With a predicted CAGR of 5.

6% in the next 20 years, India is touted to one of the top

five air travel market (domestic travel) globally, in terms of additional passengers
per year. Factors like low costs, cost efficient infrastructure and capacity
management have pummeled a rapid growth in the domestic airlines. This is
primarily driven by the fact that only 0.5 percent of the population travel in
airplanes .As a result of these enormous growth prospects, Indian airlines are a
significant opportunity for global players. The government at the centre and the
state are encouraging the airline industry by relaxing regulatory policies, providing
discounted utilities and infrastructure. In spite of the above mentioned growth, India
is still a small player globally. The trips per capita are low (0.04) compared to other
emerging nations like Brazil (0.25), Malaysia (0.54) and China (0.15). India is only
1/5th of China in terms of domestic traffic, in spite of having population only 15%
less than that of China.
Following airline deregulation {Private players were allowed which curtailed the
then existing monopoly by Air India leading to Low cost travel} in India, many low
cost carriers have evolved in India which have taken away the market share from
traditional carriers like Air India.
However a large number of tier 2 and 3 cities remain unconnected. It is estimated in
2014 that there are around 400 unused airstrips across India. With rising fuel prices,
inadequate infrastructure, strikes and multiple taxation issues, the current players
are facing heavy operating losses.
Currently there are around 8 players in this industry namely Air India, Air Asia , Air
Costa, Jet , Spice jet, Indigo, Go air and Vistara.
Fuel costs account to about 45% of the total operating costs on an average. The
ATF(Aviation turbine fuel) costs have increased by 6% during 2013-14.
The economic status is adding additional pressure on industry, increasing the
operating losses to about 9% .(rupee depriciated by 11% during 2013-14 and dollar
related expenses account about 70% of the operating expenses)
To reduce overall costs, aircarriers

Reduce labour costs per hour of productivity

Reduce Ticket distribution costs
Modify origin and destination route structure
Use secondary airports
Increase aircraft utilization-how much?

Cost structure
The airline costs can be majorly divided into three categories

a.Direct operating costs-these costs are related to both airlines(fuel,

maintainence,repairs, handling and staff pay) and passengers (cargo, on board
meals, commission etc). They comprise of the costs which the airlines directly incurr
or are related to providing comfort to the customers. In order to reduce air line
prices, the carrier tries to reduce the direct operating costs by concentrating on
efficiency reduction
b.Indirect operating costs- These are the costs which are not incurred during the
flight operations. But the airlines charege them on the passengers for boarding the
flight. Example- ground staff salary, parking , handling of air carriers etc.,)
c.Overhead costs These costs are basically are the managerial expenses towards
sales,HR and marketing.(Admin expenses, accounting expenses etc.,)
As every airline differs in the operational structure , it becomes difficult to compare
airlines using one method. One of the most used metric to standardize airline costs
is Costs per available seat miles (CASM). It is the cost of flying an aircraft seat for
one mile, irrespective of whether the seat is taken or not.

Break even analysis

Break even is the revenue required for the costs to be recovered. The basic formula
is
Fixed costs/(Price-Variable costs)
Break even in the airline industy is usually expressed as a percentage of Available
seat miles(ASM)
Operating leverage(DOL) is another metric which shows the ratio between profit
and sales growth. It basically is the elasticity of the firms financial health with
respect to sales growth. It provides an idea about the cost structure with respect to
the fixed costs incurred.
DOL= % change in EBIT/ % change in sales

Economies of scale
Economies of scale play a vital role in the industry as the fixed costs are very high.
Due to these costs and additional marketing expenses, airlines expand to gain from
economies of scale. This is one of the prime reasons why there are only a few

airlines in the industry and consolidation of airlines happen.From an operational

view, it is costly to maintain different types of aircrafts by one carrier as the costs of
maintaining different parts require lot of manpower and budget. Therefore, air
carriers simplify by using as few variations as possible

Industry size and growth rate

Fuel cost, rupee volatility, cost structurte of airlines. Industry size and growth rate,
supply of man pwer(pilots airhostess and air crew)
SWOT
Strengths

Increase in demand to provide services

Ensure a leisure travel, especially to the business traveller, like airport lounges

Enhanced in-flight service and more comfortable seating

In long-haul markets, where premium service is essential, through higher

capacity and long range Boeing 787s and Airbus 340s.

Weakness

Excess capacity

Complicated flight operations. Hub-and-spoke networks of legacy carriers were

profitable as long as LCCs had low service along heavily travelled routes.

