strategic management of indigo

7/31/2019 Strategic Management of Indigo

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CHAPTER -1

INTRODUCTION


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Strategic Management

INDIGO AIRLINES

1.1Organisation Indigo Airlines formed in founded in1997 .

1.2Objectives or purpose of the study

The objective of this report is to study the external environment of the Aviation

Industry in India. Subsequently, internal environment analysis is conducted for

IndiGo Airlines. With the help of this comprehensive study, we have suggested

recommendations that can be adopted by IndiGo to sustain its competitive

advantage by utilizing its cost leadership strategy.

study the compititon faced by other companies in the market.Study IndiGo

airlines Rise to become India's largest airline

1.3 Research Methodology of the study

To understand the important factors responsible for the formulation of

corporate strategy, weave utilized Strategic Management tools like Porters

Five Forces model, Value Chain analysis, TOWS matrix etc.

1.4 Limitations of the study

Due to confidentiality clause and corporate policies of the company, accurate

financial data could not be obtained for IndiGo Airlines. However, most recent

and reliable data sources have been referenced for the analysis of this case.

1.5 Findings


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IndiGo airlines entered the low cost carrier market in aviation industry in 2006.

It has been able to achieve its break even within two years of its launch and has

reported gross revenue of 60 cores this year. Despite the decline in the aviation

industry and global economic slowdown, IndiGo has accelerated its growth

rate. Also, IndiGo being a new entrant has managed to become a cost leader in

its sector.


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Chapter -2

Company profile


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Introduction

India is one of the fastest growing aviation industries in the world. Because of

the introduction of liberalization policy in the Indian aviation sector, the

industry has witnessed vast difference 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. Besides, there was

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 purchasing power of middle class, low airfares offered by low cost

carriers and the growth of the tourism industry in India. In addition to the

liberalization policy, the deregulation policy has also played a major role to

encourage private players in the aviation industry. Below graph shows the

gradual growth in the domestic air traffic: The growth in the aviation industry

looked promising and hence attracted many low cost carriers like Spice Jet, Go

Air and IndiGo after the success of Air Deccan in 2003.On one hand, the

booming opportunities incited players to expand capacity but on the other hand,

rising fuel costs and taxation rates, increased the operational costs. Thus the

low-cost players found it difficult to maintain their commitment. In their urge

to survive, they were compelled to increase prices, add free refreshments and

beverages on-board, etc. Some players sought refuge in mergers, whereas some

survived by modifying their business model. However, amidst this aviation

turmoil, IndiGo continued to fly high. In its Endeavour to consistently maintain

low costs, IndiGo resorted to measures like outsourcing and having

homogeneous fleet. These efforts helped IndiGo to offer its passengers low air

fares. IndiGo is the latest entrant as a low cost carrier in the aviation industry of

India. It started its operations on August 4, 2006. Interlope Enterprises, a


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renowned travel corporation, is the owner of IndiGo. The IndiGo team uses all

of these resources to design processes and rules that are safe and simple, that

make sense, and that cut waste and hassles, which in turn ensures a uniquely

smooth, seamless, precise, gimmick-free customer experience at fares that are

always affordable. It was awarded the title of

Best Domestic Low Cost Carrier

In India for 2008. The airline currently operates 120 daily flights with a fleet of

nineteen brand newAirbus A320 aircraft and flies to 17 destinations. IndiGo

plans to serve approximately 30Indian cities by 2010, with a fleet of

approximately 40 A320s.

1 Below are the key factors of the business model of IndiGo airlines:

A single passenger class.

Single type of airplane to reduce training and service cost.

No frills such as free food/drinks, lounges.

Emphasis on direct sale of ticket through Internet to avoid fee and

commissions paid to travel agents.

Employees working in multiple roles.

Unbundling of ancillary charges to make the headline fare lower. In this report,we will analyze what strategies IndiGo followed to enter the aviation industry.

