A REPORT ON AIRLINE INDUSTRY ANALYSIS
RESEARCH METHODOLOGY
SUBMITTED BY: GROUP 12 AMRITA SINGH ANSHUPRABHA SINGH JEETU JOSE MANASH VERMA MUDIT MATHUR SHUVENDRA KUMAR MOHANTY
STRUCTURE OF THE AIRLINE INDUSTRY
Monopoly: During pre and post nationalization i.e. upto 1986, the only flights plying in the Indian sky were Air India and Indian Airlines both owned and controlled by the Government of India and as such the government enjoyed monopoly in the Indian Aviation Industry. Let us look at the basic characteristics of the Monopoly market:1. There is a single seller and many buyers of a product. 2. The products produced and sold by the firm is homogeneous or non-homogeneous but it has got no close substitutes in the market. 3. There are barriers to entry. 4. The firm is a price maker i.e. it has substantial control over the market price of the product. 5. The supply of the product by the single firm constitutes the market supply. 6. The firm acts atomistically i.e. while taking its profit maximizing decisions it ignores the reaction of other firms( potential competitors) and 7. The firm faces the market demand curve for its product.
Let us analyse the Indian Aviation industry during that time on the above mentioned parameters:1. Indian Airlines and Air India both under the same entity were the only suppliers of civil air services while there were buyers for the same. 2. The product was homogeneous as the air services were similar in the two airlines and though Railways was considered a competitor but it catered to entirely different market segment and was nowhere near to the air services considering the time and cost factor. 3. Due to government regulations, no other player could enter the market. 4. Both the airways controlled the entire demand and supply of the airline services. 5. Government was the price maker and it did not take pricing decisions strategically.
Price Discrimination When a monopolist discriminates between consumers the practice is called Price Discrimination.
It is sometimes able to charge different prices to different consumers of the same commodity. In the Airline Industry also the consumers are categorized into different classes such as Business and Economy and accordingly the prices charged also differs in the two classes.
MC Price, Cost P*
G
C*
F
AC
E AR
0
Q*
Quantity MR
In the above graph, we measure quantity along the x-axis and price(P), average cost(AC), marginal cost(MC), average revenue(AR), marginal revenue(MR) along the y-axis. The monopolist faces a downward sloping demand curve and as such his MR curve is also downward sloping. The monopolist will produce at the profit maximizing level which is the point where 1. MR=MC and 2.
MC cuts MR from below.
This happens at the point E and accordingly the quantity supplied would be Q* and the price
charged is P*. The AC curve intersects Q at the point F. As such his TC =C*FQ*0.
His TR= P*GQ*0 and the profit earned is denoted by the area P*GFC*. The monopolist earns profit in the long run also as there is no competitor to enter the industry
and take away his share of profits. The above graph applies to the Air India and Indian Airlines when they were enjoying monopoly status in the industry.
Oligopoly: After the post privatization period i.e. the period after 1991 lot of private players entered the industry under the government policy of open sky, which repealed the Air Corporations Act of 1953 and came up with Air Corporations Act, 1994. Opening up of the Aviation industry to 41% FDI in the form of equity stake has also increased the competition in the economy. By 1995, Private airlines occupied 10% of the domestic air traffic. Hence the various players broke into the monopoly of IA and AI creating a situation of Oligopoly market. The various characteristics of an oligopoly market are:y
Small number of sellers but it entirely depends on the size o f the market.
y
Interdependence of decision making- The business strategy of each and every firm in respect of pricing, advertising, product modifications is closely watched b y the rival firms.
y
There are barriers of entry due the high capital investment, economies of scale, resistance
by existing firms, price cutting strategy etc. y
Product may or may not be homogeneous.
y
The consumer is the price taker and the industry players are the price makers.
y
Stabilized prices ± The prices tend to stabilize because no player is willing to bring about
a change in its prices. Out of the above mentioned characteristics of Oligopoly, the Indian Aviation Industry possesses the following:y
There are 8 major airways in the current Indian aviation industry. Each and every player
has a control on the prices and influences the market prices. y
The business strategies of pricing of tickets, advertisements, promotion schemes etc are
in line with that of the competitors. A slight change in any type policy by a company will lead to the others to follow suit. Like when Air Deccan came up with a promotional scheme of Re 1 ticket, its immediate competitor S pice Jet launched a scheme of 99p/ ticket. y
The Indian Aviation Industry involves a huge capital investment and government
regulation which acts as major reasons for any new player to enter. Not only that, the customer loyalty is attached to a particular airline and they might not be willing to switch. y
The product offered by each and every airline i.e. air services is more or less
homogeneous with minor differences.
