Alliance University

The Airline Industry

An Analysis

GROUP 12 SEC:C Amrita Singh Anshuprabha Singh Jeetu Jose Manash Verma Mudit Mathur Shuvendra kr. Mohanty

The Airline Industry

Contents

Page

Introduction Global Perspective Statistical facts about Indian Aviation Industry Structure of the airline industry in India PEST Analysis SWOT Analysis Conduct Performance analysis Analysis of competitiveness Future outlook Bibliography

3 4 6 8 17 20 23 31 37 40 42

The Airline Industry

Introduction:
The history of the civil aviation industry in India can be traced back to the year 1912 when the first air flight between Karachi and Delhi was started by the Indian State Air Services in collaboration with the UK based Imperial Airways. The Government of India nationalized nine airline companies vide the Air Corporations Act, 1953. Accordingly it established the Indian Airlines Corporation (IAC) to cater to domestic air travel passengers and Air India International (AI) for international air travel passengers.

The assets of the existing airline companies were transferred to these two corporations. This Act ensured that IAC and AI had a monopoly over the Indian skies. A third government-owned airline, Vayudoot, which provided services between smaller cities, was merged with IAC in 1994. These government-owned airlines dominated India's air travel industry till the mid-1990s. In 1994, IAC was renamed Indian Airlines (IA). In the same year, the Indian Government, as part of its open skies policy, ended the monopoly of IA and AI in the air transport services by repealing the Air Corporations Act of 1953 and replacing it with the Air Corporations (Transfer of Undertaking and Repeal) Act, 1994. Private operators were allowed to provide air transport services. Foreign direct investment (FDI) of up to 49 percent equity stake and NRI (Non Resident Indian) investment of up to 100 percent equity stake were permitted through the automatic FDI route in the domestic air transport services sector. However, no foreign airline could directly or indirectly hold equity in a domestic airline company. For many years since its inception the Indian Aviation Industry was plagued by inappropriate regulatory and operational procedures resulting in either excessive or no competition. Nationalization of Indian Airlines (IA) in 1953 brought the domestic civil aviation sector under the purview of Indian Government. Government's intervention in this sector was meant for removing the operational limitations arising out of excess competition. Air transportation in India now comes under the direct control of the Department of Civil Aviation, a part of the Ministry of Civil Aviation and Tourism of Government of India. Aviation by its very nature constitutes the elitist part of our country's infrastructure. This sector has substantial contribution towards the development of country's trade and tourism,

The Airline Industry providing easier access to the areas full of natural beauty. It therefore acts as a stimulus for country's growth and economic prosperity. Currently there are 6 major domestic airlines catering to the needs of around 520.1 lakh passengers, with Jet Airways along with JetLite enjoys 25% market share and hence a leader in India.

Why Air transport?

Air transport drives economic and social progress It connects people, countries and cultures It provides access to global markets It generates trade and tourism It forges links between developed and developing nations Aviation broadens peoples leisure and cultural experiences via wide choice/affordable access to destinations across the globe

Improves living standards and alleviates poverty through tourism Often serves as the only means of transportation to remote areas promoting social inclusion

Fosters the conservation of protected areas Facilitates the delivery of emergency and humanitarian aid relief Swift delivery of medical supplies, organs for transplantation

Global Perspective:
Employment

Air transport Industry generates 31.9 million jobs globally It directly creates 5.5 million jobs worldwide
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Airlines and airports employ 4.7 million people The civil aerospace sector employs 782,000 people

6.3 million indirect jobs are created via purchases of goods and services from companies in the air transport supply chain

2.9 million jobs are induced through spending by industry employees 17.1 million direct and indirect jobs are created through air transports catalytic impact on tourism

The Airline Industry Economic benefits

Aviation provides the only worldwide transportation system which makes it essential for global business and tourism

Aviation transports around 2 billion passengers annually Aviation carries over 43 million tonnes of freight annually and 35% of interregional exports of goods by value

40% of international tourists travel by air Aviations global economic impact is estimated at $ 3,557 billion (2007)
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That is equivalent to 7.5% of world GDP

25% of all companies sales are dependent on air transport 70% of businesses report that serving a bigger market is a key benefit of air transport

Air Transport Facts (2009)

1,715 airlines 27,024 aircraft (22,235 jets and 5,789 turbo props) 3,670 airports 28.6 million scheduled departures per year

Air Transport Efficiency

Aviation occupancy rates of 75.7% (2009 industry load factor) are better than those of road and rail

Air transport entirely covers its infrastructure costs ($54.2 billion/year) It is a net contributor to national treasuries through taxation Modern aircraft achieve fuel efficiencies of 3.5 litres per 100 passenger kilometres or 67 passenger miles per gallon

The Airline Industry

Statistical facts about Indian Aviation Industry:

The Total sales for the industry stands at 41.31 thousand crore for 2010. Net Profit is at -3.9 thousand crore. In the present scenario around 12 domestic airlines and above 60 international airlines are operating in India. The growth of airlines traffic in Aviation Industry in India is almost four times above international average. Aviation Industry in India have placed the biggest orders for aircrafts globally Aviation Industry in India holds around 69% of the total share of the airlines traffic in the region of South Asia . Air Passenger Traffic in India

The above data shows the trend in the passenger traffic movement in aviation industry from April 08 September 10.As the graph shows, there is not much movement of passengers through International Airlines, reason being that in India still the majority of travelers are

The Airline Industry domestic travelers. There is a constant fluctuation in the passengers movement. The best time for the aviation industry was from October to December 2009.Then again in May 2010 there was a boom in the aviation industry mainly because of the rise in per capita income and increase in the no. of flights scheduled. The major downturn however came in 2008, in this period the aviation industry suffered a major blow because of economic downturn. It hampered not only the domestic but the international passengers movement also. Air Freight Traffic Movement in India

As we can see that there has been a constant growth in the freight movement through airline simply because of the time factor. Airlines are the fastest means of delivering goods. However there has been a slight slump in the movement from April 2010- September 2010 mainly because of the rise in petrol prices and because of which the rates of freight increased.

