AIRLINES INDUSTRY- INDIAGroup 9Ashish SinhaHimanshu 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.

• 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.

Major Developments

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.

Competition in the industry

- 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

Competing Companies

Market Shares (Nov 2009)

Government: NACILPrivate: 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, GoAirFull 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 groups in the passenger segment

Characteristics LCC Full service

Types of plane used

Single configuration

Two plane configuration

Number of seats per

plane 150 190

Crew involved per plane 24 40

Strategic Groupings

• 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: ModerateKey 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 Structure

• 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) – Flight rental cost

20%

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.

Industry Perspectives

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

Marketing Perspectives

• 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

Customer Analysis

• 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.

Industry size & future outlook

Trends and Potential events

• 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.

Factors affecting growth

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.

Thrust Areas

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

Future Outlook

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

Issues affecting strategy choice