The prices in this industry are fixed by the players according to the segment of market
y
they want to cater to. In Oligopoly market the profit maximization output and price is not determined by the profit maximizing criterion we saw in the monopoly market structure. Hence here lies the problem of indeterminacy. As such we can describe the Indian Aviation industry¶s market structure through Sweezy¶s model of Oligopoly which talks about price stability/rigidity. Here, a firm A believes
that if it increases its prices then none of the firms will follow suit so firm A will face considerable losses. Hence in this context the demand is relatively inelastic. On the other hand when firm A reduces its prices, all other firms follow suit to protect their market share. Here the demand curve becomes relatively elastic. Same is the case with Indian aviation players like reduction in price by Air Deccan will result in reduced prices of S pice Jet and an increase in prices of Air Deccan will cause them considerable losses. This kind of asymmetrical price conjecture leads to kink in the demand curve. Due to this reason
firms prefer to maintain stable pr ices for particular periods.
P, MR, MC MC2 D MC1 E PO
Kinked Demand Curve A
D¶ B
0
QO MR
Q
In the above graph, the x-axis shows Quantity and the y-axis shows the price, MR and MC. Demand curve faced by an oligopolist has a kink point at E, the price and output corresponding
to it is 0PO and 0QO respectively. DE portion is relatively elastic while ED¶ is relatively inelastic. It is very unlikely that MC would pass through the discontinuous portion of MR, if QQO then MC>MR And the firm will increase its output to maximize profit. Hence, the profit of the firm is maximized when Q=QO. Here, the equilibrium price- output combination (Po, QO) is compatible with a wide range of costs. Thus, shifts in MC curve do not affect the equilibrium.
We can see from the following data that prices in airline industry are same for the players
competing with each other. We take the fares charged by the major airlines flying along Delhi ± Mumbai route (busiest route- 44 flights/day). High Cost Players
Prices Charged
1. Jet
Rs. 7760
2. Kingfisher
Rs 7400
Low Cost Players
Prices Charged
1. Go Air
Rs. 5000
2. S pice jet
Rs. 5148
1. Oligopoly market tending towards Monopolistic characteristics The future scenario of the Indian Aviation industry is tending towards monopolistic market
Characteristics, some of which are as follows: y
Large number of buyers and sellers
y
Product is differentiated
y
No Barriers to entry.
It is being forecasted that around 8 ± 9 new airlines would be starting their services in the next 2 years. As such we see that number of players is increasing and there would be cut throat competition. As such the market may move towards monopolistic in the coming years.
PLAYERS IN THE INDUSTRY AND MARKET SHARE
INDIAN PLAYERS
MARKET SHARE
Kingfisher
18.6 %
Jet Airways + Jet lite
25.4 %
Nacil(I)
Indigo S
17.1 % 18.6 %
pice jet
Go Air
13.8 % 06.4%
30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00%
Series1
Some of the Top international airline are as follows:
1. Emirates 2. Air New Zealand 3. Singapore Airlines 4. Cathay 5. Air France 6. Virgin Atlantic
BARRIERS TO ENTRY: Barrires to entry are conditions such as high start up costs or obstacles that prevent new entrants from easily entering the particular industry. These barriers benefit existing companies who already operate in the industry by protecting their existing revenues from new competitors. They can be as a result of interventions by the government or a natural occurrence in business. In the airline industry, there are number of barriers to entry that affect new entrants. Risk: The high risk nature of the airline industry is a major barrier for new entrants. Airlines have high
cost that tend to be fixed in relation to revenues. Load factors or fare increases may affect revenue, when this happens profits will be instantly affected. This makes airline industry highly vulnerable to an economic slowdown. Slots:
Since 1969, the Federal Aviation Administration has limited the daily number of takeoffs and
landings at key airports such as the Chicago O'Hare, Ronald Reagan Washington National and New York's JFK and LaGuardia. As a result of new airlines entering the market, the demand for access at these airports increased. This increase made it difficult for the takeoff and landing slots to be equally divided.
