Service Sector Management Project:

Airline Industry

TY-BMS(B)

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Table of ContentsIntroduction to Service Sector Management.............................................................2

Introduction to the Airline Sector...........................................................................2-3

Airline Sector: Global............................................................................................3

History.................................................................................................................3

Recent developments..........................................................................................3

Future Outlook....................................................................................................3

Airline Sector: India............................................................................................3-4

Classification & Segmentation within the Airline Sector.........................................5

Seven Ps of the Airline Sector................................................................................5-9

Quality Dimensions in the Airline Sector...............................................................10

Information Technology in the Airline Sector........................................................11

Case Study on.....................................................................................................12-13

Conclusion...............................................................................................................14

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Introduction to Service Sector Management

Introduction

The world economy nowadays is increasingly characterized as a service economy. This is primarily due to the increasing importance and share of the service sector in the economies of most developed and developing countries. In fact, the growth of the service sector has long been considered as indicative of a country’s economic progress.

Economic history tells us that all developing nations have invariably experienced a shift from agriculture to industry and then to the service sector as the main stay of the economy.

This shift has also brought about a change in the definition of goods and services themselves. No longer are goods considered separate from services. Rather, services now increasingly represent an integral part of the product and this interconnectedness of goods and services is represented on a goods-services continuum.

Introduction to the Airline Sector

Airline Sector: Global

HistoryThe air travel market grew up originally to meet the demand of business travelers as companies became increasingly wide-spread in their operations. On the other hand, rising income levels and extra leisure time led holidaymakers to travel to faraway places for their vacation. A further stimulus to the air travel market was provided by the deregulation and the privatisation of the aviation industry. State-owned carriers that hitherto enjoyed monopoly status were now exposed to competition from private players. However, one development that changed the entire landscape of the industry was the emergence of low cost carriers (LCCs). These carriers were able to offer significantly cheaper fares on account of their low-cost business models and thereby attract passengers who might not otherwise be willing to fly. LCCs have achieved rapid growth in market share in the U.S. domestic market, short-haul market in Europe and recently in Asia. Since 1970, the international passenger traffic has grown by an average rate of more than 6%, compared to a 7% increase in the domestic passenger traffic.

Recent developmentsThe aviation industry is highly cyclical. However, in times of recession, the decline in the industry growth rate is much sharper when compared to the world economy. After witnessing a strong growth during the late 1990s, the industry saw a sharp reversal in fortune as a result of a global economic downturn in 2001. The situation was further aggravated by 9/11 attack, the Iraq war and the SARS epidemic. The mammoth financial losses incurred by the scheduled carriers

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during this period led to a long-overdue restructuring among the full service carriers (FSCs). Many airlines embarked upon severe cost-cutting and fleet-rationalisation programmes as they struggled to remain afloat. The conditions for FSCs were further worsened with the advent of budget carriers in the U.S. and Europe. According to IATA, the combined losses posted by the world's scheduled carriers amounted to US$ 6 bn in 2007, following a cumulative loss of US$ 36 bn in the next four years.

Future OutlookAs per the estimates of aircraft manufacturers and other industry bodies, the world passenger traffic is expected to grow at 5% p.a. in the medium to long-term. The growth will however be slower in matured economies, but faster in under-penetrated and growing economies like India and China. The primary reason for the increase in passenger traffic over the years has been decline in airline passenger yields. As per an estimate, after adjusting for the general inflation, the average airline yields (revenue per passenger kilometers) have almost halved since 1970. During the same period, the real revenue growth (by combining growth in traffic and decline in yields) has averaged only 2% to 3%. Since aviation industry is a high fixed cost industry, a small increase in operating cost can have a sharp impact on the profitability of the companies. High fuel prices, congestion cost, higher security and insurance cost can increase the overall cost of operations and thereby impact the demand for air travel services. However, there is room for cost reduction in the form of distribution cost and cost synergies from industry consolidation. Overall, we believe that consolidation is the only solution for addressing the problem of excess capacity and poor financial ratios of the company.

