TYBMS - SEM V - SSM Compiled by Kripa Kalro

SECTOR 6 A: TRANSPORTATION: AIRLINE SERVICES

CHAPTER CONTENTS:

4 Characteristics Innovations Technology Segmentation Types of Civil Aviation 8 P`s PEST Analysis Additional matter
INTRODUCTION: Aviation Industry in India is one of the fastest growing aviation industries in the world. With the liberalization of the Indian aviation sector, aviation industry in India has undergone a rapid transformation. From being primarily a government-owned industry, the Indian aviation industry is now dominated by privately owned full service airlines and low cost carriers. In 1994 the Air Corporation Act of 1953 was repealed with a view to remove monopoly of air corporations on scheduled services, enable private airlines to operate scheduled service, convert Indian Airlines and Air India to limited company and enable private participation in the national carriers. However, beginning 1990 private airline companies were allowed to operate air taxi services, resulting in the establishment of Jet Airways and Air Sahara. These changes in the Indian aviation policies resulted in the increase of the share of private airline operators in domestic passenger carriage to 68.5% in 2007 from 0.4 of 1991 4 CHARACTERISTICS OF AIRLINE INDUSTRY 1) Intangibility: Intangible services are difficult to sell because they cannot be produced and displayed ahead of time. They are therefore harder to communicate to prospective customers. It means that services are high in credence qualities whereas goods are high in search qualities. In the airline i n dus tr y transportation is

TYBMS - SEM V - SSM Compiled by Kripa Kalro the core product. Since it is intangible in nature a service company can distinguish itself from its competitors by providing several tangible clues like: Food / Beverages, Newspapers, Movies, Music, Seats, Audio / Video facilities for work or pleasure, Baggage retrieval, Flight bookings 2) Inseparability: In the airline industry, it is very important for the company to consider the customers as a part of the company in order to serve them better. In the airline industry, the customer has to be physically present in the service factory. Hence, he is coming in direct contact with the service provider as well as other customers of the airline. 3) Inconsistency: Service variability leads to difficulty in projecting a consistent image and developing a strong brand. As it is difficult to standardize to blueprint the service process there is inconsistency in service quality. Different front-line personnel have different abilities. Services are performances, often involving the cooperation and skill of several individuals, and are therefore unlikely to be same every time. This potential variability of service quality raises the risk faced by the consumer. One method is to design services to be as uniform as possible - by training personnel to follow closely defined procedures, or by automating as many aspects of the services as possible. Ways to reduce inconsistency in airline industry:
Most a i rl i nes i include online booking resulting in a standardized procedure & fewer mistakes due

to human errors.
To provide satisfaction guarantees or other assurances that the customer will not be stuck

with a bad result. The standardization of in-flight procedures for example the security instructions given at the beginning of the flight. 4) Inventory: Service businesses cannot normally stockpile their output, because the time bound nature of service delivery makes it impossible to inventory the finished goods. An airline seat is a perishable commodity and if it goes empty, it is money lost .Domestic airlines are come up with new ways to enthuse non-frequent flyers to avail of cheap tickets during offseason INNOVATIONS IN AIRLINE INDUSTRY Video/ Music on every individual seat Business connectivity in sky Sale of empty sats through auction Frequesnt flyer program Computerized ticket reservation Merchandise for sale Inflight entertainment

TYBMS - SEM V - SSM Compiled by Kripa Kalro TECHNOLOGIES IN AIRLINE INDUSTRY DHL Jumbo Concorde & Supersonic Jet Online Reservation Real Time Flight information Telephony- sky to ground

