On September 24, 2003, Air Deccan, the first low cost airline (LCA) in India, was ready to take

off on its inaugural flight from Hyderabad to Vijayawada. The flight had 33 passengers, who included the Bhartiya Janata Party president, Venkaiah Naidu (Naidu), the then civil aviation minister Rajiv Pratap Rudy (Rudy) and some journalists. A few seconds before takeoff one of the aircraft engines caught fire and panic gripped everyone. The fire was extinguished and the passengers had a miraculous escape. The flight had to be aborted. Analysts felt that the accident would earn a bad name for Air Deccan, which had started business, just a month back. An analyst commented that the accident was "Enough to hurt consumer sentiment. Fragile consumer sentiment! Enough to cause a consumer to associate the otherwise USP of cost advantage (low fares) to low quality and therefore high risk to life."3 Despite the initial setback, in December 2003, Air Deccan announced that it was expanding its fleet and introducing flights on several new routes. The airline, which had started operations mainly in South India, said it would foray into Western India before entering the Northern and Eastern routes. The fares for Air Deccan flights were 40% to 50% less than that of other leading full service airlines (FSAs) in the country. Stressing the safety aspect, Gopinath said, "We assure that our low fares come with high standards of flight safety. We have very stringent safety regulations in place, approved by the regulatory authorities. Soon, Air Deccan services attracted a positive response from customers. In July 2004, Air Deccan stunned FSAs and industry experts by announcing its 'Dynafares' wherein it introduced tickets for as low as Rs 700 for flights between major metropolitan cities in India. Economy class fares between these cities ranged between Rs 6,500 and Rs 10,000 on FSAs. Analysts and aviation industry experts began discussing the implications of such low fares and wondered whether other carriers would enter the LCAs market. One analyst described the impact of LCAs on the Indian civil aviation industry saying, "A full service airline will not be able to compete with no-frills carriers due to comparatively high operating cost. Hence, all existing full service airlines will have to respond to the new challenge.

The Indian Civil Aviation Industry The history of Indian aviation industry dated back to the early 1930s, when one of the leading Indian business houses, the Tatas established Tata Airlines. There was limited activity in the sector over the next two decades despite of eight more private companies entering the airline industry. In 1953, the Air Corporations Act came into force and all the assets of the then existing nine airline companies were transferred to two corporations - Indian Airlines Corporation (IA) and Air India International (Air India).

While Air India offered international air services, IA offered domestic services. The Air Corporations Act 1953 prohibited any person or company to operate any scheduled air transport services from, to or across India. Therefore, two corporations enjoyed a monopoly status in the scheduled air transport services market. In 1962, Air India International was renamed as Air India Limited. In 1986, the winds of change blew and private airlines were allowed to operate chartered and non-scheduled services under an 'Air Taxi' scheme. The scheme was introduced to boost tourism and augment domestic air services. The carriers were however, not allowed to publish time schedules or issue tickets to passengers. The government's aviation policy was progressively liberalized in the early 1990s. In 1993, the Air Corporations Act 1953 was abolished, which put an end to the monopoly of IA and Air India in the scheduled air transport services market. After the abolition of the Act, there was a considerable change in the India government's aviation policy. From March 1994, the market was opened to any company that fulfilled the statutory requirements of scheduled airline services (Refer Exhibit I statutory requirements). The government approved eight private carriers to start domestic operations. They were Jet Airways (JA), Air Sahara (Sahara), Indian International, Archana Airways, East West Airlines, NEPC Airlines, Modiluft and Damania Airways.

While Indian International was the first licensee after the open skies policy came into force, East West was the first scheduled airline to take off from the ground. In 1995, the Airports Authority of India (AAI) was formed after the merger of the National Airports Authority (NAA) and the International Airport Authority of India (IAAI). The AAI offered infrastructure facilities to all airlines. There were five international airports Delhi, Mumbai, Kolkata, Chennai and Thiruvananthapuram for scheduled international operations by Indian and foreign carriers...

Entry and Expansion of Air Deccan Gopinath was in the Indian army till 1980, when he left his job and started trying his hands at various things like multi-culture farming, sericulture and agri-consultancy. In the early 1990s, Gopinath was in Singapore, where he read about a helicopter company, founded by a girl in Vietnam. The company was set up to carry tourists in the US to Vietnam after the war had destroyed infrastructure in the country.

The story reportedly inspired Gopinath to do something similar in India. In 1995, Gopinath started Deccan Aviation Private Limited (DAPL), a private helicopter charter company, providing helicopter services for company charters, tourism, medical evacuation, offshore logistics and a host of other services. DAPL soon emerged as a pioneer in helicopter tourism in India. While serving tourists, the company encountered demands for flights to many smaller tourist places. Gopinath claimed that government representatives from the states of Andhra Pradesh and Karnataka met him and asked whether DAPL could provide air links to smaller cities in these states...