Airline Sector: IndiaThe Indian Aviation Industry has been going through a turbulent phase over the past several years facing multiple headwinds – high oil prices and limited pricing power contributed by industry wide over capacity and periods of subdued demand growth. Over the near term the challenges facing the airline operators are related to high debt burden and liquidity constraints - most operators need significant equity infusion to effect a meaningful improvement in balance sheet. Improved financial profile would also allow these players to focus on steps to improve long term viability and brand building through differentiated customer service. Over the long term the operators need to focus on improving cost structure, through rationalization at all levels including mix of fleet and routes, aimed at cost efficiency. At the industry level, long term viability also requires return of pricing power through better alignment of capacity to the underlying demand growth.

While in the beginning of 2008-09, the sector was impacted by sharp rise in crude oil prices, it was the decline in passenger traffic growth which led to severe underperformance during H2, 2008-09 to H1 2009-10. The operating environment improved for a brief period in 2010-11 on back of recovery in passenger traffic, industry-wide capacity discipline and relatively stable fuel

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prices. However, elevated fuel prices over the last three quarters coupled with intense competition and unfavorable foreign exchange environment has again deteriorated the financial performance of airlines. During this period, while the passenger traffic growth has been steady (averaging 14% in 9m 2011-12), intense competition has impacted yields and forced airlines back into losses in an inflated cost base scenario. To address the concerns surrounding the operating viability of Indian carriers, the Government on its part has recently initiated a series of measures including (a) proposal to allow foreign carriers to make strategic investments (up to 49% stake) in Indian Carriers (b) proposal to allow airlines to directly import ATF (c) lifting the freeze on international expansions of private airlines and (d) financial assistance to the national carrier. However, these steps alone may not be adequate to address the fundamental problems affecting the industry.

While the domestic airlines have not been able to attract foreign investors (up to 49% FDI is allowed, though foreign airlines are currently not allowed any stake), foreign airlines may be interested in taking strategic stakes due to their deeper business understanding, longer investment horizons and overall longer term commitment towards the global aviation industry. Healthy passenger traffic growth on account of favorable demographics, rising disposable incomes and low air travel penetration could attract long-term strategic investments in the sector. However, in our opinion, there are two key challenges: i) aviation economics is currently not favorable in India resulting in weak financial performance of airlines and ii) Internationally, too airlines are going through period of stress which could possibly dissuade their investment plans in newer markets. Besides, foreign carriers already enjoy significant market share of profitable international routes and have wide access to Indian market through code-sharing arrangements with domestic players. Given these considerations, we believe, foreign airlines are likely to be more cautious in their investment decisions and strategies are likely to be long drawn rather than focused on short-term valuations. On the proposal to allow import of ATF, we feel that the duty differential between sales tax (averaging around 22-26% for domestic fuel uplifts) being currently paid by airlines on domestic routes and import duty (8.5%-10.0%) is an attractive proposition for airlines. However the challenges in importing, storing and transporting jet fuel will be a considerable roadblock for airlines due to OMCs monopoly on infrastructure at most Indian airports. From the working capital standpoint too, airlines will need to deploy significant amount of resources in sourcing fuel which may not be easy given the stretched balance sheets and tight liquidity profile of most airlines.

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Classification & Segmentation within the Airline Sector

Seven Ps of the Airline Sector

Product

The airline industry is a service that satisfies customer needs for travelling. In the airline industry the customers can be divided into two segments, business and leisure. Business travel has changed this industry to a necessity. The leisure traveler has always had the need for the airline industry. Satisfying the customer needs today involves competitive rates, convenient booking of flights and benefits with those flights

Some of the problems with this industry are personally experienced by the customers. The airlines have a difficult time being punctual and this has become the norm in the industry, although some companies try to avoid it. The industry is highly susceptible to situations that result in declines in air travel, such as political instability, regional hostilities, recession, fuel price escalation, inflation, adverse weather conditions, consumer preferences, labour instability or regulatory oversight. Airlines are now in the commodity business as the public demands low-priced transportation. It has moved from elite to a common form of transportation. Today's travelers know how to surf the web for bargains through a myriad of sites such as Make my Trip, Expedia, Travelocity, Hotwire, and Cheaptickets. As a commodity, airlines cannot increase prices to increase profits, so their only choice is to cut operating costs such as labour costs.

