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Introduction
and Tier-III cities. The non-metro airports presently account for only about 30%
of the total air traffic, which is expected to rise to 45% in the next few years
representing huge potential. To meet the demand
for air travel government is planning to build nearly 200 low cost airports in
the coming years. Due to liberalization and deregulation, there has been
steady growth in number of private players.
Despite reforms, the domestic aviation sector continues to operate under high
cost environment due to high taxes on Aviation Turbine Fuel (ATF), high airport
charges, significant congestion at major airports, dearth of experienced
commercial pilots, labor laws and overall higher cost of capital. While most of
these factors are not under direct control of airline operators, the problems
have compounded due to industry-wide capacity additions, much in excess of
actual demand.
The Indian aviation industry is among the top 10 globally with a size of around
US$ 16 billion, according to a recent KPMG report. The aviation industry
presently supports about 0.5 per cent of the Indias GDP. This sector caters
about 150 million passengers daily, with the potential to grow further. By 2020,
traffic at Indian airports is anticipated to touch 450 million.
2.
1. Air India:
Air India was founded as Tata Airlines in 1932 and in 1946 it became a
public and renamed itself as Air India. It has a fleet of 124 aircrafts. It
operates flights to more than 100 domestic and international destinations
across Asia, Europe and North America. Its domestic market share was 19.5
percent and international market share was 47 percent in 2014-15.
2. Jet Airways:
Jet Airways was incorporated as an air taxi operator in 1993. The airline's
main domestic hub is Mumbai and its international hub is Brussels, Belgium.
Jet Airways acquired Air Sahara from the Sahara India Pariwar in April 2007
and it was renamed as Jet Lite. As of now, Jet Lite is a wholly-owned, alleconomy subsidiary of Jet Airways. The airline started its low-fare carrier, Jet
Airways Konnect in mid 2009-10 to compete with others in the segment
such as Spice Jet, Indigo, etc. Jet Airways consolidated Jet Lite and Jet
Airways Konnect under the JetKonnect brand as part of a rebranding
exercise in March 2012. Jet Airways operates flights to 21 international
destinations and 47 domestic destinations. Its domestic market share was
20.5 percent in 2014-15.
4. IndiGo:
Indigo, a private low-cost airline, commenced operations in August 2006.
6. GoAir:
GoAir, a low fare air carrier (LFC) headquartered in Mumbai, India, is wholly
owned by the Wadia Group. Established in June 2005, the airline began
commercial operations in November 2005. The airline has its primary hub at
Mumbai and its secondary hub at Delhi. GoAir operates around 100 flights
daily to 21 destinations across India. In 2014-15 it had a market share of 8.5
percent.
7. Kingfisher Airlines:
It is part of United Breweries Group and commenced in May 2005. In 200809, it acquired Air Deccan and renamed it Kingfisher Red. It operated flights
to 60 domestic destination and 11 countries across Asia and Europe. DGCA
has suspended its flying license because of which domestic market share
dropped drastically to 1.9 percent. It has halted its international operations
post April 2012 and domestic operations post September 2012.
8. AirAsia:
AirAsia India is a joint venture (JV) between AirAsia Berhard (49 per cent
shareholding), Tata Sons Ltd (30 per cent) and Telestra Tradeplace Pvt Ltd
(21 per cent). The company received the Air Operators Permit (AOP), which
is the final permit to start commercial operations, in May 2014, over 16
months after applying for it. In 2014-15 it had a domestic market share of
1.1 percent
9. Vistara :
It is headquartered in New Delhi . The carrier, a joint venture between Tata
Sons and Singapore Airlines, commenced operations on 9 January 2015 with
its inaugural flight between Delhi and Mumbai and had carried a total of
500,000 passengers by August 2015. As of August 2015, the airline
operates 245 weekly scheduled passenger services across 10 domestic
destinations within India with a fleet of 6 Airbus A320-232 aircraft. It was the
first airline to introduce premium economy seats on domestic routes in
India. In 2014-15 it had a domestic market share of 1.1 percent
3. Role of Regulatory
The directorate general of civil aviation (DGCA) is the sole regulatory body
which controls the Indian aviation industry and has laid done very clear rules
and guidelines to be followed by the both the major as well as small players in
the industry. The Oligopoly nature of the market has further aided in
governing and maintaining the control. A broader context of the rules are:
Even after such clear cut instructions, there have been instances where
travellers come up with grievances about having being misinformed on
various occasions:
Even the blue chips of the industry like Jet and Air India follow the
policies of providing discounted prices in order to sell extra tickets and at
a later stage try to cover the cost of running by over-charging on the last
moment bookings.
Managing the time slots by the air travellers is another major concern as
airlines keep on changing their prices relative to morning and evening slots and
thus, affects the travelling choice of the passenger.
During peak seasons, the airlines using smaller aircraft even take help
from other airlines on the same route to carry the luggage. This
misinformation causes delays and loss of luggage leading to
inconvenience to the travellers.
The choices of airlines for the travellers is also hampered by the sector
allocation.
Milestone
1991
Open
skies
policy
introduced, new players
enter
East
West,Damania,ModiLuft
move out
Air Deccan low cost
service expands
5 new carriers including
3 LCCs enter
Kingfisher
buys
Air
Deccan,Jet
buys
Sahara ,Air India and
Indian Airline Merge
Mid 1990s
2004
2006,2007
2007,2008
2013
2015
Pricing Strategy
In market structure like oligopoly, the company decides the output and the
price keeping in mind the decision taken by the rival. Price Wars have been
witnessed recently as AirAsia reduced its fare to Rs.500, Spice Jet also on
similar lines, provided tickets at such a nominal price.