The Airline Industry

Structure of the airline industry in India:

Monopoly:
During pre and post nationalization i.e. up to 1986, the only flights plying in the Indian sky were Air India and Indian Airlines both owned and controlled by the Government of India and as such the government enjoyed monopoly in the Indian Aviation Industry. Let us look at the basic characteristics of the Monopoly market:1. There is a single seller and many buyers of a product. 2. The products produced and sold by the firm is homogeneous or non-homogeneous but it has got no close substitutes in the market. 3. There are barriers to entry. 4. The firm is a price maker i.e. it has substantial control over the market price of the product. 5. The supply of the product by the single firm constitutes the market supply. 6. The firm acts atomistically i.e. while taking its profit maximizing decisions it ignores the reaction of other firms( potential competitors) and 7. The firm faces the market demand curve for its product.

Let us analyse the Indian Aviation industry during that time on the above mentioned parameters:1. Indian Airlines and Air India both under the same entity were the only suppliers of civil air services while there were buyers for the same. 2. The product was homogeneous as the air services were similar in the two airlines and though Railways was considered a competitor but it catered to entirely different market segment and was nowhere near to the air services considering the time and cost factor. 3. Due to government regulations, no other player could enter the market. 4. Both the airways controlled the entire demand and supply of the airline services. 5. Government was the price maker and it did not take pricing decisions strategically.

The Airline Industry Price Discrimination When a monopolist discriminates between consumers the practice is called Price Discrimination. It is sometimes able to charge different prices to different consumers of the same commodity. In the Airline Industry also the consumers are categorized into different classes such as Business and Economy and accordingly the prices charged also differ in the two classes.

MC Price, Cost P* C* G F AC

E AR

Q* MR

Quantity

In the above graph, we measure quantity along the x-axis and price(P), average cost(AC), marginal cost(MC), average revenue(AR), marginal revenue(MR) along the y-axis. The monopolist faces a downward sloping demand curve and as such his MR curve is also downward sloping. The monopolist will produce at the profit maximizing level which is the point where 1. MR=MC and 2. MC cuts MR from below.

This happens at the point E and accordingly the quantity supplied would be Q* and the price charged is P*. The AC curve intersects Q at the point F. As such his TC =C*FQ*0. His TR= P*GQ*0 and the profit earned is denoted by the area P*GFC*. The monopolist earns profit in the long run also as there is no competitor to enter the industry and take away his share of profits. The above graph applies to the Air India and Indian Airlines when they were enjoying monopoly status in the industry.

The Airline Industry

Oligopoly:
After the post privatization period i.e. the period after 1991 lot of private players entered the industry under the government policy of open sky, which repealed the Air Corporations Act of 1953 and came up with Air Corporations Act, 1994. Opening up of the Aviation industry to 41% FDI in the form of equity stake has also increased the competition in the economy. By 1995, Private airlines occupied 10% of the domestic air traffic. Hence the various players broke into the monopoly of IA and AI creating a situation of Oligopoly market. The various characteristics of an oligopoly market are: Small number of sellers but it entirely depends on the size of the market. Interdependence of decision making- The business strategy of each and every firm in respect of pricing, advertising, product modifications is closely watched by the rival firms. There are barriers of entry due the high capital investment, economies of scale, resistance by existing firms, price cutting strategy etc. Product may or may not be homogeneous. The consumer is the price taker and the industry players are the price makers. Stabilized prices The prices tend to stabilize because no player is willing to bring about a change in its prices. Out of the above mentioned characteristics of Oligopoly, the Indian Aviation Industry possesses the following: There are 8 major airways in the current Indian aviation industry. Each and every player has a control on the prices and influences the market prices. The business strategies of pricing of tickets, advertisements, promotion schemes etc are in line with that of the competitors. A slight change in any type policy by a company will lead to the others to follow suit. Like when Air Deccan came up with a promotional scheme of Re 1 ticket, its immediate competitor Spice Jet launched a scheme of 99p/ ticket. The Indian Aviation Industry involves a huge capital investment and government regulation which acts as major reasons for any new player to enter. Not only that, the customer loyalty is attached to a particular airline and they might not be willing to switch. The product offered by each and every airline i.e. air services is more or less homogeneous with minor differences.