Also, we will discuss how IndiGo implemented the low cost strategy to gain

competitive advantage and provide recommendations to sustain its competitive

position in the long-term. To know about the industry attractiveness of aviation

and the factors that helped IndiGo enter this market, we will use the Porters

Five Forces model. This will be useful in gaining insight about the entry


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barriers, power of buyers and suppliers, competition among the existing players

and the feasible alternatives in aviation industry. SWOT analysis of the

company will help us understand the current positioning of the company based

on the analysis of external and internal environments. For internal analysis, we

will study the criteria for sustainable competitive advantage as well as the

Value Chain Analysis. This will help identify the strengths and weaknesses of

the company. Further, the analysis of government policies, competitors

strategies and other variables like fuel prices, increasing domestic traffic,

economic downturn etc will lead us to the external influences that affect the

aviation industry of India. Hence, using the external environment study, we can

come to know about the opportunities and threats for IndiGo airlines. Thus, the

consequences and influence of the all factors of SWOT taken together will aid

in the formulation of alternative strategic actions that IndiGo may consider to

sustain its competitive advantage


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Chapter-3 Finding and

analysis


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External Analysis

Airline Industry Attractiveness

1.Foreign equity allowed:

Foreign equity up to 49 per cent and NRI (Non-Resident Indian) investment up

to 100per cent is permissible in domestic airlines without any government

approval

2.Attraction of foreign shores:

After five years of domestic operations, many domestic airlines too will be

entitled to fly overseas by using unutilized bilateral entitlements to Indian

carriers.

3. Rising income levels and demographic profile:

Demographically, India has the highest percentage of people in age group of

20-50among its 50 million strong middle class, with high earning potential.

4. Untapped potential of India's tourism:

Tourist arrivals in India are expected to grow exponentially, especially due to

the open sky policy between India and the SAARC countries and the increase

in bilateral entitlements with European countries, and US.

5. Glamour of the airlines:No industry other than film-making industry is as glamorous as the airlines.

Airline tycoons from the last century, like J. R. D. Tata and Howard Hughes,

and Sir Richard Branson and Dr. Vijay Malaya today, have been idolized.


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Porters Five Forces strategy for Airline Industry

1.Threat of New Entrants

Product differentiation:

In low cost carriers, there is not much differentiation in the basic service that is

being provided to the customers. Differentiation can only be achieved by Value

Added Services. IndiGo provides check-in kiosks, stair-free ramps, and Q-

Busters. Hence this argument works in favor of IndiGo.

Switching cost:

1. The switching cost is not high. Customers can easily choose other low cost

carriers.

2. The switching cost of an airline company to other business/industry is high

as the exit cost is high.


In aviation industry the major entry barriers can be:

Government regulations:

1. The government's open sky policy has encouraged many overseas players to

enter the aviation market.

2. Aviation was primarily a government owned industry. Due to liberalization

Indian aviation industry is now dominated by privately owned full-service

airlines and low-cost carriers. Private airlines account for around 75 per cent

share of the domestic aviation market.


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2. Indian Civil Aviation Policy:

3. Private sector is allowed to operate scheduled and non-scheduled services.

4. Operator should be a citizen of India or a company or a body corporate

which is registered in India and whose principal base of business is in India.

5. Chairman and at least twothirds of its Directors are Indian citizens.

6. Foreign equity participation up to 49 percent and investment by Non-

Resident Indians (N.R.I), Overseas Corporate Bodies (OCBs) up to 100% is

allowed. The representation of the foreign investing institution/entity on the

Board of Directors of the company shall not exceed one-third of the total.

7. Foreign airlines are not permitted to pick up equity. Foreign financial

institutions other entities who seek to hold equity in the domestic air transport

sector shall not have foreign airlines as their shareholders.

8. As regards safety and security arrangements, the operators must ensure

compliance with relevant regulatory requirements stipulated respectively by the

Director General of Civil Aviation (DGCA) and the Bureau of Civil Aviation

Security (BCAS).

