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AIRLINES INDUSTRY- INDIA

Group 9 Ashish Sinha Himanshu Nigam PGP/12/177 Isma Mohammad PGP/12/178 Shivam Srivastava PGP/12/199 Suman Kumar patra PGP/12/187

Major Developments
Industry trends and developments:
Air India and Indian Airlines retained a monopoly over civil aviation in India till 1992. The first phase of deregulation in 1991
Several new airlines Damania, EastWest, Jet, Sahara, Modiluft and NEPC started operations.

Most of these failed:


Under-capitalisation poor management failure to build a network that could exploit economies of scale and scope, poor cost economies. Only Jet survives today.

Major Developments
After 2003 six new airline services, Kingfisher Airlines, SpiceJet, Air Deccan, Paramount airlines, IndiGo and GoAir Huge financial losses: But now, the industry has reported a total loss of $2 billion in the last financial year alone. Industry estimates -Air traffic in India could double to 50 million passenger journeys a year by 2010.

Competition in the industry


Divisions

Passenger

Freight

Cargo airlines are divisions or subsidiaries of major players. In India, full cargo service is operated by Blue Dart Aviation and Crescent Air Cargo Our concentration is on the passenger segment.

Competing Companies
- NACIL: Air India and Indian Airlines (brand name Indian). Also Air India Express and Air India Regional - Jet Airways and Jet Lite - Kingfisher Airlines and Kingfisher Red - IndiGo - SpiceJet - GoAir - Paramount Airways - MDLR Airlines (operations suspended from Nov, 2009) - Taj Air - Deccan Aviation

Market Shares (Nov 2009)


Company-wise market share
Paramount Airways 2%

GoAir 6% SpiceJet 14%

Air India and Indian Airlines 21%

IndiGo 16%

Jet Airways +Jet Lite 23%

Kingfisher Airlines 18%

Strategic groups in the passenger segment


Government: NACIL Private: Jet Airways and Jet Lite, Kingfisher Airlines and Kingfisher Red, IndiGo, SpiceJet, GoAir, Paramount Airways, Taj Air, Deccan Aviation LCC: Jet Lite, Kingfisher Red, IndiGo, SpiceJet, GoAir Full service: Jet Airways, Indian, Paramount Regular service: Jet Airways and Jet Lite, Kingfisher Airlines and Kingfisher Red, IndiGo, SpiceJet, GoAir, Paramount Airways Taxi Service: Taj Air, Deccan Aviation Only Domestic: Indian, IndiGo, SpiceJet, GoAir, Paramount Airways, Taj Air, Deccan Aviation Domestic and International: Jet Airways, Kingfisher, Air India

Strategic Groupings
LCC vs full service
Characteristics Types of plane used Number of seats per plane Crew involved per plane LCC Single configuration Full service Two plane configuration

LCC 44% Full service 56%

150

190

24

40

Govt vs private

Dometic vs International

Government 19% Domestic + International 62%

Only domestic 38%

Private 81%

Industry Structure
All airlines are as of now battling with costs.
All major airlines in the red.

Costs are huge.


With 40% costs owed to fuel, the high variability in fuel prices makes it tough for airlines to manage costs.

Herd behaviour:
None of the airline use fuel hedging. All airlines were caught in the fuel price run in 2008. Still, fuel hedging is absent. (Southwest airlines was not at all affected by the price surge)

Industry Structure
Government affects through two mechanisms:

Taxation on Aviation fuel. AAI


AAI is a monopolistic set-up. All this time, AAI has been in profit. Airlines are not always free to chose their operating centers which hampers implementation of operational models like the hub and spoke.

Competition is very heated.

Conventional wisdom (the rule of 3) dictates that we would see consolidation in the near future. In fact, we have already been witness to some consolidation.

Undercutting has largely stopped, prices lie in similar range.

Industry Structure
Buyer power: High
Highly price sensitive customers. Price comparison is very easy. Switching costs are very low. Strong loyalty programs are absent.

Industry Structure
Supplier power: Moderate
Key Inputs: Fuel, aircraft and labour. Aircraft: Low
Aircraft market is a duopoly (Airbus and Boeing) with stiff competition. On that front, very less supplier power. Airlines able to negotiate good lease contracta.

Labour: High
Constraint labour supply. Foreign pilots costs as much as 20% more. Labour unions are present. Strikes do take place.

Fuel: High
Public companies are the major suppliers. Govt controls the taxes.

Industry Structure
Threat of new entrants: High
Airline industry is largely deregulated. The only constraint is capital. Industry is capital intensive. As such, barrier to entry is low. Attractiveness of the industry has gone down due to heavy competition and struggling participants. High costs of airport slots is a barrier.

Industry Structure
Threat of substitutes: Low
Road: Buses, Private transport Rail: Only Indian Railways, extensive coverage Overall, threat of substitutes is low

Industry Perspectives
Cost structure: (Drivers)
Fuel cost 40% Salaries (Flight crew, pilot, copilot, navigator, flight engineers) 20% ATC services, Ground personnel services, handling passengers, catering 20% Maintenance services (labour) 20% Flight rental cost

Industry Perspectives
Life cycle position: Growth stage
Trips per capita remain low even by the standards of other developing countries. Similarly on the international front, less than 1% of Indians travel overseas each year. One of the sectors most benefited by economic growth of the country. Thus it is not difficult to see the expansion potential from such a low base as economic growth continues.

