Table of Contents

1. Overview

2. History

3. Civil Aviation Policy in India

4. Airport infrastructure

5. Passenger airlines – The players

6. Foreign equity participation

7. Market Structure and Implications

8. Trends in International and Domestic Civil Aviation and Projected Future

Scenario

9. Study of Consumer Demand in the industry

10. Potential Market Entrants

11. SWOT of legacy carriers

12. Recommendations

13. References/Acknowledgements
 1. Overview

1.1 Air Traffic: The Airport Authority of India (AAI) manages total 140 Airports in
the country, which include 18 International Airports, 122 domestic airports and
28 civil enclaves. Top 7 airports in the country handle 70% of the passenger
traffic of which Delhi and Mumbai together alone account for 50%.
Passenger and cargo traffic has growth at an average of about 9% over the
last 10 years.

1.2 Growth: Estimated domestic passenger segment growth is at 12% per

annum. Anticipated growth for International passenger segment is 7% while
the growth for International Cargo is likely to grow at a healthy rate of 12%.

1.3 Privatization: Privatization of International Airports is in offing through Joint

Venture route. Three Greenfield airports are getting developed at Kochi,
Hyderabad and Bangalore with major shareholding of private sector. The
work on Bangalore airport is likely to commence shortly. Few selected non-
metro airports are likely to be privatized.100% foreign equity has also been
allowed in construction and maintenance of airports with selective approval
from Foreign Investment Promotion Board.

1.4 Air movements: The total aircraft movements handled in October 2006 has
shown an increase of 19.4 percent as compared to the aircraft movement
handled in October 2005. The international and domestic aircraft movements
increased by 19.4 percent each during the period under review. The reason
for increase in aircraft m’ovements is due to increase of operation of smaller
aircraft by airlines and the introduction of new airlines viz., Air Deccan in
southern region and international airlines (Air Canada, Polar Air Cargo, Qatar
Airways (Freighter), Turkish Airways, Air Slovakia at IGI Airport with effect
from October 2005.

1.5 Passenger Traffic: International and Domestic passenger traffic handled in

October 2005 has increased by 15.4 percent and 6.7 percent over the period
of October 2004 leading to an overall increase of 9.4 percent. The total
passenger increased by 9.2 percent, 7.6 percent, 8.9 percent and 17.0
 percent respectively at five international airports six developing international
airports, eight custom airports and 26 Domestic airports.

1.6 Cargo Traffic: The total cargo traffic handled in October 2006 has shown an
increase of 3.5 percent as compared to the cargo handled in October 2005.
The international and domestic cargo traffic increased by 6.3 percent and 2.1
percent respectively during the period.

During the month of October 2007, 7346 thousand aircraft movements (excludes
defence & other non-commercial movements), 60.33 lakh passengers and 98.59
thousand tones of cargo were handled at all the airports taken together.

2. History

The first commercial flight in India was made on February 18, 1911, when a
French pilot Monseigneur Piguet flew airmails from Allahabad to Naini, covering
a distance of about 10 km in as many minutes.

Tata Services became Tata Airlines and then Air-India and spread its wings as
Air-India International. The domestic aviation scene, however, was chaotic.
When the American Tenth Air Force inIndia disposed of its planes at throwaway
prices, 11 domestic airlines sprang up, scrambling for traffic that could sustain
only two or three. In 1953, the government nationalized the airlines, merged
them, and created Indian Airlines. For the next 25 years JRD Tata remained the
chairman of Air-India and a director on the board of Indian Airlines. After JRD left,
voracious unions mushroomed, spawned on the pork barrel jobs created by
politicians. In 1999, A-I had 700 employees per plane; today it has 474 whereas
other airlines have 350.

For many years in India air travel was perceived to be an elitist activity. This view
arose from the “Maharajah” syndrome where, due to the prohibitive cost of air
travel, the only people who could afford it were the rich and powerful.
In recent years, however, this image of Civil Aviation has undergone a change
and aviation is now viewed in a different light - as an essential link not only for
international travel and trade but also for providing connectivity to different parts
of the country. Aviation is, by its very nature, a critical part of the infrastructure of
the country and has important ramifications for the development of tourism and
trade, the opening up of inaccessible areas of the country and for providing
stimulus to business activity and economic growth.

Until less than a decade ago, all aspects of aviation were firmly controlled by the
Government. In the early fifties, all airlines operating in the country were merged
into either Indian Airlines or AirIndia and, by virtue of the Air Corporations Act,
1953; this monopoly was perpetuated for the next forty years. The Directorate
General of Civil Aviation controlled every aspect of flying including granting flying
licenses, pilots, certifying aircrafts for flight and issuing all rules and procedures
governing Indian airports and airspace. Finally, the Airports Authority of India was
entrusted with the responsibility of managing all national and international air
ports and administering every aspect of air transport operation through the Air
Traffic Control. With the opening up of the Indian economy in the early
Nineties, aviation saw some important changes. Most importantly, the Air
Corporation Act was repealed to end the monopoly of the public sector and
private airlines were reintroduced.