9. For green field airports, foreign equity up to 100 percent is allowed throughautomatic approvals. For upgrading present airports, foreign equity up to 74

percent is allowed through automatic approvals and 100 percent through special

permission (from FIPB).

Setup costs:

Nowadays, venture capital of $10 million or less is enough to launch an airline.


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1. In order to overcome the shortfall of aircrafts during the peak seasons,

airlines can utilize an ACMI lease agreement for the extra aircraft. If the airline

has many aircrafts, either owned or leased, then they can offer their surplus

aircrafts in their low season to another airline that is facing peak season

2. An airline company will bear the cost of purchasing an aircraft if it wants to

start or expand its fleet, leasing allows the cost to be spread across several

years. At the lease term end, the lease can be renewed or aircraft can be

returned, to be replaced with more modern aircraft.

Fuel prices:

Domestic ATF prices have increased by over 160 per cent from the beginning

of 2005 till last year and by over 80 per cent from a year-ago levels. In India,

oil companies do not import ATF directly; instead they refine it from imported

crude oil. With rising crude oil prices, imports are becoming expensive day by

day and at the same time, the governments unable to pass on the full impact of

this rise to the consumer. As a result, the state owned oil marketing companies

(almost 95 per cent of the market is with state owned firms) are forced to sell

diesel, petrol, kerosene and LPG at way below cost, a cost they are trying to

somewhat make up by raising the price of ATF, which is under their control. As

a result prices of ATF in India are much higher than some of the other Asian

countries.

Resource:The aviation industry in India suffers a shortfall of pilots. The reasons are:

1. The aspirants can receive Commercial Pilot License (CPL) only if they

undertake attaining abroad.


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2. The reason being that in India, there is a lack of dedicated flight Instructors,

decade-old aircrafts and poor quality training offered at a price much higher

than what is offered by flying schools in USA, Canada and Australia.

3. Indian institutes provide training with the help of their training partners in the

foreign countries like U.S.A; U.K etc.Private airlines hire pilots; get expatriates

or retired personnel from the Air Force or PSUairlines in senior management

positions. Airlines can contract employees such as cabin crew, ticketing and

check-in staff members. In airline sector, finding appropriate labor-force is very

costly. Moreover, due to the liberalization of policies by government, foreign

and private players often poach work-force of competitors which leads to

talent-drain and thus losses.

2. Bargaining Power of Suppliers

Any airlines in general face a duopoly of two major suppliers of aircrafts i.e.

Airbus and Boeing. There are other suppliers like Dauphin,Dronier,Bell,ATR-

42 but do not meet the requirements to serve the low cost commercial aircraft

carriers, particularly Indigo airlines. Fleet Forecast for the India-Region 2006-

2011 shows that there will be approx. 85% growth in the order rate of air

carriers.

Thus, suppliers are few and thus in better position to bargain as they always

finds customers for their aircrafts.

IndiGo fleet comprises of Airbus-A320 and the switching cost is high due to

the limited number of suppliers.

Due to shortage of commercial aircraft pilots in India the supply of pilots is

concentrated, hence increasing their power.


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There are only four suppliers for ATF (Aviation Turbine Fuel); IOC,

Hindustan Petroleum Corporation, Bharat Petroleum and ONGC and since their

number is limited, they possess more power.

The proof of evidence for high power enjoyed by ATF suppliers lies in the fact

that the ATF prices constitute 35-40% of the costs in India compared to 20-

25% globally.

The brand value of suppliers is high due to their less number and results in

higher bargaining power for them.

The airlines also face a threat of forward integration since the suppliers are in

close contact and are familiar with the knowhow of the aviation industry.

The suppliers are few and thus in better position to bargain as they always

finds customers for their aircrafts.