MARKET SEGMENTATION FOR AIRLINES Most airlines use a very traditional segmentation strategy, dividing passengers into business travelers and economy travelers (mostly leisure travelers). Business passengers They are crucial for airlines' profitability. With less spare time and more cash in their pockets, they agree to pay a premium price for a premium service. Today business passengers account for approximately 48% of passengers, and these 48% contribute 66% of airlines' revenue. The premium prices they pay provide wider and more comfortable seats, better choice of meals and seats, luxurious lounges. Economy Travelers They represent a totally different market. The most important consideration for most of them is the price. The lower the airfare, the more people will fly the respective airline. By and large, with the exception of wealthy travelers, this segment will not pay extra for premium services and will agree to change several planes during their trip if this option costs less than a direct flight. TYPES OF CIVIL AVIATION The different types of civil aviation are:

Domestic airlines (Indian Airlines) International airlines (Air India, Lufthansa) Chartered airlines (Evergreen, Deccan Aviation)

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Private helicopter services (Pawan Hans) Corporate aircraft (Reliance) Transport (Fed EX owns planes)

ISM/ 8 P`s WITH REFERENCE TO AIRLINES PRODUCT Levels of services Core expected Augmented Transport. Lounge, hygiene food, Emergency Exit, Sahara airlines offer its passengers six different types of cuisine like vegetarian, fat free, diabetic etc. Air Emriates provide cab services where they have customized pick and drop service.

potential

AIR SERVICES MIX Passenger serviceNational International 4

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Air Service Mix

Goods service National international

Product Mix

Mail service National International

Social service National International

I.

PRICE

Airline pricing is sensitive and seasonal Price plays as much a tool of marketing as promotion plays a critical role in the marketing mix. The concept of 'fair price' is paramount. Buyers judge whether a product is fairly priced by seeing whether it represents value for money. Pricing can be classified in three ways. DIVISION OF FARES: The final fares charged to the passengers include the following components: Basic fares, Insurance Inland Aviation Travel Tax (IATT), Passenger Service Fee (PSF) The basic fares include the operating cost incurred by the airlines and the profit margin. The major constituents of the operating cost in respect of domestic airlines in India are the Aviation Turbine Fuel (ATF) the basic raw material for this service industry, varies 30-40 % depending on aircraft utilization; Navigation, Landing & Parking costs 7-10%; Repair and Maintenance 13%, Manpower 12%; Acquisition/ Depreciation & Insurance 13% and balance other expenses. Pricing Strategies

TYBMS - SEM V - SSM Compiled by Kripa Kalro Premium Pricing:The airlines may set prices above the market price either to reflect the image of quality or the unique status of the product. The product features are not shared by its competitors or the company itself may enjoy a strong reputation that the 'brand image' alone is sufficient to merit a premium price. Value for Money Pricing: The intention here is to charge the average price for the product and emphasize that it represents excellent value for money at this price. This enables the airline to achieve good levels of profit on the basis of established reputation. Cheap Value Pricing: The objective here is to undercut the competition and price is used to trigger the purchase immediately. Unit profits are low, but overall profits are achieved. Air India and Indian Airlines have slashed their prices to meet the competition of private airlines so that they can consolidate their position in the market. Airlines usually practice differential pricing. There are three classes: The First Class, The Executive or Business Class and The Economy Class. Fares for each class are different since the facilities provided and the comfort and luxury level is different in each class. Seasonal fares are also fixed, fares rise during the peak holiday times. Low-cost PricingIn low-pricing strategies, the airlines provide very low prices for the flight tickets. Also, they prices are made cheaper by booking the tickets long before the flight date. APEX Fares In this scheme, people are given very cheap rates only if tickets are booked atleast before the specified time period. But the draw-back here is that if the booking is cancelled, a substantial amount of money is not returned.

II.

PLACE

Marketing-channel distributions are among the most critical decisions facing the management. The companies chosen channel ultimately affect all the other marketing decisions. Understanding what, where, why, when, and how the target market buy, is the first step in designing the marketing channel. Special convenience expresses the degree to which the marketing channel makes it easy for customers to purchase the service. For example, Jet Airways' ticket counters are conveniently located at all destinations within its network, both in the city and at the airport and with a computerized ticketing facility at most airports. Airlines also provide all the essential information required by their customers, with the help of polite front line office staff and airhostess on board the flight. The airline industry has adopted different distribution channels for marketing their services to their target audience. On the ground there are many ticket counters with computerized 24-hour reservation systems. They have many specially designed check-in counters for club and premiere passengers. Distribution channels The Four methods of distribution are as following:

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MethodsConsolidation

examples The direct sale of tickets from airport to the passenger on the airline desk.