3. Civil Aviation Policy in India

In the context of a multiplicity of airlines, airport operators (including
private sector), and the possibility of oligopolistic practices, there is a
need for an autonomous regulatory authority which could work as a
watchdog, as well as a facilitator for the sector, prescribe and enforce
minimum standards for all agencies, settle disputes with regard to
abuse of monopoly and ensure level playing field for all agencies. The
CAA was commissioned to maintain a competitive civil aviation
environment which ensures safety and security in accordance with
international standards, promotes efficient, cost-effective and orderly
growth of air transport and contributes to social and economic
development of the country.
3.1 Objectives of Civil Aviation Ministry

a) To ensure aviation safety, security

b) Effective regulation of air transport in the country in the
liberalized environment
c) Safe, efficient, reliable and widespread quality air transport
services are provided at reasonable prices
d) Flexibility to adapt to changing needs and circumstances
e) To provide all players a level-playing field
f) Encourage Private participation
g) Encourage Trade, tourism and overall economic activity and
growth
h) Security of civil aviation operations is ensured through
appropriate systems, policies, and practices

3.2 Private Sector Participation and the Civil Aviation Policy

• Private sector participation will be a major thrust area in the civil

aviation sector for promoting investment, improving quality and
efficiency and increasing competition.
• Competitive regulatory framework with minimal controls encourages
entry and operation of private airlines/ airports.
• Encouragement of private sector investment in the construction,
upgradation and operation of new and existing airports including cargo
related infrastructure.
• Rationalization of various charges and price of ATF/AVGas will be
undertaken to render operation of smaller aircraft viable so as to
encourage major investment in feeder and regional air services by the
private sector.
• Training Institutes for pilots, flight engineers, maintenance personnel,
air-traffic controller, and security will be encouraged in private sector.
• Private sector investment in non-aeronautical activities like shopping
complex, golf course, Entertainment Park, aero-sports etc. near airports
will be encouraged to increase revenue, improve viability of airports and
to promote tourism. CAA will ensure that this is not at the cost of
primary aeronautical functions, and is consistent with the security
requirements.
• Government will gradually reduce its equity in PSUs in the sector.
• Government will encourage employee participation through issue of
shares and ESOP
3.3 Security

Strict national civil aviation security programme to safeguard civil aviation

operations against acts of unlawful interference have to be established through
regulations, practices and procedures, which take account of the safety,
regularity and efficiency of flights. A good safety record is a judgment of past
performance but does not guarantee the future, although it is a useful indicator.
While pilot error is said to be on the decline, factors of fatigue, weather,
congestion and automated systems have complicated safety. Airline operators,
pilots, mechanics, flight attendants, government regulators and makers all have a
stake in making aviation as safe as possible. The International Air Transport
Association (IATA), the International Civil Aviation Organization (ICAO),
manufacturers and others bodies cooperate in this aim. As world air traffic is
expected to double or more by 2020, the accident rate must be reduced in order
to avoid major accidents occurring more frequently around the globe.

3.4 Maintenance

Private sector participation is encouraged in existing maintenance infrastructure

of Indian Airlines and Air India like Jet Engine Overhaul Complex (JEOC) and
new maintenance facilities including engine overhaul and repairs with up to 100
% foreign equity.

Indian Airlines has major maintenance facilities for all the types of aircraft in IAL
fleet i.e. Airbus-300, Airbus-A380, Airbus-320, Boeing-737 and Dornier-228. The
Engineering Department is responsible for maintenance of aircraft and is
answerable to Director General of Civil Aviation (DGCA) in maintaining the
Quality Control. The Maintenance of the aircraft is carried out at four major
bases located at Delhi, Mumbai, Calcutta and Hyderabad.

Sahara also has its own NDT Shops, wheels and brake assembly shop,
battery charging shop, avionics shop and seat repair shop. It is the only
private domestic airline to have its own hangar for aircraft maintenance.
It is also the only private domestic airline to have self maintenance
capability.

Air Deccan, Bangalore-based airline, has decided to set up its engineering and
maintenance facility for Airbus-320 operations, basing two of a fleet of 11 Airbus
jets here. They have also sought land from the Airports Authority of India to build
an exclusive hangar to carry out 300 and 500-hour checks, apart from C-Checks
and line maintenance.

4. Airport Infrastructure

In India, airports were totally owned and managed by central government or the
armed forces. The Airport Authority of India (AAI), a body functioning under the
Ministry of Civil Aviation was responsible for managing the airports in India. It
owns 122 airports, 61 of which are operational. The breakdown is as follows:

• 11 international
• 94 civil and
• 27 civil enclaves at defence airfields.

The AAI operate most aspects of the airport (including air traffic control) and
procure most of their equipment directly (via global/local tenders). India’s airports
handle 42 million passengers, of which the four Metro gateway airports (Delhi,
Mumbai, Kolkata and Chennai) account for 47% of revenue and 66% of the
passengers.

Until 2000, there were five major international airports, - Mumbai, Kolkata, Delhi,
Chennai and Trivandrum. But the GoI announced a further six airports
including Amritsar, Bangalore, Hyderabad,Cochin during the course of 2002.

According to projections, Indian air passenger traffic was estimated to grow to

100 million passengers by 2012 from 36.98 million in 1998-99. Growth
projections in the cargo front were also promising. Airport infrastructure is linked
to development of India's international competitiveness and her ability to attract
foreign investments. The policy opened the doors of private investment in this
sector, including investments from foreign airport authorities.
5. Passenger Airlines – The players
5.1 Indian Airlines

Indian Airlines was founded in 1953. Today, together with its fully owned
subsidiary Alliance Air, it is one of the largest regional airline systems in Asia with
a fleet of 62 aircraft(4 wide bodied Airbus A300s, 41 fly-by-wire Airbus A320s, 11
Boeing 737s, 2 Dornier D-228 aircraft and 4 ATR-42).

It has many firsts to its credit, including introduction of the wide-bodied A300
aircraft on the domestic network, the fly-by-wire A320, Domestic Shuttle Service,
Walk-in Flights and Flexi-fares

The airlines network spans from Kuwait in the west to Singapore in the East and
covers 75 destinations - 57 within India and 20 abroad. The Indian Airlines
international network covers Kuwait, Oman, UAE, Qatar and Bahrain in West
Asia, Thailand, Singapore, Yangon and Malaysia in South East Asia and
Pakistan, Nepal, Bangladesh, Myanmar, Sri Lanka and Maldives in the South
Asian sub-continent.

Indian Airlines is presently fully owned by the Government of India and has total
staff strength of around 18562 employees. Its annual turnover, together with that
of its subsidiary Alliance Air, is well over Rs.4000 crores (around US$ 1 billion).