Amid the competition, airlines have refocused their attention on the customers. The industry still heavily targets frequent flyers, as members can earn miles through travelling, car rentals, hotels, and credit card use. On overseas flights, business class seats convert to real flat beds. Soon passengers will have internet access during flights. Airlines are also catering to the consumer by offering mostly organic menus, while others are offering meals-to-go before boarding. For travelers pressed for time, many airlines offer fast check-in, online at home before leaving for the airport; or self-service check-in kiosks where passengers identify themselves with a credit card, print their own boarding pass, change their seat, and purchase meal coupons.

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Price

Premium Pricing:

The airlines may set prices above the market price either to reflect the image of quality or the unique status of the product. The product features are not shared by its competitors or the company itself may enjoy a strong reputation that the 'brand image' alone is sufficient to merit a premium price.

Value for Money Pricing:

The intention here is to charge the average price for the product and emphasize that it represents excellent value for money at this price. This enables the airline to achieve good levels of profit on the basis of established reputation.

Cheap Value Pricing:

The objective here is to undercut the competition and price is used to trigger the purchase immediately. Unit profits are low, but overall profits are achieved. Air India and Indian Airlines have slashed their prices to meet the competition of private airlines so that they can consolidate their position in the market. Airlines usually practice differential pricing. There are three classes: The First Class, The Executive or Business Class and The Economy Class. Fares for each class are different since the facilities provided and the comfort and luxury level is different in each class. Seasonal fares are also fixed, fares rise during the peak holiday times.

Low-cost Pricing:

With the advent of the low-cost airlines in the Indian aviation industry, a different low-cost flying concept has come up. Since these low-cost airlines are trying to woo the customers by providing air travel in exceptionally low prices, a price-band kind of pricing has to be designed.

In low-pricing strategies, the airlines provide very low prices for the flight tickets. Also, they prices are made cheaper by booking the tickets long before the flight date.

Promotion

Integrated Marketing Communication: A successful product or service means nothing unless the benefit of such a service can be communicated clearly to the target market. An organization’s promotional mix can consist of: Advertising, Public Relations, Sales Promotion, Personal Selling, Direct Mail and Internet / E-commerce. In airline industry all the above methods are use for promotion purpose.

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It is vitally important to recognize that promotion, or marketing communications generally, may not always be aimed at potential consumer or end user of service. In many business areas, it is to design promotions aimed at channel customers to complement end user promotion. For e.g. Airlines will need to promote their services to tour operators as well as end user.

Place

In Airlines, they utilize more than one method of distribution. For e.g. they sell tickets through travel agents & sell seats on flights to tour operators, whilst also operating direct marketing. Whichever distribution strategy is selected, channel management plays a key role. For channels to be effective they need reliable updated information. For these reason, I.T has been widely adopted such as on-line booking system.

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People

The people section of the Marketing Mix is the most important section of the extended Marketing Mix. It is broken up into three sections: Employees, Consumers and the Company. Every individual have different needs and expectations in this market, so segmentation and positioning will be also fundamental. Furthermore, it’s normally an industry where, the user follows all the steps of the buyer behavior in the selection and purchase of the service. Special importance have the Information Search by the customer (which is normally more complete than in other purchases) and beliefs and attitudes, which are the most important challenges of this analysis because normally have an important weight in the final decision of the customer. In a market as competitive as this one, a personal bad experience or just a non favorable belief or attitude can determine the user's choice forever. That's why the Brand Image is also fundamental for this kind of Companies.

For e.g. A Jain would be satisfied with the service only if he is served Jain food and it should be kept in mind that the customers next to him are also Jain or at least vegetarian. Therefore, management faces a tremendous challenge in selecting and training all of these people to do their jobs well, and, perhaps even more important, in motivating them to care about doing their jobs well, and to make an extra effort to serve their customers. After all, these employees must believe in what they are doing and enjoy their work before they can, in turn, provide good service to customers. The "people" component of the service marketing mix also includes the management of the firm's customer mix. Because services are often experienced at the provider's facilities, other customers who are being served there can also influence one’s satisfaction with a service. For e.g. crying children in a nearby seat on an airplane or ill mannered customer are all examples of unpleasant service conditions caused by a firm's other patrons.

