Microeconomics report on Indian Aviation Industry

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Indian Civil
Aviation Industry
September 07, 2012
Presented by Group No. 2 & 3
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2. Contents
Indian Civil Aviation Industry
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Introduction
Pricing Strategies
Advertisement and Branding
International and Domestic
Market
 Impact of Govt. policies
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3. Indian Civil Aviation Industry
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Statistics:
 India is the ninth largest civil aviation market
in the world with a market worth of US
$12bn
 There are 4,200 airports deploying 27,000
aircraft
 87 foreign airlines fly to and from India and 5
Indian carriers fly to and fro from 40
countries
 Handles about 2.5 Bn passengers across the
world in a year
 Moves 45 Mn tons of cargo a year
Source: ICA Institute

4. Current Scenario
Current Scenario:
 Indian aviation witnessed growth, both in
domestic as well as international passenger traffic 18%
 Operational losses despite growth in passenger
traffic
 Debt trapped industry - combined debt of Indian
airlines companies was around USD 15 Billion as
of March 2012
 Negative sentiment observed from international
Financial Institutions
 The total loss for all the airlines FY12 was
approximately USD 2.5 billion according to the
Ministry of Civil Aviation.
 The only carrier that remained a profit-making
operation was low-cost IndiGo, which also hit the
headlines by announcing an order for 180 aircraft
from Airbus Industries worth as much as $15.6
billion.
 They also reported the fullest aircraft in Jul-2012
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5. Cost Environment
India’s carriers today face a deteriorating cost environment on
a number of fronts.
These include:
 Fuel prices: a high, and more importantly
sustained high, oil price environment. On average
around the world, fuel accounts for about 34% of
an airline’s cost structure. In India, because of high
taxes, it accounts for 45%.
Impact : Domestic airfares are set to rise further by
Rs 500 due to the recent 7.6 per cent rise in the
price of Aviation Turbine Fuel (ATF).
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 Weak currency: further depreciation of the
Rupee, which has already fallen more than 20% in
the last 12 months, thereby pushing up the price
of dollar‐ denominated costs such as fuel, aircraft
leases, maintenance and offshore interest
obligations
 Airport charges: the regulator has already
approved a 334% increase in charges at Delhi
Airport and 500% at Mumbai. These additional
levies likely to inc airfares by 15‐20%.
 Service tax: the service tax on economy class
airfares will change from a fixed amount to an ad
valorem percentage.

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Pricing

8. Pricing
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What are the important factors influencing pricing decisions ?
Bodies Governing
The Ministry of Tourism and Civil Aviation
The Indian Airlines Corporation
The National Airports Authority
The International Airports Authority of India
The Air India Corporation
These are the bodies directly or indirectly influencing the process of making the pricing
decisions.

9. Pricing Strategies
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Demand Based Pricing (Price Discrimination)
Season Based Pricing (Monopolistic Competition)
Competition based pricing (Oligopoly)
Value based Pricing
Discounting
Odd pricing
Penetration Pricing
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10. Pricing Strategies
1. Demand Based Pricing
The pricing of air fares under this strategy is normally based on the demand
from the customers.
For example:
The person sitting next to u might not have paid the same price for the
ticket. If a person wanting to travel in Business class does not get the ticket
for the same when tried to book at the last minute, will travel in Economy
class paying more than what the other travelers must’ve paid.
The Pricing is never fixed and it is always Discriminated.
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11. Pricing Strategies
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Price Discrimination
What do we mean by Price Discrimination ?
For simplicity we have assumed no fixed costs and constant variable cost so that
MC = ATC.
a. Without price discrimination
Price
b. With discrimination
Price
Profit = $3200
Profit = $2400
MC = ATC
Quantity
MC = ATC
Quantity

12. Pricing Strategies
2. Season Based Pricing
The pricing of airline industry largely depends on seasons.
Characteristics for Monopolistic Competition
Large no of sellers
Differentiated Product
Firms compete on price, quality and marketing
Quality is a significant product differentiating strategy (Marketing is must)
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13. Pricing Strategies
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Monopolistic Competition
Firms in monopolistic competition maximize economic profits by producing where MR = MC and by
charging the price for that quantity from the demand curve D . hence the firms earns positive economic
profits because P > ATC.
Short Run
Long Run

14. Pricing Strategies
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Competition based Pricing
This strategy focuses on the prices charged by other airlines.
For Example
Spice jet on completion of three years on May 23rd 2008 offered 3 lakh tickets just for Rs.
3 starting from July 1st to 21st September 2008 across its 18 destinations in India.
This type of pricing strategy can be broadly discussed with the help of Kind Curved
Model in Oligopoly