Indian Airlines flight operations centre around its four main hubs- the main metro
cities of Delhi, Mumbai, Calcutta and Chennai. Together with its subsidiary
Alliance Air, Indian Airlines carries a total of over 7.5 million passengers annually.

5.2 Air Sahara

Air Sahara has established itself as one of the leading players in the Indian
Aviation industry. Air Sahara is part of the multi-crore Sahara India Pariwar.
Sahara India Pariwar has interests in Public Deposit Mobilization, Media &
Entertainment, Housing & Infrastructure, Tourism, Consumer Products and
Information Technology. Starting on a modest scale and a capital of only
Rs.2000 in 1978, Sahara India Pariwar has traversed a long way to become an
icon in Indian entrepreneurship.

Air Sahara began operations on December 3, 1993 following the Indian

government's decision to open the skies to the private sector. It operated with a
fleet of only two Boeing 737-200s. Today, its fleet includes advanced aviation
technology New Generation Boeings 737-700s and 737-800s and Classics 737-
400s and a fleet of 7 Canadair Regional Jets. The fleet also includes four highly
advanced Helicopters (Dauphin and Ecureuil), which provide efficient charter
services. Offering 119 flights with 11800 seats on a daily basis, Air Sahara flies
to various destinations in India, which include important cities like Delhi,
Bangalore, Mumbai, Kolkata, Lucknow, Hyderabad, Pune, Chennai and others.
The airline has recently added Colombo, Srinagar, Coimbatore, Ahmedabad,
Jaipur, Gorakhpur, Allahabad, Bhubaneshwar, Ranchi and Kochi to its route
network. Air Sahara also operates flights to Dibrugarh,
Guwahati, Varanasi, Patna and Goa.

The airline is currently undergoing a complete overhaul and restructuring

exercise. Air Sahara has redefined itself in terms of an efficient and punctual
airline with a high record of on-time-performance and dispatch reliability. Efforts
are being made to increase connectivity and offer convenient timings.

A major investment programme has been launched for the modernization and
enhancement of its fleet. Fleet review and route rationalization have become the
focus points of Air Sahara's strategy. Five new Boeings have been added to the
fleet in the last one year. These were used to add new destinations and increase
frequency on existing routes. In the second phase of its expansion four Canadair
Regional Jets have been added to the fleet this year serve on regional routes.

Air Sahara has introduced initiatives such as Steal-a-seat flexi fare

options, Sixer/Super Sixer and Square Drive/Super Four. The Sixer initiative
recently won the 'The Pacific Asia Travel Association' (PATA) award for the year
2003, at Bali, Indonesia.

Air Sahara's frequent flyer programme called Cosmos offers faster accruals,
lower redemption bars and requires no minimum balance for redemption.

5.3 Jet Airways

In May 1974, Naresh Goyal founded Jetair (Private) Limited with the objective of
providing Sales and Marketing representation to foreign airlines in India.

In 1991, as part of the ongoing diversification programme of his business

activities, Naresh Goyal took advantage of the opening of the Indian economy
and the enunciation of the Open Skies Policy by the Government of India, to set
up Jet Airways (India) Private Limited, for the operation of scheduled air services
on domestic sectors in India.
Jet Airways has emerged as India's largest private domestic airline and has been
acclaimed by frequent travellers as the most preferred carrier offering the highest
quality of comfort, courtesy and standards of in flight and ground service and
reliability of operations. It currently has a market share of 46.7% per cent and
operates a fleet of Boeing and ATR72-500 turbo-prop aircraft.

Jet Airways has been voted India's 'Best Domestic Airline' consecutively and won
several national and international awards, including the 'Market Development
Award' for 2001 awarded by Air Transport World.

5.4 Air Deccan

Air Deccan is a unit of Deccan Aviation Private Limited, India's largest private
heli-charter company. Formed in 1995, Deccan Aviation Private Limited has
carved a niche for itself in the Indian aviation scene with its reputation for
providing speedy and reliable heli-services for company charters, tourism,
medical evacuation, off-shore logistics and a host of other services.

The company has a modern fleet of ATR-42-320 aircraft, one of the finest and
most efficient Turbo-Prop aircraft flying. ATR is a European joint venture between
Alenia Aeronautica and EADS. The ATR 42 has become a reference aircraft
amongst airlines around the world, by offering a safe, easy to maintain and
comfortable aircraft operating on the regional market with the best economics on
short haul sectors. To date, ATR has sold over 650 aircraft to more than 100
operators in 73 countries all around the world.

The company has adopted a 'lean-and-mean' approach to staffing and aims at

maintaining a low aircraft-to-employee ratio. A good work culture coupled with a
skilled workforce is the backbone of the company.

5.5 Investors

While most information about the Indian Carriers, other than the Government
owned, is not in public domain, the available information does not tell us much.
The Promoters and Key Management persons are not listed nor is their equity
ownership pattern provided. Jet Airways' ownership is apparently fully foreign
giving rise to the phrase: India based airlines in place of home country airlines.
There is a large variation in the financial base of these airlines. While Jet Airways
has an equity base of 205.92 crores, Deccan Airways has an equity base of a
mere 40 crores.
5.6 Fleet Size

Fleet-wise also Indian carriers are quite small. Air India has a total fleet size of 33
aircraft; Indian Airlines is somewhat larger, being the size of Singapore Airlines
with 62 aircraft. Alliance Air, a wholly owned subsidiary of Indian Airlines has 14
aircraft. Among the private airlines Jet Airways has 41 aircraft, Sahara 19 and
Deccan Air 5.

This is minimal when compared with American Airlines, one of the world's largest
airlines with almost 1000 aircraft and carrying over 80,000,000 passengers and
650,000 Tonnes of freight a year. Even Singapore Airlines, a small Nation airline
that operates only internationally, has almost twice the number of aircraft than its
parallel Air India. This when India is lulled with the images of being a part of the
bricks economy, the so-called economies of the future. This makes Indian
carriers a small player in the passenger aviation world in general and
International travels in particular.
6. Foreign equity participation
The three-member enquiry committee, led by former petroleum secretary T S
Vijayaraghavan, has suggested that 100 per cent foreign investment, including
by foreign airlines, should be allowed in non-scheduled services such as
chartered aircraft and helicopter operations.