Tour Operator/ Travel Agent

Customers approach travel agents or tour operators who book the tickets from the airline and take commission. E.g. SOTC airlines gets affiliated with companies who carry all its trips with a same airline who in turn gives special discounts or offers in return.

Affiliated with companies

Direct through home leased system

Phone, fax, email and also online e-booking.

III.

PROMOTION

The formulation of an ideal promotion mix is essential to inform sense and persuade the users. In the Indian perspective, we need more creative efforts because the potential users in a majority of the cases dont prefer to use air services. The business magnets, executives, politicians, actors, high spending tourists etc are some of the users of the air services. Advertising Airlines need creative advertisements to promote their business. In the view of rising cost of inputs and the increasing impact of worldwide economic depression on the airlines, advertisements should be budget optimistic vis--vis optimal. The telecast media and print media are important for promoting the air business.Airlines can also use broadcast media. The domestic flights should use radios because due to increasing access to FM. Publicity It is a process of persuasive communication. It persuasion process provided the media is people, 7 very instrumental relations in sensitizingthe public officers provide their

TYBMS - SEM V - SSM Compiled by Kripa Kalro help.Strengthening the PR activities is essential to promote airlines business. The PRO, Receptionist, Travel agents, Media people are very Sales promotion The sales promotion measures are meant for both the related sources channel sing and using the business, such as the travel agents, tour operators and all of them who process the services and the passengers and business houses who use the services. The travel agents contribute a lot to the promotion of airlines business and therefore the need to think of them in their favor on their priority basis. In addition the tour operators, the frontline staff also must be given priority. The incentives may be in the form of confessional services, a small gift etc. Brand mascot-eg maharaja for air india important people in publicizing the business.

IV.

PEOPLE

In the service industry, service personnel come in direct contact with their customers in the course of production and consumption of the services. Because people provide most services, the selection, training, and motivation of employees can make a huge difference in attaining customer satisfaction. Ideally, employees should exhibit competence, caring attitude, responsiveness, problems. Type of contact High contact Medium contact Low contact airhostess cock pit crew travel agent is expected analytical to and initiative, problem solving ability, and goodwill. Many service organizations trust their people enough to empower their front-line personnel to resolve customer

The service contact personnel in the airline industry is an airhostess who crew, being categorized as a low contact personnel, require possessing high

possess a pleasing personality with polite service handling. While on the other hand the cock pit technical attributes. In the airline industry, there is also the ancillary service personnel, the travel agent who helps to create the service exchange but is not a part of the service.

TYBMS - SEM V - SSM Compiled by Kripa Kalro For example, Delta Airlines recruits an employee, and moulds him to cater to their demands. These employees are sent to places like the US and Frankfurt on a 21 day training programme. offers such as one-month bonus or some incentive, on the achievement of the sales target. The successful completion of this training motivates the staff to stay on with the airline. They are provided with

