Airline Management New Thrust Areas

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					              AIRLINE MANAGEMENT –
                NEW THRUST AREAS

                      A DISSERTATION

                          Submitted to:

                  NALSAR UNIVERSITY OF LAW
               in partial fulfillment of the requirements
                          for the Certificate of
Post Graduate Diploma in Aviation Law and Air Transport Management

                          Presented by:

                      Capt. Birendra Verma

                         AIRLINE MANAGEMENT –
                           NEW THRUST AREAS
In the recent past, Indian civil aviation sector has grown manifold. Several new
players have entered the industry and many more are about to enter the arena. Apart
from the state-owned airline, a number of private companies have entered the arena,
thereby providing more choices to the passenger. Today, air travel is no more the
monopoly of the rich and the mighty. With the arrival of cheap airline carriers in
India, air traveling has become simpler and cheaper. Private players including
Kingfisher Red, Spice Jet, Jetlite, Indigo etc. are coming up with attractive rates for
their passengers, thereby making civil aviation lucrative.
Now, airline has become a common man’s vehicle and revolutionized the way a
common Indian traveler used to travel. The airlines are adding more and more cities
to their list of destinations covered throughout the country. Therefore, it can be said
that the domestic airlines of India have made traveling easier for the masses. More
and more people are opting for traveling by air, because they save a lot of time in
traveling, as compared to other means of transportation. Here is a brief preview of
domestic airlines in India. This includes private airlines as well as low cost airlines in

                 LIST OF ABBREVIATION
AAI        -   Airport Authorities of India
ACI        -   Airports Council International
AEA        -   Association of European Airlines
AI         -   Air India
APEC       -   Asia-Pacific Economic Cooperation
ASA        -   Air Services Arrangements
ASEAN      -   Association of South-East Asian Nations
ASK        -   Available Seat Kilometer
ATAG       -   Air Transport Action Group
CAGR       -   Compounded Annual Growth Rate
DGCA       -   Directorate General of Civil Aviation
DOT        -   Department of Tourism, Government of India
FDI        -   Foreign Direct Investment
GDP        -   Gross Domestic Product
IA / IAC   -   Indian Airlines
IATA       -   International Air Transport Association
ICAO       -   International Civil Aviation Organization
MOU        -   Memorandum of Understanding
OECD       -   Organization for Economic Co-operation and Development
PATA       -   Pacific Asia Travel Association
RPK        -   Revenue passenger-kilometer
WTO        -   World Trade Organization
WTTC       -   World Travel and Tourism Council

                           GLOSSARY OF TERMS
Air Services Agreement - An agreement with formal treaty status between
governments regulating the conduct of trade in international air services. It consists
of a series of articles (or provisions).
Alliance - An agreement between airlines to cooperate in the provision or operation
of some of their services on a route, or on a regional or global basis.
Available Seat Kilometers - The total number of seats offered multiplied by the
distance flown, used as a measure of air transport passenger capacity.
Blocked Space Agreement - The purchase by one carrier of a block of seats from
another carrier for resale to passengers directly.
Cabotage - Provision of commercial domestic air services within a country.
Cabotage rights are classified as either consecutive cabotage the right of foreign-
owned airline(s) to fly a domestic flight stage within the host country as a
continuation of an international service (also know as eighth freedom) or standalone
cabotage the unrestricted right of foreign-owned airline(s) to provide domestic air
services in the host country (also known as ninth freedom).
Capacity Allocation - The allocation of rights to individual airlines to fly services
available under ASAs.
Charter Services - See non-scheduled services.
City Pair - An air route between two cities.
City Designation - The designation of air services to particular cities, or a choice of
cities specified under an ASA.
Code Sharing - The assignment of one airline’s designator code (for example, ‘AI’
for Air India) to a flight operated by another airline.
Double Disapproval - Arrangements in bilateral air service agreements whereby
proposed fares can be disallowed only if rejected by both contracting countries.
“Fourth Freedom Traffic Right”- The right of a designated airline of one country
to take on, in the territory of another Country, passengers, freight and mail for off-
loading in the Country in which it is licensed.
“Fifth Freedom Traffic Right” - the right of designated airline of one country to
carry passengers, freight and mail between two countries other than the country in
which it is licensed.
Flag Carrier - A country’s national airline. Countries with only a government-
owned airline often identify the airline as the national or flag carrier.
Freedoms of the Air - Types of international aviation rights established under
Hub and Spoke Network - A network of routes operating through a central hub
point. Airlines may channel and increase traffic through hub points, thereby creating
economies of traffic density.
Intermediate Rights - The right of a carrier from one country to fly to another
country via a third country (a form of fifth freedom rights).
Landing and take-off Slots - A landing and/or take-off time at an airport.
Load Factor - The number of passengers carried as a percentage of the number of
seats available.

Memorandum of Understanding - An agreement between two parties. With regard
to ASA’s, it is a less formal type of agreement that may be as binding as a formal
agreement and may cover scheduled and/or non-scheduled international air services.
Multilateral (Agreement) - A trade agreement that encompasses a large number of
Dual / Multiple Designation - A country’s policy of permitting more than one
airline to operate scheduled international air services between it and other
Non-scheduled Airline - Any air transport enterprise only offering air transport
services to the public that are not performed according to a regular timetable.
Non-scheduled Services - Flights performed for remuneration on an irregular basis.
[Both scheduled and non-scheduled airlines provide nonscheduled services.] Usually
referred to charter services and can apply to either passengers or freight.
‘Open Skies’ Agreement - An agreement to remove restrictions on the ability of
airlines to operate services between two countries.
Origin– Destination Traffic - A measure of airline (passenger) traffic between the
commencement point of an air passenger’s journey and the end point of the journey,
as distinguished from uplift discharge traffic.
Plurilateral (Agreement) - A trade agreement, not necessarily confined to a
geographic region, between more than two countries, but not so many as to make it
Revenue Passengers A commercial passenger for whose transportation an air carrier
receives commercial remuneration.
Revenue Passenger Kilometres - The number of paying passengers on an aircraft
multiplied by the number of kilometres flown, used as a measure of air passenger
travel services.
Route - At its simplest level, an air service between two points or cities.
Scheduled Airline - Any airline operating regular air services according to a
published timetable (Many also operate non-scheduled services).
Scheduled Services - Flights listed in a published timetable (or that are as regular
and frequent as to constitute a recognizably systematic series) and performed for
Single Designation - A country’s policy of permitting only one airline to operate
scheduled international air services between it and other destinations.
Stage Length - The distance flown between take-off and landing.
Stopover Rights - The right of a carrier from one country to carry its own
international passengers between two points within another country.
Substantial Ownership - All or majority ownership of an airline by citizens in the
country of registration. There is no internationally agreed standard, so each country
can determine what it accepts as substantial ownership.
Tariffs - The prices to be paid for the carriage of passengers, baggage or cargo
(excluding mail) on scheduled air services and the conditions, under which these
prices apply, including remuneration and conditions offered to travel agencies and
other auxiliary services.
Thin Route - Route over which traffic and frequency is low.

“Third freedom Traffic Right” - The right of an Eligible Airline of one State Party
to put down, in the territory of another State Party, passengers, freight and mail taken
up in the State Party in which it is licensed.
Yield - Airline revenue per unit of traffic. Passenger yield is airline revenue per
passenger kilometer.

                                    Chapter – 1
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. Private airlines account for around 75% share
of the domestic aviation market. Earlier air travel was a privilege only a few could
afford, but today air travel has become much cheaper and can be afforded by a large
number of people.
The origin of Indian civil aviation industry can be traced back to 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. It was an extension of London-
Karachi flight of the Imperial Airways. In 1932, JRD Tata founded Tata Airline, the
first Indian airline. At the time of independence, nine air transport companies were
carrying both air cargo and passengers. These were Tata Airlines, Indian National
Airways, Air Service of India, Deccan Airways, Ambica Airways, Bharat Airways,
Orient Airways and Mistry Airways. After partition Orient Airways shifted to
In early 1948, Government of India established a joint sector company, Air India
International Ltd in collaboration with Air India (earlier Tata Airline) with a capital
of Rs 2 crore and a fleet of three Lockheed constellation aircraft. The inaugural flight
of Air India International Ltd took off on June 8, 1948 on the Mumbai-London air
route. The Government 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 feeder
services between smaller cities, was merged with IAC in 1994. These government-
owned airlines dominated Indian aviation industry till the mid-1990s.
A recurring demand often voiced by interested parties is that, in order to promote
Travel & Tourism, India should adopt an Open Skies policy. It is argued that the
current policy restricts the access of foreign airlines. As a result potential tourists are
not offered a choice of airlines or seats when travelling to India. This problem is
exacerbated during the holiday season when it is difficult, if not impossible, to get a
seat either into the country or out of it. It is argued, therefore, that India should adopt
an Open Skies approach to any foreign carrier wanting to fly into India, which
literally means allowing them unlimited service, capacity and points of call.
At the outset we must point out that the concept of 'Open Skies' is much
misunderstood in its meaning and implications. Strictly speaking Open Skies means
unrestricted access by any carrier into the sovereign territory of a country without
any written agreement specifying capacity, ports of call or schedule of services. In
other words an Open Skies policy would allow the foreign airline of any country or
ownership to land at any port on any number of occasions and with unlimited seat
capacity. There would be no restriction on the type of aircraft used, no demand for

