indian civil aviation industry

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Indian Civil Aviation Industry

Presented by Group No. 2 & 3

September 07, 2012

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2ContentsIndian Civil Aviation Industry

Introduction Pricing Strategies Advertisement and Branding International and Domestic

Market Impact of Govt. policies

3Indian Civil Aviation Industry

Statistics: India is the ninth largest civil

aviation market in the world with a market worth of US $12bn

There are 4,200 airports deploying 27,000 aircraft

87 foreign airlines fly to and from India and 5 Indian carriers fly to and fro from 40 countries

Handles about 2.5 Bn passengers across the world in a year

Moves 45 Mn tons of cargo a year

Source: ICA Institute

4Current Scenario

Current Scenario: Indian aviation witnessed growth, both in

domestic as well as international passenger traffic - 18%

Operational losses despite growth in passenger traffic

Debt trapped industry - combined debt of Indian airlines companies was around USD 15 Billion as of March 2012

Negative sentiment observed from international Financial Institutions

The total loss for all the airlines FY12 was approximately USD 2.5 billion according to the Ministry of Civil Aviation.

The only carrier that remained a profit-making operation was low-cost IndiGo, which also hit the headlines by announcing an order for 180 aircraft from Airbus Industries worth as much as $15.6 billion.

They also reported the fullest aircraft in Jul-2012

5Cost

Environment India’s carriers today face a deteriorating cost environment on a number of fronts.

These include: Fuel prices: a high, and more

importantly sustained high, oil price environment. On average around the world, fuel accounts for about 34% of an airline’s cost structure. In India, because of high taxes, it accounts for 45%.Impact : Domestic airfares are set to rise further by Rs 500 due to the recent 7.6 per cent rise in the price of Aviation Turbine Fuel (ATF).

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Weak currency: further depreciation of the Rupee, which has already fallen more than 20% in the last 12 months, thereby pushing up the price of dollar‐ denominated costs such as fuel, aircraft leases, maintenance and offshore interest obligations

Airport charges: the regulator has already approved a 334% increase in charges at Delhi Airport and 500% at Mumbai. These additional levies likely to inc airfares by 15‐20%.

Service tax: the service tax on economy class airfares will change from a fixed amount to an ad valorem percentage.

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Pricing

8Pricing

What are the important factors influencing pricing decisions ?

Bodies Governing

The Ministry of Tourism and Civil AviationThe Indian Airlines Corporation The National Airports Authority The International Airports Authority of IndiaThe Air India Corporation

These are the bodies directly or indirectly influencing the process of making the pricing decisions.

9Pricing Strategies

1. Demand Based Pricing (Price Discrimination)2. Season Based Pricing (Monopolistic Competition)3. Competition based pricing (Oligopoly)4. Value based Pricing • Discounting• Odd pricing • Penetration Pricing

10Pricing Strategies

1. Demand Based Pricing

The pricing of air fares under this strategy is normally based on the demand

from the customers.

For example:

The person sitting next to u might not have paid the same price for the

ticket. If a person wanting to travel in Business class does not get the ticket

for the same when tried to book at the last minute, will travel in Economy

class paying more than what the other travelers must’ve paid.

The Pricing is never fixed and it is always Discriminated.


Price Discrimination

What do we mean by Price Discrimination ?

For simplicity we have assumed no fixed costs and constant variable cost so that MC = ATC.

a. Without price discrimination b. With discrimination

Quantity Quantity

MC = ATC MC = ATC

PricePrice

Profit = $2400

Profit = $3200


2. Season Based Pricing

The pricing of airline industry largely depends on seasons.

Characteristics for Monopolistic CompetitionLarge no of sellersDifferentiated ProductFirms compete on price, quality and marketingQuality is a significant product differentiating strategy (Marketing is must)


Monopolistic Competition

Firms in monopolistic competition maximize economic profits by producing where MR = MC and by charging the price for that quantity from the demand curve D . hence the firms earns positive economic profits because P > ATC.

Short Run Long Run


Competition based Pricing

This strategy focuses on the prices charged by other airlines.

For Example

Spice jet on completion of three years on May 23rd 2008 offered 3 lakh tickets just for Rs. 3 starting from July 1st to 21st September 2008 across its 18 destinations in India.

