www.foolonahill.com
4. Civil
Aviation Policy in India
6. Passenger
airlines – The players
7. Foreign
equity participation
9. Market
Structure and Implications
10. Trends in International and Domestic Civil
Aviation and Projected Future
Scenario
11. Study of Consumer Demand in the industry
12. Case Study - The No frills model
16. References/Acknowledgements
www.foolonahill.com
1.1
Air
Traffic: The Airport
Authority of India (AAI)
manages total 122 Airports in the
country, which include 11
1.2
Growth:
Estimated
domestic passenger segment growth is at 12% per annum.
Anticipated growth
for International passenger segment is 7% while the growth for
International
Cargo is likely to grow at a healthy rate of 12%.
1.3
Privatization: Privatization of International Airports
is in offing through Joint
Venture route. Three Greenfield airports are getting developed at
Kochi,
Hyderabad and Bangalore with major shareholding of private sector. The
work on
Bangalore airport is likely to commence shortly. Few selected
non-metro
airports are likely to be privatized.100% foreign equity has also been
allowed
in construction and maintenance of airports with selective approval
from
Foreign Investment Promotion Board.
1.4
Air
movements: The total
aircraft movements handled in
October 2003 has shown an
increase of 15.4 percent as compared to the aircraft movement handled
in
October 2002. The international and domestic aircraft movements
increased
by 15.4 percent each during the period under review. The reason
for
increase in aircraft movements is due to increase of operation of
smaller
aircraft by airlines and the introduction of new airlines viz., Air
Deccan in
southern region and international airlines (Air Canada, Polar Air
Cargo, Qatar
Airways (Freighter), Turkish Airways, Air Slovakia at IGI Airport with
effect
from October 2003.
1.5
Passenger
Traffic:
International and Domestic
passenger traffic handled in October
2003 has increased by 15.4 percent and 6.7 percent over the period of
October
2002 leading to an overall increase of 9.4 percent. The total
passenger
increased by 9.2 percent, 7.6 percent, 8.9 percent and 17.0 percent
respectively at five international airports six developing
international
airports, eight custom airports and 26 Domestic airports.
1.6
Cargo
Traffic: The total
cargo traffic handled in
October 2003 has shown an
increase of 3.5 percent as compared to the cargo handled in October
202.
The international and domestic cargo traffic increased by 4.3 percent
and 2.1
percent respectively during the period.
During the month of October 2003, 5346
thousand
aircraft movements (excludes defence & other non-commercial
movements),
40.33 lakh passengers and 88.59 thousand tones of cargo were handled at
all the
airports taken together.
The first commercial flight in
Tata Services
became Tata Airlines and
then Air-India and spread its wings as Air-India International. The
domestic
aviation scene, however, was chaotic. When the American Tenth Air Force
in
For many years in
In recent years, however, this image of Civil Aviation has undergone a
change and aviation is now viewed in a different
light - as an essential link
not only for international travel and trade but also for providing
connectivity
to different parts of the country. Aviation
is, by its very nature, a critical part of the infrastructure of the
country
and has important ramifications for the development of tourism and
trade, the
opening up of inaccessible areas of the country and for providing
stimulus to
business activity and economic growth.
Until less than a decade ago, all aspects
of aviation were firmly controlled by the
Government. In the early fifties, all airlines operating in the country
were
merged into either Indian Airlines or Air
3.1 Need
for Open Skies Policy
A recurring demand often voiced by
interested parties
is that, in order to promote
3.2 Meaning
of ‘Open Skies’
At the outset we must point out that
the
concept of
'Open Skies' is much misunderstood in its meaning and implications.
Strictly
speaking Open Skies means unrestricted access by any carrier into the
sovereign
territory of a country without any written agreement specifying
capacity, ports
of call or schedule of services. In other words an Open Skies policy
would
allow the foreign airline of any country or ownership to land at any
port on
any number of occasions and with unlimited seat capacity. There would
be no
restriction on the type of aircraft used, no demand for certification,
no
regularity of service and no need to specify at which airports they
would land.
Defined in this manner, it is not surprising that Open Skies policies
are
adopted only by a handful of countries, most commonly those that have
no
national carriers of their own and that have only one or two airports.
No sovereign
country of any eminence practices Open Skies least of all the European
Union,
UK, USA, Japan, Australia or countries in South East Asia.
3.3 Bilateral
Treaties
However, almost 99 per cent of
Members of
the
International Civil Aviation
Organization (ICAO) follow the system of negotiated bilateral treaties
determining the aviation
relations between two sovereign Contracting parties. In fact, the
bilateral aviation regime is considered the
fundamental basis for a disciplined and regulated aviation
system between the nations of the world. It provides not
only regularity of operations through scheduled services but also
stipulates
the basis of ownership, number of seats to be utilized, type and
certification
of aircraft and visiting ports of call. The Bilateral Agreements also
protect
the different kinds of aviation
Freedoms granted to contracting parties by specifying the reciprocal
rights to
be enjoyed by each.