certification, no regularity of service and no need to specify at which airports they
would land. Defined in this manner, it is not surprising that Open Skies policies are
adopted only by a handful of countries, most commonly those that have no national
carriers of their own and that have only one or two airports. No sovereign country of
any eminence practices Open Skies least of all the European Union, UK, USA,
Japan, Australia or countries in South East Asia.
In April 1990, the Government adopted open-sky policy and allowed air taxi-
operators to operate flights from any airport, both on a charter and a non charter basis
and to decide their own flight schedules, cargo and passenger fares. In 1994, the
Indian Government, as part of its open sky 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.
By 1995, several private airlines had ventured into the aviation business and
accounted for more than 10 percent of the domestic air traffic. These included Jet
Airways Sahara, NEPC Airlines, East West Airlines, ModiLuft Airlines, Jagsons
Airlines, Continental Aviation, and Damania Airways. But only Jet Airways and
Sahara managed to survive the competition. Meanwhile, Indian Airlines, which had
dominated the Indian air travel industry, began to lose market share to Jet Airways
and Sahara. Today, Indian aviation industry is dominated by private airlines and
these include low cost carriers such as Deccan Airlines, GoAir, and SpiceJet etc, who
have made air travel affordable.
Airline industry in India is plagued with several problems. These include high
aviation turbine fuel (ATF) prices, rising labor costs and shortage of skilled labor,
rapid fleet expansion, and intense price competition among the players. But one of
the major challenges facing Indian aviation industry is infrastructure constraint.
Airport infrastructure needs to be upgraded rapidly if Indian aviation industry has to
continue its success story. Some steps have been taken in this direction. Two of
India's largest airports-Mumbai and New Delhi-have been privatized. Two
Greenfield airports are at Bangalore and Hyderabad in southern India are operational.
Investments are pouring into almost all aspects of the industry, including aircraft
maintenance, pilot training and air cargo services. The future prospects of Indian
aviation sector look bright.
Airlines Industry in India is one of the fastest growing airlines industries in the
world. Post-liberalization, airlines industry in India has undergone a rapid
transformation. From being primarily a government-owned industry, the Indian
airlines industry is now dominated by privately owned airlines and low cost carriers.
In 1990 government adopted open-sky policy. Indian Airlines, which had dominated
the Indian air travel industry, began to lose market share to Jet Airways and Sahara.
Today, Indian airlines industry is dominated by private airlines and these include low
cost carriers such as Deccan Airlines (now a part of Kingfisher), GoAir, SpiceJet, etc,
which have made air, travel affordable.
Airline industry in India is plagued with several problems like high airlines turbine
fuel (ATF) prices, rising labor costs and shortage of skilled labor, rapid fleet

expansion, and intense price competition among the players. But one of the major
challenges facing Indian airlines industry is infrastructure constraint.
The key objective for the research will be ‘To assess whether the Indian aviation
industry has the ability to sustain its growth rates in the near future' some of the
specific objectives that will be examined here include;
      To study and analyse the trends in the Indian airline industry
      To enlist the factors affecting the Indian Airline Industry.
      To understand the various aspects of Airline management and its effect on the
        airline Industry in India.
      To make recommendations based on research work for improving the
        performance of domestic airlines in India.
      To examine problems facing the industry today and how these can reflect on
        the future problems
      To asses whether India's population and infrastructure is capable of handling
        such rapid expansion
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, providing easier access to the areas full of natural beauty. It therefore
acts as a stimulus for country's growth and economic prosperity.
The Aviation Industry in India is the most rapidly growing aviation sector of the
world. With the rise in the economy of the country and followed by the liberalization
in the aviation sector, the Aviation Industry in India went through a complete
transformation in the recent period.
Fuel cost account for about 40-45% of the cost of airline tickets in India as compared
to 35% globally. In the last six months, higher oil prices have forced nearly all the
airlines in India to raise ticket prices.
Decline in demand and fast increasing oil prices have adversely affected the financial
position of airlines in India. Indian government has come to the rescue of the airlines
with a bailout package.
The Indian aviation industry is one of the most talked about aviation industries in the
world. The major reason behind this interest is its liberalization. After the latter
move, India's airline passengers began enjoying the benefit of choice because Indian
carriers quadrupled in number. As if that was not enough, the country recorded a
twenty two percent increase in passenger traffic.
In the past, the Indian aviation industry was state owned. This meant that airline
carriers could not operate under the laws of the free market. Consequently, the
government decided to liberalize this industry by encouraging privately owned
airlines to join this lucrative sector. The industry has registered a high entry of
numerous low cost airline providers. Only twenty five percent of the domestic market
share belongs to government owned companies. The other percentage is by private
airlines. This industry has undergone a rigorous transformation as it is a far cry from
what it was in the short term.
Previous research with regard to this topic has looked at the successes of the Indian
aviation industry after liberalization. However, there are still minimal discussions

about some of the problems plaguing the industry currently. Additionally, there are
also few predictions about the future of this industry i.e. can India continue with the
momentum that it had started with after liberalization. This means that there is need
for an examination into the likely problems that could slow down this growth or halt
it altogether.
This study was mainly being done through secondary research where aviation data
for India was collected from DGCA, AAI and other relevant research reports. This
method was chosen because it would be difficult to get a summary of a country's
aviation industry from a specific airline or individual. Consequently, using a
summary of the facts would yield more reliable results.
The second specific objective will be measured by assessing the operational
environment in India. It should be noted that this current success may simply be an
indication of overall momentum within the sector. New players in the market have
not yet stabilized and there may be some unforeseen problems in the future. The third
objective is with regard to Infrastructural requirements. The airline industry is
painstakingly demanding with regard to capital investments. There is a need to assess
India's readiness for these airline expansions.

                                Chapter -2
                         FINDINGS AND ANALYSIS
At a time when most developed economies shrunk, a 4.7% growth during the first
quarter of 2009-10, puts India among the top-most growing nations. In spite of the
global recessionary trends, India managed 6.7% economic growth in the fiscal 2009.
The growth in the aviation sector is linked with the growth of GDP, which according
to latest figures released in Dec.2009 has rebounded to pre-slowdown phase of nearly
In recent years, with the entry of several new airlines, the aviation sector in India has
undergone a major transformation. The arrival of the low-cost airlines like Air
Deccan (merged with Kingfisher now), Go Air, and SpiceJet revolutionized the
sector to meet the growing demand of economical and faster inter- city travel options
within India. Air travel is no longer the luxury of business executives and the
economically well-off. As more airlines are entering India’s domestic aviation
market, it is leading to increased competition, resulting in drastic fare cuts.
Currently there are eight scheduled airlines in the domestic market in India, four of
which are Low cost carriers (LCCs) - the full service carriers are also competing on
low fares with the LCCs. There has been consolidation in the industry by way of
merger of two private full service carriers and also two state owned full service
Airline traffic growth in India remained in the double digits in Jan-2011 with growth
of 21% year-on-year to start the year. This marks two consecutive Januarys of traffic
growth with domestic traffic up 106% from Jan-2006 levels. Domestic traffic is now
some 48% above Jan-2009 levels, 27% above Jan-2008 levels and 44% above Jan-
2007 levels. The scheduled domestic airlines recorded an 18.7% growth in the
number of passengers carried during the calendar year 2010 compared to 2009.
Although the Indian economy recovered swiftly from the slowdown in 2008-09,
there has been a remarkable shift in the market share of scheduled domestic airline
operators. The market share of every low-cost airlines including Indigo, GoAir and
SpiceJet is rising at a rapid pace. In the calendar year 2010, Kingfisher witnessed a
fall in share by over 300 basis points compared to the previous year.
This share was mainly appropriated by Indigo and marginally by Go Air and
SpiceJet. The three account for over one-third of the market.

                     Market share of Domestic Airlines- 2010

                                 Indigo             Air India
                                  16%                 18%
                        Go Air

                                                                Jet Airways
                     Spice Jet
                                 Kingfisher           Jet Lite
                                    21%                 7%

Going by the current trend, Jet Airways plans to convert a-third of its flights from
full-fare to low-cost (Konnect). Given that the peak travel season is coming to an
end, the company has taken the decision to improve seat factor. However, it must be
noted that profit margins in operating low-cost airlines is far lower than full-fare
airlines. Thus, while sales realisation will be lower for Jet Airways, its seat factor
(passenger load factor) is likely to improve. Surging expenses, particularly ATF
prices, are expected to erode profits.
As per the India’s civil aviation ministry, the regional air connectivity is still very
low with air travel confined to very small segments of population. Therefore, there is
a vast scope for expansion of civil aviation in the country in which low cost carriers
will play an important role. The government has announced open skies policy for
cargo services and foreign equity participation has been hiked from 40 to 49%
allowing investments by NRIs, OCBs, although foreign airlines are not yet permitted
to pick up equity. FIIs who seek to hold equity in domestic air transport sector cannot
have foreign airlines as their share holders.
The forecast for air travel in India is robust – likely to grow 25% year-on-year for the
next 3 years. This therefore means excellent demand, which has been induced
primarily by low cost airlines enticing train travelers to fly at similar fares. The
emerging markets of India pose a great opportunity in the civil aviation sector –
exhibiting trends towards industry consolidation, liberalization and increased
competition from new players and a travel demand above the world level.
Recently, there have been signs of revival in the aviation sector with carriers finally
emerging from two years of turbulence, as an improving economic scenario and
relaxed corporate travel norms led to a 7.8% growth in air traffic in the calendar year
2009 over the previous year.
According to statistics compiled by the Directorate General of Civil Aviation, the
number of passengers carried by domestic airlines in 2009 totaled 445.13 lakh,
against 412.71 lakh in 2008. This is in sharp contrast to the situation in 2008 when
passenger traffic dipped, operating costs shot up due to higher oil prices and fares
slipped to very low levels on sagging demand and competition.

India's private airlines are set to post stronger profits this year and order up to 200
new aircraft as the economy rebounds from the global financial crisis. The airline
sector has been one of the most vibrant symbols of economic progress by the country
of 1.2 billion people, but it was buffeted by the global slump of 2007-2009 which

slowed the domestic economy. The Indian Airline sector would report total profits of
$350-$400 million for this financial year to March 2012. The centre had estimated a
profit of $250-$300 million for private carriers in the financial year just ended.
However, struggling state-run Air India is expected to announce losses of $1 billion
to $1.25 billion, the centre said, up from an estimated loss of $650 to $700 million
for the last year. Indian private carriers are also expected to place orders this year for
up to 200 new aircraft with a list price of $11-$12 billion, the centre forecast.
Even with surging oil prices, 2011-2012 may well turn out to be a profitable year for
the country’s airlines.
12-14% growth in domestic capacity              5-7% increase in yields
17-18% growth in domestic traffic               200 aircraft orders expected to be placed,
                                                with a list price of $11-12 billion
Analysis of Capacity (ASKM) and Demand (RPKM) data for the year 2009 vis-à-vis
2008 indicates that the airlines increased the capacity with effect from July onwards.
The data also suggests that demand has started increasing with effect from June 2009
indicating better utilization of the capacity.

