Principles Of Economics

In Aviation Industry

Group Members

Contents :

• Introduction• Major Players• Demand And Supply• Kinked Demand Curve• Market Structure• Snob Effect• Macro Environment Analysis• SWOT Analysis• Michel Porter’s Five Forces• Comparison Between Low and High Cost• Suggestions

History

•  The birth of civil aviation in India began happened on Feb 18, 1911 when Henri Piquet flew a Humber biplane.

• In 1932, JRD Tata, a visionary launches India’s first scheduled airline, Tata Airline and also piloted its first inaugural flight.

• Air India International Ltd. was established by the Government of India and Air India (earlier Tata Airline).

• In 1953 Air-India International became a public sector corporation along with Indian Airlines Corporation.

Aviation PolicyMany policies supporting the infrastructures are now in place:

• For Greenfield airports, FDI [Foreign Direct Investment] up to 100 per cent is permitted through automatic approvals.

• Private developers are allowed to set up captive airstrips and general airports 150 km away from an existing airport.

• 100 per cent tax exemption for airport projects for a period of 10 years.

Aviation Sector Outlook

As per the investment commission of India, the aviation sector is likely to boom further in the coming year, attracting huge investments.

• Passenger traffic in projected to grow at a compound annual growth rate (CAGR) of over 15 per cent in the next 5 years.

• The vision 2020 statement announced by the ministry of civil Aviation, envisages creating infrastructure to handle 280 million passenger by 2020.

• Air cargo traffic to grow at over 11.4 per cent p.a. over the next 5 years to exceed 2.8 million tones by 2010.

Airport Infrastructure

• Of the 454 airports and airships in India, 16 are designated international airports.

• Currently 97 airports are owned and operated by the Airports Authority of India (AAI).

• India’s civil Aviation Ministry aims at 500 operational airports in the next 12 years, as per a report of centre for Asia Pacific Aviation (CAPA).

• The government aims to attract private investment in aviation infrastructure.

Market Size

• Domestic and international traffic is up 45 per cent and 15.1 per cent, respectively.

• Over 135 aircraft have been added in the past two year alone.

• Center of Asia Pacific Aviation (CAPA) Estimates domestic traffic to grow 25-30 per cent annually by international traffic 15 per cent until 2010.

Major Players

DEMAND

The demand drivers of the airline industry include:-

Ticket prices

# Purchasing power

# Access to and suitability of other modes of transportation

# Frequency of services

# Safety

Random factors such as terror threat

Supply

The supply drivers of the aviation industry are:

Cost Of Resources (fuel, labor, maintenance)

Government regulation

Price Of Airline Industry

Technology

Kinked Demand Curve

The aviation industry in India, especially with regard to passenger airlines, follows a strictly oligopoly-type structure with the characteristics.

(1) an industry dominated by a small number of large firms. (2) firms sell either identical or differentiated products (the only differentiation here being in service quality and frills offered).

(3) the industry has significant barriers to entry (which holds true both with respect to regulations and huge capital investment required).

Market Structure and Implications

Macro Environment Analysis

• Political environment

• Economic environment • Social environment

• Technological environment • Demographic environment

• People tend to follow the crowd without examining the merits of a particular thing.

• The bandwagon effect arises when people's preference for a commodity increases as the number of people buying it increases.

• SNOB EFFECT

• Situation where the demand for a product by a highincome segment varies inversely with its demand by the lower income segment.

Economic Environment

This rise in income levels along with introduction of no-frills flights will lead to • Rise in no of travelers, • More investments in aviation, • More competition and • Rise in industrialization leading to more need of air transport

SOCIO-CULTURAL ENVIRONMENT

Change in lifestyle:-Average income of middle class household is expected to rise to 194000 Rs by 2010 from 169000 Rs in 2001-02.No of households projected to be 43.6million in 2010.

Rise in Leisure travel :-Tourism industry grew 8.8 percentThere has been an increase in leisure travel by tourists of 15% in 2006.

Technological Environment

• Introduction of Airbus A380.

• ILS-Instrument Landing System (instrument landing system.)

Political Environment:-

• Open Sky Policy:- India had this agreement with 40 countries and lately it signed the policy with UK, USA and European Union.

• Modernization of Airports:- The Indian Cabinet has approved a proposal mandating the state-run airport operator to modernize 35 airports in second-tier cities.

• Abolishment of Taxes:- Foreign Travel Tax (FTT) Rs500 and 15% inland air travel tax (IATT) charged on Basic airfare has been abolished by the government w.e.f from January 9, 2004 to reduce fares.

• Reduction on Excise Duty:-From January 9, 2004, the excise duty on ATF was reduced from 16 to 8 percent

Demographic Environment

• Changing structure of consumers.• High %age of young population.• Higher number of literates

SWOT ANALYSIS OF SPICE JET At present it has a market share of 6%. This indicates huge potential of growth compared to other low cost airlines in India.