3.4 Indian
Bilateral Treaties
3.5 Utilization
of Bilateral Treaty Contracts
It is in the actual utilization of
the
contracted
seats that the problem arises. Of the contracted amount, 50 per cent
are to be
utilized by the national carrier and 50 per cent by the airline owned
by the
contracting country. However, whilst the foreign carriers are in a
position to
use over 70 per cent of their entitlement, the national carrier is only
able to
utilize 29.4 per cent of their share. It is this shortfall that creates
pressure on seats, particularly during peak tourism national carriers
do not
have sufficient aircrafts to be able to utilize the bilateral rights
available
to the country and enter into commercial and code sharing arrangements
to
maximize revenue. Whilst this does improve their profitability in the
short
run, it has a long-term adverse effect in that it deprives the country
of much
needed air bridges to bring in tourists and carry trade.
Under the present bilateral system, the
utilization
of the traffic rights on international routes to and from India, as negotiated by the Government
of India, is restricted to the
two Government owned 'national' carriers - namely Air India
and Indian Airlines and either or both these carriers are
the Indian designated carriers under the various Air services
Agreements. The
Operating Permits restrict the privately owned carriers, such as Jet
Airways
and Air Sahara, to operate only domestic routes within
In the context of a multiplicity of
airlines, airport
operators (including private sector), and the possibility of
oligopolistic
practices, there is a need for an autonomous regulatory authority which
could
work as a watchdog, as well as a facilitator for the sector,
prescribe and
enforce minimum standards for all agencies, settle disputes with regard
to
abuse of monopoly and ensure level playing field for all agencies. The
CAA was
commissioned to maintain a competitive civil aviation environment which
ensures
safety and security in accordance with international standards,
promotes
efficient, cost-effective and orderly growth of air transport and
contributes
to social and economic development of the country.
4.1 Objectives of Civil Aviation
Ministry
a)
To
ensure
aviation safety, security
b)
Effective
regulation of air transport in the country in the liberalized
environment
c)
Safe,
efficient,
reliable and widespread quality air transport services are provided at reasonable prices
d)
Flexibility
to
adapt to changing needs and circumstances
e)
To
provide all
players a level-playing field
f)
Encourage
Private participation
g)
Encourage
Trade,
tourism and overall economic activity and growth
h)
Security
of
civil aviation operations is ensured through appropriate systems,
policies, and
practices
4.2 Private Sector Participation and
the Civil Aviation Policy
·
Private
sector
participation will be a major thrust area in the civil aviation sector
for
promoting investment, improving quality and efficiency and increasing
competition.
·
Competitive
regulatory framework with minimal controls encourages entry and
operation of
private airlines/ airports.
·
Encouragement
of
private sector investment in the construction, upgradation and
operation of new
and existing airports including cargo related infrastructure.
·
Rationalization
of various charges and price of ATF/AVGas will be undertaken to render
operation of smaller aircraft viable so as to encourage major
investment in
feeder and regional air services by the private sector.
·
Training
Institutes for pilots, flight engineers, maintenance personnel,
air-traffic
controller, and security will be encouraged in private sector.
·
Private
sector
investment in non-aeronautical activities like shopping complex, golf
course,
Entertainment Park, aero-sports etc. near airports will be encouraged
to
increase revenue, improve viability of airports and to promote tourism. CAA will ensure that this is not at the cost
of primary aeronautical functions, and is consistent with the security
requirements.
·
Government
will
gradually reduce its equity in PSUs in the sector.
·
Government
will
encourage employee participation through issue of shares and ESOP
4.3
Security
Strict
national civil aviation security programme to safeguard civil aviation
operations against acts of unlawful interference have to be established
through
regulations, practices and procedures, which take account of the
safety,
regularity and efficiency of flights. A good safety record is a judgment of past
performance but does
not guarantee the future, although it is a useful indicator. While
pilot error
is said to be on the decline, factors of fatigue, weather, congestion
and
automated systems have complicated safety. Airline operators, pilots,
mechanics, flight attendants, government regulators and makers all have
a stake
in making aviation as safe as possible. The International Air Transport
Association (IATA), the International Civil Aviation Organization
(ICAO),
manufacturers and others bodies cooperate in this aim. As world air
traffic is
expected to double or more by 2020, the accident rate must be reduced
in order
to avoid major accidents occurring more frequently around the globe.
4.4
Maintenance
Private
sector participation is encouraged in existing maintenance
infrastructure of
Indian Airlines and Air
Air
In
The
AAI operate most aspects of the airport (including air traffic control)
and
procure most of their equipment directly (via global/local tenders).
Until
2000, there were five major international airports, - Mumbai, Kolkata,
According
to projections, Indian air passenger traffic was estimated to grow to
100
million passengers by 2012 from 36.98 million in 1998-99. Growth
projections in
the cargo front were also promising. Airport infrastructure is linked
to
development of
6.1 Indian Airlines
Indian
Airlines was founded in 1953. Today, together with its fully owned
subsidiary
Alliance Air, it is one of the largest regional airline systems in Asia
with a
fleet of 62 aircraft(4 wide bodied Airbus A300s, 41 fly-by-wire Airbus
A320s,
11 Boeing 737s, 2 Dornier D-228 aircraft and 4 ATR-42).
The
airlines network spans from
Indian
Airlines flight operations centre around its four main hubs- the main
metro
cities of
6.2 Air
Air
Air
The
airline is currently undergoing a complete overhaul and restructuring
exercise.