The airline industry is essentially a service industry with a perishable product.
Capacity not filled at the time of takeoff is lost - there is no opportunity to gain
revenue at a later date for such excess capacity. Airlines therefore wish to generate
revenue by selling each individual seat on a given airplane for a given route during a
given period of time. Each seat is potentially treated as a differentiated product
appealing to different market segments.
The airlines compete by offering distinct products, presented to consumers as fares.
Each fare represents a different market a route connecting two cities and departure
time. The products are also differentiated by service levels received in flight, and by
the willingness of a consumer to accept certain restrictions. Customers seem to be

used to the fact that they are charged different fares for the same flight and that they
will receive specific benefits if they accept certain restrictions.
Customers thus are primarily sorted into two groups: Business and Leisure
Travelers. The elasticity of their demand is greatly affected by their purpose for
travel. Apart from passenger traffic airline industry also provide the transportation
services for Cargo & Air Freight.
Besides transportation services for passengers, the airlines industry also serve as
cargo and air freight service providers through scheduled air routes for perishables
such as vaccines, medicines and fruits that may often require cold storage facilities .
The aviation industry also derives its revenues from express delivery service for
example express mail, or newspapers.
First-class and unrestricted premier services tickets are more often bought by
business travelers, who have little choice about when they travel as their companies
pick up the tab. The business travel accounts for approximately 55 percent of the
traveling public. Business travelers are important to airlines because they are more
likely to travel several times throughout the year and they tend to purchase the
upgraded services that have higher margins for the airline. The business class
travelers are often lured by full service airlines by on flight premier services, luxury
seats, in-flight entertainment and gourmet meals and valet services on the ground.
These customers travel for non-business purposes, for example vacationing or
visiting friends and family or for personal needs. Leisure travelers are less likely to
purchase the premium services and are typically very price sensitive. They are often
prepared to make sacrifices in terms of product frills for example by traveling in the
rear cabin on board the aircraft rather than a premier class or by opting for a low cost
airline offering an inexpensive seat. In the domestic aviation market of India, there is
not much price variation between travel by first class railway AC coaches and travel
by low cost airlines. The rapid entry of new players into the airline industry in the
last 6 years has changed its competitive and growth dynamics with the low fares. As
a result, there has been increased demand and new consumer segments have been
created. The leisure segment is growing dominant in the local air transport industry
in India today.
Domestic market can be divided into 2 segments: Premium – where full services
airlines like Jet, Kingfisher, and Indian Airlines compete and Low cost carriers
(LCC or No Frills) such as SpiceJet, Go Air, and Indigo. The LCC boom in India
started with Low Price Tags, Apex Fares, Internet Auctions, Bulk Purchases and Last
Day Fares. The factors that have contributed to enormous growth of LCCs are:
(i) Low Entry barriers; (ii) Permit for flying to Foreign Shores; (iii) Rising income
levels and demographic profile (iv) Rise in Industrialization

We can understand the growth in the domestic airline industry using the Increased
Demand and Increased Supply curve as shown in the graph below. The original
equilibrium (with the green supply and red demand) occurs at the price of P1 and
quantity (bought and sold) of Q1. The supply curve has moved to the right more than
the demand curve moved to the right due to the entry of new low cost carriers. As a
result, the equilibrium price decreased to P2 while the quantity (bought and sold) has
increased to Q2 with more and more customers being able to afford low fares.

Consumers have options to choose from various airlines or switch to other modes of
transport such as road and rail while making their travel decisions. The advent of new
generation communications technology options such as video and audio conferencing
have substituted the need to travel itself. Other substitutes in existence are traveling
by train or car. With the wave of technology, a large percentage of business travel
has been eliminated to conserve spending.
Airlines reach out to prospective customers most often through various
intermediaries such as travel agents, consolidators, and online travel portal on the
internet. Airlines pay commission to the intermediaries which in turn rebate some
portion of the commission to the end customer.
An airline consolidator (sometimes called a bucket shop) is a specific kind of airline
ticket reseller. Airlines rely on wholesale blocks of seats to organizations known
generally as tour operators or travel organizers or ‘consolidators’.
Airlines and Consolidators work through rules on routes, stopovers, seasonality for
the tickets that governs contracts to manage blocks of airline seat inventory at
reduced prices which the consolidators then sell through retail agencies. . Wholesale
consolidators do not offer retail service directly to the end-customer. Airlines sell at
lower than their published fare rates to the consolidators. The markup on wholesale
tickets may be very low but the volume of sales with the airline may be high. Airlines
set the discount contracts for the wholesale consolidator’s contingent on a specified
sales volume, with year-end bonuses or additional commission rebates based on sales
Since the goal of the airlines is to get each passenger to pay the most they are willing
to pay, airlines try to discount tickets in such a way as to fill otherwise empty seats
rather than divert full-fare passengers to cheaper tickets.
Airlines restrict consolidator from advertising, such as forbidding mention of the
name of the airline. It is common for tickets to be most heavily discounted in a place
far from where the ticket either begins or ends so as not to depress the primary

Travel agents are extremely important and airlines cultivate their loyalty to obtain
market share by partnering with the rapidly developing online travel agency business
to sell over the internet and also engaging with offline travel agents who sell to the
retail end-customers.
There are marked differences between an airline’s passenger and freight business. In
air freight, marketing intermediaries are known as ‘forwarders’ who are similar to the
travel agents for the passenger business. Forwarders gather large number of small
packages from individual shippers and present them to the airline as one large
consignment. Airlines charge a lower rate per kilo from forwarders, who is thus able
to pass on the some of the saving to the shippers who generate small consignments.
The internet has greatly facilitated the process of selling. Through computers, new
airfares can be published quickly and efficiently to the airlines' sales channels. End-
customers can make reservations directly with the airline through the airline’s
website or Automated Interactive Voice Response (IVR) ticketing. Airlines levy a
slightly higher price to end customer purchasing directly without intermediaries. The
airline companies have introduced e-ticketing and ticket purchase through call
centers besides other modes such as - airport counters, firm’s website, counters at
local office, counters at other corporate office space ( for example – Reliance web
world, selected club HP outlets of Hindustan Petroleum Corporation)
To understand pricing in the airline service industry, we should perceive the product
unit to be sold as an airline seat on an aircraft. Each seat is potentially a differentiated
product appealing to different market segments and it is priced differently. Pricing
for each seat should be at, or above, the average cost for that seat.
Alternatively, if the average cost per flight is determined on a given route or network,
then the focus must be on the average total revenue generated per aircraft. Airline
decides price considering the costs allocated across the unit of measurement be it unit
seat or each scheduled aircraft, and the break-even load factor for the flights.
The Airline Industry have developed extensive tools to wring out as much revenue
from a flight as possible through ‘discriminatory pricing’ – the practice of charging
different prices to different consumers for similar products. Even though customers
buy similar seats on an aircraft they essentially are buying different products, because
of the associated restrictions on ticket. For the airline firm, while it is imperative to
be profitable, the focus is to maximize the cost of the flight revenue. Airlines focus
on Yield management, also known as revenue management to understand,
anticipate and influence customer behavior in order to maximize revenue from a
fixed, perishable resource – the unit seat that needs to be sold.
The objective is to sell the right resources to the right customer at the right time for
the right price by applying suitable the pricing strategies as discussed next:
Airlines use several different types of price discrimination:
      Bulk discounts to wholesalers, consolidators, and tour operators
      Incentive discounts for higher sales volumes to travel agents and corporate
      Seasonal discounts, incentive discounts, and variance in price by location

     Timing of the purchase
Airlines mostly practice the third degree of price discrimination that involves
dividing customers into segments based on some distinguishing characteristic,
thereby allowing the charging of different rates to different groups.

The airlines traditionally divide their customer base primarily into customer groups –
business and leisure travelers. Each customer group has a separate demand curve
(shown by D1 and D2 in the above graph). The optimal prices and quantities (seats)
are such that the marginal revenue from each group is the same and equal to marginal
cost. The business traveler segment (D1) with demand curve D1 is charged the
higher price, while the leisure segment group with the more elastic demand curve D2
is charged the lower price. Marginal cost depends on the total seats such that MRT=
MR1 + MR2.
Yield management allows an airline to vary the fare charged for a ticket based on the
elasticity of demand for that ticket in relation to the marginal cost of providing that
ticket. The more inelastic the demand for a ticket, the greater the premium charged
for the ticket above the marginal cost. The more elastic the demand (that is, the more
sensitive the market is to the price), the closer the price is to the marginal cost. The
airlines use lower fares to fill empty seats, continuing to generate revenue for the
firm once the less elastic demand has been fully met.
Thus high fares are charged to the business travelers, while the leisure segment
customers enjoy low fares. The airlines enforce the scheme by making the tickets
non-transferable thus preventing a tourist from buying a ticket at a discounted price
and selling it to a business traveler (arbitrage).


Carriers often accomplish price discrimination by dividing each cabin of the aircraft
into a number of travel classes for pricing purposes. Airlines typically have three
travel classes as shown in the above picture, although many airlines are eliminating
first class replacing it with business class as the highest level of service:
      FIRST CLASS - generally the most expensive and most comfortable
         accommodations available.
      BUSINESS CLASS OR EXECUTIVE CLASS - high quality, traditionally
         purchased by business travelers
      PREMIUM ECONOMY - slightly better Economy Class seating (greater
         distance between rows of seats; the seats themselves may or may not be wider
         than regular economy class)
         CLASS) – basic accommodation, commonly purchased by leisure travelers
Within each travel class there are often different fare classes, relating to ticket or
reservation restrictions and used to enhance opportunities for price discrimination.
This is done by assigning capacity to various booking classes, which sell for different
prices and which may be linked to fare restrictions. The restrictions help ensure that
customers buy in the booking class range that has been established for their
The technological advances in computers and communications have enabled the
airlines to more closely match their fare prices to the actual demands of the traveling
consumer. Everyone on a flight pays a different fare, hence we can say that the
airlines are approaching or at least trying to accomplish the first degree of price
discrimination, however, it is very difficult to determine the reservation price of each
customer to achieve first degree discrimination.
Regulation in the industry causes prices to be not determined by the free demand and
supply market forces rather regulated and bound by government or agreements. No
airline industry has core customers that are forever loyal promising not to be swept
by price competitive rival. In the airline industry informal cartels are said to have
been formed through the use of computerized airline reservation systems (CRS)