As of now, foreign airlines are not permitted to pick up equity directly or indirectly
in domestic air companies. Foreign equity upto 40% and NRI/OCB investment
upto 100% is permissible in the domestic air transport services.

Under the current policy, if a foreign airline operates in India the responsibility to
ensure safety of the aircraft vests with the country in which it is registered and is
outside the purview of the Director General of Civil Aviation (DGCA). "Such an
operation is termed `cabotage' and is not permitted anywhere," the report said.

Indian operators can, however, lease aircraft from foreign companies, but the
government only permits "dry-lease," which requires the aircraft to be registered
in India and certified by the DGCA as airworthy. Wet lease with foreign
registration and crew is only allowed in exceptional circumstances.

The US National Commission to Ensure a Strong and Competitive Airline

Industry (1993) envisaged the long-term development of more liberal cross
border airlines investment. However, as a short-term measure it advocated
‘expanded access to international capital markets by allowing larger investments
from foreign investors under the current bilateral system’. It also proposed that
foreign investors be able to hold up to 49 per cent of the voting equity in US
airlines, up from the then (and still current) limit of 25 per cent.

Any increase in the cost of equity capital flows through to the choice of debt
versus equity and thereby distorts capital structures. Airlines should have
flexibility in financing their operations and developing their corporate structures.
The existence of a cap on foreign ownership limits this flexibility.

7. 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 (see market shares, below) (2) firms
sell either identical or differentiated products (the only differentiation here being
in service quality and frills offered) , and (3) the industry has significant barriers to
entry (which holds true both with respect to regulations and huge capital
investment required).

One sees the following characteristics with respect to the Indian passenger
airlines market –

1. Few number of firms contributing to majority of the market share

2. Products are differentiated in terms of service quality and offerings

3. MR=MC

4. p>MC

5. Entry Barriers

6. Firm is a price-setter

7. Long run profit >= 0

8. Strategy dependent on individual rival firm’s behaviour

7.2 Indian Aviation Market – A differentiated Oligopoly

Each seller in an imperfectly competitive market faces a negatively sloped

demand curve for his product, permitting him some control of the price of his
product. In an oligopoly, a few firms produce the same product, while in
monopolistic competition, many firms produce differentiated but similar products.
In a differentiated oligopoly, a few firms produce products different enough for
each firm to have its own downward sloping demand curve. As with a perfectly
competitive firm or a monopoly, the differentiated oligopoly firm produces at a
profit maximizing level of output where marginal cost equals marginal revenue.
The firm finds the price it will charge customers at the profit maximizing level of
output (Qm) from the demand curve, and sets price to P m. As we can see, the firm
is earning economic profits since price exceeds average total cost at the profit
maximizing level of output.
7.3 Pricing Mechanisms

Price and quantity are determined by the interaction of demand and supply in the
market. However, given the large number of buyers, firms can decide prices at
which they will sell tickets. In fact, in the airlines sector, firms go in for third
degree price discrimination and segment the market, charging a higher price to
the market with a relatively inelastic demand (such as fares between business
and economy class travellers, or between emergency travel and leisure travel by
providing apex fares). The low cost airlines follow this different pricing strategy.
Customers booking early with carriers such as Air Deccan will normally find much
lower prices if they are prepared to commit themselves to a flight by booking
early, on the justification that consumer’s demand for a particular flight becomes
more inelastic the nearer to the time of the service.

The term ‘‘revenue management’’ is commonly used to describe most aspects of

airlines’ pricing and seat-inventory control decisions; but in reality, revenue
managers primarily practice seat-inventory control. Formally, revenue
management describes a process of setting fares for each route (origin and
destination pair) and each set of restrictions (nonstop, time-of-day, day-of-week,
refundable, advance purchase, first class or coach, and Saturday-night stayover)
and limiting the number of seats available at each fare. In the language of
economics, revenue management increases airlines’ profits in three ways –
• Implements peak-load pricing.

• Implements third-degree price discrimination. That is, fare restrictions screen

customers and segment them by their sensitivity to price and potentially by
their demand uncertainty. For instance, Indian Airlines apex fares (for booking
one week or three weeks in advance).

• Implements an inventory control system for coping with uncertain demand.

7.4 Limited Entry

Virgin Group founder Richard Branson once famously said: "The safest way to
become a millionaire is to start as a billionaire and invest in the airline industry."

The mortality rate in the airline business is very high. That's equally true for any
low-cost airline model. It requires adequate staying power to buy aircraft and take
losses in the initial years. Experts say it takes nearly $75 million-90 million (Rs
370 crore-435 crore) to float a full-service airline.

Entry costs are not recoverable and incumbents have the ability to respond
quickly to entry of a new competitor. Capacity constraints, absence of freedoms
to compete on a route, investment constraints, and restrictions on codesharing
can all be important barriers to entry.

7.5 Market Equilibrium Through The Cournot Model

The Cournot model assumes that each firm takes the output of the other firm as
given. If Indian Airlines output is assumed to stay the same, Jet will maximize
profits by setting MR=MC. The result is shown. In the Cournot framework the
equilibrium is at the intersection of the two reaction functions. These are just the
profit-maximizing conditions rearranged.

The revenue of both a competitive firm and of a monopolist depends only on the
firm's own output: for a competitive firm we assume that the firm's output does
not affect the price, and for a monopolist there are no other firms in the market.
For a duopolist, however, revenue depends on both its own output and the other
firm's output.