PHYSICAL EVIDENCE Physical Evidence refers to the environment in which the service is delivered and where the service industry and customer interact. The seating is such that it is comfortable and there is enough leg space. Delta Airlines has introduced new sleeper seats with electric controls for reclining lumbar support, leg rest extension, expanded seat back height for a more insulated environment etc. thus providing highly comfortable seating. The in-flight food is another, important aspect, a wide selection of meals is passengers. Booking offices, ticket counters, etc. must be spacious and well designed with good looks. Further the air crafts must be given good exteriors and must be maintained wel1. The aircraft must have elegant interiors and must be incorporated with all basic facilities. Domestic lounges Example The jet logo prominently displayed on each of its aircrafts, is used a cue to trigger of a reminder of the customers experience at Jet & also of all the values that jet airways stands for. The kingfisher airline, which is soon going to be launched, has hired a high profile Fashion designer for designing clothes for the employees. This leaves an impression on the minds of the customers and they are easily able to relate to the airline. Easy-Jet airline has also created an impression in the minds of the customers as the color of the employees clothes is orange and the interiors are also in orange color.. VII. PROCESS are enhanced with good interiors and basic amenities which will make it an ideal place to conduct business, entertain or relax. offered to the

Service Encounter:

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VIII. PRODUCTIVITY AND QUALITY TANGIBLES RELIABILITY surrounding area, car parking, baggage

counter, reservation counter Airlines ensure that the service is delivered as promised and this is often totally with in the

control of the front-line staff. RESPONSIVENESS helping customers to know details about flights ASSURANCE timings their flight will be on time and their journey will be safe EMPATHY airhostesses are trained to provide polite, warm and courteous service

PEST ANALYSIS 1) Political Analysis:

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TYBMS - SEM V - SSM Compiled by Kripa Kalro In India, one can never over-look the political factors which influence each and every industry existing in the country. Like it or not, the political interference has to be present everywhere. Given below are a few of the political factors with respect to the airline industry: o The airline industry is very susceptible to changes in the political environment as it has a great bearing on the travel habits of its customers. An unstable political environment causes uncertainty in the minds of the air travellers, regarding travelling to a particular country. o Overall Indias recent political environment has been largely unstable due to international events & continued tension with Pakistan. o The recent Gujarat riots & the governments inability to control the situation have also led to an increase in the instability of the political arena. o The most significant political event however has been September 11. The events occurring on September had special significance for the airline industry since airplanes were involved. The immediate results were a huge drop in air traffic due to safety & security concerns of the people. o International airlines are greatly affected by trade relations that their country has with others. Unless governments of the two countries trade with each other, there could be restrictions of flying into particular area leading to a loss of potential air traffic (e.g. Pakistan & India) o Another aspect is that in countries with high corruption levels like India, bribes have to be paid for every permit & license required. Therefore constant liasoning with the minister & other government official is necessary. The state owned airlines suffer the maximum from this problem. These airlines have to make several special considerations with respect to selection of routes, free seats to ministers, etc which a privately owned airline need not do. The state owned airlines also suffers from archaic laws applying only to them such as the retirement age of the pursers & hostesses, the labour regulations which make the management less flexible in taking decision due to the presence of a strong union, & the heavy control &interference of the

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TYBMS - SEM V - SSM Compiled by Kripa Kalro government. This affects the quality of the service delivery & therefore these airlines shave to think of innovative service marketing ideas to circumvent their problems & compete with the private operators. 2) Economic Analysis: Business cycles have a wide reaching impact on the airline industry. During recession, airline is considered a luxury & therefore spending on air travel is cut which leads to reduce prices. During prosperity phase people indulge themselves in travel & prices increase. After the September 11 incidents, the world economy plunged into global recession due to the depressed sentiment of consumers. In India, even a company like Citibank was forced to cut costs to increase profits for which even the top level managers were given first class railway tickets instead of plane tickets. The loss of income for airlines led to higher operational costs not only due to low demand but also due to higher insurance costs, which increased after the WTC bombing. This prompted the industry to lay off employees, which further fuelled the recession as spending decreased due to the rise in unemployment. Even the SARS outbreak in the Far East was a major cause for slump in the airline industry. Even the Indian carriers like Air India was deeply affected as many flights were cancelled due to internal (employee relations) as well as external problems, which has been discussed later.