while more formal relationships are formed through Code Sharing. The Code Sharing
is an arrangement between airlines to allow the placing of their code on another
airline's flight, thereby allowing their passengers the ability to book through
apparently only one airline.
The Indian airline industry must adopt code sharing in the future as they expand and
venture into newer markets so as to minimize the costs of operating services. By
selling seats on a flight operated by another carrier, code sharing enables an airline to
make direct cost savings by rationalizing services or establishing market presence on
a route without actually operating on it. Thus, both airlines may be able to save on
fuel, labour and other variable costs, as well as making more effective use of aircraft
and other overheads.
The benefits of differential and higher price being charged to business travelers can
be understood in the light of economic theory of long run demand-supply. Consider
the example of an airline that sells all its seats at uniform price with no benefits to
business travelers. As such, the fare charged to business travelers paying higher
would be reduced, while the fare paid by passengers currently paying less would
have to rise to uniform level reflecting the end of the existing cross subsidy of the
low payments by those currently paying higher prices.
In such a situation it is most unlikely that in the long run, the leisure travelers would
pay the extra in order to continue traveling with the same airline concerned. Most
leisure travelers have high price elasticity, reflecting the fact that they are paying
fares out of their own pockets. Because of this a sudden steep increase in ticket
prices, some customers would opt not to travel at all. A much greater number will
continue to travel but will choose a competitor airline or substitute that offers
attractive lower fare. Thus, overall, an airline changing over from such a fare
structure to one of uniform pricing might easily find a drop in the number of
passengers it carried.
The first reaction of business travelers to uniform pricing might be positive due to the
reduction of cross subsidy burden, however, in the long run, due to large number of
drops in the number of leisure travelers, the frequent business traveler will have to
provide for the cover of the higher proportion of the airline’s increased overhead,
variable costs which will in turn lead to higher rather than lower fares.
Overall uniform pricing will result in frequently travelling business segment
customer paying still higher prices for a worse product than they received. Thus an
airline’s decision to adopt differential pricing though results in higher unavoidable
costs of implementing complex pricing systems, it also brings significant benefits
both to the airlines and its customers in terms of profit and performance. It allows
airlines to maintain their network and frequency, use larger aircraft to achieve
economies of scale (by lower seat-kilometer costs) leading to the variable and
overhead costs to be spread more widely and allowing fares to be lowered across all
customer segments.
Airlines have to be concerned with their break-even load factors, that is, the number
of passengers paying a sufficient fare to enable the airline to break even on the flight.
If an airline is selling seats above its average variable cost, but is not selling a
sufficient number of seats, then the airline continues to lose. In the rational economic
view, airlines price their tickets differently for each customer so as to meet their
break-even load based on projections of demand. This is done by projecting the

expected minimum fill rate on the aircraft, and then assigning prices to meet the
break-even costs for that flight.
All airlines use revenue management systems also called ‘Yield Management
System’ to dynamically vary their fares according to supply and demand, and to
manage yield with the objective of achieving profitability. Airlines use a formula of
combining their yield and inventory costs to determine ticket prices.
Yield Management Tools allow the airlines to balance a large number of premium
and discount fares, regularly re-evaluating demand for different segments of the
ticket prices, adjusting the amount of each type of ticket available to maximize
revenue while filling every seat on the aircraft (selling the total inventory).
The airlines need to keep a specific number of seats in reserve to cater to the probable
demand for high-fare seats. The price of each seat varies inversely with the number
of seats reserved, that is, the more seats that are reserved for a particular category, the
lower the price of each seat. This will continue till the price of seat in the premium
class equals that of those in the concession class. Depending on this, a floor price
(lower price) for the next seat to be sold is set. The advent of sophisticated computer
systems for managing the sale of seats and cargo space helps airlines industry to
optimize financial returns based on decisions on what number of seats to sell, at what
prices and when. The capacity on board each aircraft is divided into large number of
booking classes.
Decisions are made about the number of seats to be allocated to each class and the
time at which these seats would be made available for sale based on demand.
For example, for a flight leaving to a business destination on a Monday morning, few
if any seats will be allocated to those classes allowing for early sale at low prices.
Almost all of them will be in classes allowing for sale permit at high fares only,
while most of the bookings only being made a relatively short time before flight
departure. In contrast, a flight leaving to such a destination early on a Sunday
morning will be given a completely different profile. Here, almost all the seats will
be allocated to booking classes allowing for sale at low prices or for their use by
people redeeming frequent flyer program miles as the airline attempts to obtain at
least some revenue from seats which might otherwise remain empty.
Since airlines often fly multi-leg flights, and since no-show rates vary by segment,
competition for the seat has to take in the spatial dynamics of the product. Someone
trying to fly A-B is competing with people trying to fly A-C through city B on the
same aircraft. This is one reason airlines use yield management technology to
determine how many seats to allot for A-B passengers, B-C passengers, and A-B-C
passengers, at their varying fares and with varying demands and no-show rates.

In recent years there has been an advent of sophisticated software and information
dissemination systems for example e.g. - Semi-Automated Business Research
Environment (SABRE) and for real time information management.
These Computerized Reservation Systems (CRS) distribute latest fares for multiple
airlines to travel agents and online databases of travel portals across the world. The
data is formatted for computer processing and the latest fares can be loaded
automatically, allowing these new fares to be sold in the market place in the shortest
possible time. Airlines carefully monitor new public fares filed by their competitors
for detecting the action of other airlines increasing or decreasing their fares for
specific connections. This information is used to set new pricing strategies. For
instance, if a competitor introduces special promotional pricing between two cities,
the other players may want to quickly react by filing their own special fares for that
Pricing policy reflects the costs associated with the freight handling. For example
some commodities may need extra security, fragile items may need special handling,
and perishables may need refrigeration. Shippers of low density freight are charged
on volumetric basis so as to avoid excessive amounts of low density cargo that fills
the capacity of the aircraft without payload potential. The attempt is to apportion the
flight operation costs between passenger and freight output of a flight.
Pricing Factors: The pricing has to be strategized by airlines depending on the
interaction of various micro and macro economic factors. Low profits or losses may
occur where pricing is not in tandem with costs. It is therefore vital to understand the
controllable and uncontrollable costs and how to manage them. Prices have to be
modified if there is rise in uncontrollable costs like aircraft fuel, navigation charges.
Controllable costs such as labour costs, wages constitute as high as 30% of carriers
total cost and if not effectively managed can damage productivity. Multi-airlines
approach to tariffs management is only effective in situations where capacity and
demand are in some sort of equilibrium. The offers of discounts and competitors

prices, have to be specially monitored and controlled, otherwise passengers with low
price elasticity will take advantage of discount fares causing high degree of revenue
dilution. The important factors for arriving at price decisions are as below:
Peak Hour Loads: On peak time flights very few low fare seats are offered, forcing
people who need to travel on these flights to pay higher prices
Off-Peak Hour Loads: A large number of seats are offered at low prices, reflecting
the low marginal costs of filling seats which would otherwise be flown empty
Restrictive Conditions: These are conditions set on discount fares to make them
unattractive to business traveler thus forcing him to buy full fare ticket instead. These
conditions are hence designed to protect airlines’ high yielding traffic. These rules
are used to enforce on the cheaper fares to ensure that customers that customers have
to pay full fare tickets in order to obtain flexibility. The major type of such restrictive
discount fare conditions are as follows:
Length of the Stay Conditions: require passengers to spend time at their
destination. On short haul routes , weekend can be specified which means passengers
cannot make return journeys earlier if they wish to do so without paying the extra full
fare, thus restricting the freedom-of-action.
Advanced Purchase: The airlines use time of purchase to create this segmentation,
with later booking customers paying the higher fares and customers booking in
advance paying lesser. This means that passengers must book and pay for their ticket
a defined minimum period in advance. Customers must also accept that there will be
substantial penalty if they wish to alter or cancel the booking once made. The
advanced purchase conditions are beneficial for the airline as they improve cash
flows, ease task of capacity management in that they force low yielding demand to
come forward at an early stage. Most business trips cannot be planned far in advance
and business executives often cannot accept the limits on their flexibility that a
cancellation or re-booking penalty will cause - thus it makes make it difficult for the
business traveler to avail low fare.

                              Chapter – 3
                       ANALYSIS AND DISCUSSION
Labour: If regulations or industry policy provide protection to an industry, the value
of protection may be dissipated in poor productivity and higher-than-normal returns
to labour and capital. Entry limitations and capacity constraints have the potential to
allow airlines to earn above normal returns, which may be appropriated by
shareholders or paid out in higher than normal costs (including wages, salaries and
working conditions).
Given the valuable contribution that aviation and tourism make to national welfare, it
is essential that the aviation market is globally competitive and functions in the most
efficient way. This means that the inputs that the industry depends on, such as labour
and capital, must also be available on an internationally competitive basis.
Fuel Prices: ATF is the major cost for domestic carriers accounting for 30% of the
total operating costs in India, which is much higher than around 10-15% for airlines
worldwide. The exorbitant sales tax on the ATF, which increases the price of ATF, is
the major reason for this higher share in operating cost. The Jet fuel price has
increased by 13.1 % to USD 424.64/ KL in New Delhi during the period May-Aug
’04. The rise in the first seven months of 2004 stands at 21.5%.
Capital: The relatively capital-intensive nature of the airline industry, combined with
the fact that airlines are generally regarded as being inherently risky investments,
means that access to large, well-functioning capital markets is an important issue for
all airlines. The effects of these restrictions may vary from country to country, but
are likely to be greater for countries with small domestic capital markets.
Operating Costs: The regulatory system affects where, how and when airlines can
fly. Thus it affects airlines’ ability to operate efficient networks and their revenue. To
the extent that airlines cannot use the least cost combinations of aircraft types to
carry passengers and freight, the costs of operating existing networks are higher than
they otherwise might be (technical inefficiency). Further, they may be prevented
from flying the optimum sized and configured network (allocative inefficiency).
Thus, costs may be reduced as airlines are able to operate the right aircraft at the right
frequencies on an existing route. Airlines, by changing the design of a network and
increasing its size, may also be able to decrease costs through economies of scale and
Ownership and Control: As airlines strive for greater efficiencies, they consider the
benefits of consolidation. However, the normal commercial process of acquisition
and/or merger is not available due to restrictions contained in bilateral agreements
that are designed to ensure that ownership and control of airlines remain with
nationals of the countries where they are based.
Growth through merger or acquisition enables airlines to achieve economies scale
and scope by consolidating airline functions. The merger of two airlines, for
example, may allow them to consolidate their ground handling, maintenance,
information technology and various managerial functions.
Airline Acquisition/Leasing Cost: Taking aircraft on lease is one of the preferred
modes among the Indian carriers. However, this has suddenly become costlier affair
due to changes proposed in Union Budget. The budget has resulted in imposition of
withholding tax of 42% on leasing of aircraft. Impediment of this kind at a juncture