We conclude that the firms' outputs and the price are different in Cournot-Nash
equilibrium than they are in a competitive equilibrium. As the demand curve
slopes down, price exceeds marginal cost, so that, as for a monopoly, the total
output produced by the firms is less than the competitive output. An implication is
that, as for a monopoly, the Nash equilibrium outcome in a Cournot duopoly is
not Pareto efficient.
8. Trends in International and Domestic
Civil Aviation and Projected Future
Scenario
Trends & Alternatives

In 1998, approximately 500 alliances existed between airline companies. Some

of these alliances were to the point of a merger (Market Share of World Airlines
Traffic, 2006). The scene today is dominated by a few multilateral alliances. Top
three, Star, Skyteam and Oneworld together account for over 60% of the total
international traffic.

Oneworld
American Airlines, British Airways, Aer Lingus, Cathay Pacific, Finnair, Iberia, Lanchile,
Quantas
Star
United Airlines, Lufthansa, Air Canada, Air New Zeland, ANA, Asiana, Austrian, bmi British,
midland, LOT Polish Airlines, Mexicana, SAS, Singapore, Spanair, Thai Airways, Varig, US
Airways, TAM
SkyTeam
Air France, Delta Airlines, Aeromexico, Alitalia, CSA Czech Airlines, Korean Air, Northwest,
Continental, KLM

While so far India has stayed out of these alliances, relying

primarily on bilateral agreements, it is merely a matter of time
before Indian airlines are drawn in this web and the three blank spots,
Russia, China and India are filled in by the International Alliances ((in all
three cases, the leading carrier is a government owned/aligned entity
which makes decision making a complex politico-economic process). As
it is, Nippon, Asiana, Thai and Singapore Airlines are all working to
develop an extensive network in China.

In any case India will sooner or later have to review even its bilateral
agreements, as currently they are more advantageous to the partners than
toIndia. While bilateral are supposed to be on equal basis, partners are utilizing
almost 75% of seat share while India uses, prima facie for lack of capacity, only
25% of seats. Obviously, this cannot be a permanent solution to the capacity
issue, dependent though India is on other nations and their manufacturers for an
increase in capacity.

Considering the fragmented nature of Indian Aviation Market, at the national

level India will require a mixed fleet of wide-bodied, narrow-bodied and small
aircraft to be able to service various market segments. Individual airlines,
however, may choose a homogeneous fleet to limit their maintenance costs.

9. Study of Consumer Demand in the

industry
9.1 The Potential Market

While formulating the national strategy one must remember a few aspects of
Indian Passenger Aviation Market -

a. Potentially, India is a very large corporate and luxury travel market.

b. Potentially, it is also a very large low-fare market.

c. India also has largely blocked but significant markets in the north in China.

d. India, unlike other major travel hubs in the region, is an original market both for
originating and turnaround traffic.

e. India is also a potential transit hub in more than one direction.

In Aviation circles India has become Asia's hot growth market and in the words of
SIA CEO it is, along with China, one of the two "locomotives" for growth in the
continent. Thus to enter in to an open skies agreement when India has nothing
more to offer than land for airports and the so called cheap blue and white collar
labour will tantamount to accepting a second class economic citizenship in the
comity of nations.

9.2 Growing the Market

Airbus Industries Research shows that there is a cut-off point beyond which the
preferred mode of travel changes. Thus small distance journeys are convenient
by road while longer journeys are preferred by rail and air. The data should
actually be viewed in terms of time involved rather than the distance since
technological development in any field can impact the time taken for same travel.
As has already happened in Europe, high speed trains have reduced the need
for short haul services while the multi-lane smooth highways have similarly
increased the distance up to which one can comfortably travel by road.

While data for similar preference change in the mode of travel is not available
for India, some assumptions are possible. It can, for example, be safely assumed
that in the current Indian context bus journeys of say up to 4-5 hours duration are
quite easeful even though often stretched up to 10 hours and sometimes even
overnight due to non-availability and/or inadequacy of train services.

To a business traveller, overnight journeys by train are quite comfortable

although given the economic situation even 24 hour journeys are quite
acceptable. Beyond that, given the distances within the country any one would
prefer to hop on a flight provided it is offered as an alternate travel service and
not something only for the corporate world. For this to succeed, the low cost
travel will have to be both with predictable pricing and longevity of offer beyond
the gimmickry of attention getting news. This is the only way to enlarge the pie
and aim at strata beneath the upper crust.

9.3 Other substitutes

The issue of affordability of domestic air travel has been well addressed in the
Naresh Chandra Committee Report on Aviation. While the goal of affordability is
absolutely well placed, the assumption that the lowering of tariffs, taxes and
charges alone; for fuel, landing or travel, is the answer that needs careful
examination. Even if these charges constitute a significant part of the fare, they
need to be evaluated in the context of competition and monopoly. At home,
considering road and rail as the competition, the charges for fuel should be
viewed as a similar cost composition for all modes of travel. To reduce fuel
charges for any one sector while enhancing or retaining them at the same level
for the others will distort the field. This, particularly when airlines have, and can
have, the freedom of picking up fuel from other competing nations. Fuel charges
at home, therefore, should be viewed as a part of the overall petroleum pricing
policy. This is important since petroleum, as fuel is common to many industry
groups apart from being a raw material for some. Incidentally, how much of what
product is extracted from the available crude is as much a matter of choice as is
it a matter of the quality of crude.

9.4 Low-fare Airlines

Despite reports of low budget airlines loosing their momentum due largely to the
incumbent firms’ crushing the competition with even lower fares whenever a low
cost upstart invaded its market, low-fare will always remain the basic market.
This is amply proven by the success of Southwest in the US and Ryanair and
Easyjet in Europe.

To any buyer of service or goods, price and quality are always two key
considerations. No doubt there is a class of air passengers who will only look at
the bonuses, be that in the form of Frequent Flyer Miles during peak season or
extra cushioning of the seat. These are generally the corporate travellers where
someone else is footing the bill. There is also an occasional traveller who, being
in distress will not look at the price during emergency. While the corporate
travellers are a distinct segment and will be serviced fully, obviously civil aviation
will have to look beyond them if it hopes to expand the market. In the US, the low
fare airlines have almost a 30% share of the entire passenger aviation and in the
recent past Southwest, the leading Low-fare US airlines has outperformed even
the largest US airlines in passenger kilometres.