Air
A major investment programme has been launched for the modernization
and
enhancement of its fleet. Fleet review
and route rationalization have become the focus points of Air
Sahara's
strategy. Five new Boeings have been added to the fleet in the last one
year.
These were used to add new destinations and increase frequency on
existing
routes. In the second phase of its expansion four Canadair Regional
Jets have
been added to the fleet this year serve on regional routes.
Air
Air
6.3 Jet Airways
In
May 1974, Naresh Goyal founded Jetair (Private) Limited with the
objective of
providing Sales and Marketing representation to foreign airlines in
In 1991, as part of the ongoing
diversification programme of his
business
activities, Naresh Goyal took advantage of the opening of the Indian
economy
and the enunciation of the Open Skies Policy by the Government of
India, to set
up Jet Airways (
Jet Airways has emerged as
Jet Airways has been voted
6.4 Air
Air
The
company has a modern fleet of ATR-42-320 aircraft, one of the finest
and most
efficient Turbo-Prop aircraft flying. ATR is a European joint venture
between
Alenia Aeronautica and EADS. The ATR 42 has become a reference aircraft
amongst
airlines around the world, by offering a safe, easy to maintain and
comfortable
aircraft operating on the regional market with the best economics on
short haul
sectors. To date, ATR has sold over 650 aircraft to more than 100
operators in
73 countries all around the world.
The
company has adopted a 'lean-and-mean' approach to staffing and aims at
maintaining a low aircraft-to-employee ratio. A good work culture
coupled with
a skilled workforce is the backbone of the company.
While most information
about the Indian Carriers, other than the Government owned, is not in
public
domain, the available information does not tell us much. The Promoters
and Key
Management persons are not listed nor is their equity ownership pattern
provided. Jet Airways' ownership is apparently fully foreign giving
rise to the
phrase:
6.6 Fleet Size
Fleet-wise also Indian
carriers are quite small. Air
This is
minimal when compared with American Airlines, one of the world's
largest
airlines with almost 1000 aircraft and carrying over 80,000,000
passengers and
650,000 Tonnes of freight a year. Even Singapore Airlines, a small
Nation
airline that operates only internationally, has almost twice the number
of
aircraft than its parallel Air
The
three-member enquiry committee, led by former petroleum secretary T S
Vijayaraghavan, has suggested that 100 per cent foreign investment,
including
by foreign airlines, should be allowed in non-scheduled services such
as
chartered aircraft and helicopter operations.
As
of now, foreign airlines are not permitted to pick up equity directly
or
indirectly in domestic air companies. Foreign equity upto 40% and
NRI/OCB
investment upto 100% is permissible in the domestic air transport
services.
Under
the current policy, if a foreign airline operates in
Indian
operators can, however, lease aircraft from foreign companies, but the
government only permits "dry-lease," which requires the aircraft to
be registered in
The US National Commission
to Ensure a Strong and Competitive Airline Industry (1993) envisaged
the
long-term development of more liberal cross border airlines investment.
However, as a short-term measure it advocated ‘expanded access to
international
capital markets by allowing larger investments from foreign investors
under the
current bilateral system’. It also proposed that foreign investors be
able to
hold up to 49 per cent of the voting equity in US airlines, up from the
then
(and still current) limit of 25 per cent.
Any increase in the cost
of equity capital flows through to the choice of debt versus equity and
thereby
distorts capital structures. Airlines should have flexibility in
financing
their operations and developing their corporate structures. The
existence of a cap
on foreign ownership limits this flexibility.
Source -
Business World,
July 2004
Airfares in
8.1 Labour
If regulations
or industry policy provide protection to an industry, the value of
protection
may be dissipated in poor productivity and higher-than-normal returns
to labour
and capital. Entry limitations
and
capacity constraints have the potential to allow airlines to earn above
normal
returns, which may be appropriated by shareholders or paid out in
higher than
normal costs (including wages, salaries and working conditions).
Given the valuable
contribution that aviation and tourism make to national welfare, it is
essential that the aviation market is globally competitive and
functions in the
most efficient way. This means that the inputs that the industry
depends on,
such as labour and capital, must also be available on an
internationally
competitive basis.
8.2 Fuel Prices
ATF is
the major cost for domestic carriers accounting for 30% of the total
operating
costs in
8.3 Capital
The relatively
capital-intensive nature of the airline industry, combined with the
fact that
airlines are generally regarded as being inherently risky investments,
means
that access to large, well-functioning capital markets is an important
issue
for all airlines. The effects of these restrictions may vary from
country to
country, but are likely to be greater for countries with small domestic
capital
markets.
8.4
Operating Costs
The regulatory system affects where, how
and when airlines can fly. Thus
it affects airlines’ ability to operate efficient networks and their
revenue.