when almost all, Indian carriers are firming up their expansion plans especially
through leasing of aircraft is a setback.
As leasing route is the most preferred one for a new entrant, the Budget initiatives
will prove be a heavy deterrent as they will escalate the effective lease rental cost by
almost 42%.
Product Level Analysis: The product offered by airlines is essentially a service,
although it can be supplemented by a number of physical products too. The services
offered are:
      In-flight services
      On ground services
The services provided inside the flight include the core service of travel, crew,
ambience and comfort, in-flight entertainment etc. This is highly variable across
competitors as per brand and different classes of travel.
The on-the-ground services include a convenient airport with car parking facilities,
waiting lounges, duty free' shopping quick and efficient checking of baggage,
efficient service at reservation counter, transport to the airplane, etc. Although the
physical infrastructure part of the on ground services are usually maintained by the
airports authority but airlines like Kingfisher have gone a step ahead to make
separate lounges for their customers to make them feel special.
Core Product: The core product of the airlines industry is the service of transporting
passengers and goods to different destinations. This is supplemented by various other
services mentioned ahead.
Supplementary Services Information: Upto date information regarding flight
schedules, ticket fares, promotion schemes, new policies and systems, etc are
available to customers.
Consultation: Airlines are suggesting and designing products like packaged tours to
the customer. Also, providing the customer with various options regarding the route
of flight, in-flight cuisine & benefits asks them to play a role of consultant.
Order taking: The order taking procedure is essentially the booking procedure of the
airlines. The important aspect to be noted here is that the procedure should be
smooth, easily understood and fast. Also provision of instantly updated information
about availability of seats and fares is required.
Hospitality & Caretaking: With the increased competition today hospitality has
emerged as a key-differentiating factor. It is tested right from the time of booking till
the post flight help extended. It also includes safeguarding the baggage.
Billing & Payment: Billing options available to the customer are plenty including
credit card & travelers cheque. Airlines use the open account system with their
corporate clients. Frequent fliers are also given special payment privileges.
Product Levels: Various product levels at which the airlines compete are:
The Core Benefit: It is the benefit which the customer is actually buying. In our case
it is the service of traveling or transportation of goods.
The Basic Product: At this level the core benefit is converted into a basic service
package. This includes from buying the ticket to reaching the destination. The low
cost airlines like Indigo, GoAir, and Spicejet offer the product at this level and
compete on the basis of price.

Expected Product: This includes a set of services and products that the consumer
normally expects to receive along with the core benefit. For example: In flight
snacks, comfortable seats, on time departure and arrival etc. The low cost model of
airlines labels these addition services as ‘frills’ and tries either to eliminate or charge
separately for these.
Augmented Product: An augmented product exceeds customer’s expectations. For
example: Serving hot food, warm and friendly crew, provision of in flight
entertainment etc. Jet Airways, Kingfisher Class, Air India IC compete in this
Potential Product: At this level all possible augmentations are offered and the
companies try to encompass new and innovative ways to satisfy customers. Where
Emirates airline offers onboard shower spas for the first class customers, Thai
Airways offers a limousine service at the airport and Virgin Atlantic offers an
onboard massage.
As the level moves from the core benefit to the potential product, the competition
moves from price to service and experience of the customer. Various competitors
operating at different product level in India are shown in the diagram in Annexure #
Brand Positioning: In a highly competitive scenario it is imperative for any airline
to build its brand and have a focused marketing strategy.
Positioning of a few Airline Brands Operating in India
Kingfisher Airlines - Full Frills - True Value Carrier: The Brand Kingfisher has
been made synonymous with `Good Times’ in India. Coherent and clear positioning
has also enabled Kingfisher Airlines to differentiate itself in a market. Kingfisher has
implemented this positioning by making service and hospitality their main focus.
Spicejet - McDonalds of the skies: SpiceJet seeks to position itself as an innovative,
modern, and safe and customer friendly airline. The airline's philosophy is to make
air travel accessible to a growing market of time and cost conscious consumers yet at
the same time open newer markets.
Jet Airways: Jet Airways is positioned as a global airline with the highest
international standards but with a touch of India. They have retained many of the
familiar elements of our corporate identity, but have contemporized them to make the
brand more relevant to global markets.
Air Deccan - Simplify Deccan - Kingfisher Red: Air Deccan had substantial brand
equity among the consumers and had become synonymous with low-cost travel in
India. The re-branding followed an exhaustive market study which showed that
although the brand was closely associated with pioneering the low-cost airline
business, it was perceived as a carrier that was consistently late and suffered serious
service issues. The brand’s makeover by Kingfisher to first Simplify Deccan and then
to Kingfisher Red has also brought a change in its positioning. It is now being
positioned between a full service and low cost carrier.
Branding of airline industry has to be based on delivering on its promises, long term
customer engagement and continuous innovation in its services. For the airlines to
build a brand image consistent with these, the following brand model proposed:
1) Brand Expectation - Making an authentic promise

   This promise is a reflection of the brand’s identity and its differentiation from
   other brands. Kingfisher airlines for example clearly promise its guests an
   unparalleled experience in the skies. Air Deccan (when it existed) promised the
   lowest fares.
2) Brand Experience - Keeping the word
   The promise has to be kept as literally as possible. For example Virgin Airlines in
   the US promises to “reinvent air travel” and does a great job in not just meeting
   them but exceeding them too.
3) Brand Expression - Engaging the customer
   It refers to extending the engagement with the customer beyond the flight hours.
   The engagement should ensure constant touch with them. For example: few
   airlines give away their headphones and in-flight magazines to passengers, which
   they subsequently share with more people. Low cost carriers lose out on this
   opportunity to invest in engagement with the customer.
4) Brand Externalities - Dealing with industry uncertainty
   The externalities could be as small as a flight being delayed to a pilot union strike
   or a government regulation to a plane crash. Nonetheless, all need to be handled
   effectively to maintain the brand image. For example: Airlines like Jet Airways
   and Singapore Airlines have been upgrading to newer, more fuel efficient planes
   in good times to hedge fuel costs to counter the rising oil prices.
5) Brand Extensibility - Staying consistent over time
   Delivering an experience requires meticulous planning and persistence. An
   opinion blog about Kingfisher Airlines said “The amazing observation on
   Kingfisher is that all the employees (cabin crew, ground staff and others) project
   a consistent and common kingfisher brand image and lifestyle which is 'live king
   style and fly good times'. This is proved by very pleasant approach and attitude of
   its employees towards all customers.
Consumer satisfaction Index about a particular airline as perceived by
consumers is given below:

Pricing: Pricing is the value perceived by the customer. Pricing decisions cannot be
made in isolation of product. Product and pricing decisions are made together.
Deregulation in airline pricing has given the companies an edge to charge fares.
Pricing Environment: With the advent of sophisticated systems for managing the
sale of seats it is easier to develop sound pricing policies. Seats are sold on first-come
first-serve basis, so passengers get cheaper fares by booking earlier. Airlines adjust
prices as per demand and there is no difference in conditions.
Selecting the price objective: When Airlines put in capacity (seats) and frequency
(flights) between any two points, they market research the route in order to arrive at
the total potential for that segment. Size of the market is determined to decide the
price. Pricing or fare levels are arrived at after taking into consideration various
factors like type of aircraft, configuration of aircraft (number of seats), density of
route, competitor activity and minimum breakeven cost.
Premium Pricing: The airlines may set prices above the market price benefited by
its ‘brand-image’ to reflect the quality of their service. Example: Jet Airways,
Kingfisher, Indian Airlines, etc charge a premium price for providing frills and extra
comfort to the customer. They provide options like first class, executive and
economy. A trip from Mumbai to New Delhi will cost anywhere between Rs 6000 to
Rs 23000 depending on the class and time of flight.
Value for Money Pricing: Low Cost Airlines like Air Deccan, Spicejet, Indigo,
Goair, etc go for value for money to charge lower by operating cost cuts. Low cost
carrier model go for dynamic pricing strategy. They follow low and simple fare
structure .They point-to-point links between primary and secondary airports with
high frequency. The airlines provide basic services and just one class. 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 by volume. Prices
are as low as Rs 4000 which includes mostly the tax component.
Determining Demand: This industry is highly price sensitive. With the development
of Global Distribution Systems the customer can assess all the tariffs; they shop on
internet where it is easy to compare ticket price, flight time and number of stops in
route. In case of recessionary periods when supply exceeds demand, airlines find it
difficult to fill seats and pricing becomes extremely important to gather market share.
For example, for a flight leaving to a business destination on a Monday morning,
very few seats will be sold at low prices. Almost all the tickets will be sold at high
fares and bookings sold at relatively shorter time.
Estimating Costs: The aviation turbine fuel (ATF) and staff (flight, ground,
reservation and ticketing staff) form the major part of the operating cost. Other part
includes navigation, landing and parking costs, repair and maintenance. Apart from
operating costs there is insurance, Inland Aviation travel Tax (IATT) and Passenger
Service Fee (PSF).
New Strategies and Trends: Social networking sites have opened up a new
distribution platform for the airline. The traditional travel agents and travel websites
will co-exist with the new medium. National carrier Air India (AI) is the latest to
market itself via social networking site Facebook and micro-blogging site Twitter.
The airline, which is aggressively pursuing an image makeover, is looking to
enhance sales by at least 30% through these new forms of media. At present, an
increasing number of domestic and international airlines are using the social media
platform for brand promotion. Until now, they were unable to provide a flexible
pricing and customised products to the customers. While other airlines have their