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The Airline Industry The prices in this industry are fixed by the players according to the segment of market they want to cater to. In Oligopoly market the profit maximization output and price is not determined by the profit maximizing criterion we saw in the monopoly market structure. Hence here lies the problem of indeterminacy. As such we can describe the Indian Aviation industrys market structure through Sweezys model of Oligopoly which talks about price stability/rigidity. Here, a firm A believes that if it increases its prices then none of the firms will follow suit so firm A will face considerable losses. Hence in this context the demand is relatively inelastic. On the other hand when firm A reduces its prices, all other firms follow suit to protect their market share. Here the demand curve becomes relatively elastic. Same is the case with Indian aviation players like reduction in price by Air Deccan will result in reduced prices of Spice Jet and an increase in prices of Air Deccan will cause them considerable losses. This kind of asymmetrical price conjecture leads to kink in the demand curve. Due to this reason firms prefer to maintain stable prices for particular periods.

P, MR, MC MC2 D MC1 E PO A D B Kinked Demand Curve

QO MR

In the above graph, the x-axis shows Quantity and the y-axis shows the price, MR and MC. Demand curve faced by an oligopolist has a kink point at E, the price and output corresponding to it is 0PO and 0QO respectively. DE portion is relatively elastic while ED is relatively inelastic. It is very unlikely that MC would pass through the discontinuous portion

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The Airline Industry of MR, if Q<QO, then MC<MR, and the firm will increase its output to maximize profit. Again if Q>QO then MC>MR And the firm will increase its output to maximize profit. Hence, the profit of the firm is maximized when Q=QO. Here, the equilibrium price- output combination (Po, QO) is compatible with a wide range of costs. Thus, shifts in MC curve do not affect the equilibrium.

We can see from the following data that prices in airline industry are same for the players competing with each other. We take the fares charged by the major airlines flying along Delhi Mumbai route (busiest route- 44 flights/day). High Cost Players 1. Jet 2. Kingfisher Prices Charged Rs. 7760 Rs 7400 Low Cost Players 1. Go Air 2. Spice jet Prices Charged Rs. 5000 Rs. 5148

1. Oligopoly market tending towards Monopolistic characteristics The future scenario of the Indian Aviation industry is tending towards monopolistic market Characteristics, some of which are as follows: Large number of buyers and sellers Product is differentiated No Barriers to entry.

It is being forecasted that around 8 9 new airlines would be starting their services in the next 2 years. As such we see that number of players is increasing and there would be cut throat competition. As such the market may move towards monopolistic in the coming years.

Some of the Top international airlines are as follows:

1. Delta Airlines 2. United Airlines 3. Southwest Airlines 4. American Airlines 5. Lufthansa 6. China Southern Airlines

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Players in the industry and market share

INDIAN PLAYERS Kingfisher Jet Airways + Jet lite Nacil(I) Indigo Spice jet Go Air

MARKET SHARE 18.6 % 25.4 % 17.1 % 18.6 % 13.8 % 06.4%

30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Series1

Herfindahl index =25.4^2+ 17.1^2 + 18.6^2 + 6.4^2 + 13.8^2 + 18.6^2 = 1861 This value of HHI dictates that the airlines industry in India is an oligopolistic market.

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The Airline Industry

Barriers:
Barriers to entry are conditions such as high start up costs or obstacles that prevent new entrants from easily entering the particular industry. These barriers benefit existing companies who already operate in the industry by protecting their existing revenues from new competitors. They can be as a result of interventions by the government or a natural occurrence in business. In the airline industry, there are number of barriers to entry that affect new entrants. Risk: The high risk nature of the airline industry is a major barrier for new entrants. Airlines have high cost that tends to be fixed in relation to revenues. Load factors or fare increases may affect revenue, when this happens profits will be instantly affected. This makes airline industry highly vulnerable to an economic slowdown. Slots:

Since 1969, the Federal Aviation Administration has limited the daily number of takeoffs and landings at key airports such as the Chicago O'Hare, Ronald Reagan Washington National and New York's JFK and LaGuardia. As a result of new airlines entering the market, the demand for access at these airports increased. This increase made it difficult for the takeoff and landing slots to be equally divided.

Leases:

Airports in cities such as Charlotte, Cincinnati, Detroit, Minneapolis, Newark and Pittsburgh permit airlines to lease the airport gates over a long period of time. This period can be extended as long as 20 years. This gives them exclusive rights to use the gates and prevents new airlines from acquiring the use of any airport facilities.

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The Airline Industry Perimeter Rules: Perimeter rules at LaGuardia and National airports prohibit incoming and outgoing flights that exceed 1,500 and 1,250 miles, respectively. These rules were implemented to promote JFK and Dulles airports as the long-haul airports for the New York and Washington metropolitan areas. Additionally, these rules limit the ability of airlines based in the west from competing, since those airlines are prohibited from serving LaGuardia and National airports where the western airlines are strongest.

Marketing Strategies:

Some marketing strategies such as booking incentives and frequent flier programs have been executed by established airlines to create loyalty among passengers and travel agents. This has made it increasingly difficult for new airlines to enter the market. Smaller airlines may choose not to enter or quickly exit a market due to increased competition and financial loss.

Resources:

A company's control or ownership of a significant resource bars would-be competitors from entering the market. For example, a monopoly that provides oil to local governments might have access and exclusive rights to the land from which the oil comes. Government also creates barriers to entry when it grants firm exclusive rights to certain resources through grants, patents, copyrights and licenses.

Sunk Costs:

Sunk costs are unavoidable expenditures for a company. For example, some firms in a competitive market have more money than others to spend on advertising. Marketing costs must be spent, thus it's a sunk cost. Business owners with little money budgeted to spend on marketing and advertising can find it difficult to enter an industry where another company has more money to put towards product promotion.