This type of pricing strategy can be broadly discussed with the help of Kind Curved Model in Oligopoly


Oligopoly

Features:Small number of sellersProducts may be similar or different Significant barriers to entryInterdependence among competitors (Decisions made by one firm affect the demand, price and profit of others in the industry)

Kink Demand Curve Model


Value Based Pricing

This strategy can be applied when the most important determinant of value to a customer is money.

Various Methods:Discounts:The service provider or marketer may offer discounts or price cuts to communicate to the price-sensitive buyers/ customers’ that they are receiving value for which their money is spent.

For example: Spice jet has a special group discounting scheme wherein groups of over 15 guests may be provided with consideration for special fares.


Odd Pricing

This is another strategy wherein the service providers offer prices at an amount which seems comparatively lower than the normal rates.

So in case on Spicejet. Instead of offering a ticket from Mumbai to Goa at Rs. 2400 they would offer at Rs. 2299. So, on looking at the figure the price difference seems to be more which in fact is just hundred and eleven rupees.Penetration pricing:

This is a strategy in which new services are introduced at low prices to stimulate trial and widespread use. This strategy is appropriate when the sale of tickets is price-sensitive.

Example: Jet Airways announced a new offer `Everyone can fly’

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Branding and Advertising

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The primary purpose in advertising is not simply to alter the demand curve, but to shift it upward and to the right.

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For an airline in a competitive market, an increase in its demand may also accrue from a shift of passengers away from its competitors.

Some is institutional, stressing the reliability, dependability, comfort, and convenience of air travel; some is almost purely competitive, stressing a sometimes nonexistent advantage, such as an alleged superiority of one aircraft or service over that of competitors.

Airlines competing for traffic on the same routes are compelled to advertise simply to maintain their share of the market.

Another intra-industry use of advertising may occur when airlines serve different places through a common city.

If the market for air transportation is carefully considered, this inter-industry effect shows great long-term promise for the airlines.

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The airlines often use other means to create psychological impact. They use advertising to stimulate the potential traveler by depicting glamorous vacations and exciting adventures in distant places, and they emphasize that these places are only a few hours away by air. This is to gain more business from other transportations.

The effects of advertising manifest themselves in both the short and the long run. In terms of intra-industry competition, an airline can at best only hope to use advertising as a means of increasing market share in the short run.

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Probably the most important effects of advertising to the airlines are its long-run influence on inter-industry market shares.

Continued advertising has a cumulative response. It produces an increased awareness of air transportation through constant exposure, and may create an identification of a particular carrier or carriers with a route, market, or region.

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Advertising must be successful in : reaching the airline's target markets, remind the customer of existing product features, routes

served, inform the customer about new or improved product

features, new routes being added and so on

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International and Domestic Market

33Competition in International

Market Indian aviation witnessed growth

internationally by 11.8% However, nearly 1/3rd of 32 million

international passengers to/from India, travelled on international carriers.

Reasons are – offering good onward connections via hubs in US and Europe, as the same are underserved by local airlines (CAPA report).

Debt trapped industry - combined debt of Indian airlines companies was around USD 15 Billion as of March 2012

Industry also faces negative sentiment observed from international Financial Institutions due to Government restrictions, taxes etc.

34Competition in Domestic Market In early 2000 there were just 3 major

carriers in the Indian Civil Aviation Industry – Indian Airlines, Jet Airways and Air Sahara

The Airline industry too witnessed rapid growth which led to the emergence of new players such as Air Deccan, Indigo, Go Air, Paramount Airways, Spice Jet etc

This led to significant price reduction and increased competition and increase in overall passenger traffic.

This increased and intense competition coupled with high cost of operations, led to significant operating losses for a significant majority of the airlines, which led to a spate of consolidation in the Industry– Air Sahara was acquired by Jet Airways

and subsequently renamed as Jet Lite– Air Deccan was acquired by UB Group

and merged with Kingfisher Airlines– Merger of Indian Airlines and Air India

35Competition in Domestic Market

Operators such as Paramount have stopped operations given the continued losses incurred from operations

Kingfisher Airlines is also currently facing significant debt pressures coupled with operating losses

The only carrier that remained a profit-making operation was low-cost IndiGo, which also hit the headlines by announcing an order for 180 aircraft from Airbus Industries worth as much as $15.6 billion.