presence on Facebook and Twitter, we were missing from that space. AI will
henceforth have a corporate account on Facebook, where customers can book tickets
and check their flight status. International carriers like the US-based Delta Airlines
and Southwest Airlines have found a boost in their sales via Facebook, according to
media reports. Airlines like Air Canada also prefer sites like Flickr and You Tube to
interact with customers. Private carrier Jet Airways has over 1.5 lakh fans on
Facebook and the airline is constantly enhancing its media presence through sites
such as LinkedIn, which is a professional social network and even on Foursquare, a
location-based mobile social networking application. These initiatives are part of the
airline's strategy to reach out to a larger cross section of costumers and engage with
them on a real time basis. Kingfisher, too, is active on Twitter, addressing its
customer's queries. AI's is confident about Facebook and Twitter helping the carrier
increase customer engagement and brand value.
The new marketing efforts will give an additional push to the airline which has
already benefited from an increase in air travel in the post-recession period. AI
clocked in network revenues of R4, 400 crore on its international flights in the April-
November 2010 period, up 15.8% from the corresponding period in 2009. It also
reported a 35% jump in revenues on its domestic network at Rs 2,849 crore during
the period, compared to R2, 110 crore a year ago. A well attended guest or happy
customer's tweets can do wonders to airlines, which perhaps advertising cannot.
LCC reduces their prices by having high seat density, reducing costs by providing no
frill. They also go for uniform aircrafts to share parts; they go for high airtime and
generate revenue through alternate resources. Full Service Providers charge extra
premium for extra services like in-flight cuisines, magazines, entertainment, the
flexibility and comfort provided to the customers.
Adapting Prices
Price discounts and allowances: Price discounts need to be carefully done
otherwise it may result in diluting the revenue of airlines and affecting their brand-
image. Discounts are given on off-peak flights which might go empty if not filled.
Discounts can also be given by provided fewer services to the customer.
Differential pricing: 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. Though all the passengers get the same
tangible product features but the intangible features like flexibility is different. This
justifies differential pricing.
Initiating and Responding to Price Changes: Airlines went for a price cut with the
entry of Air Deccan in 2003. It was done to retain their market share. In a price
sensitive market like airlines increasing the price might lead to considerable drop in
market share so any major price increases are done in coordination with competitor
airlines. Price increase leads to higher profits.
Primary activities – Inbound logistics
        Aircraft acquisition
             o Airlines must negotiate deals with aircraft manufacturers to acquire

        Route selection
              o Flight routes are selected as per desire, and deals negotiated with the
                  airports. Airports are selected for their prime location to allow
                  consumers to get to their desired location. This entails the scheduling
                  of flights and crew.
        Passenger services system
              o Software which allows the airlines to function "comprehensive
                  passenger reservations, inventory control, fares, ticketing, and
                  departure control functions". This allows airlines to reduce their costs
                  of wages, paper transactions and maximize utilization.
        Stock control
              o Airlines must store and handle fuel, food, and drinks. Stock is
                  managed to ensure reductions in stock turnover, thus reducing costs
                  and wastage.
        Crew scheduling
              o Crew scheduling problems at the planning level are typically solved in
                  two steps: first by creating working patterns, and then assigning these
                  to individual crew and second by a set-partitioning model.
The users of air services typically include business executives, cine artists, politicians
and domestic and international tourists. Hence, creativity becomes an important
criterion. With the looming worldwide financial crisis, airlines are facing financial
crunch and it has become imperative to use different components of marketing
communication optimally:
Advertising should be done keeping in my mind the quality and nature of the target
audience as well as level of expectations. Advertisement slogans, message and
campaigns need to be proactive. Air India has been facing the image problem but
advertising may be efficacious in transmitting the facts and removing the image
1. Mission: To maintain a competitive civil aviation environment which ensures
safety and security in accordance with international standards, promotes efficient,
cost-effective and orderly growth of air transport and contributes to social and
economic development of the country.
2. Objectives: The objectives of this policy are the creation and continued
facilitation of a competitive and service-oriented civil aviation environment in which:
   i.    the interests of the users of civil aviation are the guiding force behind all
         decisions, systems and arrangements,
  ii.    safe, efficient , reliable and widespread quality air transport services are
         provided at reasonable prices,
 iii. there exists a well-defined regulatory framework catering to changing needs
         and circumstances,
 iv.      all players and stakeholders are assured of a level playing field;
  v.      private participation is encouraged and opportunities created for investors to
         realize adequate returns on their investments;

 vi.     recognizing that aviation today is an important element of infrastructure,
        rapid upgradation of airport infrastructure to world class with priority to the
        busiest airports and those handling international flights;
vii.    recognizing that transportation of air cargo is vital to the economic growth of
        the country, creation and development of specific infrastructure for air
        transportation of cargo and express cargo is encouraged,
viii.   "airline operations and acquisition of aircraft" is conferred "infrastructure"
        status for overall growth of civil aviation sector in the country
 ix.    domestic and international aviation in the country are encouraged to grow at
        par with world aviation industry;
  x.    inter-linkages with other modes of transport are encouraged and stimulated;
 xi.     trade, tourism and overall economic activity and growth is encouraged;
xii.     international cooperation in aviation and development in tune with
        international trends and best practices, consistent with airspace sovereignty is
xiii.   indigenous development of aircraft, components and aviation products is
xiv.    Security of civil aviation operations is ensured through appropriate systems,
        policies, and practices, and
 xv.    Effective systems are put in place for timely crisis and disaster management,
        including investigation of incidents/accidents.

                            CHAPTER – 4
                       CONCERNS AND REMEDIES
As per a Directorate General of Civil Aviation (DGCA) order on route disbursal
guidelines, it has been stated that a scheduled air transport service provider operating
Category I routes is required to deploy at least 10% of ASKM on Category II routes
and at least 50% of ASKM on Category III routes. Subject to approval from the
DGCA, concerned operator could meet this obligation by providing services either
by aircraft available in its fleet or with aircraft in any other operators' fleet on
mutually agreed terms and conditions.
Category II comprises routes to destinations like J&K, North-East states and the
islands of Andaman & Nicobar. Category III comprises remaining routes. Simply
put, Category II routes are unremunerative, and constitute about 6% of the capacity
of an airline and can easily drain out 1.2% to 1.5% of an airline’s margin.
The tremendous growth anticipated in the aviation industry is possible only if the
country's infrastructure is in place. The industry is already facing problems of
congestion during peak hours at major airports. The current airport infrastructure in
the country is inadequate to support the tremendous expansion in fleet announced by
major players. The ministry of civil aviation has decided to modernize and upgrade
35 non-metro airports across India at an estimated investment of US$ 800m. Any
delay in the development of these airports would be a major constraint for the
industry's rich fortunes ahead.
While there are well intentioned government policies and controls like FDI norms,
license control, landing slots and flight schedule allocations that allow ample
opportunity for airlines to remain profitable, but the sheer growth in airline capacity
can induce competition. This has happened in FY06 and FY07, and its recurrence
cannot be ruled out. The need to fill aircrafts with maximum revenue passengers is
the key to making profits. Events that keep passengers away, including a slower than
anticipated GDP growth, may trigger another bout of competition.
Over the years, airlines have been straddled with legacy business processes with
hardly any effort at re-engineering innovative solutions. With the IT industry
providing a commendable backbone, airlines can now emerge from the inefficiency
they have been restrained with. Innovative strategies and new technologies may well
offer cost savings, but at the same time they can be hard to implement given the cost.
Some of the areas that need re-engineering are:
     Customer oriented improvements - Self-service kiosks, remote passenger
        checkin, fast bag drop-off and biometrics are the need of the hour.
     Improved crew management - Planning and pairing through online rostering.
     Training module and packs. IT enabled crew control, crew communication
        and crew records.
     Improvements in aircraft operation - Clear IT tools that allow uploading of
        weather and flight plans and downloading of engine performance data help in
        pre-flight and post-flight plans.

Carbon offsetting practices may add to cost: Globally, the aviation industry is
under the scanner because it is the fastest growing cause for global warming; and EU
aircraft emissions alone have risen by 87% since 1990. The amount of carbon
dioxide emitted by air travel doubled between 1990 and 2004; and with huge
expansion in air traffic forecasted in both Asia and Europe, predominantly driven by
low cost leisure travel, the trend is expected to continue.
It is also pertinent to note that the high altitude nature of carbon and other airline
emission make air travel potentially more damaging than most other forms of
transport. However, the aviation industry only contributes about 2% of all global
carbon emission. Also, according to International Air Transport Association (IATA),
airlines have been addressing the problem of carbon emission since the early 1970s –
well before other industries did anything constructive. Aircraft fuel efficiency has
improved 20% in the past decade and almost 5% in the last two years alone. New
aircrafts, such as the Airbus A380 and Boeing Dreamliner, will continue this trend
with further reduction in carbon emission.
With the government now taking a liberal view of domestic airlines flying
international routes, a number of new players could be in the race to service them.
Thus, Indian players flying these routes would be subject to the stringent EU norms.
India is one of the fastest growing aviation industries in the world. Because of the
introduction of liberalization policy in the Indian aviation sector, the industry has
witnessed a vast difference with the entry of the privately owned full service airlines
and low cost carriers. In 2006, the private carriers accounted for around 75% share of
the domestic aviation market. Besides, there was significant increase in the number
of domestic air travel passengers. Some of the factors that have resulted in higher
demand for air transport in India include the growing purchasing power of middle
class, low airfares offered by low cost carriers and the growth of the tourism industry
in India. In addition to the liberalization policy, the deregulation policy has also
played a major role to encourage private players in the aviation industry.
Airline Industry Attractiveness
1. Foreign equity allowed: Foreign equity up to 49 per cent and NRI (Non-Resident
     Indian) investment up to 100 per cent is permissible in domestic airlines without
     any government approval
2. Attraction of foreign shores: After five years of domestic operations, many
     domestic airlines too will be entitled to fly overseas by using unutilized bilateral
     entitlements to Indian carriers.
3. Rising income levels and demographic profile: Demographically, India has the
     highest percentage of people in age group of 20-50 among its 50 million strong
     middle class, with high earning potential.
4. Untapped potential of India's tourism: Tourist arrivals in India are expected to
     grow exponentially, especially due to the open sky policy between India and the
     SAARC countries and the increase in bilateral entitlements with European
     countries, and US.
5. Glamour of the airlines: No industry other than film-making industry is as
     glamorous as the airlines. Airline tycoons from the last century, like J. R. D. Tata
     and Howard Hughes, and Sir Richard Branson and Dr. Vijaya Mallya today, have
     been idolized.