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The Airline Industry Investment:

Businesses with a higher amount of start-up capital than other firms create barriers to entry. Firms with high-yielding investments and those that show a good return for investors can afford to spend much money on resources, thereby overshadowing the efforts of the competition.

Innovation and Research: The high cost of investment in new technologies or research deters many firms from entering the market. Firms with greater resources for research and development to create new products, as well as capital to invest in equipment and in emerging technologies, can dominate an industry that depends on Research and innovation to grow.

Regulations:
In order to maintain orderly growth of airline operation, to serve the needs of the country, in an efficient and safe manner, the Civil Aviation Requirements, Section 3, Air Transport, Series C, Part II were issued in 1994 which stipulates the minimum requirements for grant of permit to operate scheduled passenger air transport services Scheduled Operator's Permit is granted only to:

A citizen of India; or A Company or a Corporate provided that:

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It is registered and has its principal place of business within India; Its chairman and at least two-thirds of its directors are citizens of India; and, Its substantial ownership and effective control is vested in Indian nationals.

Eligibility Requirements Before the Scheduled Operator's Permit is issued, an applicant should have: A subscribed equity capital of not less than Rs. 30 crores in respect of aircraft of maximum take-off mass exceeding 40,000 kg and not less than Rs. 10 crores in respect of aircraft of maximum takeoff mass not exceeding 40,000 kg. A fleet of minimum five aircraft either by outright purchase or through lease with maximum certified take-off mass more than 5,700 kg and type

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The Airline Industry certified meeting the requirements of transport category aircraft acceptable to DGCA. To facilitate the start of operations, operators will be permitted to operate with three aircraft and will be given one year's time to have the fleet size of five aircraft. The fourth aircraft should be acquired within a period of six months and the fifth aircraft within a period of one year. The aircraft shall be registered in India with current Certificate of Airworthiness in normal passenger category. Adequate number of AMEs and own maintenance and repair facilities for maintenance of aircraft at least up to flight release or 500 hours, whichever is higher. For higher maintenance, the operator should preferably establish his own maintenance facilities, but can carry out such maintenance using facilities of reputed organisation approved by DGCA. Sufficient number of flight crew and cabin crew but not less than three sets of crew per aircraft. The flight crew should hold current licenses issued by DGCA and appropriate endorsements on the type of aircraft operated.

PEST Analysis:
Political: 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: 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. Overall Indias recent political environment has been largely unstable due to international events & continued tension with Pakistan. The Gujarat riots & the governments inability to control the situation have also led to an increase in the instability of the political arena. 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.

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The Airline Industry 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) 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 government. This affects the quality of the service delivery & therefore these airlines have to think of innovative service marketing ideas to circumvent their problems & compete with the private operators. Economic: 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.

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The Airline Industry Social: 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 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 travellers 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. Technological: The increasing use of the Internet has provided many opportunities to airlines. For e.g. Air Sahara had 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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The Airline Industry 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 travellers. 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.

SWOT Analysis:
STRENGTHS

Speed and Comfort Air mode of transportation is the fastest and most comfortable form of transport.

Geographical barriers not a constraint Geographical barriers like mountains, sea etc are constraints for land and water mode of transport but Air travel is not constrained by such issues.

Tourism growth: Due to growth in tourism, there has been an increase in number of the international and domestic passengers. The estimated growth of domestic passenger segment is at 50% per annum and growth for international passenger segment is 25%. Airlines is the most preferred mode of transportation by the foreign tourists as the convenience provided by the airlines is higher.

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The Airline Industry Rising income levels: Because of the rise in income levels, the disposable income is also higher which are expected to enhance the number of flyers.

WEAKNESSES

Under penetrated Market: The total passenger traffic was only 50 million as on 31st Dec 2005 amounting to only 0.05 trips per annum as compared to developed nations like United States have 2.02 trips per annum.

Inefficiency of the domestic airlines: There are number of instances of flight being cancelled or delayed. Secondly frequent strikes by the pilots and maintenance problems are a major cause of concern. This is one of the reasons that make a tourist disheartened

Infrastructural constraints: The infrastructure development has not kept pace with the growth in aviation services sector leading to a bottleneck. Huge investment requirement for physical infrastructure for airports. Lack of basic facilities at the airport. When international airports offer such services like free transportation facilities, private lounge facilities at airports, food etc, it sometimes become impossible to find a clear toilet in our international airports.

OPPORTUNITIES

Expecting investments: Indian Airlines industry is expecting investment of about US $30 billion in 2011.

Expected Market Size: In Indian airlines industry average growth of aviation sector is about 25%-30% and the expected market size is projected to grow upto100 million by 2010. As the tourism industry

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The Airline Industry expands the airline industry is also in for a boom and development and up gradation of the present airports, India's geographic location makes it an ideal location to serve as a link between the East and the West Untapped Air Cargo Market: Air cargo market has not yet been fully taped in the Indian markets and is expected that in the coming years large number of players will have dedicated fleets.

THREATS Shortage of trained Pilots: There is a huge shortage of trained pilots, co-pilots and ground staff which is severely limiting growth prospects. because of payment delay.

Shortage of Airports: There is a shortage of airport facilities, parking bays, air traffic control facilities and takeoff and landing slots.