Leases:
Airports in cities such as Charlotte, Cincinnati, Detroit, Minneapolis, Newark and Pittsburgh permit airlines to lease the airport gates over a long period of time. This period can be extended as long as 20 years. This gives them exclusive rights to use the gates and prevents new airlines from acquiring the use of any a irport facilities.
Perimeter Rules:
Perimeter rules at LaGuardia and National airports prohibit incoming and outgoing flights that exceed 1,500 and 1,250 miles, respectively. These rules were implemented to promote JFK and Dulles airports as the long-haul airports for the New York and Washington metropolitan areas. Additionally ,these rules limit the ability of airlines based in the west from competing, since those airlines are prohibited from serving LaGuardia and National airports where the western airlines are strongest.
Marketing Strategies:
Some marketing strategies such as booking incentives and frequent flier programs have been
executed by established airlines to create loyalty among passengers and travel agents. This has made it increasingly difficult for new airlines to enter the market. Smaller airlines may choose not to enter or quickly exit a market due to increased competition and financial loss.
Resources:
A company's control or ownership of a significant resource bars would-be competitors from entering the market. For example, a monopoly that provides oil to local governments might have access and exclusive rights to the land from which the oil comes. Government also creates barriers to entry when it grants a firm exclusive rights to certain resources through grants, patents, copyrights and licenses.
Sunk Costs:
Sunk costs are unavoidable expenditures for a company. For example, some firms in a
competitive market have more money than others to spend on advertising. Marketing costs must be spent, thus it's a sunk cost. Business owners with little money budgeted to spend on marketing and advertising can find it difficult to enter an industry where another company has more money to put towards product promotion.
Investment:
Businesses with a higher amount of start-up capital than other firms create barriers to entry.Firms with high-yielding investments and those that show a good return for investors can afford to spend much money on resources, thereby overshadowing the efforts of the competition.
Innovation and Research: The high cost of investment in new technologies or research deters many firms from entering the
market. Firms with greater resources for research and development to create new products, as well as capital to invest in equipment and in emerging technologies, can dominate an industry that depends on Research and innovation to grow.
FUTURE OUTLOOK
Passenger traffic is estimated to grow at a CAGR of over 15% in the coming few years.
The Ministry of Civil Aviation would handle aro und 280 million passengers by 2020.
US$ 110 billion investment is envisaged till 2020 with US$ 80 billion solely for new aircraft and US$ 30 billion for developing the airport infrastructure.
LCCs and other entrants together now command a market share of around 46%. Legacy carriers are being forced to match LCC fares, during a time of escalating costs. Increasing growth prospects have attracted & are likely to attract more players, which will lead to more competition.
Airport and air traffic control (ATC) infrastructure is inadequate to support growth. While a start has been made to upgrade the infrastructure, the results will be visible only
after 2 - 3 years.
Modernization of airports:
The Airports Authority of India (AAI) is undertaking the development and modernization
of all 35 non-metro airports in the country.
The other two metro airports - Chennai, Kolkata -- may soon be on the modernization
path.
Augmentation of fleets:
Kingfisher has also ordered five Airbus A380 aircraft. India is expecting to add aircraft worth about US$80 billion by 2020.
Growth in MRO Segment:
Growth in the MRO segment in India is estimated at 10.2 per cent, and is expected to outpace growth in Asian and global markets.
The total MRO market in the country is around $500 million and is likely to touch $1.06
billion by 2014.
By then, India's contribution to Asia's MRO market is expected to grow to seven per cent.
Job opportunities:
The aviation sector in India is likely to create more jobs in future as the sector is growing
rapidly.
The demands of more aircrafts leads to the demand of more manpower.
The industry would create 2,00,000 jobs by 2017.