Mounting debt Enormous debt to investment ratio (above 90% for

most US legacy carriers like US, DL, AA, UL, CO) compared to LCCs (25% for
Southwest)

Cost-to-revenues ratio per seat mile is very high (>13) compared to

Southwests 7.67

Opportunities

Maintain short-haul flights only to extent needed to feed the network

Threats

Labour problems as legacies try to streamline in order to compete with LCCs

Flood of new capacity into the region from LCCs may trigger a competitive
bloodbath among the legacies

Five forces
Suppliers are airline mfctrers-2 major players, life of air crafts,explore the typical
lease periods, cost of aircraft and time to manufufactuer itl.capital-whoo lends for
aircraft what are my inputs-fuel,airport infra-types of airports,size of airports and
how is leasing done in airports,location of airports,food supply
Buyer- customers,
Bargaing power?acees to them
Competition in the industry,..explore the coist strucute-salary,airfuell costs, parking
costs,mmaintainence costs,lease
Entry barriers-technology,high initial costs

1. Smart art about porter

2. Value chain analysis smart arrt
3. Spend of percapita on airlines

Porter's 5 Forces Analysis

1. Threat of New Entrants. At first glance, you might think that the airline industry is
pretty tough to break into, but don't be fooled. You'll need to look at whether there are
substantial costs to access bank loans and credit. If borrowing is cheap, then the
likelihood of more airliners entering the industry is higher. The more new airlines that
enter the market, the more saturated it becomes for everyone. Brand name
recognition and frequent fliers point also play a role in the airline industry. An airline

with a strong brand name and incentives can often lure a customer even if its prices
are higher.
2. Power of Suppliers. The airline supply business is mainly dominated by Boeing and
Airbus. For this reason, there isn't a lot of cutthroat competition among suppliers.
Also, the likelihood of a supplier integrating vertically isn't very likely. In other words,
you probably won't see suppliers starting to offer flight service on top of building
airlines.
3. Power of Buyers. The bargaining power of buyers in the airline industry is quite low.
Obviously, there are high costs involved with switching airplanes, but also take a look
at the ability to compete on service. Is the seat in one airline more comfortable than
another? Probably not unless you are analyzing a luxury liner like the Concord Jet.
4. Availability of Substitutes. What is the likelihood that someone will drive or take a
train to his or her destination? For regional airlines, the threat might be a little higher
than international carriers. When determining this you should consider time, money,
personal preference and convenience in the air travel industry.
5. Competitive Rivalry. Highly competitive industries generally earn low returns
because the cost of competition is high. This can spell disaster when times get tough
in the economy.
6.

Bargaining power of Buyers Low Threat

Question
Are there a large number of buyers relative to the number
of firms in this business?
Do you have a large number of customers, each with
relatively small purchases?
Does the customer face any significant costs in switching
suppliers?
Does the buyer need a lot of important information with
regard to using the product?
Is the buyer aware of the need for additional information?
Is there anything that prevents the customers from
manufacturing the product/service in-house?

Yes
No
(Low
(High
Threat) Threat)
X

Cannot
Assess

X
X
X
X
X

Are customers highly sensitive to price?

Are products unique to some degree? Do they have

accepted branding?
Do firms provide incentives to decision-makers on the
buyer side?

X
X

7.
8.
9.

Bargaining Power of Suppliers- Low Threat

Question
Inputs (material, labor, services) in this industry are
standard rather than differentiated.

Yes (Low
Threat)
X

No (High
Threat)

Firms can switch between suppliers quickly and easily.

Suppliers would find it difficult to enter this business.
There are many current and potential suppliers in this
industry.
This business is important to the suppliers.

Cannot
Assess

X
X
X
X

10.
11.
12.

Threat of New Entrants- Low Threat

Question
Do existing firms have cost and/or performance advantage
in this industry?
Are there proprietary products/services on offer in this
industry?
Are there established brand identities in this industry?
Do customers incur significant costs in switching
suppliers?
Is a lot of capital needed to enter this industry?
Does a new comer to the industry face difficulty in
assessing distribution channels?
Does experience in this industry help firms to continually
lower costs and/or improve performance? In other words, is
there a learning effect in this industry?

Yes(Low
Threat)

No
(High
Threat)

Cannot
Assess

X
X
X
X
X
X
X

Are there any licenses, insurance and other qualifications

required in this industry that are difficult to obtain?

Can a new comer entering this industry expect strong

retaliation from the existing players?

13.
14.

Threat of Substitutes- Medium Threat

Question

Available substitutes have performance limitations

and/or high prices that do not justify their use as
mainline products.
Customers will incur costs in switching to substitutes.

Yes

No

(Low
threat)
X

(High
threat)

Cannot
assess

There truly are no real substitutes for the products

available in this industry.

Customers are not likely to go for substitutes.

15.
16.
17.
18.
19.

Rivalry among Existing Players- High Threat

Question

The industry is growing rapidly.

The industry does not have overcapacity at the moment.

Yes

(Lowers (Intensifies
rivalry)
rivalry)
X
X

The fixed costs of the business are a relatively low

proportion of the total costs.
There are significant product differences and brand
identities among the competitors.

No

X
X

It would not be hard to get out of this business because

there are no long-term commitments that bind players to
the industry.
Customers would incur high costs if the switched from one
player to another.

Products on offer are highly complex and require

significant customer-producer interaction.

Cannot
assess

Market shares in the industry are more-or-less equally

distributed among competitors.