional meals which can be bought on the flight. In-flight

meals used to be provided to all customers for most airline services but considering the increasingly


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competitive slashing of prices, operators have reduced the number of flights which actually provide in-

flight meals for free. Passengers can now choose from a variety of items given in a menu on the flight.

These are generally priced at a premium and do not form a part of the actual ticket. The cost of using

domestic airlines to fly between cities has thus decreased.

In-flight Entertainment

Another in-flight service provided to attract customers is the entertainments provided on-board. These

include gift packets to passengers, on-board movie or radio services etc. Certain services provide

television screens attached to the seats which air a certain number of channels which the passenger can

individually choose. Kingfisher airlines provide portable earphones to all its passengers so that they can

enjoy this service. It leads the way to in-flight entertainment among Indian domestic airlines. At the same

time other services such as Indigo maintain the low cost by providing no in-flight entertainment.

The different levels of services as perceived by a customer are shown through a scale as represented

below:

In-flight services of some major operators are as below:

Air India Express and Indian Airlines: Despite being a low-cost airline, Air India Express offers in-flight

services like free standardized meals and limited on-board entertainment facilities. Indian Airlines offers a

wide variety in its in-flight meal menus, with a multi-cuisine approach to cater to the predilections of the

range of passengers.

GoAir: GoAir offers travel in two classes, namely Economy Class and Business Class. Passengers

travelling in Business Class are served meals on-board, while Economy Class travelers can purchase

meals on-board. Mineral water is served complimentary to passengers travelling in both classes.

Indigo:To keep fares always affordable, Indio has designed a clean, comfortable and reliable airline

without costly frills that put upward pressure on fares. Indigo offers an assortment of vegetarian/non-

vegetarian sandwiches, flavored cashew nuts, cookies, soft drinks and juices for sale onboard. Drinking

water is provided free of charge on all its flights to all customers. Food can also be carried on board, and

the allowed food items include: cold snacks, non-alcoholic drinks, snack bars and biscuits.

Jet Airways: JetScreen is Jet Airways' award-wining in-flight Entertainment system. JetScreen offers a

virtual feast of entertainment for passengers with options like movies, latest music albums, award-winning

TV shows and games. Jet airways offer the in-flight magazine JetWings with an in-flight shopping

catalogue called JetBoutique.

Kingfisher: The airline offers several unique services to its customers. These include: personal valet at

the airport to assist in baggage handling and boarding, exclusive lounges with private space,


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accompanied with refreshments and music at the airport, audio and video on-demand, with extra-wide

personalized screens in the aircraft, sleeper seats with extendable footrests, and three-course gourmet

cuisine.

Punctuality

The first factor that a consumer experiences when he goes in a flight is the on-time performance of the

airlines he has chosen. Punctuality is one of the major competitive factors between airlines as it directly

affects consumer preferences. The main objective of using a domestic flight instead of a train in India is to

save time. People generally take flights for urgent work like seminars, meetings, etc. And if a flight gets

late, it upsets the whole agenda of the travellers. Punctuality depends on the following factors

Network planning and control

Aircraft availability

Ground operations and departure process

Affect of Unscheduled Maintenance on Punctuality

Any lag in these processes might lead to a considerable delay in the flight schedule. These processes

should be efficient and systematic so that these may not affect the quality of service of the airlines. The

other dimension to punctuality is the cancellation of flights, many reasons are involved

Technical Operational

Commercial

Weather


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Cancellation rates of the major domestic operators

Reasons for cancellation in domestic airlines

Delay costs and punctuality trade-offs

There are two major trade-offs involved in acknowledging costs of punctuality-

Punctuality vs. Turnover and yield

Punctuality vs. cost and equipment utilization

Punctuality vs. Turnover and yield

Poor operational performance in maintaining traffic at peak hours, short connecting times and tight

scheduling may result in loss in revenue maximization in the long run.