To the extent that airlines cannot use the least cost combinations of
aircraft
types to carry passengers and freight, the costs of operating existing
networks
are higher than they otherwise might be (technical inefficiency).
Further, they
may be prevented from flying the optimum sized and configured network
(allocative inefficiency). Thus, costs may be reduced as airlines are
able to
operate the right aircraft at the right frequencies on an existing
route.
Airlines, by changing the
design of a network and increasing its size, may also be able to
decrease costs
through economies of scale and scope.
8.5 Ownership and control
As
airlines strive for greater efficiencies, they consider the benefits of
consolidation.
However, the normal commercial process of acquisition and/or merger is
not
available due to restrictions contained in bilateral agreements that
are designed
to ensure that ownership and control of airlines remain with nationals
of the
countries where they are based.
Growth
through merger or acquisition enables airlines to achieve economies
scale and
scope by consolidating airline functions. The merger of two airlines,
for
example, may allow them to consolidate their ground handling,
maintenance,
information technology and various managerial functions.
8.6 Airline
Acquisition/Leasing Cost
Taking aircraft on lease is one of the
preferred modes
among the Indian carriers. However, this has suddenly become costlier
affair
due to changes proposed in Union Budget 2004-05. The budget proposes
withdrawal
of tax exemption granted to acquire aircraft or an aircraft engine on
lease
prospectively from
All carriers barring Jet
Airways will feel the heat
of the sudden withdrawal of exemption for taking aircraft for lease as
they
have significant plan to expand the fleet capacity by leasing route.
This
includes both state carriers like Air India (AI), Indian Airlines (IA),
Alliance Air and private carriers like Air Sahara, Air Deccan. As Jet
Airways
that has predominantly prefers owning aircraft rather than going for
leasing.
As tax exemption will not
be available for lease
agreements entered on or after
As leasing route is the
most preferred one for a new
entrant, the Budget initiatives will prove be a heavy deterrent as they
will
escalate the effective lease rental cost by almost 42%.
The aviation industry in
One sees the following characteristics
with respect
to the Indian passenger airlines market –
1.
Few
number of
firms contributing to majority of the market share
2.
Products
are
differentiated in terms of service quality and offerings
3.
MR=MC
4.
p>MC
5.
Entry
Barriers
6.
Firm
is a
price-setter
7.
Long
run profit
>= 0
8.
Strategy
dependent on individual rival firm’s behaviour
9.1 Market
share concentration
According to the figures on market share
of various
scheduled airlines in the same year, Jet Airways topped the list with
46.7 % in
2003-04, followed by Indian Airlines (IA) and its subsidiary Alliance
Air
together at 39.3%, Air Sahara at 13% and Air Deccan 1 %.
9.2 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
differentiated but 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 Pm. As we can see, the firm is earning
economic
profits since price exceeds average total cost at the profit maximizing
level
of output.
9.3 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 travellers, 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 consumer’s 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 and
seat-inventory c
ontrol 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 stayover) 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.
9.4 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."
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.
9.5 Market
Equilibrium through the Cournot Model
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
duopolist, 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 implication is that, as for a monopoly, the
Nash
equilibrium outcome in a Cournot duopoly is not Pareto efficient.
Trends
& Alternatives
In 1998, approximately 500
alliances existed between airline companies. Some of these alliances
were to
the point of a merger (Market Share of World Airlines Traffic, 2003).
The scene
today is dominated by a few multilateral alliances. Top three, Star,
Skyteam
and Oneworld together account for over 60% of the total international
traffic.
|
Oneworld |
|
American Airlines,
British Airways, Aer Lingus, |
|
Star |
|
United Airlines,
Lufthansa, Air Canada, Air New Zeland, ANA, Asiana, Austrian, bmi
British, midland, LOT Polish Airlines, Mexicana, SAS, Singapore,
Spanair, Thai Airways, Varig, US Airways, TAM |
|
SkyTeam |
|
Air |
While so far
India has stayed out of these
alliances, relying primarily
on bilateral agreements, it is merely a matter of time before Indian
airlines
are drawn in this web and the three blank spots, Russia, China and
India are
filled in by the International Alliances ((in all three cases, the
leading
carrier is a government owned/aligned entity which makes decision
making a complex
politico-economic process). As it is,
In any case
Considering
the fragmented nature of Indian Aviation Market, at the national level
11.1 The
Potential Market
While formulating the
national strategy one must remember a few aspects of Indian Passenger
Aviation
Market -
a.
Potentially,
b.
Potentially, it is also a very large low-fare
market.
c.
d.
e.
In Aviation circles
11.2
Growing the Market
Airbus Industries Research
shows that there is a cut-off point beyond which the preferred mode of
travel
changes. Thus small distance journeys are convenient by road while
longer
journeys are preferred by rail and air. The data should actually be
viewed in terms
of time involved rather than the distance since technological
development in
any field can impact the time taken for same travel. As has already
happened in
While data for similar
preference change in the mode of travel is not available for
To a business traveller,
overnight journeys by train are quite comfortable although given the
economic
situation even 24 hour journeys are quite acceptable. Beyond that,
given the distances
within the country any one would prefer to hop on a flight provided it
is
offered as an alternate travel service and not something only for the
corporate
world. For this to succeed, the low cost travel will have to be both
with
predictable pricing and longevity of offer beyond the gimmickry of
attention
getting news. This is the only way to enlarge the pie and aim at strata
beneath
the upper crust.