Latest news reports indicate that the low cost airlines are the price leaders now.
Recently, Southwest Airlines initiated a round of fare cuts and the bigger airlines
had to respond.

9.5 Consumer Perception

We conducted a survey in order to find the consumer perception about airlines.

The following results have been culled out from the survey of 116 individuals.
The sampling method was a mix of purposive and stratified random sampling and
attempted to duplicate the general consumer profiles of the population (as based
on preliminary secondary data). The age group of the sample was between 18
and 58, across gender, location, and socio-economic class (mapped on
education and occupation, with a majority of the sample in SEC A and B+).

The region-wise spilt up of the sample is as follows:

The areas covered in the survey are -

1. Brand Awareness
 2. Airlines usage –
a. Frequency
b. Brands
c. Purpose
d. Circuits
e. Class
3. Factors affecting consumer perception
4. Promotional Scheme Preferences
5. Brand parameter preferences
6. Circuits flown

Brand Awareness Study

Indian Airlines ranks number one in brand awareness. This could be attributed to
its long stay in the market and continued support from the government. Today,
Indian Airlines has become synonymous with reliability and efficiency. Jet
Airways is offering stiff competition and ranks second in the list. Sahara is
providing value-add services and is following closely. The concept of a low-cost,
no-frills airline is being merged into having high quality, low-cost carriers.
Air Deccan, following the low-cost airlines model, being a relatively new entrant
in the market, comes in lowest currently on brand awareness.

Usage of Airlines
Indian Airlines, mostly used by government employees, recorded the highest
usage followed by Jet Airways. Although most consumers rated Jet Airways high
on price, it still ranks second in usage and this could be attributed to its excellent
service and promotion schemes. Similar data for the entire population reflects a
higher usage of Jet Airways than IA, and a lower usage ofSahara, which is a
possible implication of the sample location being concentrated in almost equal
proportion in Lucknow (which has a higher price sensitive population) as other
major metros.

Frequency of Usage

As indicated in the graph below, a majority the population flies relatively

infrequently (as compared to the developed markets). Passengers travelling on
business were found to be more frequent users, while those flying on holidays
and emergencies were those that tended to make up the segment that flew less
than once a year.

Note – As purposive sampling was undertaken at Lucknow Airport, the sample

population of ‘never’ is not representative of the population, even in the given
SECs).

Flight Class and Occasion of use

Although the occasion of use indicates

that maximum usage is for business,
the flight class graph indicates that the
proportion travelled by business class
is very small in comparison to that
travelled by economy class. This
indicates that most business travellers
are flying Economy class as well.
Further, the second important
occasion of usage is for emergencies
and time-critical travels.

Circuits Flown: The most frequently flown circuit is that between major
metros, followed by other state capitals and Delhi-Mumbai. Delhi and Mumbai
airports accounts for roughly half of passengers flown, and metro airports
account for 66% of the passengers flown (and 47% of revenues, as per
secondary data).
Scheme Preference: With the entry of new players in the market, airlines are
competing for passengers on non-price parameters. This increases the product
differentiation in order to decrease elasticity of demand in the market. Given the
key differentiators that substitute for price, consumers have rated Apex fares as
their most preferred scheme. Indian Airlines, Jet and Air Sahara offer apex fares.
Next most preferred to Apex fares is the frequent flyer program, a trend noticed
predictably in the high frequency repeat users and those travelling on business.
Factors affecting consumer perception

We identified the following factors that make the demand function of consumers.
Based on our hypothesis, a choice parameter weight was arrived at by asking the
sample to rank the following parameters on a Likert scale -

a) Price

b) Service

c) Promotional Schemes

d) Loyalty programmes

e) Flight Schedules

f) Comfort with the brand

g) Corporate tie-ups
Consumer Choice Parameters

Price appears to be most important factor for the consumer followed by

service provided and flight schedules.

Indian Airlines has been rated high on most parameters while Jet Airways,
although rated low on price, is rated highest in most other factors. Air Deccan,
which has been ranked best on prices, has succeeded in its mission to provide
reliable low-cost air-travel to common man by constantly driving down air-fares.

Air Sahara’s many services such as In-flight entertainment and Wings n' Wheels
coach service, exclusive business lounges being operated at departure halls at
airports in a number of cities, providing for business and refreshment services
has made it second most popular under services. It has taken the lead in
introducing novel initiatives such as Steal-a-seat flexi fare options, Sixer/Super
Sixer and Square Drive/Super Four.

Air Sahara's frequent flyer program called Cosmos has also become a great hit
with the passengers, though it still ranks almost on par or lower on customer
perception than the schemes offered by Jet and IA (see promo schemes and
loyalty programs), essentially due to lower customer awareness levels.

Corporate tie-ups were a trend significant by their absence on the brand

preference parameters. While the only major tie-ups were by Indian Airlines with
government agencies, these were not perceived as strictly ‘corporate’ tie-ups.
This segment is hence a possible opportunity which can be explored as a non-
price differentiator, given the large frequency of use by business travellers.

10. Potential Market Entrants

Others are just as keen to get India's millions airborne. Liquor king Vijay Mallya in
January 2006 plans to launch a low-cost carrier, named after his Kingfisher beer,
with $20 million in financing from GE Capital Aviation Services. Following closely
will be Go, promoted by textile scion Jehangir Wadia. And charter carrier Jagson
Airlines plans to expand as a regional discounter next year. Richard Branson's
Virgin Atlantic and Britain's bmi are hungry for more direct routes from London to
major Indian cities, which are restricted under existing agreements. Including
these, the potential players in the market could be a double-digit figure, most of
them looking at setting-up a low-cost airline, namely - Air-India Express (which
will ply between India and the Middle East), AirOne and Visa (both floated by ex-
Indian Airlines people), Alliance Air, Go (from the Wadias), Kingfisher (Mallya),
Royal (ModiLuft's relaunched avatar), Skylark, Yamuna Air (Gill Brothers, UK-
based NRIs), hotelier Lalit Suri, and the Interglobe group (which runs the travel
bookings firm, Galileo).