Physical Evidence

The service is intangible because unlike a product it can't be experienced before it is delivered. It is the ability and environment in which a service is delivered. Because it is intangible customers are at greater risk when deciding whether to use a service, so to reduce this risk, and improve success, potential customer are offered the chance to see what the service would be like with the use of testimonials, demonstrations etc. Promotional materials and written correspondence provide tangible reassurance; they can be incorporated into the firm's marketing communications to help reduce customer anxiety about committing to the purchase. Service firms should design these items with extreme care, since they will play a major role in influencing a customer's impression of the firm. In particular, all physical evidence must be designed to be consistent with the "personality" that the firm wishes to project in the

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marketplace. They can offer to the consumer more than a fly: additional services, and so they focus their promotional efforts in communicating that to the potential user.

Process

The customer service department of any airline company deal with a number of processes involved in making marketing effective in an organization e.g. processes for handling customer complaints, processes for identifying customer needs and requirements, processes for handling requirement etc.

Example of Jet Airways

Purchasing process

People like how easy it is to choose from the different one-way fares online to make up a round-trip reservation. Some travelers prefer to use Jet telephone reservation agents for purchasing their tickets. Overall, these reservation agents have been described as very courteous and helpful.

Destination Choices

Several people complained that Jet doesn't offer service (either non-stop or connecting) to enough destinations. Some complained about Jet operating out of smaller, less convenient airports (like Poona and Nasik). People also complained that Jet only offers limited flights per day to some destinations, making travel less convenient for some.

Overall Customer Service

Jet customer service is very highly regarded. Although some people have had unpleasant experiences, almost everyone who gave an opinion raved about the service from Jet flight attendants, gate agents, ticketing/reservation agents, and even the pilots.

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Quality Dimensions in the Airline Sector

Quality Dimensions is a concept which was introduced by Parasuraman, Valerie Zeithmal and Leonard Beof. These are five quality dimensions which are used by consumers to judge the quality of a process. The five quality dimensions are as follows:

1) Reliability 2) Responsiveness3) Assurance4) Tangibles5) Empathy

The Quality Dimensions with respect to the Airline Sector are as follows:

Reliability: Airlines ensure that the services are delivered as promised and this is mostly controlled by the front line staff of the airline company

Responsiveness: In the Airline sector this could refer to the helpfulness and responsiveness of the Airline staff to help customers to know further details about their queries regarding flight timings, delays, etc

Assurance: Assurance in the Airline Sector would suggest that the Airline has flights which are on time, safety precautions are taken and communicated to the passengers and an assurance is maintained implicitly by having highly trained pilots, well maintained aircraft, etc

Tangibles: The tangibles in the Airline Sector would constitute of the reservation counter, baggage counter, uniforms worn by flight crew, the aircraft in itself and the seats/belts, etc present in it. In international flights, the presence of T.V. sets within the seats is also a tangible factor along with the food and beverages served.

Empathy: The attitude of the service provider towards the consumers and passengers is the “Empathy” component. The polite and courteous behavior of airhostesses would classify as empathy in the Airline Sector.

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Information Technology in the Airline Sector

Information Technology has changed the way airlines sell their products and services over the last decade. No longer does one have to engage a travel agent to book a flight. Airline branded websites now allow consumers to book a flight online while travel portals such as Expedia, Price line and Orbitz enable travelers to search airlines’ databases for the lowest fares A computer reservations system or central reservation system (CRS) is a computerized system used to store and retrieve information and conduct transactions related to air travel. Originally designed and operated by airlines, CRSes were later extended for the use of travel agencies. Major CRS operations that book and sell tickets for multiple airlines are known as global distribution systems (GDS). Airlines have divested most of their direct holdings to dedicated GDS companies, who make their systems accessible to consumers through Internet gateways. Modern GDSes typically allow users to book hotel rooms and rental cars as well as airline tickets. They also provide access to railway reservations and bus reservations in some markets, although these are not always integrated with the main system.

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Case Study on Kingfisher

The main highlight was when After Rajat Gupta, the cancellation of 40-odd flights on a single day, a number that eventually exceeded 80, triggering shock waves in business and consumer circles. A approx total of Rs 7,507.8 crore debt and slump in stock prices. Seven Creditors' decided to wind up petitions that are pending before the Bangalore High Court. Rumours of shutdown and relinquishment of majority stake by Mallya, none of which were new, occasioned an appeal from the Civil Aviation Ministry for a corporate debt restructuring, and now the Ministry reportedly is considering fast forwarding policy changes to permit foreign airlines to invest up to 24 per cent in Indian carriers, while the Industry Ministry is pitching for the cap to be 26 per cent.

