Product Level Analysis The product offered by airlines is essentially by mamapeirong


             NEW THRUST AREAS

                        A DISSERTATION

                        A Project Report

Submitted in partial fulfillment for the award of the degree of
                         Submitted by
         Department of Centre for Air & Space Law
                     In Collaboration With


                       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 India.

                    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
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
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
“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
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 countries.
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
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 “multilateral”.
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 remuneration.
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 Pakistan.
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-
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
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
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
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

                                    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 8%.
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 carriers.
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- 2011

                                                Air India
                     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

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
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
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
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 thresholds.

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 market.

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
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 buyers
     Seasonal discounts, incentive discounts, and variance in price by
     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.
        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)
        TRAVEL 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 segments.
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
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
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
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
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 market.
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
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 scope.
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

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
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
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
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
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 segment.
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 # 02.
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
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
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
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 planes.
       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 problem.
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
   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
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
viii.   "airline operations and acquisition of aircraft" is conferred
        "infrastructure" status for overall growth of civil aviation sector in the
 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
 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 promoted;
xiii.   indigenous development of aircraft, components and aviation products
        is encouraged,
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
4.1       ROUTE        DISPERSAL   GUIDELINES                      CONSTRAIN
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
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
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

 Customer oriented improvements - Self-service kiosks, remote
  passenger checkin, fast bag drop-off and biometrics are the need of the
 Improved crew management - Planning and pairing through online
 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
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
    (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
    (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
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
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 aircrafts.
 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% globally.
 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
 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
 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 loyalty.
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 -
                                          %        Januar Januar       %
                       Januar   Januar   Chan         y)      y)     Chan
   Traffic Category    y 2011   y 2010    ge       2010-11 2009-10     ge
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 +
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
                                                   115523   110868
Total                  120884   112430       7.5        2        0    4.2
General Aviation
Movements (in nos.)     25386    27419      -7.4   243076   220756   10.1
Passengers (in nos.)

11 International       107875   103578           958887   866333
Airports                    2        8     4.1        3        0   10.7
6 JV International     227892   208221           206977   187456
Airports                    5        5     9.4       52       63   10.4
                                                 127988   116546
9 Custom Airports      133735   132305     1.1        0        9    9.8
20 Domestic Airports       45        5   800.0    17868    11865   50.6
Others Domestic
Airports                   83       10   730.0      759      756    0.4
                       349154   325032           315851   285870
Total                       0        3     7.4       32       83   10.5
11 International       260426   217024           229750   197405
Airports                    1        7    20.0       70       48   16.4
6 jv International     522565   445810           486618   419642
Airports                    7        2    17.2       48       90   16.0
                                                 643956   520642
9 Custom Airports      675871   565171    19.6        3        2   23.7
                                                 756588   620714
20 Domestic Airports   805178   625448    28.7        5        1   21.9
Others Domestic                                  126899   115055
Airports               139715   119561    16.9        8        4   10.3
                       945068   793852           869113   742689
Total                       2        9    19.0       64       55   17.0
International +
11 International       368301   320603           325639   284038
Airports                    3        5    14.9       43       78   14.6
6 JV International     750458   654031           693596   607099
Airports                    2        7    14.7       00       53   14.2
                                                 771944   637189
9 Custom Airports      809606   697476    16.1        3        1   21.1
                                                 758375   621900
20 Domestic Airports   805223   625453    28.7        3        6   21.9
Others Domestic                                  126975   115131
Airports               139798   119571    16.9        7        0   10.3
                       129422   111888           118496   102856
Total                      22       52    15.7      496      038   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 -
                                                  123866   102827
Total                  121035   104427     15.9        4        5   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 +
11 international
airports                50188    43017     16.7   533864   426729     25.1
6 jv international                                134634   111217
airports               134251   115142     16.6        8        8     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
                                                  194941   159175
TOTAL                  191130   163116     17.2        3        4     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

  1. GDP growth could touch 8% in current fiscal: FM, Economic Times,
      24                               Jan,                              2010
  2. Domestic air traffic grows 7.8% in 2009, Economic Times, 14 Jan,
  3. Directorate General of Civil Aviation Website:
  4. Microeconomics 7th Ed., Robert S. Pindyck, Daniel L. Rubinfeld, Prem
      L. Mehta
  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

              KINGFISHER AIRLINES (2009)

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
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 success.


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