11.3 Other
substitutes
The issue of affordability
of domestic air travel has been well addressed in the Naresh Chandra
Committee
Report on Aviation. While the goal of affordability is absolutely well
placed,
the assumption that the lowering of tariffs, taxes and charges alone;
for fuel,
landing or travel, is the answer that needs careful examination. Even
if these
charges constitute a significant part of the fare, they need to be
evaluated in
the context of competition and monopoly. At home, considering road and
rail as the
competition, the charges for fuel should be viewed as a similar cost
composition for all modes of travel. To reduce fuel charges for any one
sector
while enhancing or retaining them at the same level for the others will
distort
the field. This, particularly when airlines have, and can have, the
freedom of
picking up fuel from other competing nations. Fuel charges at home,
therefore,
should be viewed as a part of the overall petroleum pricing policy.
This is
important since petroleum, as fuel is common to many industry groups
apart from
being a raw material for some. Incidentally, how much of what product
is
extracted from the available crude is as much a matter of choice as is
it a
matter of the quality of crude.
11.4 Low-fare
Airlines
Despite reports of low
budget airlines loosing their momentum due largely to the incumbent
firms’
crushing the competition with even lower fares whenever a low cost
upstart
invaded its market, low-fare will always remain the basic market. This
is amply
proven by the success of Southwest in the
To any buyer of service or
goods, price and quality are always two key considerations. No doubt
there is a
class of air passengers who will only look at the bonuses, be that in
the form of
Frequent Flyer Miles during peak season or extra cushioning of the
seat. These
are generally the corporate travellers where someone else is footing
the bill.
There is also an occasional traveller who, being in distress will not
look at
the price during emergency. While the corporate travellers are a
distinct
segment and will be serviced fully, obviously civil aviation will have
to look
beyond them if it hopes to expand the market. In the US, the low fare
airlines have
almost a 30% share of the entire passenger aviation and in the recent
past
Southwest, the leading Low-fare US airlines has outperformed even the
largest
US airlines in passenger kilometres.
Latest news reports
indicate that the low cost airlines are the price leaders now.
Recently, Southwest
Airlines initiated a round of fare cuts and the bigger airlines had to
respond.
11.5
Consumer
Perception
We
conducted a survey in order to find the consumer perception about
airlines. The
following results have been culled out from the survey of 116
individuals. The
sampling method was a mix of purposive and stratified random sampling
and
attempted to duplicate the general consumer profiles of the population
(as
based on preliminary secondary data). The age group of the sample was
between
18 and 58, across gender, location, and socio-economic class (mapped on
education
and occupation, with a majority of the sample in SEC A and B+).
The region-wise
spilt up of
the sample is as follows:
The areas
covered in the
survey are -
Brand
Awareness Study
Indian
Airlines ranks number one in brand awareness. This could be attributed
to its
long stay in the market and continued support from the government.
Today,
Indian Airlines has become synonymous with reliability and efficiency.
Jet
Airways is offering stiff competition and ranks second in the list.
Usage of Airlines
Indian
Airlines, mostly used by government employees, recorded the highest
usage
followed by Jet Airways. Although most consumers rated Jet Airways high
on
price, it still ranks second in usage and this could be attributed to
its
excellent service and promotion schemes. Similar data for the entire
population
reflects a higher usage of Jet Airways than IA, and a lower usage of
Frequency of Usage
As
indicated in the graph below, a majority the population flies
relatively
infrequently (as compared to the developed markets). Passengers
travelling on
business were found to be more frequent users, while those flying on
holidays
and emergencies were those that tended to make up the segment that flew
less
than once a year.
Note
– As purposive sampling was undertaken at
Flight Class and Occasion of use
Although the occasion of use indicates
that maximum usage is for
business, the flight class graph indicates that the proportion
travelled by
business class is very small in comparison to that travelled by economy
class. This
indicates that most business travellers are flying Economy class as
well. Further,
the second important occasion of usage is for emergencies and
time-critical
travels.
Circuits Flown: The most frequently flown circuit is that
between
major metros, followed by other state capitals and Delhi-Mumbai.
Scheme Preference: With the entry of new players in the market, airlines are competing for passengers on non-price parameters. This increases the product differentiation in order to decrease elasticity of demand in the market. Given the key differentiators that substitute for price, consumers have rated Apex fares as their most preferred scheme. Indian Airlines, Jet and Air Sahara offer apex fares. Next most preferred to Apex fares is the frequent flyer program, a trend noticed predictably in the high frequency repeat users and those travelling on business.
Factors
affecting consumer perception
We
identified the following factors that make the demand function of
consumers.