The focus of media coverage of the last week has been squarely on Kingfisher Airlines (KFA), when The crisis and the efforts to find a solution to the KFA predicament is a case study of the evolution of the aviation sector, its dynamics, legal and regulatory issues.

There was certainly relief all around in 1990, when the aviation sector was opened up to private investors and the monopoly of the State owned airlines (don't forget Pawan Hans) came to an end. Most of the initial start-ups, such as East West, Damania and Modiluft were short lived, only Sahara endured and survived. The entry of Air Deccan witnessed the launch of a new model in Indian skies, that of a low cost airline, to make air travel affordable for the common man, without "coffee and kebabs". But even the man with a mission had no recourse but to sell out because of working capital issues.

Globally, the aerospace market remains one of the fastest growing, notwithstanding recessionary trends. It must be kept in mind that mergers allow airlines an option of survival and diversion from insolvency or bankruptcy which the Damanias faced and should be encouraged as long as they are in consumer interest.

Investors are either Private Equity (PE) or other airlines. In India, in spite of FDI by foreign airlines being prohibited, there have been three major M&A activities since private entry was permitted.

The first of such acquisitions was of Air Sahara by Jet Airways, to take its market share to 50 per cent, and gaining entry into international routes to become the largest airline in India. The deal was in the danger of being aborted with Jet alleging that the Sahara aircrafts were in poor condition. Several hidden losses emerged on due diligence. Sahara alleged breach of contract and the parties were locked in arbitration and before courts, but finally settled and the rest is history.

United Breweries (UB) Kingfisher's parent company acquired 40 per cent of Air Deccan's parent Deccan Aviation, holding 52 per cent of the target company. The reverse merger with Deccan became effective in April, 2008 and Deccan Aviation was renamed Kingfisher Airlines. Its low

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cost fleet was rebranded as Kingfisher Red in 2007-08. Did KFA require the value addition of a law cost airline? Not really, but the deal carried some major benefits - fast forwarding KFA's entry in the international sector riding on Deccan's five year experience, savings on operating costs, and the right to operate charter flights, as well as Deccan's own market share. What also came on board were debts.

Unlike Jet, which retained / absorbed and continues the Sahara business in a separate entity, with a dedicated work force, and operating the flights as 'S2'even now.

The post merger integration failed, which is not unusual, as historically integration of low cost and high cost carriers have worked as exceptions. Perhaps the Deccan brand was abandoned too soon. Possibly, the long term potential and incompatibilities were not foreseen and the acquirer did not fully understand the business model and success factors of his acquisition. But its' a lesson for the industry - particularly if foreign airlines are going to crowd the space. If indeed the entry is being fast forwarded to help the beleaguered KFA, such entry is possible only through joint ventures routes, which will have to undergo anti-trust and other regulatory tests to effect their entry, and in the long term keep in mind the value of merger integration - the success for any deal.

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CONCLUSION

The Airline Industry encompasses a single aircraft conveying cargo articles and mail to different places to the numerous aircrafts carrying passengers to the different parts of the world. Services of the Airline industry can be segregated as domestic, regional, within the continent or travel between continents. A thorough analysis of the Airline industry will essentially comprise all of the above. Records show that the demand for airline travel has been increasing. 1950 through 1960 manifested a trend when the yearly growth was consistent at approximately 15%. Airline industry showed yearly growth ranging between 5% to 6% consistently in the 80s and the 90s. However, rate of growth cannot be expected to remain same throughout due to several factors. Deregulation being one of the reasons. Deregulation in the Airline industry led to flexibility in the prices of the airline tickets. Consequently, the airfares nosedived at times

escalating the airway traffic.

There have been ups and downs in this industry, where some companies are working on huge losses, some are making exorbitant profits. Yet the services each airline co. offers is changing each day, everyone wants to walk that extra mile, give the customer more than he expects.

Pickups from their homes to spa services on the flight, these services are offered by some leading airline co’s.

No one forecasted this industry to change and shape up in this way, from a carrier to transfer goods, to take passengers as a complete luxury mode of transport. Today flights in most cases have become necessities and passengers are made to feel the kings, it has broken the boundaries of classes and is affordable even for the middle class with introduction to econonomical flights.

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