3. Bargaining Power of Buyers

Buyers in airlines industry are large in number and highly fragmented thus

lowering their power .With the growing Indian economy and increasing low

cost carriers, the buyers have increased and so have the growth opportunities.

The switching cost is minimal since there are multiple alternatives available. It

is not difficult to move from one airline to another or to switch to a substitute.

Furthermore the players in the particular strategic group do have minimalistic

differentiating points.


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Backward integration from the buyers end is very difficult and next to

impossible.

4. Competitive Rivalry

The aviation industry is a highly competitive industry because of which it is

difficult to earn high returns in this sector. Below are the major reasons for the

high competition in the low-cost carrier airlines:

Very little scope for differentiation between competitors products and services


Aviation is a mature industry with very little growth. The only way to grow is

by stealing away customers from competitors

Suppliers of aircrafts are the same, i.e., Boeing and Airbus. Hence suppliers

bargaining power is high.

Switching cost of customers is high for low cost carriers, i.e., there is no brand

loyalty. Closest competitor of IndiGo is Spice Jet followed by Go Air

. Below is brief description about each of them:

Spice Jet is a low-cost airline based in New Delhi, India. Spice Jets mission is

tobecome Indias preferred low cost airline, delivering the lowest air fares with

the highest consumer value, to price sensitive consumers. Its vision is to ensure

that flying is no longer confined to business travelers, but is affordable for

everyone and thus the tagline flying for everyone

Spice Jet airways began its operations in May 2005. Spice Jet has chosen a

single aircraft type fleet which allows for greater efficiency in maintenance, and

supports the low-cost structure. It has a fleet of 6 Boeing 737-800 in single


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class configuration with 189 seats. Spice Jets new generation fleet of aircraft is

backed by cutting edge technology and infrastructure to ensure the highest

standards in operating efficiency. Spice Jet currently flies to 11 destinations.

4. GoAir Airlines

Owned by Wada Group, is a low-cost budget airline based in Mumbai, India. It

has been showcased as

The People's Airline.

GoAir is looking at

'commoditisingair travel'

By offering airline seats at marginally higher train prices to all cities in India.

TheAirlines theme line is

Experience the Difference

And its objective is to offer its passengers quality consistent, quality assured

and time efficient product through affordable fares. GoAir's business model

has been created on the

'punctuality, affordability and convenience'

Model. Go Air operates four A320 aircraft with a single class, 180-seat

configuration, and plans to expand its fleet to 33 aircraft in three years.

5. Thus, we can summarize from above data that all the three players are trying

to follow cost leadership strategy by bringing down the ticket rates to the

minimum possible value. However, it is clear that, to sustain in this cutthroat

competition, each player will have to come up with different strategies to

improve the non price factors.

5. Availability of Substitutes

The substitute for low cost airline company is the railways. But this substitute is

not very powerful due to the following reasons: 1.


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Customers use airline transport as it is convenient and saves travelling time. So

trains cannot work as a substitute to save time.2.

Secondly, many customers use airlines as a status symbol. So again, trains

cannot substitute for prestige. So if we consider IndiGo airlines, the direct

substitutes are the other low cost carriers likeSpiceJet and GoAir. So in

this case, threat of substitutes is high as the switching costbetween low cost

carriers is low.

Opportunities

IndiGo airlines have not ventured into the huge air freight market which

cancontribute a sizeable portion of the revenue. A study by Centre for Asia

PacificAviation or CAPA

6. An aviation consulting firm estimates the cargo services of 3.4million tonnes

per annum.

According to a research conducted by PhoCus, Indian domestic traffic will

touch 86.1million by 2010, up from 32.2 million in 2007

7. The flight density of IndiGo airlines is limited in domestic market; hence

there is a big scope to increase the flight frequency

The huge untapped international sectors should be explored once IndiGo hasconsiderable presence in the domestic market.

IndiGo currently does not have too many long haul aircrafts and as per CAPA

studyby 2020, Indian Airports are expected to handle more than 100 million

passengers. IndiGo airlines should focus on long haul aircrafts both for

domestic and international sectors.