15. Pricing Strategies
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Oligopoly
Features:
Small number of sellers
Products may be similar or different
Significant barriers to entry
Interdependence among competitors
(Decisions made by one firm affect the demand, price and profit of others in the
industry)
Kink Demand Curve Model

16. Pricing Strategies
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Value Based Pricing
This strategy can be applied when the most important determinant of value to a
customer is money.
Various Methods:
Discounts:
The service provider or marketer may offer discounts or price cuts to communicate
to the price-sensitive buyers/ customers’ that they are receiving value for which
their money is spent.
For example: Spice jet has a special group discounting scheme wherein groups of
over 15 guests may be provided with consideration for special fares.

17. Pricing Strategies
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Odd Pricing
This is another strategy wherein the service providers offer prices at an amount
which seems comparatively lower than the normal rates.
So in case on Spicejet. Instead of offering a ticket from Mumbai to Goa at Rs. 2400
they would offer at Rs. 2299. So, on looking at the figure the price difference seems
to be more which in fact is just hundred and eleven rupees.
Penetration pricing:
This is a strategy in which new services are introduced at low prices to stimulate trial
and widespread use. This strategy is appropriate when the sale of tickets is pricesensitive.
Example: Jet Airways announced a new offer `Everyone can fly’

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Branding and Advertising

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The primary purpose in advertising is not simply to alter the demand
curve, but to shift it upward and to the right.

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 For an airline in a competitive market, an increase in its demand may also accrue from a shift
of passengers away from its competitors.
 Some is institutional, stressing the reliability, dependability, comfort, and convenience of air
travel; some is almost purely competitive, stressing a sometimes nonexistent advantage, such
as an alleged superiority of one aircraft or service over that of competitors.
 Airlines competing for traffic on the same routes are compelled to advertise simply to
maintain their share of the market.
 Another intra-industry use of advertising may occur when airlines serve different places
through a common city.
 If the market for air transportation is carefully considered, this inter-industry effect shows
great long-term promise for the airlines.

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 The airlines often use other means to create psychological impact.
They use advertising to stimulate the potential traveler by depicting
glamorous vacations and exciting adventures in distant places, and
they emphasize that these places are only a few hours away by air.
This is to gain more business from other transportations.
 The effects of advertising manifest themselves in both the short
and the long run. In terms of intra-industry competition, an airline
can at best only hope to use advertising as a means of increasing
market share in the short run.

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 Probably the most important effects of advertising to the airlines
are its long-run influence on inter-industry market shares.
 Continued advertising has a cumulative response. It produces an
increased awareness of air transportation through constant
exposure, and may create an identification of a particular carrier or
carriers with a route, market, or region.

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Advertising must be successful in :
 reaching the airline's target markets,
 remind the customer of existing product features, routes served,
 inform the customer about new or improved product features,
 new routes being added and so on

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International and Domestic Market

33. Competition in International Market
 Indian aviation witnessed growth internationally by
11.8%
 However, nearly 1/3rd of 32 million international
passengers to/from India, travelled on international
carriers.
 Reasons are – offering good onward connections via
hubs in US and Europe, as the same are underserved
by local airlines (CAPA report).
 Debt trapped industry - combined debt of Indian
airlines companies was around USD 15 Billion as of
March 2012
 Industry also faces negative sentiment observed from
international Financial Institutions due to
Government restrictions, taxes etc.
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34. Competition in Domestic Market
 In early 2000 there were just 3 major carriers in the Indian
Civil Aviation Industry – Indian Airlines, Jet Airways and
Air Sahara
 The Airline industry too witnessed rapid growth which led
to the emergence of new players such as Air
Deccan, Indigo, Go Air, Paramount Airways, Spice Jet etc
 This led to significant price reduction and increased
competition and increase in overall passenger traffic.
 This increased and intense competition coupled with high
cost of operations, led to significant operating losses for a
significant majority of the airlines, which led to a spate of
consolidation in the Industry
– Air Sahara was acquired by Jet Airways and
subsequently renamed as Jet Lite
– Air Deccan was acquired by UB Group and merged
with Kingfisher Airlines
– Merger of Indian Airlines and Air India
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35. Competition in Domestic Market
 Operators such as Paramount have stopped
operations given the continued losses incurred
from operations
 Kingfisher Airlines is also currently facing
significant debt pressures coupled with
operating losses
 The only carrier that remained a profit-making
operation was low-cost IndiGo, which also hit
the headlines by announcing an order for 180
aircraft from Airbus Industries worth as much
as $15.6 billion.
 They also reported the fullest aircraft in Jul-2012
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36. Air Passenger Traffic :
International and Domestic
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37. Air Freight Traffic :
International and Domestic
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38. Future of Indian Aviation
 International markets:
– Increasing financial capability of the considerable middle class population
– Increase in levels of expendable income
– Positive demographics
– Rising ambitions of middle class
– Quick economic progress
– Lower levels of penetration
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39. Future of Indian Aviation
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 Domestic markets:
- Indian domestic capacity growth of 7-8% in FY2012/13, traffic to grow 8-10%
- India’s airlines expected to post a combined loss of USD1.3-1.4 billion
- Jet Airways to prosper; major aircraft order expected
- Kingfisher Airlines revival dependent on foreign airline investment
- Serious cost challenges
- continued dithering over foreign ownership
- government leadership needed more than ever
-government policy to introduce FDI in domestic airlines.

