economics aviation (2)

7/27/2019 Economics Aviation (2)

1/23

Managerial Economics Project

Topic: Airline Industry

Group Members:Nikhil Kele 24

Harshvardhan Chavan 77Nikhil Kasat 85Sanket Madavi 88Umesh Mahajan 89Rohan Jadhav 103


2/23

Agenda Indian Scenario

Methodology

Statistical Tools used: Regression

Analysis Findings from Survey : Validation of

Hypothesis

World Airline Industry Report Managerial Aspects

References


3/23

History of Airline Industry in India

Genesis on Feb 18, 1911

In 1932, JRD Tata launched the

TATA Airlines

In 1948, Air India International

came into being between Indian

Govt. and AIR India (TATA Airline)

The Indian Scenario


4/23

The Indian Scenario

1986: Private sector players permitted as Air taxioperatorsPlayers including Jet, Air Sahara, NEPC Sky liner,

East West, Modiluft etc. started service

1994: Private Carriers permitted to operatescheduled servicesSix operators granted license however

Only Jet and Air Sahara able to service

2003: Entry of low cost carriersAir Deccan, Spicejet, Go Air, Indigo


5/23

Medium Term Growth Forecast

India GDP: 10.2 % p.a.

Domestic Air travel: 20-25 %

WTTC Travel & Tourism : 8.8 %

Over the next 10 years

Characteristics


6/23

Air Passenger market up 12 %

Domestic Airlines have struggled with losses, debt andgrounded aircraft

India needs to add at least 15% to the current strengthof 400 aircraft

Indian carriers added 30 aircraft in 2011 but kingfishergrounded 20 planes fighting a debt of rs 1600 cr

Low cost carriers like Indigo, GoAir, SpiceJet to add 29carriers


7/23

The aviation sector contributes INR 912 billion (1.5%) to

Indian GDP.

INR 147 billion directly contributed through the output

of the aviation sector

INR 107 billion indirectly contributed through the

aviation sectors supply chain

INR 77 billion contributed through the spending by

the employees of the aviation sector and its supply

chain.

In addition there are INR 582 billion in catalytic

benefits through tourism


8/23

The aviation sector supports 8.8 million jobs in India.

276,000 jobs directly supported by the aviationsector

841,000 jobs indirectly supported through theaviation sectors supply chain

605,000 jobs supported through the spending bythe employees of the aviation sector and itssupply chain.

In addition there are a further 7.1 million peopleemployed through the catalytic (tourism) effectsof aviation.


9/23

26%

18%

19%

5%

13%

19%

Market Share

Jet Airways

Air India

Indigo

Go Air

SpicejetKingfisher


10/23

Few firms provide services different enough - in

terms of quality, frills offered, and frequent flyer

programs - for each firm to have some control

over the price of their service.

The strategy of each firm depends on the

behavior of rival firms.

Slight increase in passengers and especially

business class passengers

Aviation in Asia still attracting passengers mainly

in India and China


11/23


12/23

Drivers to Growth of the Indian Aviation Sector

Increase in Consumerism

Increasing Tourists Travel

Increasing Business Travel Entry of Low Cost Carriers

Untapped Market

Rising Disposable incomes

Rising Middle Class Population

Increasing Competition

Government Reform Measures


13/23

Issues of Concern

High fuel prices only a part of the problem

Rising Aircraft lease rentals a bigger issue

0

10

20

30

40

50

60

70

80

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

atf price in india(domestic) (in 000/kiloleter) domestic

atf price in india(domestic) (in

000/kiloleter) domestic


14/23

Mounting losses of the airlines

The new Ground Handling policy

High Aviation Turbine Fuel (ATF) prices

High airport charges

Shortage of qualified pilots and

technical manpower

Safety and security issues

Closure of old airports

Congestion at airports

High taxation

Issues of Concern


15/23

Traffic Enplaned Passengers RPK = Revenue Passenger Kilometer One paying passenger transported 1 kilometer Yield = Revenue per RPK Average fare paid by passengers, per kilometer

flown PDEW = Passenger trips per day each way A common way to measure OD marketdemand

Airline Demand = Traffic + Rejected DemandRejected Demand or Spill = Passengersunable to find seats to fly

Airline SystemWide Measures

E

(

o

u


16/23

Airline Supply ASK = Available Seat Kilometer One aircraft seat flown one kilometer Unit Cost = Operating Expense per ASK(CASK)

Average operating cost per unit of output

Airline Performance Average Load Factor (LF)= RPM/ASM Average Leg Load Factor (ALLF) = LF/ #

of Flights Average Network or System Load Factor (ALF)= RPM/ASMUnit Revenue = Revenue/ASM (RASM) Total Passenger Trip Time

Airline SystemWide Measures


17/23

Indian Domestic Traffic (RPK and ASK)

0

10000

20000

30000

40000

50000

60000

70000

80000

RPK(Mn)

ASK(Mn)


18/23

Indian Domestic Traffic (Passenger load factor)

0

10

20

30

40

50

60

70

80

90

Load Factor(%)

Load Factor(%)


19/23

Operating Profit = RPK x Yield ASK x Unit Cost(Revenue) (Operating Expenses)

Use of any of the individual terms as indicators

of airline success can be misleading

High Yield is not desirable if ALF is toolow Low unit cost is of little value if Revenues

are weak High ALF can be the result of selling alarge proportion of seats at low fares

Basic Airline Profit Equation

Q

Price


20/23

Airline Profit Maximizing Strategies

Intended Benefit Strategy Pitfalls

Cutting Fares/ Yields Stimulate Demand The price cut must generate a

disproportional increase in total

demand, elastic demand

Increasing Fares/Yields Increase Revenue The price increase can be

revenue positive if demand isinelastic

Increase Flights (ASK) Stimulate Demand Increases Operational Costs

Decrease Flights (ASK) Reduce Operational

Costs

Lower Frequencies made lead

to market share

losses and lost demand

Improve Passenger

Service Quality

Stimulate Demand Increases Operational Costs

Reduce Passenger

Service Quality

Reduce Operational

Costs

Excessive cuts can reduce

market share and

demand


21/23

Flight Leg (or flight sector or flight segment) Nonstop operation of an aircraft between A and B, withassociated departure and arrival times

Flight One or more flight legs operated consecutively by asingle aircraft (usually) and labeled with a single flightnumber

Route Consecutive links in a network served by single flight

numbers

Passenger Paths or Itineraries Combination of flight legs chosen by passengers in aOD market

to complete a journey

Airline Supply Terminology


22/23

Centre for Asia Pacific Aviation (CAPA) forecasts

that domestic air traffic will rise by 35%-40% till

2012

International traffic growth by 15%, taking total

market to 100 mn passengers by 2012

Govt. plans to invest US$ 10 billion to modernize

existing airports by 2012 Govt. is planning to develop around 300 unused

airstrips

Potential for Growth


23/23

Vision 2020 by the ministry of civil aviation to create

infrastructure to handle 280 mn passengers by 2020

Indian airports expected to handle more than 60 mn

domestic passengers and 3.4 mn tonnes of cargo perannum

Investment opportunities of US$ 110 bn envisaged upto

2020 with US$ 80 bn in new aircraft and US$ 30 bn in

infrastructure

A report by Ernst & Young says the maintenance, repair

and overhaul (MRO) can absorb up to US$ 120 bn worth

of investments by 2020

Potential for Growth

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