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The chartered flight services still remain an area not exploited by Indian

aviation industry and IndiGo airlines can play a major role in tapping the

potential in that particular market.


Threats

ATF (Air Turbine Fuel) prices have increased radically since 2005.

Foreign and private players often poach work-force of competitors.

Extensive Government Interference can affect the accountability of the

organization. In aviation industry, government has control over fuel prices,

foreign investments (e.g. FDI policies), tourism laws, taxes etc. This can greatly

affect the day to day business in the airline industry.

Like every other industry, recession has hit aviation industry as well. People

have cut down on tourism and corporate travels have also been slashed down.

The shortage of trained pilots, co-pilots and ground staff is severely limiting

the growth prospects of all the airline companies.

Barriers to exit in aviation industry are high because of high capitalinvestment, nongovernment restrictions and loss of brand image


Internal Environment Analysis


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Resources, Capabilities and Core Competencies are the key elements of the

Internal Environment. The resources are tangible and intangible.

Tangible resources

Aircrafts:

The airline currently operates 120 daily flights with a fleet of nineteen brand

new AirbusA320 aircraft and flies to 17 destinations.

Human Resources:

1. The human resources are the pilots, crew members and ground staff.

2. No airline can recruit a trainee pilot and directly assign him to fly an airplane

carrying around 500 passengers. The labor-force has to be trained and then

assigned with tasks to perform after proper evaluation.

Fuel:

1. Porters five forces model does not cover the importance of complementary

product.

2. ATF is the complementary product for airplane and it constitutes

approximately 35%of the production costs.

Intangible resources

Brand Equity/Reputation

IndiGo is the most reputed low cost carrier due to the following reasons: 1.

On time arrivals is the key differentiating factor for IndiGo Airlines.

2. IndiGo keeps implementing new and innovative ideas to increase the quality

of customer service. Recent example is: IndiGo has roving check-in counters


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where passengers with only cabin baggage can check-in with an IndiGo official

with handheld device, rather than lining up at the check-in counter.

3. It gives the customers the freedom to carry their own eatables and snacks on

board.

4. Compared to the direct competitors, that is, the other low cost carriers like

SpiceJet, Jetlite, etc. IndiGo offers the lowest airfare.

Social Capital:

1. IndiGo has amicable relationship with the other organizations that contribute

to the value addition for the service provided to the customers.

2.IndiGo has engaged many Travel web-portals and regional travel agents with

incentives like booking commissions, etc. There have been no instances of

distress between IndiGo and its other collaborators, that is, suppliers

3. Collaboration with hotels: Mumbai-based hotel chain operator Samovar

Hotels and Indigo Airlines announced a marketing tie-up for frequent travelers.

The highlights are

A:The arrangement will allow guests staying at select Sarovar Hotels across 26

destinations in India to avail a 10 per cent discount on their next travel booking

with IndiGo.

B:While IndiGo flyers can avail up to 25 per cent discount on published room

tariff, 10 per cent discount on holiday stay packages and 10 per cent discount

on restaurant dining at select Sarovar properties

8. Hence IndiGo has a remarkable Social Capital.

Brand Awareness:


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IndiGo is a well known Low Cost Carrier in India. The following points

contribute to the brand awareness of IndiGo:

1. Advertising using print media like newspapers, billboards, etc.

2. It may not pay for an advertisement in a newspaper, but has been covered in

news forits low cost strategy implementation.

3. As IndiGo provides better value added services to the customers, Word of

Mouth promotion also works in its favor.

Employee Relationship:

Good Employee Relationship is a key factor to sustain competitive advantage.