Marketing Perspectives
Product
International carriers are usually full service carriers while the domestic market is tilted towards low cost carriers

Full Service Carriers

Low Cost Carriers

Low cost carriers are the no frill air services having lower operating costs compared to the full service carrier

Trends : Due to the economic slowdown, the overall market volumes have decreased and the customers
are opting more for low cost carriers over full service carriers People are flying less and as a result most of the carriers have to operate much under the capacity of the planes and as a result even the full service carriers have resorted to cost cutting measures

Customer Analysis
Segments
Segmentation on the basis of purpose:
Business, Leisure, Personal

Domestic v/s International passengers Segmentation on the basis on price and facilities:
Preference for price Preference for combination of price and other features Consumers not worried at all about price: Looking for privacy or luxury Willingness to pay for brand names

Segmentation on the basis of demographic features:


Age (share of 50% of the travelers belongs to age group of 20-25 yrs) Income group (middle class now accounts for the largest share.

Customer Analysis
Buying motive
Saves time Price (LCC) Comfort and facilities (Business class and International passengers) Security (when one carries high value items) Psychological benefits (prestige)

Customer Analysis
Unmet needs
No real time information available (Delay/ cancellation), so passengers sometimes have to unnecessary wait in the airports for long time Customized meal option: While booking (frill and non frill both) travelers should be given option to choose their meals. Right now people have to have whatever the airline serves Feeder Lines: Flights are more concentrated on metro routes or tier-I cities, so small destinations are being neglected Business opportunities in other facets of aviation like helicopter tourism, sea tourism and business

Industry size & future outlook


In 2009, the number of passengers carried stood at 41 Mn. In 2007, the volume was 42.8 million passengers. Overcapacity. LCC proliferation was expected to be 70% by now, but it stands below 50% By 2020:
Domestic traffic to reach 160-180 million. The total aircraft fleet is likely to reach 1000 with an estimated value of over US $ 80 Bn.

Trends and Potential events


The civil aviation ministry recently revived a proposal to allow foreign carriers to invest in domestic airlines
The move can prove to be significant by way of improving the bottom lines of cash-strapped domestic airlines

The recent opening of the market to private participation and India s ability to attract foreign direct investment (FDI)
Indian participants can leverage on the advantages of lower labor costs and strategic location to make India an export hub.

High Taxes/Duties : Servicing tax is 12.5%, while there is a customs duty of 50% on spares, a VAT of 12.5% & an octroi of 4%

Factors affecting growth


Airport infrastructure
Top 5 airports handle 75% of the traffic.

Business considerations v/s government objectives:


All airlines need to deploy 10% and 50% of Available seat Kms to category II and III routes.

Scarcity of trained personnel


Fleet size expected to double in the next 3 years. A need around 2000 trained pilots.

Relatively high ATF rates


No rationalization wrt to international fuel prices. High crude rates in India + Govt taxes and duties.

Direct and indirect taxation


Multilayered taxation. Tax exemption on lease rentals not extended beyond March 2007.

Thrust Areas
The industry Market share changes on a monthly basis. Managing costs. More on day to day survival. Expanding in face of mounting losses. Focus is to survive the dynamism. Future holds a lot of promise. Herd behaviour. LCC: Focus is on minimizing cost. The only variable cost component was food which has been largely eliminated. Operational efficiency through standardization, homogenous fleet and maximum airborne time for the aeroplanes.

Thrust Areas
Full service: LCC is a major competitor. Still in search for a proper definition of service. No significant differentiate. Giving price discounts is not uncommon (Super Apex and Super monsoon apex for Jet). Indian, Jet entered into co-branding agreements with AmEx and Stan Char trying to induce loyalty (mainly through direct cost advantage to consumers).

NACIL: Struggling with the makeover, integration. Still not clear, how much the government wants to intervene in this. Govt has decided to infuse new capital.

Future Outlook

Domestic ATF prices versus oil going forward

Fleet expansion plans

CAPA Projections for year 2020 : Domestic passenger traffic to reach 160-180 million International traffic in excess of 50 million Combined throughput to touch 400-450 million traffic marks The total aircraft fleet is likely to reach 1000 with an estimated value of over US$80bn

Future Outlook
Short Term Outlook : Uncertain
Overcapacity : With a dip in demand there has been a major underutilization of the airplanes which has added to high costs Heavy losses: Poor government policies Volatility : due to high prices, overcapacity of acquired planes, diminishing load factor and high losses suffered by the airlines Weak Infrastructure

Long term Outlook : Bright


Strong fundamentals Cost reduction due to industry maturity & fiscal reform Infrastructure improvement

Issues affecting strategy choice


Government policies Oil prices Infrastructure Consumer spending power/overall economic outlook Competition Mergers and Acquisitions

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