High Fuel prices: Though enough number of low cost carriers already exists in the industry, majority of the population is still not able to fly to other destinations. High oil prices mainly affect the airlines in this regard bringing up the operational cost. Government policies: Changing government policies also affect the Indian airlines industry it is regulated by the DGCA which is in turn controlled by the Aviation Ministry.

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The Airline Industry

Conduct: Distribution:
Air ticket distribution is carried out both directly by airlines via their websites, call centres or dedicated ticket sales offices and via third-party intermediaries - including global distribution systems (GDSs) and travel agents - both on- and offline. Most of the major legacy (traditional) airlines continue to sell the majority of their tickets via traditional intermediaries such as GDS, and, by and large, only the low-cost carriers (LCCs) have succeeded in distributing the greater part of their tickets via their proprietary websites. As the trade association for the international air travel industry, the International Air Transport Association (IATA) plays an important role in the billing of transactions, the accreditation of travel agents worldwide and the implementation of e-ticketing. Key statistics

In 2007, the worldwide sale of air tickets reached an estimated US$275 billion. E-ticketing became universal as of mid-year 2008, following a four-year campaign led by the IATA.

Premium tickets accounted for 7% of the total issued in 2007. Major legacy carriers generally succeed in selling between 10-30% of their tickets via their own websites. Most tickets continue to be sold by traditional third-party channels (travel agents and GDSs).

Proprietary websites are by far the most important distribution channel for LCCs, accounting for between 70% and almost 100% of ticket sales.

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Pricing strategies:
Premium Pricing: The airlines may set prices more than the market price either to reflect the image of quality or the different status of the product. The product features are not shared by its competitors or the company itself may enjoy a strong reputation like that the 'brand image' is only sufficient to charge a premium price. Value for Money Pricing: The value for money pricing is to charge the average price for the product and it represents excellent value for money at this price. This accredits the airline to achieve good levels of profit on the basis of established reputation. Low-cost Pricing: The low-cost airlines in the Indian aviation industry, a different low-cost flying concept has come up. Since these low-cost airlines are trying to attract the customers by providing air travel in exceptionally low prices. In 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: Apex fare is when, people are paid very cheap rates only if tickets are booked at least before the specified time period (e.g. before at least one month). But the draw-back here is that if the booking is cancelled, a substantial amount of money is not refund.

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Marketing Strategies:
In-flight advertising

In-flight advertising is the use of personalised spaces or objects such as headrests, trays as well as magazines and audiovisual messages for advertising purposes and for advertisers it can represent an ideal opportunity to reach a highly receptive audience that is literally captive. Emirates publishes three magazines, Open Skies, Portfolio and TV & Radio with the idea of making contact with its more sophisticated readers. The first is a lifestyle magazine reflecting the cosmopolitan character of its readership, including stories from around the world covering such diverse topics as travel, technology, health, the environment, art, culture, food, business and adventure. Portfolio is a business magazine aimed exclusively at First Class and Business Class passengers including interviews and profiles related to business topics and current affairs. TV & Radio is an entertainment guide providing listings for the in-flight entertainments programs available on the different routes operated by the airline. The advertising included in these publications is not invasive; on the contrary, travelers are provided with added value and entertainment. Other promotional options are also possible, such as the campaign carried out by La Prairie where first class passengers travelling with Qantas, Swiss International Air Lines, Malaysia Airlines, Lufthansa and Eva Air were delivered with a gift set of the companys cosmetics.

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Online Marketing
Attracting potential customers to airline websites is the first step towards boosting the sale of flight tickets online. One of the several possibilities available is email marketing. According to a survey conducted by the Travel Industry Association of America (TIA), over 35 million Internet users made a travel reservation after receiving information on offers or promotions by email. The same study also found that in 2003 ten million people were influenced by email marketing to make a trip or journey that they otherwise would not have made. In order to start up online marketing campaigns, the definition of the goals to be attained and the performance of prior segmentation of the data bases to be employed are both crucial. It is also important to reach persons forming part of the target audience who will receive the offer favorably, with a strong interest in the services offered by the airline. At the same time this type of actions will contribute to brand notoriety. In this context the email marketing campaigns conducted by Austrian Airlines (which according to organiza.com managed to attract 11,000 new customers) or Vueling are of special interest. The latter was centered on the prize draw of a trip to Venice, linked to the willingness to receive information on special flight offers. There is wide variety of online marketing methods. According to a survey on the Effectiveness of Display Publicity conducted by IAB and the Cocktail Analysis in April 2009 on a sample of 1035 Internet users of both sexes, aged between 15 and 50 and who had been online for at least one hour before accessing the survey on which the research was based. The results showed that in terms of generation of brand recall, layers and pop-ups were found to the most effective formats. With only 3.1% of the investment, a 23.4% recall rate was attained (+655%). The second most effective format turned out to be online video. Even though only 3 out of 100 euros are destined to this format, its effectiveness on generating brand recall is proportionally much higher. Almost 2 out of 10 of the commercials associated to the brands recalled by the persons surveyed were linked to this format. As could be expected, it was the more creative, dynamic ads that generated greater recall. Over half (54%) of the ads mentioned were dynamic.

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The Airline Industry In this direction, one of the points to be included in this online plan would be the analysis of presence in social networks. The same study found that 78% of the persons surveyed belonged to one of the social networks under analysis (Facebook, Fotolog, Tuenti, Myspace, Hi5, Twitter, Sonico, Badoo).