Indigo provides several incentives to its employees. As per the news article

published in The Hindu Business Line:

IndiGo officials claimed that they have been seeing a healthy growth in

passenger numbers and had no plans to defer delivery of any of the 100 Airbus

it has ordered.Hence, it is clearly evident from the above statement that IndiGo

is optimistic about its long term growth. Also, it is planning to expand its

employee strength and at the sometime there is no indication of downsizing the

current staff. Quoted below are some comparisons about the different

approaches implemented by various airlines at the time of recession stated in

the same article:At a time when several domestic airlines are looking to prunetheir staff strength, the Delhi-based low cost airline, IndiGo, is on the lookout

for more pilots, cabin attendants, customer service and airport service

agents.In the recent past, both Kingfisher Airlines and Jet Airways have

asked their staff to leave. While Jet Airways offered a voluntary retirement

scheme to more than 300 of its staff, it was also planning to lay off about


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1,900 of its staff. In late September, Kingfisher announced that 300 employees

had parted ways with the company

9. The above facts show that IndiGo has taken a positive approach while

dealing with its loyal employees at the time of economic slowdown.

IndiGo has high brand awareness and brand equity.

Cost leadership: Successful implementation of low cost strategy.

Highly efficient management that ensures high rate of on- time arrivals.

Continuous innovation to improve on non price factors.

Tie-up with hotels.

Ease ofticket booking for customers.

Weaknesses

Scope of product differentiation is less.

Benefits of the innovations implemented by IndiGo to provide better services

to the customers are short-lived, as these can be easily imitated by the

competitors.

IndiGo is not exploring the untapped domestic air cargo market


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Chapter -4

Suggestions


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Feasible Alternatives

1. Increase domestic operation

There are a number of initiatives taken up by government to encourage aviation

industry,e.g., promotion of regional air connectivity

10. Open Sky pol icy

11.and policy of Greenfield airports

12. In addition to this, government has also made plans for the development

of airport infrastructure

13. 35 airports have been selected for this purpose, of these 24 airportswould be

taken up for city side development through PPP including maintenance

andoperation of the terminal buildings, cargo operations and real estate

development

14. All these factors indicate towards a favorable environment for growth in the

domestic aviation sector. Hence it would be a wise option for IndiGo to

increase its domestic operations. IndiGo must increase the number of

destinations and can start long haul aircrafts.

2. Extension

Currently, IndiGo is concentrating only in domestic passenger flights.

However, the freight/cargo market and charted plane service are the areas that

can prove to be good potential market for IndiGo. As per the reports from an

economic survey this year, it was stated that domestic cargo showed a growthof 14.55%15. Besides, chartered flight services are an untapped market for

IndiGo. Thus, IndiGo has a huge opportunity to expand in both these arenas.

10To expand air connectivity on Tier II and Tier III cities and to promote

regional air connectivity a separate category of permit, Scheduled Air Transport

(Regional) Services had been introduced.

11


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The `Open Sky' policy encourages the promotion of Regional Airlines, lower

fares to make aviation affordable and remove price monopolies in respect of

Aviation Turbine Fuel (ATF).

12

The Policy aims to have an approval mechanism for setting up of new airports.

Guidelines for granting technical approvals by various agencies involved in

setting up of an airport would be provided upfront to provide clarity, Airport

Authority of Indiawww.airportsindia.org.in

13

Airport infrastructure has been undertaken through the PPP route in major

metro cities like Delhi, Mumbai, Bangalore and Hyderabad. Modernization of

the Kolkata and Chennai airports is being undertaken by the AAI.For the non-

metro airports AAI are responsible for the airside development.


Final Recommendation

As inferred from the above two solution analysis, we recommend that IndiGo

must increase its domestic operations by starting flights connecting to new

destinations and long haul flights. As the opportunities are vast for this purpose,

the other low cost carriers may also venture in this area. So using the cost

leadership strategy, IndiGo can gain competitive advantage over its competitors

as the first mover. Once the above strategy is successful and results in

promising revenue growth, IndiGo cause extension to freight and chartered

services as the next objective for further expansion

strategic management of indigo

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