1. Threat of New Entrants
Product differentiation: In low cost carriers, there is not much differentiation in the
basic service that is being provided to the customers. Differentiation can only be
achieved by Value Added Services. IndiGo provides check-in kiosks, stair-free
ramps, and “Q-Busters”. Hence this argument works in favour of IndiGo.
Switching cost:
1. The switching cost is not high. Customers can easily choose other low cost
2. The switching cost of an airline company to other business/industry is high as the
     exit cost is high. In aviation industry the major entry barriers can be:
     Government regulations:
     (i) The government's open sky policy has encouraged many overseas players to
            enter the aviation market.
     (ii) Aviation was primarily a government owned industry. Due to liberalisation
            Indian aviation industry is now dominated by privately owned full-service
            airlines and low cost carriers. Private airlines account for around 75 per cent
            share of the domestic aviation market.
     (iii) Private sector is allowed to operate scheduled and non-scheduled services.
     (iv) Operator should be a citizen of India or a company or a body corporate
            which is registered in India and whose principal base of business is in India.
     (v) Chairman and at least two –thirds of its Directors are Indian citizens.
     (vi) Foreign equity participation up to 49 percent and investment by Non-
            Resident Indians (N.R.I), Overseas Corporate Bodies (OCBs) up to 100% is
            allowed. The representation of the foreign investing institution/entity on the
            Board of Directors of the company shall not exceed one-third of the total.
     (vii) Foreign airlines are not permitted to pick up equity. Foreign financial
            institutions and other entities who seek to hold equity in the domestic air
            transport sector shall not have foreign airlines as their shareholders.
     (viii) As regards safety and security arrangements, the operators must ensure
            compliance with relevant regulatory requirements stipulated respectively by
            the Director General of Civil Aviation (DGCA) and the Bureau of Civil
            Aviation Security (BCAS).
     (ix) For green field airports, foreign equity up to 100 percent is allowed through
            automatic approvals. For upgrading present airports, foreign equity up to 74
            percent is allowed through automatic approvals and 100 percent through
            special permission (from FIPB).
Setup costs: Nowadays, venture capital of $10 million or less is enough to launch an
airline. In order to overcome the shortfall of aircrafts during the peak seasons,
airlines can utilize an ACMI lease agreement for the extra aircraft. If the airline has
many aircrafts, either owned or leased, then they can offer their surplus aircrafts in
their low season to another airline that is facing peak season.
An airline company will bear the cost of purchasing an aircraft if it wants to start or
expand its fleet, leasing allows the cost to be spread across several years. At the lease
term end, the lease can be renewed or aircraft can be returned, to be replaced with
more modern aircraft.

Fuel prices: Domestic ATF prices have increased by over 160 per cent from the
beginning of 2005 till last year and by over 80 per cent from a year-ago levels. In
India, oil companies do not import ATF directly; instead they refine it from imported
crude oil. With rising crude oil prices, imports are becoming expensive day by day
and at the same time, the government is unable to pass on the full impact of this rise
to the consumer. As a result, the state owned oil marketing companies (almost 95 per
cent of the market is with state owned firms) are forced to sell diesel, petrol, kerosene
and LPG at way below cost, a cost they are trying to somewhat make up by raising
the price of ATF, which is under their control. As a result prices of ATF in India are
much higher than some of the other Asian countries.
Resource: The aviation industry in India suffers a shortfall of pilots. The reasons are:
1. The aspirants can receive Commercial Pilot Licence (CPL) only if they undertake
    a training abroad.
2. The reason being that in India, there is a lack of dedicated flight Instructors,
    decade old aircrafts and poor quality training offered at a price much higher than
    what is offered by flying schools in USA, Canada and Australia.
3. Indian institutes provide training with the help of their training partners in the
    foreign countries like U.S.A, U.K etc.
Private airlines hire pilots; get expatriates or retired personnel from the Air Force or
PSU airlines in senior management positions. Airlines can contract employees such
as cabin crew, ticketing and check-in staff members.
In airline sector, finding appropriate labour-force is very costly. Moreover, due to the
liberalization of policies by government, foreign and private players often poach
workforce of competitors which leads to talent-drain and thus losses.
2. Bargaining Power of Suppliers
Any airlines in general face a duopoly of two major suppliers of aircrafts i.e. Airbus
and Boeing. There are other suppliers like Dauphin,Dronier,Bell,ATR-42 but do not
meet the requirements to serve the low cost commercial aircraft carriers, particularly
LCC airlines. Fleet Forecast for the India-Region 2006-2011 shows that there will be
approx. 85% growth in the order rate of air carriers [Exhibit 2]. Thus, suppliers are
few and thus in better position to bargain as they always finds customers for their
 Due to shortage of commercial aircraft pilots in India the supply of pilots is
    concentrated, hence increasing their power.
 There are only four suppliers for ATF (Aviation Turbine Fuel); IOC, Hindustan
    Petroleum Corporation, Bharat Petroleum and ONGC and since their number is
    limited, they possess more power.
 The proof of evidence for high power enjoyed by ATF suppliers lies in the fact
    that the ATF prices constitute 35-40% of the costs in India compared to 20-25%
 The brand value of suppliers is high due to their less number and results in higher
    bargaining power for them.
 The airlines also face a threat of forward integration since the suppliers are in
    close contact and are familiar with the know how of the aviation industry.
 The suppliers are few and thus in better position to bargain as they always finds
    customers for their aircrafts.

3. Bargaining Power of Buyers
 Buyers in airlines industry are large in number and highly fragmented thus
    lowering their power .With the growing Indian economy and increasing low cost
    carriers, the buyers have increased and so have the growth opportunities.
 The switching cost is minimal since there are multiple alternatives available. It is
    not difficult to move from one airline to another or to switch to a substitute.
 Furthermore the players in the particular strategic group do have minimalistic
    differentiating points.
 Backward integration from the buyers end is very difficult and next to
4. Competitive Rivalry
The aviation industry is a highly competitive industry because of which it is difficult
to earn high returns in this sector. Below are the major reasons for the high
competition in the low cost carrier airlines:
 Very little scope for differentiation between competitors’ products and services•
    Aviation is a mature industry with very little growth. The only way to grow is by
    stealing away customers from competitors.
 Suppliers of aircrafts are the same, i.e., Boeing and Airbus. Hence supplier’s
    bargaining power is high.
 Switching cost of customers is high for low cost carriers, i.e., there is no brand
5. Availability of Substitutes
The substitute for low cost airline company is the railways. But this substitute is not
very powerful due to the following reasons:
 Customers use airline transport as it is convenient and saves travelling time. So
    trains cannot work as a substitute to save time.
 Secondly, many customers use airlines as a status symbol. So again, trains cannot
    substitute for prestige.
 So if we consider IndiGo airlines, the direct substitutes are the other low cost
    carriers like SpiceJet and GoAir. So in this case, threat of substitutes is high as
    the switching cost between low cost carriers is low.
 Many airlines have not ventured into the huge air freight market which can
    contribute a sizeable portion of the revenue. A study by Centre for Asia Pacific
    Aviation or CAPA6, an aviation consulting firm estimates the cargo services of
    3.4 million tonnes per annum.
 According to a research conducted by PhoCus, Indian domestic traffic will touch
    86.1 million by 2010,up from 32.2 million in 20077.The flight density of many
    players airlines is limited in domestic market; hence there is a big scope to
    increase the flight frequency.
 The huge untapped international sectors should be explored once many players
    have a considerable presence in the domestic market.
 Many players currently do not have too many long haul aircrafts and as per
    CAPA study by 2020, Indian Airports are expected to handle more than 100

    million passengers. Major airlines should focus on long haul aircrafts both for
    domestic and international sectors.
 The chartered flight services still remain an area not exploited by Indian aviation
    industry and airlines can play a major role in tapping the potential in that
    particular market.
 ATF (Air Turbine Fuel) prices have increased radically since 2005.
 Foreign and private players often poach work-force of competitors.
 Like every other industry, recession has hit aviation industry as well. People have
    cut down on tourism and corporate travels have also been slashed down.
 The shortage of trained pilots, co-pilots and ground staff is severely limiting the
    growth prospects of all the airline companies.
 Barriers to exit in aviation industry are high because of high capital investment,
    no government restrictions and loss of brand image.

                               TRAFFIC SUMMARY

                                        For The Month                    Cumulative Traffic
                                                                    (Apr -     (Apr -
                              January      January        %       January)   January)        %
       Traffic Category         2011         2010       Change     2010-11    2009-10      Change
Aircraft Movements
(in nos.)
11 International Airports         8306         8191         1.4       78293      76604        2.2
6 JV International Airports      16584        14824        11.9      159458     145809        9.4
9 Custom Airports                 1300         1310        -0.8       11811      12754       -7.4
20 Domestic Airports                 2            2         0.0         208        139       49.6
Others Domestic Airports             1            2       -50.0          52         28       85.7
Total                            26193        24329         7.7      249822     235334        6.2
11 International Airports        24707        23160         6.7      230189     227296        1.3
6 JV International Airports      48316        44149         9.4      461964     434482        6.3
9 Custom Airports                 6521         6421         1.6       63376      61263        3.4
20 Domestic Airports             11646        11066         5.2      117860     115797        1.8
Others Domestic Airports          3501         3305         5.9       32021      34508       -7.2
Total                            94691        88101         7.5      905410     873346        3.7
International + Domestic
11 International Airports       33013         31351         5.3     308482      303900        1.5
6 JV International Airports     64900         58973        10.1     621422      580291        7.1
9 Custom Airports                7821          7731         1.2      75187       74017        1.6
20 Domestic Airports            11648         11068         5.2     118068      115936        1.8
Others Domestic Airports         3502          3307         5.9      32073       34536       -7.1
Total                          120884        112430         7.5    1155232     1108680        4.2
General Aviation
Movements (in nos.)              25386        27419        -7.4      243076     220756       10.1
Passengers (in nos.)
11 International Airports     1078752       1035788         4.1     9588873     8663330      10.7
6 JV International Airports   2278925       2082215         9.4    20697752    18745663      10.4
9 Custom Airports              133735        132305         1.1     1279880     1165469       9.8
20 Domestic Airports               45             5       800.0       17868       11865      50.6
Others Domestic Airports           83            10       730.0         759         756       0.4
Total                         3491540       3250323         7.4    31585132    28587083      10.5
11 International Airports     2604261       2170247        20.0    22975070    19740548      16.4
6 jv International Airports   5225657       4458102        17.2    48661848    41964290      16.0
9 Custom Airports              675871        565171        19.6     6439563     5206422      23.7
20 Domestic Airports           805178        625448        28.7     7565885     6207141      21.9
Others Domestic Airports       139715        119561        16.9     1268998     1150554      10.3
Total                         9450682       7938529        19.0    86911364    74268955      17.0
International + domestic
11 International Airports      3683013      3206035        14.9    32563943    28403878      14.6
6 JV International Airports    7504582      6540317        14.7    69359600    60709953      14.2
9 Custom Airports               809606       697476        16.1     7719443     6371891      21.1
20 Domestic Airports            805223       625453        28.7     7583753     6219006      21.9
Others Domestic Airports        139798       119571        16.9     1269757     1151310      10.3
Total                         12942222     11188852        15.7   118496496   102856038      15.2