3) Social Environment Analysis: The changing travel habits of people have very wide implications for the airline industry. In a country like India, there are people from varied income groups. The airlines have to recognize these individuals and should serve them accordingly. Air India needs to focus on their clientele which are mostly low income clients & their habits in order to keep

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TYBMS - SEM V - SSM Compiled by Kripa Kalro them satisfied. The destination, kind of food etc all has to be chosen carefully in accordance with the tastes of their major clientele. Especially, since India is a land of extremes there are people from various religions and castes and every individual travelling by the airline would expect customization to the greatest possible extent. For e.g. A Jain would be satisfied with the service only if he is served jain food and it should be kept in mind that the customers next to him are also jain or at least vegetarian. Another good example would be the case of South West Airlines which occupies a solid position in the minds of the US air travelers as a reliable and convenient, fun, low fare, and no frills airline. The major element of its success was the augmented marketing mix which it used very effectively. What South West did was it made the environment inside the plane very consumer friendly. The crew neither has any uniform nor does it serve any lavish foods, which indirectly reduces the costs and makes the consumers feel comfortable. 4) Technological Environment Analysis: The increasing use of the Internet has provided many opportunities to airlines. For e.g. Air Sahara has introduced a service through the internet, wherein the unoccupied seats are auctioned one week prior to the departure. Air India also provides many internet based services to its customer such as online ticket booking, updated flight information & handling of customer complaints. USTDA (US trade & development association) is funding a feasibility study and workshops for the Airports Authority of India as part of a long-term effort to promote Indian aviation infrastructure. The Authority is developing modern communication, navigation, surveillance, and air traffic management systems for India's aviation sector that will help the country meet the expected growth and demand for air passenger and cargo service over the next decade.

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TYBMS - SEM V - SSM Compiled by Kripa Kalro A proposal for restructuring the existing airports at Delhi, Mumbai, Chennai and Kolkata through long-term lease to make them world class is under consideration. This will help in attracting investments in improving the infrastructure and services at these airports. Setting up of new international airports at Bangalore, Hyderabad and Goa with private sector participation is also envisaged. A good example of the impact of technology would be that of AAI, wherein with the help of technology it has converted its obsolete and unused hangars into profit centers. AAI is now leasing these hangars to international airlines and is earning huge profits out of it. AAI has also tried to utilize space that was previously wasted installing a lamination machine to laminate the luggage of travelers. This activity earns AAI a lot of revenue. These technological changes in the environment have an impact on Air India as well. Better airport infrastructure, means better handling of airplanes, which can help reduce maintenance cost. It also facilitates more flights to such destinations. ADDITIONAL MATTER 1. PRIVATISATION OF AIRPORTS The Airport Authority of India, which manages five international airports, 87 Domestic airports and 28 civil enclaves at defense airfields, is facing an uphill task, as it for funds, management talent and its adherence to the government procedures. Government policies provide for privatization of airports at Delhi, Mumbai, Calcutta and Chennai through long lease and new developments at existing airports and Greenfield airports through private initiative. It's true that there is risk in privatization of airports, since airports essentially provide public utility services in monopolistic situations. There are apprehensions that private enterprises are profit motivated and with privatization users may not get quality services at affordable prices. To begin with, for four airports which the government has decided to privatize, consultants should immediately put the website details of assets, traffic figures for the past 10 years 14

TYBMS - SEM V - SSM Compiled by Kripa Kalro and figure projections, revenue figures existing and projected, profit & loss for last 10 Years, details of manpower, business plans, capital investment programs etc. This would enable potential investor to start preparatory work on their due diligence investigations. Consultants should immediately develop draft terms and conditions governing lease of these airports clearly bringing out obligations of new managements in terms of service levels, commitment to minimum investments for development of airport facilities, operational standards to meet our national and international obligations, clauses to deal with emergency situations, termination in event of breach, etc. These should be discussed with the aviation industry and finalized. Government should set up a regulatory Authority whose main functions would be economic regulation and operational safety audit. This authority through its statutory powers and intervene if standards of airport services in terms of safety, reliability and cost effectiveness are not met. Some of the states are taking initiative for development of Greenfield airports and they should be assisted by the Ministry of Civil Aviation in adopting more professional approach. In the first instance state governments should develop techno -economic feasibility reports for airport projects through experienced organizations / consultants of repute. Airport Authority of India (AAI) has a large number of airports where the traffic volumes are low. Private entrepreneurs are not likely to be interested in such airports, which are not financially viable. These airports should be commercialized by exploiting the commercial potential of airport lands, cost containment, increased productivity and improved cost recoveries. Thus, some of these airports may in the next few years reach a stage when they can also be privatized. There are some other airports with AAI, which could be transferred to state governments, local bodies or tourism agencies who are in an advantageous position to operate and