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Benefits of Foreign Direct Investment in the Airline Industry
 The Civil Aviation Ministry has been considering allowing up to 49% equity
investment by foreign carriers in domestic airlines
 Key Benefits for the Indian Aviation Industry
– Provide the much required capital to the domestic aviation industry reeling under
the pressure of mounting losses and rising debt burden
– Help bring global expertise and best industry practices over the medium term
 Key Benefits for the Consumer
– Increased competition as new players could enter the market and offer more
alternatives potentially reduce tariffs
– Improve customer service standards
 Key Benefits for the Foreign Airlines
– Provide entry into one of the fastest growing aviation market globally
– An opportunity to establish India as their hub for connections between
US/Europe and South-East Asian countries

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Government Policies

42. Overview of Indian Aviation Policy
 1953 – Govt Nationalized the Airlines Via the Air Corporation Act, 1953
Indian Airlines & Air India.
 1986 – Private Sector Players were granted permission to operate as Air Taxi
Operators
Air Sahara, Jet Airways, Damania Airways, East West
Airlines, Modiluft and NEPC Airways.
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Birth of

43. Overview of Indian Aviation Policy
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 1994 – Govt of India revoked the Air Corporation Act.
 1995 – Govt granted scheduled carrier status to six private air taxi operators. But only
four operated: Jet Airways, Air Sahara, Jagsons and Spicejet (previously operated as
Modiluft).

44. Current Aviation Policy
 FDI in aviation allowed up to 49% but for companies other than airline
companies (invest).
 FDI up to 74% allowed for scheduled and cargo airlines.
 FDI 100% allowed via the automatic route for the green field airports.
 Foreign Investment up to 74% is permissible.
 Private Investors allowed to establish general airports and captive airstrips –
distance of 150kms
 Tax Exemption - 10years
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45. Union Budget 2012-2013 Impact On The Aviation Sector
 ECB & Custom Duty – healthy impact on Aviation
Industry in India.
 ATF – “Declared Goods”
 Airlines allowed to import ATF – as “Actual Users”
 ECB allowed for funding working capital
requirements up to US $ 1 billion – a year.
 Custom duty from 14% to 8% - ATF
 Custom duty on some items NIL
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46. Conclusion
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Indian aviation sector in low-growth phase but long-term prospects remain
positive
 Domestic traffic in India has been flat in 2012 amid exceptional circumstances in the
market, with Kingfisher Airlines and Air India both severely curtailing capacity amid
strike action and financial woes.
 CAPA estimates that domestic passenger traffic will grow by 8-10% in FY2012/13.
Much will depend upon the impact of oil prices and other input costs on airfares.
 The short-term cost and regulatory environment remains very hostile.
 While the Indian aviation sector is now in a low-growth phase, long-term fundamentals
remain positive. India is poised to emerge as the world’s third largest aviation market
before 2020 with airport traffic forecasted to reach 450 million passengers (360 million
domestic and 90 million international) along with 6.5 million tonnes of cargo by 2020.

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Thank You!
Abha Mishra - 01
Ajay Goyal - 04
Gulistaan Dumasia - 18
Jimit Salot – 21
Sachi Agarwal - 41
Sherly Dsouza - 47
Yuvraj Tandon – 59
Rashi Kapur - 39
Neha Kumar - 29
Nitya Murti - 31
Sonal Rajadhyax - 50