It is clear that these communities provide an opportunity for spreading information on airlines special offers, however it is not as simple to find a way to do so successfully; this will entail the analysis of what moves our future customers. Airlines such as American Airlines and Virgin Atlantic already have a presence in Facebook. On Twitter, some airlines such as Vueling only offer corporate information to their users whereas other such as JetBlue offer a more a more active service where customers are provided with access to exclusive offers. Other companies such as the Dutch airline KLM have developed their own social network, the China Club, aimed both at young people looking for cheap flights and the business community. Other promotional strategies can be studied in the context of Kingfisher airlines as they are a prime example owing to their prolific marketing campaign,

Marketing strategies of Kingfisher Airlines

Kingfisher airlines launched its domestic air service operations in May 2005.KFA was promoted by UB group and offered a single class- Kingfisher Class. KFA successfully leverage the youthful and vibrant image of its kingfisher beer brand and called its airlines as Funliners to emphasize the fun-filled experience. Within the first six months of its launch, KFA managed to corner a 6% market share in the domestic air travel mark. KFA started its operation in May 7, 2005, positioning itself as a budget carrier and not as Low Cost Carrier (LCC).

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The Airline Industry As part of its promotional strategy the marketing team of KFA showcased the airline as the new flying experience. The following initiatives were taken as part of its promotional strategy

It came up with a very appealing promotional line Fly the good times and it reflected in the experience the company offered to its passengers.

KFA also launched Kingfisher express in order to tap into the growing LCC segment. The company gave best services to its customers that were like providing world class interiors, and in-flight entertainment systems.

The company came up with only one class airlines rather than other airlines that had Business Class; Economy Class the idea was to combine Business Class experiences and Economy Class experiences in one. Having a single class freed up more leg space for passengers when compared to normal economy class flights.

The company started addressing its customers as GUEST rather than passengers. The company made its mark by providing its guests with more legroom and bigger seats so as to provide better comfort.

Advertisements hoardings at airports depicted the stylish interiors of the Funliners, which conveyed youthful, fun-filled, and world class image. INOX multiplexes in Mumbai publicized KFAs special offers for a month. KFA was the official travel airlines for the cast and crew of Mangal Pandey- the movie.

KFA made use of various fashion shows, celebrity golf matches, New Year parties all to build its Kingfisher brand. The UB groups monthly magazine called Pegasus published information about KFA along with other information related to UB group. KFA launched many attractive offers to promote its sales like the King Card in association with ICICI Bank, in August 2005. This was meant to create loyal customers for KFA by providing benefits like privileged access to lounges, restaurants, free refreshments at airports, access to 180 golf clubs across India, special invites for lifestyle shows.

In October, KFA launched Chill Times Offer in the month of August 2005 and September 2005.

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The Airline Industry

In October they launched the King Saver Offer which said Fly like a King, dont play like one.

KFA targeted the frequent fliers business traveller segment, which was dominated by Jet Airways. By offering a King Saver Booklet, This booklet contained six free flight tickets and was presented as a free gift if the passenger bought two such booklets each worth Rs. 26,999.Passengers could avail off this offer if they showed there Jet Privilege Member (Gold or Platinum) card.

Advertising Intensity

14 12 10 8 %6 4 2 0
2010 2009 2008 2007 2006

The graph is a plot of the Advertising Intensity of Kingfisher Airlines from the year 2006 to 2010 as percentage. As is evident the % of advertising has increased steadily over time pointing at the aggressive attempt by Kingfisher to turn the lose making concern into a profit making organization by leveraging on the funds from the Kingfisher group.

Leverage ratio
The debt-equity structure of firms might have an effect on its financial performance. Leverage of the firm:- Debt / Equity

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The Airline Industry year 2010 2009 2008 2007 2006 2005

JET AIRWAYS KING FISHER

14.24

9.01

4.57

2.58

2.02

3.47

0.00

0.00

3.29

2.32

3.20

11.50

16 14 12 10 8 6 4 2 0 2010 2009 2008 2007 2006 2005 JET AIRWAYS KING FISHER

Here we see the leverage ratio of jet airways and king fisher airlines for five years. In 2005 leverage ratio of king fisher airlines was high then after that its yearly goes down and in2009 and 2010 leverage ratio is zero because of Equity is in negative. And the leverage ratio of jet airways yearly goes up. The equity goes to negative as the value of its assets where of lower value than the debt amount to be repaid, this came as a combined effect of Kingfisher taking over Air Deccan, the economic slowdown and the groups financial backing of the airlines.

Working capital ratio

Long term solvency position of a firm usually measured in terms of its working capital (current assets-current liabilities) over sales indicates the ability of a company to weather difficult financial periods. Working capital ratio:- Total current asset/Total current liabilities

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The Airline Industry year 2010 2009 2008 2007 2006 2005

JET AIRWAYS KING FISHER

1.01734

1.2573

0.9859

1.6015

2.9168

1.8402

0.7414

0.6213

0.9763

2.2088

1.2905

1.5921

3.5 3 2.5 2 JET AIRWAYS 1.5 1 0.5 0 2010 2009 2008 2007 2006 2005 KING FISHER

Here we see the working capital ratio of Jet airways and King Fisher airlines. As you can see Jet is consistently able to keep the ratio above 1 displaying their capacity to meet their immediate debts , however as KF is running in loses for several years their WC ratio drops down until 2008 when it goes below 1 after takeover of Air Deccan.

