1. Overview 2
2. History 4
3. Open skies policy 5
4. Civil Aviation Policy in India 7
5. Airport infrastructure 9
6. Passenger airlines – The players 10
7. Foreign equity participation 14
8. Factor Inputs 15
9. Market Structure and Implications 18
10. Trends in International and Domestic Civil Aviation and Projected Future Scenario 23
11. Study of Consumer Demand in the industry 24
12. Case Study - The No frills model 32
13. Potential Market Entrants 34
14. SWOT of legacy carriers 36
15. Recommendations 37
16. References/Acknowledgements 41
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
became Tata Airlines and
then Air-India and spread its wings as Air-India International. The
aviation scene, however, was chaotic. When the American Tenth Air Force
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
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
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.
Private sector participation is encouraged in existing maintenance infrastructure of Indian Airlines and Air
Airlines has major maintenance facilities for all the types of aircraft
fleet i.e. Airbus-300, Airbus-320, Boeing-737 and Dornier-228. The
Department is responsible for maintenance of aircraft and is answerable
Director General of Civil Aviation (DGCA) in maintaining the
Control. The Maintenance of the aircraft is carried out at four
bases located at
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).
has many firsts to its credit, including introduction of the
aircraft on the domestic network, the fly-by-wire A320, Domestic
Service, Walk-in Flights and Flexi-fares.
The airlines network spans from
Indian Airlines is presently fully owned by the Government of India and has total staff strength of around 18562 employees. Its annual turnover, together with that of its subsidiary Alliance Air, is well over Rs.4000 crores (around US$ 1 billion).
Airlines flight operations centre around its four main hubs- the main
airline is currently undergoing a complete overhaul and restructuring
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.
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
activities, Naresh Goyal took advantage of the opening of the Indian
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
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
domain, the available information does not tell us much. The Promoters
Management persons are not listed nor is their equity ownership pattern
provided. Jet Airways' ownership is apparently fully foreign giving
rise to the
6.6 Fleet Size
Fleet-wise also Indian
carriers are quite small. Air
minimal when compared with American Airlines, one of the world's
airlines with almost 1000 aircraft and carrying over 80,000,000
650,000 Tonnes of freight a year. Even Singapore Airlines, a small
airline that operates only internationally, has almost twice the number
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.
the current policy, if a foreign airline operates in
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
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
such as labour and capital, must also be available on an
8.2 Fuel Prices
the major cost for domestic carriers accounting for 30% of the total
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.
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
among the Indian carriers. However, this has suddenly become costlier
due to changes proposed in Union Budget 2004-05. The budget proposes
of tax exemption granted to acquire aircraft or an aircraft engine on
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
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
5. Entry Barriers
6. Firm is a price-setter
7. Long run profit >= 0
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 control 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).
an inventory control system for
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.
constraints, absence of freedoms to compete on a route, investment
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.
British Airways, Aer Lingus,
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
While so far
India has stayed out of these
alliances, relying primarily
on bilateral agreements, it is merely a matter of time before Indian
are drawn in this web and the three blank spots, Russia, China and
filled in by the International Alliances ((in all three cases, the
carrier is a government owned/aligned entity which makes decision
making a complex
politico-economic process). As it is,
In any case
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 -
b. Potentially, it is also a very large low-fare market.
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
changes. Thus small distance journeys are convenient by road while
journeys are preferred by rail and air. The data should actually be
viewed in terms
of time involved rather than the distance since technological
any field can impact the time taken for same travel. As has already
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
crushing the competition with even lower fares whenever a low cost
invaded its market, low-fare will always remain the basic market. This
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.
Airlines initiated a round of fare cuts and the bigger airlines had to
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
Airlines ranks number one in brand awareness. This could be attributed
long stay in the market and continued support from the government.
Indian Airlines has become synonymous with reliability and efficiency.
Airways is offering stiff competition and ranks second in the list.
Usage of Airlines
Airlines, mostly used by government employees, recorded the highest
followed by Jet Airways. Although most consumers rated Jet Airways high
price, it still ranks second in usage and this could be attributed to
excellent service and promotion schemes. Similar data for the entire
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.
– 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
business class is very small in comparison to that travelled by economy
indicates that most business travellers are flying Economy class as
the second important occasion of usage is for emergencies and
Circuits Flown: The most frequently flown circuit is that
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 -
c) Promotional Schemes
d) Loyalty programmes
e) Flight Schedules
f) Comfort with the brand
Airlines has been rated high on most parameters while Jet Airways,
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
and how, in
Airlines Co., incorporated in 1967, is a
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.
the past five years, low-cost airlines have been growing at more than
cent a year, while the full-service airlines are yet to recover from
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
· 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 low cost airlines in the
services on trunk routes have been delayed as it has not been allotted
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.
13. Potential Market Entrants
are just as keen to get
this activity has spurred
new players face some serious hurdles. The biggest is infrastructure.
airports are dismal -- when cities are lucky enough to have one. Even
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
carriers which have entered the domestic aviation sector when it opened
nearly a decade ago.
Low Cost Carriers
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)
· 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.
· 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.
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
· Maintain short-haul flights only to extent needed to feed the network
· 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
cut throat competition is at its peak in sector like Delhi-Mumbai where
Airways has cut its Apex air fare to Rs 2500 for passengers booking
days in advance. This was in response to Indian Airlines concessional
Rs 3500 if ticket is booked 21 days in advance and Air Sahara’s special
offer of Rs 4444 for a return ticket basis. The no-frills airline Air
has announced fares as low as Rs 700 if booking is done 90 days ahead.
airways has lowered its apex fares by 20% under ‘Monsoon Super Apex
scheme if the booking is done 30 days in advance in six busy sector
15.1 Government Recommendations
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.
Restricting access by foreign
carriers to the Indian domestic market gives the Indian carriers a
from which to extend into international aviation. The same applies to
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.
Eliminate Regulatory Structure
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.
airlines have difficulty accessing hangars for maintenance. As a
private operators have to do some maintenance abroad. Airline
overhaul should be an area where
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.
connections would also give further impetus to tourists’ arrival. Over
cent of the passenger traffic is concentrated in two main international
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
small planes. However, they can and should work toward streamlining the
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.
Paper on ‘
· The Civil Aviation Act, 2000 (Draft)
· Aviation Week & Space Technology
· Low-fare Airlines, (2004, July 8). Economist.com.
at 50, Business World,
· The Sky’s The Limit, Indian Express
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
IA fares to take on no-frills