They also reported the fullest aircraft in Jul-2012

36Air Passenger Traffic : International and Domestic

37Air Freight Traffic : International and Domestic

38Future of Indian Aviation

International markets:– Increasing financial capability of the considerable middle

class population– Increase in levels of expendable income– Positive demographics– Rising ambitions of middle class– Quick economic progress– Lower levels of penetration

39Future of Indian Aviation

Domestic markets:- Indian domestic capacity growth of 7-8% in FY2012/13, traffic to grow 8-10%- India’s airlines expected to post a combined loss of USD1.3-1.4 billion- Jet Airways to prosper; major aircraft order expected- Kingfisher Airlines revival dependent on foreign airline investment- Serious cost challenges- continued dithering over foreign ownership- government leadership needed more than ever-government policy to introduce FDI in domestic airlines.

http://centreforaviation.com/profiles/airlines/jet-airways-9w

http://centreforaviation.com/profiles/airlines/kingfisher-airlines-it

40Benefits of Foreign Direct Investment in the Airline Industry

The Civil Aviation Ministry has been considering allowing up to 49% equity investment by foreign carriers in domestic airlines

Key Benefits for the Indian Aviation Industry– Provide the much required capital to the domestic aviation

industry reeling under the pressure of mounting losses and rising debt burden

– Help bring global expertise and best industry practices over the medium term

Key Benefits for the Consumer– Increased competition as new players could enter the market

and offer more alternatives potentially reduce tariffs– Improve customer service standards

Key Benefits for the Foreign Airlines– Provide entry into one of the fastest growing aviation market

globally – An opportunity to establish India as their hub for connections

between US/Europe and South-East Asian countries

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Government Policies

42Overview of Indian Aviation Policy

1953 – Govt Nationalized the Airlines Via the Air Corporation Act, 1953 Birth of Indian Airlines & Air India.

1986 – Private Sector Players were granted permission to operate as Air Taxi Operators Air Sahara, Jet Airways, Damania Airways, East West Airlines, Modiluft and NEPC Airways.

43Overview of Indian Aviation

Policy

1994 – Govt of India revoked the Air Corporation Act.

1995 – Govt granted scheduled carrier status to six private air taxi operators. But only four operated: Jet Airways, Air Sahara, Jagsons and Spicejet (previously operated as Modiluft).

44Current Aviation Policy

FDI in aviation allowed up to 49% but for companies other than airline companies (invest).

FDI up to 74% allowed for scheduled and cargo airlines. FDI 100% allowed via the automatic route for the green field

airports. Foreign Investment up to 74% is permissible. Private Investors allowed to establish general airports and

captive airstrips – distance of 150kms Tax Exemption - 10years

45Union Budget 2012-2013 Impact On The Aviation Sector

ECB & Custom Duty – healthy impact on Aviation Industry in India.

ATF – “Declared Goods” Airlines allowed to import ATF – as

“Actual Users” ECB allowed for funding working capital

requirements up to US $ 1 billion – a year.

Custom duty from 14% to 8% - ATF Custom duty on some items NIL

46Conclusion

Indian aviation sector in low-growth phase but long-term prospects remain positive

Domestic traffic in India has been flat in 2012 amid exceptional circumstances in the market, with Kingfisher Airlines and Air India both severely curtailing capacity amid strike action and financial woes.

CAPA estimates that domestic passenger traffic will grow by 8-10% in FY2012/13. Much will depend upon the impact of oil prices and other input costs on airfares.

The short-term cost and regulatory environment remains very hostile. While the Indian aviation sector is now in a low-growth phase, long-

term fundamentals remain positive. India is poised to emerge as the world’s third largest aviation market before 2020 with airport traffic forecasted to reach 450 million passengers (360 million domestic and 90 million international) along with 6.5 million tonnes of cargo by 2020.

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Thank You!Abha Mishra - 01Ajay Goyal - 04Gulistaan Dumasia - 18Jimit Salot – 21Sachi Agarwal - 41Sherly Dsouza - 47Yuvraj Tandon – 59Rashi Kapur - 39Neha Kumar - 29Nitya Murti - 31Sonal Rajadhyax - 50