We can see the price wars by referring to the snapshot attached below for a
flight scheduled on 04/9/2015 from Bombay to Delhi and booking is being done
on 25/8/2015.
The above table shows how the pricing strategy of the firm changes with
respect to the rivals strategy. As a single firm increases its price, other firms
also follow the same strategy of increasing the prices on the holiday weekend
knowing the inelasticity of the demand.
We also analyzed the pricing decision based on the minimum fares (Economy
class) charged by different airlines on Mumbai-Delhi route for the November (1
November 2015) in contrast with the price charged by firms on Diwali
Weekend, just a week after this date (7 th November 2015).
Operator
Fare
Operator
Fare
Indigo
3081
Indigo
6618
Spice Jet
3437
Spice Jet
7311
GoAir
6592
GoAir
7199
Air India
3328
Air India
7438
Jet Airways
5295
Jet Airways
7808
Source:
http://flights.makemytrip.com/makemytrip/search/O/O/E/1/0/0/S/V0/BOM_DEL_0111-2015
The above table shows how the pricing strategy of the firm changes with respect to the rivals
strategy. As a single firm increases its price, other firms also follow the same strategy of
increasing the prices on the holiday weekend knowing the inelasticity of the demand.
Types of Oligopoly:
Broadly classifying Oligopoly into 2 sub parts as: Collusive & Non Collusive
Oligopoly.
Collusive Oligopoly:
Prior to 2005, the Jet and Kingfisher were running a collusive monopoly and
charging a higher price in the market. They formed a cartel and prevented
other airlines from entering the market.
has decreased over the years , but since 2011 it has remained more or less
constant which could be validated from the below graph.
ASKM vs RPKM
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
RPKM(in billion
km)
33.5
41.7
37.6
44.2
53.1
59.2
56.5
59.0
ASKM(in billion
km)
48.7
60.6
59.1
61.5
68.8
79.0
75.7
80.3
RPKM(in billion
km)
ASKM(in billion
km)
When the airfares were too costly people had other substitutes like rail and
road transportations . But now with the frequent increase of rail fares and
fierce competition among airlines which resulted in lowering of airfares, Air
transport has become a viable option which has also resulted in
comparative increase of ASKM with respect to RPKM. But since 2011 SupplyDemand hasnt witnessed much change due to the Kingfisher fiasco,
downsizing of Air India etc. Hence the bottom line is that ASKM has
increased more than RPKM which reflects that demand has risen over the
years but in the recent years has saturated.
Supply Curve:
The supply curve for aviation sector is the general supply curve that is the
part of MC curve above AVC curve. As the supply increases, the prices of
tickets decreases but upto a point beyond which it increases again.
5. Demand Elasticity:
Determinants of demand curve are Income, Price, price of substitute goods
(railways), purpose of travel. The demand can be elastic or inelastic as per
the nature of travel. Travel for holidays are highly income elastic whereas
the business travel or educational purpose are highly income inelastic.
Determination of Price:
The intersection of demand and supply curve gives the price.
DETERMINATION OF PRICES
7.
Road Ahead
The aviation industrys potential in India is massive. The market already caters to
about 150 million passengers passing through its many airports, with the
potential to grow further. By 2020, traffic at airports in India is anticipated to
reach 450 million. The aviation industry presently supports about 0.5 per cent of
the Indias GDP.
A KPMG report notes that the industry will continue to grow in India on the back
of the performance of regional airports. Currently, there are about 450 used/unused/abandoned airports and airstrips spread across India. Many Indian states,
particularly in Eastern India, have begun taking steps to promote air connectivity.
Still, more needs to be done. Today, many Tier II and Tier III cities are
unconnected. The proposed Essential Air Services Fund (EASF) by the Ministry of
Civil Aviation needs to be established as quickly as possible. All this will have a
multiplier effect with regards to higher growth of tourism, employment and local
economic activities in the country.
The government has taken steps in the direction of structural policy reforms and
is coming out with new policies which are liberal and encourage public-private
partnerships. The government has embarked on a mission to create
infrastructure with ambitious projects. At this point, it is worth noticing that policy
formulation is one aspect while smooth implementation of it is another. India has
a history of having rules and regulations in place but not putting emphasis on
implementation of the same which has impacted its own interests many a times.
Routing development through public-private partnerships presents different
challenges in terms of delineation of responsibilities, effective monitoring and
evaluation procedure in place and final transfer of rights. The future plan of
action would leverage on the past experience with a priority to upgrade the
infrastructure to accommodate further expansion. Given the size and the
8.
Conclusion
The main conclusions that we can derive from the report are as below:
1. The airline industry is facing lot of challenges in India. The taxes in India are
very high including taxes on fuel, emission taxes, high prices of ATF and very
price elastic market.
2. There is dearth of airports in Tier II and Tier III cities and with upcoming
airports in new cities, this problem will be solved somehow.
3. With new and bigger planes coming like Airbus A380 and Boeing 777 need
better and bigger runways which are present only in few airports.
4. So there is need of huge investments in the services, new technologies and
business simplification.
So, we have understood through the assignment how the Indian Airline Industry
exhibits oligopolistic behaviour in terms of homogenous products, few players,
blockaded entry & exit, imperfect dissemination of information & Opportunity for
above-normal (economic) profits in long-run equilibrium. Towards the end we
have also seen their non-collusive models and how have they employed the same
to survive in the highly competitive environment.