All this activity has spurred India's state-sector airlines to jump into the discount
fray. Air-India plans to launch Air-India Express, which will take over routes to
the Middle East, where some 4 million Indians hold service jobs. Indian Airlines,
meanwhile, is planning to turn money-losing affiliate Alliance Air into a cut-rate
carrier.

The new players face some serious hurdles. The biggest is infrastructure. Indian
airports are dismal -- when cities are lucky enough to have one. Even cities with
millions of inhabitants -- such asDehra Dun, the capital of the new northern state
of Uttaranchal -- have no commercial airport.
High fuel costs and other operating fees such as landing and parking charges,
which account for up to 15 percent on an airline's expenditure, have kept air fares
high and grounded most carriers which have entered the domestic aviation
sector when it opened up nearly a decade ago.

Defining Low Cost Carriers

Simple Product

• No meals; drinks and snacks for free

• Narrow seating (greater capacity)
• No seat reservation; free-seating
• No frequent-flyer programs

Positioning

• Non-business passengers, leisure traffic, price-conscious

business passengers
• Short-haul point-to-point traffic with high frequencies
• Aggressive marketing
• Secondary airports
• Competition with all transportation carriers

Low Operating Costs

• Low wages, low airport fees

• Low costs for maintenance, cockpit training and standby crews
due to homogeneous fleet
• High resource productivity: short ground waits due to simple
boarding processes, no air freight, no hub services, short cleaning
times
• Lean sales (high percentage of online sales)

Attributes of Low-cost Carriers

• Narrower seating (higher capacity: 148 vs. 126)

• Higher plane utilization (10.7h vs. 8.4h) due to shorter turnaround times
• Lower staff costs due to greater productivity, generally lower wages and
smaller staff (no service)

• Lower airport fees at secondary airports and smaller cities

• No sales commissions due to web sales

• Low station costs due to simpler handling and more efficient processes

• High number of passengers per employee - 7250 for RyanAir vs 1290 for
Lufthansa (2006 data)

11. SWOT of legacy carriers

Strengths

• Passengers will continue to need connecting/network 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 747s 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

Southwest’s 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.

No-Frill Airlines Prices

This cut throat competition is at its peak in sector like Delhi-Mumbai

where Jet Airways has cut its Apex air fare to Rs 3500 for passengers
booking ticket 30 days in advance. This was in response to Indian
Airlines concessional fare of Rs 4500 if ticket is booked 21 days in
advance and Air Sahara’s special package offer of Rs 5555 for a return
ticket basis. The no-frills airline Air Deccan has announced fares as low
as Rs 950 if booking is done 90 days ahead. Jet airways has lowered its
apex fares by 20% under ‘Monsoon Super Apex Fares’ scheme if the
booking is done 30 days in advance in six busy sector including 4
metros.

12. Recommendations
12.1 Government Recommendations

Codesharing

Codesharing is an important tool for airlines to minimise the costs of operating

services. By selling seats on a flight operated by another carrier, codesharing
enables an airline to make direct cost savings by rationalising services or
establishing market presence on a route without actually operating on it. Thus,
both airlines may be able to save on fuel, labour and other variable costs, as well
as making more effective use of aircraft and other overheads.

Cabotage

Restricting access by foreign carriers to the Indian domestic market gives the
Indian carriers a solid base from which to extend into international aviation. The
same applies to most other countries, with the exception of city economies such
as Singapore and Hong Kong. Restricting cabotage rights for the carriage of
passengers and freight to domestic airlines reduces competition on domestic
routes. These restrictions help keep fares and freight rates higher than they
otherwise might be, boosting domestic airline revenue at the expense of
domestic consumers. Allowing foreign carriers some cabotage rights could
improve competition in the domestic market. Integrating domestic and
international services allows airlines to achieve:

• operational synergies and efficiencies by being able to switch capacity and

aircraft between the domestic and international sectors; and

• network advantages such as economies of scope and traffic density as well

as the marketing advantages of operating a combined domestic and
international network.

The opposition to this recommendation is the view that It is most likely

that foreign carriers would engage in ‘cherry picking’ i.e. carry domestic
traffic on the most profitable routes. Incumbent airlines would need to
counter any loss of profitability on routes affected by cabotage and this
could mean a reduction in the number of services provided on these
routes, or the reduction or withdrawal of services from less profitable
routes, with consequential loss of amenity to passengers, including
those making connections to other parts of the domestic network.

Eliminate Regulatory Structure

The regulatory structure inhibits competition in many ways. It can

prevent or deter entry, constrain capacity, and limit the potential for
airlines to win market share. A problem in assessing regulatory impacts
is the structure of aviation markets. Economies of scope and traffic
density favour large airlines operating many services. On the demand
side, a single carrier operating a long thin route with multiple
frequencies will attract better business than multiple carriers who each
operate one service per week. Thus markets tend to be concentrated
with a small numbers of carriers operating on most routes.
It cannot be presumed that these airlines respond to normal commercial
incentives. Instead of shareholder value, they may be managed for national
prestige, employment enhancement, technology transfer, or defence, which
might require government subsidies. Continued use of substantial government
subsidies is an obstacle to efficient air services, and has important implications
for competition in a less regulated international environment.

Eliminate the fuel tax

A most regressive tax whose burden becomes larger as fuel costs

increase (and airlines’ ability to pay diminishes). As an interim step –
cap tax revenue and determine a better way of obtaining (e.g., a per
passenger levy).