Performance analysis of some of the major players

The performance of any industry is based on a few parameters. Thus, the performance can be analyzed by finding out the: GROWTH ANALYSIS The growth of the companies in the industry was analyzed on the basis of the Sales Growth Rate.

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The Airline Industry

Sales Growth Rate (annual growth rate) = Sales in the current year- Sales in the previous year Sales in the previous year

The trend in the Profit (%) for the companies is analyzed over the period as given.

YEAR JET AIRWAYS KINGFISHER

2010 -9.735

2009 30.849

2008 25.209

2007 23.622

2006 30.625

2005 25.833

-3.265 263.467 -11.142

31.197 305.245 385.771

450 400 350 300 250 200 150 100 50 0 2010 2009 2008 2007 2006 2005 JET AIRWAYS KINGFISHER

-50

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The Airline Industry Jet Airways has been a premium brand in the Airline Industry ever since its origin in 1995. Jet has been doing nominally well in terms of growth. But after encountering stiff competition with the LCCs and Sahara Airlines, it changed its strategy and merged with Sahara towards the end of 2007 thereby buying out Sahara for $340 million. This gave Jet an extra 27 flights along with airport gates for INR 1450 crores. Ever since the inception of Kingfisher Airlines, they have run the business well running into huge profits on the account of their amenities and services provided. It all started with huge growth in 2005 and 2006. Later after an economic slowdown, the price of oil had increased from $73 a barrel to $96 a barrel, due to which prices of the tickets rose but the demand from the customers decreased. The sudden growth in 2009 is contributed by Kingfisher consolidating with Air Deccan in 2008. This was a very strategic merger for Kingfisher as Air Deccan had just acquired its international flying license which was eyed upon by the UB Group. PROFITABILITY TREND Profitability gives us the earnings available to the investors and owners of the company after taking into account all the expenses incurred during the business operations. Profitability is calculated as: Profitability (%) = Profit after Tax (PAT) / Net Sales YEAR JET AIRWAYS KINGFISHER -24.65 -30.69 -16.48 -43.67 -31.62 -7.89 The trend in the Profit (%) for the companies is analyzed over the period as given. 2010 -5.03 2009 -15.22 2008 -7.31 2007 -2.48 2006 4.32 2005 8.87

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The Airline Industry

20 10 0 2010 -10 -20 -30 -40 -50 2009 2008 2007 2006 2005 JET AIRWAYS KINGFISHER

Kingfisher and Jet Airlines have been market Leaders in the business. But as depicted in the graph, the airline industry has been in losses since the last 5 years or so. The more premium the brand, the higher the costs of maintenance, and if the costs are not recovered then the company is in loss. Same is the case with Kingfisher as well as Jet. It invested so much in the brand building that it has not been able to recover the costs. Just when the strategic merger with Air Deccan hinted at a good move, recession had hit the world and economic slowdown had led to cost cutting all across organizations which resulted in decreased profitability. Same happened with Jet Airways. RETURN ON ASSETS (ROA) Profits before interest, depreciation and tax/Total assets gives ROA YEAR JET AIRWAYS KINGFISHER -0.2859 -0.3512 -0.5221 -0.2604 -0.4362 -0.0254 2010 0.0899 2009 0.0129 2008 0.0517 2007 0.085 2006 0.1902 2005 0.2598

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The Airline Industry 0.3 0.2

0.1
0 -0.1 -0.2 -0.3 -0.4 2010 2009 2008 2007 2006 2005 JET AIRWAYS KINGFISHER

-0.5
-0.6 Kingfisher has always banked on quality service ever since its inception. To keep it big and stylish is Mallyas style. As a result, kingfisher had invested a lot in Boeing and Airbus aircrafts. According to reports, the Indian Aviation Industry had ordered 400 Boeing and Airbus jetliners worth of $37 million during 2006-2010.On the other side, LCCs of these brands were trying to sustain the competition and declining consumer demand. Thus, in this case, Jetkonnect by Jet Airways have stood up to the storm by slashing airfare rates as low as 40% which Kingfisher Red was not able to do. RETURN ON SALES (ROS) Profits before interest, depreciation and tax/Sales gives ROS YEAR JET AIRWAYS KINGFISHER -0.2286 -0.2373 -0.4068 -0.2072 -0.2357 -0.0248 2010 2009 2008 0.0978 2007 0.1007 2006 2005

0.1435 0.02197

0.2418 0.29801

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The Airline Industry 0.4 0.3 0.2 0.1 0 -0.1 -0.2 -0.3 -0.4 -0.5 The return on investment has not been too good for Kingfisher even though Jet Airways is clearly a winner in this case. According to reports, the Indian Aviation Industry has reported losses worth $230 billion in the year 2006-2010. The sales of Kingfisher have not been able to overcome its high investment costs. 2010 2009 2008 2007 2006 2005 JET AIRWAYS KINGFISHER

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The Airline Industry

Analysis of competitiveness
Porters five forces model for aviation industry

Threat of substitution: 1.Roadways 2.Railways 3.Private Transport

Bargaining power of customers: Substitutes Increased income No. of players

Rivalry within an industry: Spicejet Jetairways Indigo Go Air Air India

Threat of new entrants: Liberal Policies Easy loans Untapped Market

Bargaining power of suppliers: Very few manufacturers No substitutes

Availability of Substitutes: Purchasing power of customers has increased: As the purchasing power of the customers has increased they have more options, from high fare to low cost airlines they can travel from any airlines. Roadways, Railways, Private Transport: Roadways, Railways , Private transport are the major substitutes for the airlines. However this is not a threat if the distances are long.