Freight (In Tonnes)
11 International Airports      32181     28291        13.7    349753    286085       22.3
6 JV International Airports    88692     75906        16.8    886621    740202       19.8
9 Custom Airports                162       230       -29.6      2223      1988       11.8
20 Domestic Airports               0         0   -                67         0   -
Others Domestic Airports           0         0   -                 0         0   -
Total                         121035    104427       15.9    1238664   1028275       20.5
11 International Airports      18007     14726       22.3     184111    140644       30.9
6 JV International Airports    45559     39236       16.1     459727    371976       23.6
9 Custom Airports               3439      2195       56.7      35681     24271       47.0
20 Domestic Airports            3028      2465       22.8      30385     25670       18.4
Others Domestic Airports          62        67       -7.5        845       918       -8.0
Total                          70095     58689       19.4     710749    563479       26.1
International + Domestic
11 international airports      50188     43017       16.7     533864    426729       25.1
6 jv international airports   134251    115142       16.6    1346348   1112178       21.1
9 custom airports               3601      2425       48.5      37904     26259       44.3
20 domestic airports            3028      2465       22.8      30452     25670       18.6
Others domestic airports          62        67       -7.5        845       918       -8.0
TOTAL                         191130    163116       17.2    1949413   1591754       22.5

                                   Chapter – 5
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.
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.
The increasing use of the Internet has provided many opportunities to airlines. For
e.g. Jet Lite has introduced a service through the internet, wherein the unoccupied
seats are auctioned one week prior to the departure. The aviation industry, like others
businesses, has been impacted by the global oil crisis and strong inflationary trends.
What is ironic, however are the obituaries lamenting the end of the low cost carrier
era in Indian aviation. If anything, it is low cost model in any business, not the high
end or luxury model which is advantageously positioned and poised to withstand
inflationary pressures. The situation in India has been challenging for airlines in the
last few years on account of the most expensive aviation turbine fuel (ATF) rates in
the world, which makes up 40-45 percent of ticket costs as compared to 35 per cent
which is global standard. This is coupled with poor and expensive infrastructure
which leads to high fuel wastage and diminished asset utilization. The present day
scenario in the aviation industry is undoubtedly tough for everyone but it’s
particularly tougher for full service airlines despite them adopting multiple cost-
cutting measures.
In other businesses too, whether it is retail automobiles the telecom industry, it is the
low cost product service mix that is rising to the challenge winning customers while
the premium brands bear the brunt. The low cost business model is not just about
cutting costs by saving some fuel or a few overhead expenses. Fundamentally, the
low cost model is all about innovations, efficiency very high asset utilization and
stimulating market demand by targeting an inclusive consumer base. The basic
philosophy is not very different from that of a self service
When a business wants to cater to the bottom of the consumer pyramid, the business
model would perforce render itself to a self service niche. The low cost model
eliminates the need for frills and middleman ensuring not just increased consumer

access, higher aircraft utilization, and quick turnaround based on innovations and
intensive technology engagement but also a lower cost base of the business resulting
in lower fares for the consumer. In the long run while low cost airlines can strengthen
their cost efficiency in various ways, full service airlines can’t because their business
model does not allow that.
While airlines are grappling with escalating fuel costs and losses they have
unfortunately put themselves in a vicious cycle by resorting to fare hikes and cutting
capacity which has further brought down occupancy. The move has not helped
airlines combat fuel process or contain the red ink on their balance sheets the real
impact, however, is visible in the entry level fares of low cost airlines which are now
barely distinguishable from that of full service airlines
The parent in the situation is that both low cost carriers and full service airlines are
trying to achieve revenues through higher fares and lower loads. Reducing aircraft
capacity is the easier choice for airlines as compared to stimulating the market. The
flip side of this option is increased costs and reduced passenger carriage. The
implication is serious and far reaching for the industry. If the art base does not
expand, airlines will ultimately have to resort to devouring each others consumer
base, which will impede the growth and sustainability of the entire industry.
While it is true that the government will also have to play an active role in bailing the
aviation industry out of the present crisis airlines can’t afford to sit back and wait to
be delivered. Inflationary pressures brought on by a global oil crisis or recessions
have been recurring since the 1970s. Efficient companies worldwide have
consistently overcome the challenges by increasing their productivity being
relentlessly innovative and staying ahead of the technology curve. Though for next
one or two years might be turbulent for Indian aviation, airlines should not take to
easier options of hiking fares and cutting operations as that will prove counter
productive. Charging higher fares is double edged sword that will not only make
people shy away from air travel, bringing down airlines traffic further and leading to
higher losses but will also shrink the consumer base in the long run.
Under the circumstances airlines have no choice but to ride out the storm. They will
need to work on their culture and core competencies to proactively costs and drive up
efficiency. The way forward for the aviation industry should be to focus on increased
occupancy which will help cushion the impact of rising costs by driving up volumes
to offset the cost margin that needs to be realized per seat.
ATF prices in India are 60 percent higher than global prices, Indian airports are
inefficient, leading to wastage but are expensive and monopolistic and there are as
yet no low cost terminals or alternate low cost airports anywhere in the country. Is
time policymakers acknowledged the intangible and collateral benefits of a robust
civil aviation industry in promoting equitable growth opportunities civil aviation is
the bulwark of a progressive economy and should be recognized of its immeasurable
contribution in helping build a physically and emotionally integrated society?
Another factor is pricing which is a high profile area and any mistake in it can lead to
huge losses. Hence, it is important to apply right principles while deciding price. The
airlines pricing model is driven by the demand and supply economics in deregulated
markets while in the regulated market or on specifically regulated routes, a uniform
pricing is being imposed. In the future, as the airlines industry expand, grow and
consolidate and grow even more competitive, regulated pricing may get abolished
completely. The price in the economy cabin too may conform to differential principle
based on the demand. It is necessary to understand that pricing decisions cannot be

made in isolation rather they have to make by analyzing the micro and macro-
economic factors, marketing mix and closely relating the pricing with the airline’s
business strategy.

  1. GDP growth could touch 8% in current fiscal: FM, Economic Times, 24 Jan,
  2. Domestic air traffic grows 7.8% in 2009, Economic Times, 14 Jan, 2010
  3. Directorate General of Civil Aviation Website:
  4. Microeconomics 7th Ed., Robert S. Pindyck, Daniel L. Rubinfeld, Prem L.
  5. Airline Marketing and Management 5th Ed., Stephen Shaw
  6. The Airline Business, 2nd Ed., Rigas Doganis
  7. Kingfisher Airlines annual report, 2008-2009
  8. Jet airlines website
  9. SpiceJet, 23rd annual report 2006-2007
  10. Exploring predatory pricing in the airline industry- Article by Stephan P.
      Brady & William A. Cunningham at
  11. News from Airline Industry
   The Civil Aviation Act, 2000 (Draft)
   Economic Survey, 2008
   Articles (Alliance Library)
   4 P’s Marketing November 2008 Edition
   Business Line/India Today
   IIM –B Report-Blue Sky/Prabhudas Liladhar Report
   Investments –Bodie Keane Marcus
   Investment Analysis & Portfolio Management –Prasanna Chandra



Ministry of Civil Aviation: Responsible for the formulation of policy, development
and regulation of Civil Aviation. Its functions also extend to overseeing airport
facilities, air traffic services and carriage of passengers and goods by air
Other Attached/Autonomous Organizations:
o Directorate General of Civil Aviation (DGCA): Promote safe and efficient Air
    Transportation through regulation and proactive safety oversight system
o Bureau of Civil Aviation Security (BCAS): Regulatory authority for civil
    aviation security in India
o Airport Authority of India (AAI): Accelerate the integrated development,
    expansion and modernization of the operational, terminal and cargo facilities at
    the airports


Available Seat Mile: is a measure of an airline's traffic. It refers to how many seat
miles were actually available for purchase on an airline. If all of the seats on the
plane are not sold, then the ASM indicates the overall capacity the airline is operating
at. It is calculated as the (total number of seats available for transporting passengers)
X (number of miles flown during period).
Revenue Passenger Mile: is a measure of an airline's revenue based on its traffic. It
indicates how many seats were actually sold on an airline’s flight. It is calculated as:
(number of revenue-paying passengers) X (number of miles flown during the period)
Air Traffic Liability (ATL): An estimate of the amount of money already received
for passenger ticket sales and cargo transportation that is yet to be provided
Load Factor: it measures the percentage of available seating capacity that is filled
with passengers. Analysts state that once the airline load factor exceeds its break-
even point, then more and more revenue will trickle down to the bottom line. During
holidays and summer vacations load factor can be significantly higher due to higher
demand. Airline payload, in other words revenue-earning traffic, essentially consists
of passengers, freight and mail. For AEA airlines, revenue from these three sources
amounted in 2005 to 86.7%, 12.7% and 0.6% respectively of total operating revenue.
Revenue per Available Seat Mile (RASM): in calculated by dividing the available
seat mile with the revenue passenger mile. RASM is the most important industry

benchmark, as load factors continue to increase, focus on yield, or revenue per
revenue passenger mile, will be the critical metric to watch to signal a carrier’s


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