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Punctuality vs. cost and equipment utilization

One of the most obvious and easy measures to increase punctuality is to remove bottlenecks and add

capacity (e.g. the number of aircraft, longer block times, and more ground staff and equipment). Without a

solid quantitative business case, based on analyzing potential savings from avoided delay costs, it is

unlikely that a controller will support such ideas, especially as most of the savings are variable while the

capacity increase builds up fixed costs.

REPORT FROM DGCA

Performance of the various operators as per DGCA report

Reasons for delay as given by DGCA

Few years back, the government of India had announced plans for allowing domestic airlines to expand

their international operations to more destinations. For past few months, there have been positive

developments in air transport volumes. International passenger load factors rebounded by 0.8 percentage

points to75.8%. Freight volumes improved by 1.2% and passenger volumes were up by 1.8%. These


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might help to alleviate some of the pressure on profits from continued high fuel prices. But there are risks

associated with political unrest in the Middle East and the European currency crisis. Such happenings in

foreign countries affect the earnings of airlines in India, thereby affecting their market share in the

industry.

The International Air Transport Association announced traffic results for May 2011 which showed an 8%

increase in international traffic and a 4.8% increase in domestic traffic for a consolidated increase of 6.8%in passenger traffic over May 2010. This is 4% higher than the beginning of the year. Freight traffic

showed a drop of 4% against the post-recession peak of the re-stocking cycle in May 2010. However,

recent months show a renewed upward trend with freight volumes 2% higher than the start of the year.

Market Demand and Supply (Charts)


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CONCLUSION

The purpose of this project was to study the domestic market for operators in the Indian aviation industry

and understand the factors that drive their market share. The market share is dependent on many factors

such as the ticket pricing considering the income level of passengers, frequency of service and

accessibility/ suitability over other modes of transport as well as the brand of the product. But afterstudying all these factors, the underlying influence seems to be only one the airline operators main

focus area being not only in providing transportation but also varied in-flight services which is the

differentiating aspect for the experience that a customer takes back for the service that each operator

provides.

In the Indian airlines industry, Kingfisher and Indigo are the market leaders holding 20% of the market

each. Following close behind is Jet airways with 18.5%. The key differentiating factor for Kingfisher is the

type of services provided (for e.g., live TV) as well as the brand image that they have created (so that the

common man associates flying with Kingfisher airlines). For Indigo, the key factors have been the

punctuality and frequency of service. Indigo is a favorite, mostly, among corporate customers as it values

their time through completely non existent delays. The market share that Kingfisher enjoys has fairly

remained constant over a period of time and it has been on a rise for Indigo. However, for Jet Airways this

share has been on a slight decline. Jet airways had been one of the first players in this industry because

of which it holds a high market share. But with the introduction of more LCC operators in the market, it

has been losing its share. Similarly, Indian Airlines has also been losing out on its market share because

of high ticket prices and relatively lower value delivery. Jet Lite maintains a relatively smaller but constant

share of 7.6% whereas it has been on the rise for Spice Jet and Go Air.

The domestic sector is growing at a rapid pace and is expected to increase over the next 20 years at 12-

14% rate. The players are primarily targeting to acquire a major share of this market in order to remain

dominant in long term and that is a reason in spite of being oligopolistic in nature some airlines have

registered losses over the last few years.


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REFERENCES

1. Competitive Strategy for Low Cost Airlines - Hongwei Jiang RMIT University, Australia

2. Aspirations, Enterprise Strategy and Sustenance of a Start-up in a Competitive

Environment:

3. A Study of Developments in Air DeccanM. R. Dixit, Sunil Sharma and Amit Karna

4. Airports and airlines sector focus article

5. www.livemint.com

6. www.theindusview.com

7. http://www.centreforaviation.com

8. www.airfleets.net

9. http://www.indiainternalflights.com/

10. Low-fare Airlines, (2004, July 8).Economist.com.

11. Official websites of major domestic airline operators.

aviation economics

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