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 Policy
Many 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
Market Structure and Implications
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).
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.
Strength Of Spice Jet
• 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
Weakness 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.
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) High Cost (Kingfisher, Jet Lite)
• Lower rate in return flights • --NA--
• Food and drink on demand • Free food and drink.
with consideration.
Low Cost High Cost
Refund Rules :
Date change Penalty. 750 750
Cancellation applicable before departure 1500 NA
Baggage allowed ( Adult & Child) 20 25
After flight refund NA 225
Suggestion’s
• 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
technical
managers in the privatization of airports.
• Encourage commercial activities within airports such as hotel,
restaurants
Etc.
Thank You