Eliminate category III restrictions

Eliminate category III restrictions and provide essential air services

subsidies where required (with costs shared by national/state/local
authorities). Category III mandates that an operator deploy on routes in
Category-II (North-Eastern region, Jammu & Kashmir, Andaman &
Nicobar and Lakshadweep) at least 10% of the capacity deployed on
routes in Category-I and of the capacity thus required to be deployed on
Category-II routes, at least 10% would be deployed on service or
segments operated exclusively within the North-Eastern region, Jammu
& Kashmir, Andaman & Nicobar and Lakshadweep. In the interim, allow
airlines to transfer category III obligations to a competitor or third party
operator – who could use a standard, appropriate fleet and be paid by
the majors to meet their category III requirements.

Improve quality of and access to airports and hangars

Privatize or municipalize. Develop a robust traffic management system

that addresses relevant technical issues and meets strategic objectives
through rigorous systems engineering and large-scale integration efforts
such that rising air traffic demand is supported in a safe, secure and
efficient manner.

Today, Indian airlines have difficulty accessing hangars for

maintenance. As a result, private operators have to do some
maintenance abroad. Airline maintenance and overhaul should be an
area where India could develop a major international business,
leveraging its low labour costs and world-class engineering to service
aircraft for other countries as well as its own.
Tourism

An efficient aviation sector is essential to support the tourism industry,

which has immense employment opportunities and the tourism and
airline industries with a joint proactive approach can foster tourism
development and promotion in a big way. One of the prerequisites for
developing tourism is 'easy access' to the tourist destinations, in terms
of international and domestic connectivity and easy movement within
the destination. An efficient aviation sector is essential to support
tourism. Air connectivity is integral to the growth of tourism. Airlines and
tourism are self dependent. The tourism market grows by itself with new
connections and a popular destination attracts more flight operations. It
is a win-win situation.

Direct connections would also give further impetus to tourists’ arrival.

Over 40 per cent of the passenger traffic is concentrated in two main
international airports namely New Delhi and Mumbai. The increase in
connectivity has contributed to domestic and international tourist
arrivals. The tourism and airline industries with a joint proactive
approach can foster tourism development and promotion in a big way.

12.2 Industry Recommendations

Reduce labour costs

All major carriers need to win significant concessions from their workers. Low
labour outlays would consist of a mix of reduced wages, more flexible work rules
and trimmed benefits including pension.

Simplify flight operations

Low-cost carriers use just a few types of aircraft, a strategy that cuts training and
maintenance expenses. Larger airlines who fly internationally, to more remote
destinations require varied fleets of large and small planes. However, they can
and should work toward streamlining the types of planes they fly.

Another way to simplify operations is modifying the hub-and-spoke model, which

uses designated headquarter airports for transfers. Traditionally, the big airlines
have sent many of their flights through hub airports at peak business-travel
hours. That way, since carriers typically charge heaps more for business fares,
they can get more revenues per flight. But many experts argue that it's time to
give up on that model - especially as low-cost carriers increase service along
heavily travelled routes.
Experts like the idea of so-called rolling hub operations, where flights are
scheduled throughout the day so that an airline's assets - from employees to
planes to hangars - can be used more efficiently. In a traditional hub system,
planes and workers spend more time waiting for connecting flights to come in at
peak operating times. With rolling hubs, travellers may end up waiting a little
longer to get a connecting flight, but planes end up in the air for more hours of
the day.

Offer more transparent pricing

The legacy carriers have long had an exotic, almost incomprehensible pricing
system. However, these days, with the Internet allowing travellers to shop for the
cheapest tickets easily, and low-cost airlines offering uncomplicated set prices,
traditional carriers have to follow suit or risk losing more and more passengers.

Get smart on fuel

With oil near $92 a barrel, airlines must be smarter about how they incorporate
its price into their costs. Discount carriers such as Southwest hedge as much as
80% of their jet-fuel costs. Essentially, that means that they lock in prices on
future fuel when the price drops. Small wonder Southwest is one of the few
success stories in the airline business.

Stop chasing market share

Airlines need to be savvier about capacity. At the start of 2008, many planned to
add more flights amid signs of an improved economy. When it became clear that
demand wasn't as strong as originally forecast, most carriers still wouldn't
retrench from their plans for fear of losing out if the market snapped back. Rather
than scrambling to add seats in fear of missing out on the party, airlines would do
well to take a more cautious approach and focus on efficiency and margins.

From bailouts to government partnership

Although the Indian airline industry was largely deregulated in 1990, plenty of
lingering rules and regulations have made it nearly impossible for carriers to be
efficient. Many believe that restrictions on foreign ownership and labour laws
have kept the industry from innovating. So instead of lobbying for protective
measures like bailouts, airlines need to work with government to tackle longer-
term projects like building more runways, running airports more efficiently, and
reining in labour costs.
A new model for premium pricing

Most of the industry's improvement efforts have focused on whittling down costs.
However, boosting revenues also needs to be a priority. After all, people are willing to
pay more if they believe they're getting more value. Legacy carriers still offer certain
advantages, especially to the business traveller including airport lounges and more
comfortable seating.

13. References/Acknowledgements
• White Paper on ‘India Initiative: Issues in Civil Aviation’ by the World Travel
and Tourism Council

• The Civil Aviation Act, 2006 (Draft)

• Aviation Week & Space Technology

• Low-fare Airlines, (2009, July 8). Economist.com.

• Crisis at 50, Business World, Sept. 15, 2010

• Businessline, Sept. 15, 2009

• The Sky’s The Limit, Indian Express

• Oil Prices drown out Airlines profit, Star Tribune, Sept. 1, 2009

• A Feel for Airline Security. Time Canada, Sept. 13, 2008

• To Cope With Travel Slump, Airlines Turn to Smaller Jets. (cover story) Wall
Street Journal - Eastern Edition, Sept. 2009

• Wikipedia, the free content encyclopedia

• India Transportation Infrastructure Blueprint

• Discounted IA fares to take