The Low Cost Business Model When Capt. Gopinath announced the launch of its low-cost airline, Air Deccan, the aviation industry wondered if he could pull it off. But, all apprehensions and questions were put to rest when Air Deccan started earning between Rs. 2.5 to 3 crore daily, making www.airdeccan.net India's biggest e-commerce site, taking it way past Indian Railway Catering and Tourism Corporation site. By evolving its e-ticketing system, the no-frills Air Deccan saved close to 20 percent in distribution cost alone. The fairy tale began in 2003, when Capt. Gopinath did the unthinkable in the Indian aviation sector. He launched India's first low-cost airline and introduced E-ticketing, which was on his mind since he flew the low-cost Kulula.com with just a piece of paper in his hand. The carrier's managing director did away with in-flight meals, reduced crew to the minimum, added more seats and offered tickets at a minimum of 30 percent lower than full-service carriers. By setting up a system that allows tickets to be booked via the Internet, Air Deccan saved close to 20 percent in distribution costs alone. "Distribution cost is seen as one of the key controllable expenditures in an air-carrier's cost structure; thus an effective and efficient distribution goes a long way," Air Deccan's CRO John Kuruvilla points out. Much of the savings that it made was by deploying its own reservation and ticket distribution system. The carrier also cut on operating expenses by using bar-coded paper tickets thus cutting down on turnaround time at the airport. It went the unconventional way by creating its own Airline Distribution System (ADS) unlike other airlines who host their seating inventory on databases of global distribution services (GDS). Travel agents access this database to allocate tickets and charge the airlines a 3-4 percent commission. It was to get rid of this GDS cost that Air Deccan decided to take the road less travelled.

Having its inventory accessible over the Internet also helped it to look for options. It thus set up a call centre which accepted ticket booking over phones and allowed corporate and agents to register to directly reserve seats. Taking the call centre approach helped the airline tap into an audience that wanted to fly but had neither an internet connection nor credit cards. To get things started at the right note, Air Deccan needed the inventory distribution solutions. It decided to outsource the project as it believes that it is a positive path to reduce project life cycle. Also, it did not want to expand its manpower when the vendor could provide the same service with higher accountability. Gurgaon-based InterGlobe Technology Quotient (ITQ) was chosen to build the ADS, and as per the demand of the airline, it blended .Net and J2EE technologies. ITQ rolled out the ADS in 40 days. Air Deccan took a different approach for investment planning with its vendors, working in a payment schedule based on the number of passengers booked every month. This helped the airline avoid any initial heavy investments. Since its initial application, many changes have been made to the ADS to enhance functionality for both the passengers and the airline. Passengers now have the option of structuring the ticket fee due in EMIs. The carrier also partnered with HPCL and Reliance Infocomm to distribute tickets through HPCL petrol pumps and the latter's Webworld. Bangalore-based Jigrahak Mobility Solutions to provide the technology that allowed customers to purchase tickets through GPRS-enabled phones. Air Deccan's business model was inspired by the globally successful low cost model pioneered by the US-based Southwest Airlines in the 1970s. In the fiscal year 2003-04, the LCAs commanded a global market share of 25% and their revenues had grown by 40%. LCAs were continuously offering lower flying rates by inventing innovative ways to cut operational costs. Analysts claimed that the overall costs for LCAs were 45% to 60% to that incurred by FSAs. To keep overall costs of the company low, Air Deccan took the following measures: LCAs were continuously offering lower flying rates by inventing innovative ways to cut operational costs. Analysts claimed that the overall costs for LCAs were 45% to 60% to that incurred by FSAs. To keep overall costs of the company low, Air Deccan took the following measures: Food: Unlike FSAs, Air Deccan did not provide any food on board. However, it sold snacks and water bottles on its flights for a price. Serving and consumption of alcohol were not permitted. The company felt that for short distance domestic flights, most passengers did not want food...

The Target Market and Positioning Analysts felt that there was huge growth potential for LCAs in India due to the country's huge 200 mn middle income group population. Gopinath expected that at least one fourth of this population would use LCAs in the near term. He pointed out that India had 15 mn rail travellers every day. Of these 1,70,000 travelled in the air conditioned class and were potential customers for Air Deccan owing to the comparable prices. Gopinath further said that the US had 40,000 commercial flights every day whereas India had only 400 flights a day. But India had four times more population than the US, so it could theoretically run 1,60,000 flights daily! Gopinath said, "Assuming that we had tapped 1 per cent of this potential, we still need 1,600 flights a day. Therefore, we need a quadruple jump in the number of commercial flights." Air Deccan defined its target segment as upper middle class in the short term but planned to tap the lower middle class aggressively in a couple of years... The Challenges Even before Air Deccan started operating on long haul routes, leading newspapers in India reported that all air tickets in the Rs 700 category were sold out for 2004. The response for the flights was reportedly such that Air Deccan's website was jammed and the call centre flooded with calls requesting booking. Since the announcement of the Rs 700 category fares, the airline received 10,000 calls a day as against 5,000 a day earlier. In response to Air Deccan's plans to offer services on major trunk routes, the FSAs quickly announced a fare reduction on these routes. Sahara announced its "Apex fare scheme" for metros and reduced its fares by 30%. JA followed by cutting prices on major metro routes by as much as 69%. IA also launched a super apex scheme and cut its prices to match that of JA. Air Deccan's success encouraged many other companies to establish LCAs...