Based on our hypothesis, a choice parameter weight was arrived at by
asking the
sample to rank the following parameters on a Likert scale -
a)
Price
b)
Service
c)
Promotional
Schemes
d)
Loyalty
programmes
e)
Flight
Schedules
f)
Comfort
with the
brand
g)
Corporate
tie-ups
Price appears to be
most important factor
for the
consumer followed by service provided and flight schedules. Indian
Airlines has been rated high on most parameters while Jet Airways,
although
rated low on price, is rated highest in most other factors. Air
Air
Sahara’s many services such as In-flight entertainment and Wings n'
Wheels
coach service, exclusive business lounges being operated at departure
halls at
airports in a number of cities, providing for business and refreshment
services
has made it second most popular under services. It has taken the lead
in
introducing novel initiatives such as Steal-a-seat flexi fare options,
Sixer/Super
Sixer and Square Drive/Super Four.
Air
Sahara's frequent flyer program called Cosmos has also become a great
hit with
the passengers, though it still ranks almost on par or lower on
customer
perception than the schemes offered by Jet and IA (see promo schemes
and
loyalty programs), essentially due to lower customer awareness levels.
Corporate
tie-ups were a trend significant by their absence on the brand
preference
parameters. While the only major tie-ups were by Indian Airlines with
government agencies, these were not perceived as strictly ‘corporate’
tie-ups.
This segment is hence a possible opportunity which can be explored as a
non-price differentiator, given the large frequency of use by business
travellers.
12.1 Analyzing Southwest
Airlines
and how, in
Southwest
Airlines Co., incorporated in 1967, is a
As
of
Presently,
Southwest is the third largest
So
what differentiates Southwest from the ‘legacies’?
·
Southwest's
average aircraft trip stage length in 2003 was 558 miles, with an
average
duration of approximately 1.5 hours.
·
The
Company's point-to-point route system, as compared to hub-and-spoke,
provides
for more direct non-stop routings for customers and, therefore,
minimizes
connections, delays and total trip time.
·
Southwest
focuses on non-stop (not-connecting) traffic. As a result,
approximately 79% of
the Company's customers fly non-stop
·
In
addition, Southwest serves many conveniently located satellite or
downtown
airports such as Dallas Love Field, Houston Hobby, Chicago Midway,
Baltimore-Washington International, Burbank, Manchester, Oakland, San
Jose,
Providence, Ft. Lauderdale/Hollywood and Long Island Islip airports,
which are
typically less congested than other airlines' hub airports. This
enhances the
Company's ability to -
1.
sustain high employee productivity
2.
ensure reliable on time performance
3.
lower landing and parking fees
4.
achieve high asset utilization
·
Aircraft
are scheduled to minimize the amount of time the aircraft are at the
gate
(approximately 25 minutes), thereby reducing the number of aircraft and
gate
facilities that would otherwise be required.
·
The
Company operates only one aircraft type, the Boeing 737, which
simplifies
scheduling, maintenance, flight operations and training activities.
·
Southwest
does not interline or offer joint fares with other airlines, nor does
it have
any commuter feeder relationships.
·
Southwest
offers a ticketless travel option,
eliminating the need to print and process a paper ticket altogether. In
2003,
more than 85% of Southwest's customers chose the ticketless travel
option and
approximately 54% of passenger revenues came through the Internet.
For
the past five years, low-cost airlines have been growing at more than
40 per
cent a year, while the full-service airlines are yet to recover from
the crisis
that hit them post 9/11. Taking a cue, Capt. G R Gopinath launched Air
Deccan in September 2003,
·
Airbus
320 can
accommodate 180 seats while IA has 145 seats including executive class.
The
extra 35 seats are in Rs 500-Rs 2,500 bracket
·
In
contrast to
the hub-and-spoke model, Air Deccan follows the point-to-point concept,
which
removes hindrances like waiting for connecting flights and through
baggage
check-in
·
Result:
greater
flexibility. Each Airbus 320 flies for 10-11 hours compared to the 7-8
hours
clocked by other airlines
·
Air
·
The
model is
akin to any other low-cost carrier. Even the most expensive ticket on
offer is
35 per cent lower than usual fares on any sector. In the
Delhi-Bangalore sector
for instance, the first 40 seats are available between Rs 500 - Rs
2,500, the
next 110 seats up to Rs 5,000 and the remaining don’t cross Rs 7,000.
·
Unlike
IA, Jet
and
But
unlike low cost airlines in the
·
Air
·
Plans
to launch
services on trunk routes have been delayed as it has not been allotted
parking
bays and ticket counters in Mumbai and
·
The
operations
of Air Deccan to Guwahati and Dibrugarh are not by choice but are part
of the
Category 2 and Category 2A routes which are compulsory for a private
airline
operating on metro routes. This need for compliance though has bled
full-service airlines what with their larger capacity fleets.
Others
are just as keen to get
All
this activity has spurred
The
new players face some serious hurdles. The biggest is infrastructure.
Indian
airports are dismal -- when cities are lucky enough to have one. Even
cities
with millions of inhabitants -- such as
High fuel costs and other
operating fees such as landing and parking charges, which account for
up to 15
percent on an airline's expenditure, have kept air fares high and
grounded most
carriers which have entered the domestic aviation sector when it opened
up
nearly a decade ago.