• Entered with Rs. 99 fares for first 99 days. • “Offering low everyday spicy fares” • Compete with Indian Railway AC Segment • Fleet of 6 Boeing 737-800 with 189 Seats

Strength Of Spice Jet

1. Limited sectors (Concentrated at only North-West-South Indian Sector)

2. Small Load Efficiency compared to other in the same segment.

Weakness Of Spice Jet

Opportunities Of Spice Jet

Future Fleet Expansion will increase its Market Share.

India's 200-million middle-class population is equal to that of the whole of Europe. Un-serviced Hinterland - Out of the 400-odd airstrips and airfields in the country, only 62 are in use. Available infrastructure is under-utilized. Tax holiday on aircraft leasing – The Union Budget of the Government of India announced in June 2004, announced a 5year tax holiday on aircraft leasing.

Threats Of Spice Jet

High Attrition Rate

Killer competition – The Indian skies are witnessing a bloody battle for market shares. A much anticipated fare war has broken out across Indian skies.

Oil price fluctuations – Oil price hikes spare no airline. Aviation turbine fuel (ATF) cost and other operational costs (all government controlled) are the same for all airlines, whether it is a low cost airline or not.

MICHAEL PORTER’S FIVE FORCES

MICHAEL PORTER’S FIVE FORCES Michael Porter’s five forces model has been used as a framework to analyze the Indian airline industry and its attractiveness to new and existing players 1-- THREAT OF NEW ENTRANTS Huge capital requirement: Capitalization of minimum Rs.30Cr without which it is not allowed to takeoff Expected retaliation: market is concentrated in the hands of a few players thus any new player would to face stiff competition Legislation or government action: along with the equity restrictions for floating an airline they also compel the airlines to operate on uneconomical routes Inadequate airport infrastructure: difficult for the existing airlines to function smoothly and thus deters new ones Shortage of pilots and high fuel costs Exit barriers

2--POWER OF BUYERS

General Indian traveller is extremely value conscious.

Growing awareness has increased expectations for punctuality, safety and service. No differentiation among the players in the same segment e.g. the differences between IndiGo and Spice Jet is minimal.

Transparent Web based comparisons in fare structures are available which increases the power of the customer to choose the best deal.

Role of intermediaries like travel agents diminishing

3--POWER OF SUPPLIERS

Two major critical suppliers: • High fuel costs-Fuel accounts for nearly 35% of the total cost and the cost of fuel is increasing rapidly posing a threat to the companies profits. • aircraft suppliers enjoy in a duopoly and fiercely control their market shares Acute shortage of pilots which makes the industry dependent on them Forward integration: airlines also face a threat of forward integration as the suppliers have or know about most or the technical aspects of the industry

4--AVAILABILITY OF SUBSTITUTES

Product for product substitution- Consumers have various options in terms of airlines to choose from. They may also switch to other modes of transport such as road and rail.

Substitution for need- With the advent of technology options such as video conferencing and conference calls reduces the need to travel thus the option of substitution of need in present but it is marginal as it is not possible to totally do away with travelling.

5--POWER OF COMPETITORS Intense Competition amongst low cost airlines and the full service airlines. Apex fares and promotional schemes offered by all the full service carriers, offering prices at lower or similar to the low cost ticket fares are a tremendous competitive force. Entry of additional players Mergers and acquisitions take place here too which increases competitive rivalry between airlines Low level of differentiation between the services offered by the different airlines increases the risk of switching High fixed costs and input constraints also add to the competitive pressures in the industry

Recent News Of Aviation Industry

• Jet - Sahara acquisition

• Jet Reinstate 1,900 employees

• Jet-government deal for bailout (Rs 47 billion)

• Committee set up to examine financial crises of domestic airlines in India.

• Air India expects first round of Govt. funding by January.

• Pilots of the erstwhile Indian Airlines staged a silent protest march against the non-payment of productivity-linked allowances.

• Airlines’ losses increase by 44% in fiscal 2009.

Comparison Between Low Cost And High Cost

Low Cost (Spice Jet, Indigo)• Lower rate in return flights• Food and drink on demand

with consideration.

High Cost (Kingfisher, Jet Lite)• --NA--• Free food and drink.

Refund Rules :Date change Penalty. 750 750

Cancellation applicable before departure 1500 NA

Baggage allowed ( Adult & Child) 20 25

After flight refund NA 225

Low Cost High Cost

• Allow all Indian Carriers, Public or Private-to operate International routes.• Lower the cost of aviation turbine fuel.• Lower the Landing and airport charges.• Strengthen and promote short haul tourism for business development,trade and tourism.• Encourage of Proactive involvement of overseas investors and technicalmanagers in the privatization of airports.• Encourage commercial activities within airports such as hotel, restaurantsEtc.

Suggestion’s

Thank You