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The Airline Industry Competition rivalry within an industry: Many players of about the same size; there is no dominant firm: There are 6 major domestic firms and there is a major competition between them, so customers have a wide choice with them. Little differentiation between competitors products and services: There is not much difference between the services provided by all the airlines. The only difference being the fares and the meals that are provided. A mature industry with very little growth; companies can only grow by stealing customers away from competitor: The only way to grab the customer share is to snatch the customers from the competitors. This can be done by differentiated pricing, frequencies, and services. Threat of new entrants: Existing loyalty to major brands: Till now the customers are loyal to their brands. But as the competition will increase they may switch over to some other players. High fixed cost: The fixed cost involved in the entry or setup is very huge, but these days the funds are available and the credits are available easily so the entry is no more a worry. Scarcity of resources: The resources are scares. Fuel is a major resource for the aviation industry and the rising prices of it is a major concern.

Government restrictions or legislation: The restrictions which were there earlier are not there now. After liberalization the entry of new player has become much easier. Besides there are very few restrictions by government in terms of the fees , platform, frequencies of flights etc. Indian airlines market is not fully trapped , its underdeveloped: The Indian market is still not fully trapped. There is a shortage in the supply as compared to demand. Besides the infrastructure is also not fully developed.

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The Airline Industry Bargaining Power of Suppliers: There are very few suppliers of a particular product: There are only 2 suppliers of aircrafts currently. So the bargaining power is not there for the firms. They cant bargain much and cost is also very high. There are no substitutes: for airlines the only source of income is the aircraft. They cant substitute this with any other thing and because of this they cant bargain with the suppliers. The product is extremely important to buyers - can't do without it: Aircrafts are the only source of income for the buyers; they cant do anything without it. The supplying industry has a higher profitability than the buying industry: The supplier has the high margin or profitability in supplying the aircrafts, because its a onetime affair for them. But for the buyers the profitability is low. Bargaining power of customers: Small number of buyers: There are not many no. of buyers or customers. As said earlier the market is still untapped. So the customers have the upper hand and he can bargain with the seller. Switching to another (competitive) product is simple: As there are many buyers with same product the switching from one firm to another is easier for the customers. The product is not extremely important to buyers; They can do without the product for a period of time: Even if there are no airline services the domestic passengers can do without it because for domestic travelling they can use the other alternatives as mentioned earlier. Customers are price sensitive: If one competitor increases the price, a customer can always switch to some other player. They are pricing sensitive and an change there preferences if there is even a slight fluctuation in the prices.

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The Airline Industry

Future outlook:
Passenger traffic is estimated to grow at a CAGR of over 15% in the coming few years. The Ministry of Civil Aviation would handle around 280 million passengers by 2020. US$ 110 billion investment is envisaged till 2020 with US$ 80 billion solely for new aircraft and US$ 30 billion for developing the airport infrastructure. LCCs and other entrants together now command a market share of around 46%. Legacy carriers are being forced to match LCC fares, during a time of escalating costs. Increasing growth prospects have attracted & are likely to attract more players, which will lead to more competition. Airport and air traffic control (ATC) infrastructure is inadequate to support growth. While a start has been made to upgrade the infrastructure, the results will be visible only after 2 - 3 years.

Modernization of airports
The Airports Authority of India (AAI) is undertaking the development and modernization of all 35 non-metro airports in the country. The other two metro airports - Chennai, Kolkata -- may soon be on the modernization path.

Augmentation of fleets
Kingfisher has also ordered five Airbus A380 aircraft. India is expecting to add aircraft worth about US$80 billion by 2020.

Growth in MRO Segment

Growth in the MRO segment in India is estimated at 10.2 per cent, and is expected to outpace growth in Asian and global markets.

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The Airline Industry The total MRO market in the country is around $500 million and is likely to touch $1.06 billion by 2014. By then, India's contribution to Asia's MRO market is expected to grow to seven per cent.

Job opportunities
The aviation sector in India is likely to create more jobs in future as the sector is growing rapidly. The industry would create 2,00,000 jobs by 2017 in India. Sector will require 2,000 more pilots and 10,000 maintenance staff in 2011.

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The Airline Industry

Bibliography:
http://www.mckinseyquarterly.com/Trends_in_the_US_airline_ticket_distribution_200

http://www.atag.org/files/ATAG%20brochure-124015A.pdf

http://www.iata.org/pressroom/facts_figures/Pages/index.aspx http://www.flykingfisher.com/index.aspx http://drypen.in/marketing/kingfisher-airlines-marketing-hr-financial-strategies.html http://www.iata.org/pressroom/pr/Pages/index.aspx http://www.iata.org/pressroom/facts_figures/Pages/index.aspx http://www.iata.org/whatwedo/Documents/economics/Industry-Outlook-PresentationDecember2010.pdf http://www.flykingfisher.com/index.aspx http://www.livemint.com/2010/01/02000041/Kingfisher-in-deals-for-bio-je.html CAPA SITA white papers ICAO Annual Report 2010 Capitaline Database

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