Defining
Low Cost Carriers
Simple Product
Positioning
Low Operating Costs
Attributes
of Low-cost Carriers
·
Narrower
seating
(higher capacity: 148 vs. 126)
·
Higher
plane
utilization (10.7h vs. 8.4h) due to shorter turnaround times
·
Lower
staff
costs due to greater productivity, generally lower wages and smaller
staff (no
service)
·
Lower
airport
fees at secondary airports and smaller cities
·
No
sales commissions
due to web sales
·
Low
station
costs due to simpler handling and more efficient processes
·
High
number of
passengers per employee - 7250 for RyanAir vs 1290 for Lufthansa (2002
data)
Strengths
·
Passengers
will
continue to need connecting/network services
·
Ensure
a leisure
travel, especially to the business traveller, like airport lounges
·
Enhanced
in-flight service and more comfortable seating
·
In
long-haul
markets, where premium service is essential, through higher capacity
and long
range Boeing 747s and Airbus 340s.
Weakness
·
Excess
capacity
·
Complicated
flight operations. Hub-and-spoke networks of legacy carriers were
profitable as
long as LCCs had low service along heavily travelled routes.
·
Mounting
debt –
Enormous debt to investment ratio (above
90% for most
·
Cost-to-revenues
ratio per seat mile is very high (>13) compared to Southwest’s 7.67
Opportunities
·
Maintain
short-haul flights only to extent needed to feed the network
Threats
·
Labour
problems as “legacies” try to streamline in order to compete with
LCCs
·
Flood
of new
capacity into the region from LCCs may trigger a competitive bloodbath
among
the legacies.
No-Frill
Airlines Prices
This
cut throat competition is at its peak in sector like Delhi-Mumbai where
Jet
Airways has cut its Apex air fare to Rs 2500 for passengers booking
ticket 30
days in advance. This was in response to Indian Airlines concessional
fare of
Rs 3500 if ticket is booked 21 days in advance and Air Sahara’s special
package
offer of Rs 4444 for a return ticket basis. The no-frills airline Air
Deccan
has announced fares as low as Rs 700 if booking is done 90 days ahead.
Jet
airways has lowered its apex fares by 20% under ‘Monsoon Super Apex
Fares’
scheme if the booking is done 30 days in advance in six busy sector
including 4
metros.
15.1 Government
Recommendations
Codesharing
Codesharing is an
important tool for airlines to minimise the costs of operating
services. By
selling seats on a flight operated by another carrier, codesharing
enables an
airline to make direct cost savings by rationalising services or
establishing
market presence on a route without actually operating on it. Thus, both
airlines
may be able to save on fuel, labour and other variable costs, as well
as making
more effective use of aircraft and other overheads.
Cabotage
Restricting access by foreign
carriers to the Indian domestic market gives the Indian carriers a
solid base
from which to extend into international aviation. The same applies to
most
other countries, with the exception of city economies such as
·
operational
synergies and efficiencies by
being able
to switch capacity and aircraft between the domestic and international
sectors;
and
·
network
advantages such as economies of
scope and
traffic density as well as the marketing advantages of operating a
combined
domestic and international network.
The opposition to this
recommendation is the view that It is most
likely that foreign
carriers would engage in ‘cherry picking’ i.e. carry domestic traffic
on the
most profitable routes. Incumbent airlines would need to counter any
loss of
profitability on routes affected by cabotage and this could mean a
reduction in
the number of services provided on these routes, or the reduction or
withdrawal
of services from less profitable routes, with consequential loss of
amenity to
passengers, including those making connections to other parts of the
domestic
network.
The regulatory
structure inhibits competition in many ways. It can prevent or deter
entry,
constrain capacity, and limit the potential for airlines to win market
share. A
problem in assessing regulatory impacts is the structure of aviation
markets. Economies
of scope and traffic density favour large airlines operating many
services. On
the demand side, a single carrier operating a long thin route with
multiple
frequencies will attract better business than multiple carriers who
each operate
one service per week. Thus markets tend to be concentrated with a small
numbers
of carriers operating on most routes.
It cannot be presumed that these airlines
respond to normal commercial incentives.
Instead of shareholder value, they may be managed for national
prestige,
employment enhancement, technology transfer, or defence, which might
require
government subsidies. Continued use of substantial government subsidies
is an
obstacle to efficient air services, and has important implications for
competition in a less regulated international environment.
Eliminate
the fuel tax
A most regressive
tax whose burden becomes larger as fuel costs increase (and airlines’
ability
to pay diminishes). As an interim step – cap tax revenue and determine
a better
way of obtaining (e.g., a per passenger levy).
Eliminate category III
restrictions
Eliminate
category III restrictions and provide essential air services subsidies
where
required (with costs shared by national/state/local authorities).
Category III
mandates that an
operator
deploy on routes in Category-II (North-Eastern
region, Jammu & Kashmir, Andaman & Nicobar and Lakshadweep)
at
least 10% of the capacity deployed on routes in Category-I and of the
capacity
thus required to be deployed on Category-II routes, at least 10% would
be
deployed on service or segments operated exclusively within the
North-Eastern
region, Jammu & Kashmir, Andaman & Nicobar and Lakshadweep. In the interim, allow airlines to
transfer category III obligations to a competitor or third party
operator – who
could use a standard, appropriate fleet and be paid by the majors to
meet their
category III requirements.