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TYBMS - SEM V - SSM Compiled by Kripa Kalro manage them more cost effectively. It is conceded that privatisation is not likely to remove all the hiccups in the development of aviation sector .We need to have a model tailored to Indian Conditions, keeping in view the local laws, rules and regulations in tune with the political philosophy and psychology of local travelers. The funding pattern should be such that the investment made is beneficial to the investors due to monopoly nature of airport business. Foreign investors do not want to investment in aviation sector in India, due to abnormal delays in decision making, undue interference, non- consistent policies of government and to some extent inflated fear of corruption in India. It's therefore essential that sectors like aviation be left in hands of professional managers and the role of bureaucracy should be only custodial and regulatory.

2) RECENT TRENDS Civil Aviation sector in India is perhaps the most striking example of the progress made in the liberalization of the Indian economy, a process that began a decade ago. Civil air transport business which hitherto had been the Government's monopoly has been completely liberalized, as a result of which private airlines have been flourishing. The steps taken by the government are as follows: 1. Investments Opportunities Foreign Equity Foreign Equity upto 40% and NRI investment upto 100% is permitted in domestic air transport services. Equity from foreign airlines is not permitted directly or indirectly. 2. Disinvestment of the Government Equity in airlines Government of India decided to disinvest partly its shareholding in both Air India and Indian Airlines, presently wholly owned companies of the Government. But with general elections round the corner this issue has been put on the backburner with constant opposition from various sections of the society. 3. Entry-Exit barriers removed Barriers to entry and exit from this sector have been removed. Only pre-

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TYBMS - SEM V - SSM Compiled by Kripa Kalro entry scrutiny to verify financial soundness, maintenance, security and safety aspects of operations and human resource development proposals is done. Choice of aircraft type and size left to the operator. 4. Private participation in Airports Foreign equity participation is allowed in ventures for airports, upto 74% approvals and upto foreign airport authorities. A variety of fiscal incentives has been provided to airport project, as decided by Government from time to time. They are as follows: choice. 40% of profits from infrastructure also deductible for financial institutions finance for airport infrastructure projects. providing long term 100% deduction in profits for purposes of Income Tax for first five years. 30% deduction in profits for Income Tax purposes for next five years. Full deduction to run for continuous 10 out of 20 fiscal years of assessee's automatic 100% with special permission. Participation is also open to

5. Bilaterals for operation of international air services The Government has been more liberal in granting additional entitlements to foreign airlines both in terms of capacity as well as in terms of points of call. The existing air services agreement with United States of America is an extremely liberal one as it allows any number of US airlines to operate services from/to India. US airlines are also allowed to decide the size of aircraft and their frequencies. 6. Taxes and Tariffs In order to facilitate acquisition of aircraft Government of India has reduced tariffs for import of aircraft from 8% to Nil. Even aircraft taken on lease do not attract customs duties. India also has a liberal Corporate Tax/Income Tax regime for airlines and encourages investment by allowance of high depreciation rates. 7. Civil Aviation Policy-Having drawn up a successful growth model for the civil aviation sector, the Government is now engaged in evolving a comprehensive and integrated new civil aviation policy, some of the major highlights of which are: All players and stakeholders are assured of a level playing field. 17

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