Improve quality of and
access to airports and hangars
Privatize or municipalize.
Develop a robust traffic management system that addresses relevant
technical
issues and meets strategic objectives through rigorous systems
engineering and
large-scale integration efforts such that rising air traffic demand is
supported in a safe, secure and efficient manner.
Today, Indian
airlines have difficulty accessing hangars for maintenance. As a
result,
private operators have to do some maintenance abroad. Airline
maintenance and
overhaul should be an area where
Tourism
An efficient
aviation sector is essential to support the tourism industry, which has
immense
employment opportunities and the tourism and airline industries with a
joint
proactive approach can foster tourism development and promotion in a
big way.
One of the prerequisites for developing tourism is 'easy access' to the
tourist
destinations, in terms of international and domestic connectivity and
easy
movement within the destination. An efficient aviation sector is
essential to
support tourism. Air connectivity is integral to the growth of tourism.
Airlines and tourism are self dependent. The tourism market grows by
itself
with new connections and a popular destination attracts more flight
operations.
It is a win-win situation.
Direct
connections would also give further impetus to tourists’ arrival. Over
40 per
cent of the passenger traffic is concentrated in two main international
airports namely
15.2 Industry Recommendations
Reduce labour
costs
All
major carriers need to win significant concessions from their workers.
Low
labour outlays would consist of a mix of reduced wages, more flexible
work
rules and trimmed benefits including pension.
Simplify
flight operations
Low-cost carriers use just a
few types of aircraft, a strategy
that cuts training and maintenance expenses. Larger airlines who fly
internationally, to more remote destinations require varied fleets of
large and
small planes. However, they can and should work toward streamlining the
types
of planes they fly.
Another way to simplify operations is modifying the hub-and-spoke
model, which
uses designated headquarter airports for transfers. Traditionally, the
big
airlines have sent many of their flights through hub airports at peak
business-travel hours. That way, since carriers typically charge heaps
more for
business fares, they can get more revenues per flight. But many experts
argue
that it's time to give up on that model - especially as low-cost
carriers
increase service along heavily travelled routes.
Experts like the idea of so-called rolling hub operations, where
flights are
scheduled throughout the day so that an airline's assets - from
employees to
planes to hangars - can be used more efficiently. In a traditional hub
system,
planes and workers spend more time waiting for connecting flights to
come in at
peak operating times. With rolling hubs, travellers may end up waiting
a little
longer to get a connecting flight, but planes end up in the air for
more hours
of the day.
Offer more
transparent pricing
The legacy
carriers have long had an exotic,
almost incomprehensible pricing system. However, these days, with the
Internet
allowing travellers 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.
Get smart on
fuel
With
oil near $50 a barrel, airlines must be smarter about how they
incorporate its
price into their costs. Discount carriers such as Southwest hedge as
much as
80% of their jet-fuel costs. Essentially, that means that they lock in
prices
on future fuel when the price drops. Small wonder Southwest is one of
the few
success stories in the airline business.
Stop chasing
market share
Airlines
need to be savvier about capacity. At the start of 2004, many planned
to add
more flights amid signs of an improved economy. When it became clear
that
demand wasn't as strong as originally forecast, most carriers still
wouldn't
retrench from their plans for fear of losing out if the market snapped
back.
Rather than scrambling to add seats in fear of missing out on the
party,
airlines would do well to take a more cautious approach and focus on
efficiency
and margins.
From bailouts
to government partnership
Although
the Indian airline industry was largely deregulated in 1990, plenty of
lingering rules and regulations have made it nearly impossible for
carriers to
be efficient. Many believe that restrictions on foreign ownership and
labour
laws have kept the industry from innovating. So instead of lobbying for
protective measures like bailouts, airlines need to work with
government to
tackle longer-term projects like building more runways, running
airports more
efficiently, and reining in labour costs.
A new model
for premium pricing
Most
of the industry's improvement efforts have focused on whittling down
costs.
However, boosting revenues also needs to be a priority. After all,
people are
willing to pay more if they believe they're getting more value. Legacy
carriers
still offer certain advantages, especially to the business traveller
including
airport lounges and more comfortable seating.
·
White
Paper on ‘
·
The
Civil
Aviation Act, 2000 (Draft)
·
Aviation Week & Space
Technology
·
Low-fare
Airlines, (2004, July 8).
Economist.com.
·
Crisis
at 50, Business World,
·
Businessline,
·
The
Sky’s The Limit, Indian
Express
·
Oil
Prices drown out Airlines profit, Star Tribune,
·
A Feel for Airline Security. Time
·
To
Cope With Travel Slump, Airlines Turn
to Smaller
Jets. (cover story) Wall
Street
Journal - Eastern Edition, Sept. 2004
·
Wikipedia,
the
free content encyclopedia
·
·
Discounted
IA fares to take on no-frills