CHAPTER-01

INTRODUCTION

1.1 INTRODUCTION

The airline industry is one of the fastest-changing industry sectors in the world today.
Changing market conditions including empowered customers, new distribution channels
and a cogent trend towards disintermediation and re-intermediation constantly forces
airlines to adopt and improve their operations and business models.

The Indian aviation industry is one of the fastest growing aviation industries in the world
with private airlines accounting for more than 75 per cent of the domestic aviation market
(as of 2006). The industry is growing at a compound annual growth rate (CAGR) of 18 per
cent. The country has 454 airports and airstrips, of which 16 are designated as
international airports. All this has resulted into increasing the intensity of competition
amongst air carriers in India. Delivering high quality service to passengers is important so
that airlines can survive and strengthen their competitiveness. Service quality conditions
influence an airline’s competitive advantage and with this come market share and
ultimately profitability (Morash and Ozment, 1994). Airlines have responded to the
competitive pressures in many ways, one of which has been service quality. It extends to
in-flight service, reservation, ticketing, airport service, reliability, employee service, flight
availability, passenger satisfaction, pricing (value), and airline image.

Air travel markets are comprised of many different demand characteristics that, in the
aggregate, result in opportunities for airlines to provide air services at airports that are
properly situated to access the markets and equipped to handle airline operation. In the

1|Page
simplest model, air passengers decide where they wish to fly and then choose an
acceptable flight that operates from an acceptable airport. Passengers then travel by
surface transportation to the airport where the selected flight will depart, transition from
the surface transportation portion of the trip to the aviation portion of the trip, and
commence the air journey.

Each market, region, and airport is unique. In addition, each airline is unique, with some
common business plan features but different capabilities and approaches to the markets
served.

Each individual consumer makes a discreet choice regarding where, when, and how he or
she will book, purchase, and travel by air. Accordingly, a research approach has been
developed for this study that uses a revealed preference approach, with a focus on the
interrelationships of airline and passenger choice factors that have been demonstrated by
events and trends that affect those choices.

Demand, Supply, and Choice

The demand for air travel is generated by individual decisions by individual consumers. In
each market, that demand is manifested through the booking of reservations, the purchase
of tickets, and the completion of travel. The markets involve multiple city-pair
combinations, made more complex by the presence of multiple airports serving individual
or proximate markets in the regions of origination and destination.

2|Page
The choices are further complicated by the levels and prices of services offered by multiple
carriers in each region and, potentially, at airport.

Airline decisions on levels of service and airport choice, in turn, impact the choices that
become available to air travelers. Although the demand for service may be present in a
region (or part of a region), airline decisions regarding where service should be provided
can constrain or expand the options available to air travelers and the service, price, and
airport choices involved.

The question of which airline is best for business travel does not have a one-size-fits-all
answer. We each have our own preferences and circumstances that can send us in
opposite directions when choosing a business-class product.

What is Airline Industry?

Airline Industry means the industry comprising (i) all companies that transport passengers
or cargo by aircraft (“Carriers”), (ii) all companies to whom Carriers outsource tasks or
functions that are (A) primarily designed to support the air transportation business and (B)
the functional equivalent of services commonly performed by or for Carriers, but in no
event shall such outsourcing companies include providers of non-industry specific
financial, accounting, human resources, risk management, access control, advertising, legal
or facilities management services; and (iii) airports and airport authorities.

1.2 Growth of Airline Industry

With middle-class people taking to the skies against the backdrop of economical air fares,
the Indian aviation market has grown at an average rate of 16 percent over the last

3|Page
decade(with FY 2017 recording 22% growth). The international passenger traffic is also
seen expanding and measured a growth of 7.72 percent in FY17.

Though the sector has seen tough times in the past and still has to cope with infrastructure
and other challenges, a bright future seems right at the corner. Credit goes to positive
moves from the government, new entrants in the sector and the outlook of a common man
towards air travel.

1.3 The future of aviation in India

Based on Goldman Sachs economic projection for India, International Air Transport
Association estimates that the country will experience 300 million passengers departure
through a movement of 6 million aircraft by the calendar year 2030. The freight traffic by
2032 is expected to cross 11.4 million tonnes, making air cargo a significant contributor of
the logistics industry. However, long before that, by 2020, India is predicted to achieve the
position of third largest aviation market in the world.

1.4 Type of Airlines

Not all airlines are created equal. As in most businesses, there is a sort of stratification of
airlines. In many countries, the government owns the airlines. An airline’s rank is
determined by the amount of revenue it generates. There are three categories in Airlines:
Major, National and Regional.

1. Major Airlines

These are the heavyweights of the airline industry, and you will often hear about them in
the news. A major airline is defined as an airline that generates more than £1-billion in
revenue annually. Typically, Major airlines are also the largest employers among airlines.

4|Page
However, there are also some major airlines that don’t employ large numbers, which
employs only 9,600 people.

2. National Airlines

Just one step down from the major airlines, these are scheduled airlines with annual
operating revenues between £100-million and £1-billion. These airlines might serve
certain regions of the country but may also provide long-distance routes and some
international destinations. They operate medium- and large-sized jets. Because these are
smaller airlines, you can expect them to have a smaller number of employees.

3. Regional Airlines

As the name suggests, these airlines service particular regions of a country, filling the niche
markets that the major and national airlines may overlook. This is the fastest-growing
segment of the airline industry

Airline Business Models

Full-Service Carriers (FSC)

A full-service carrier (FSC)is defined as an airline company developed from the former
state-owned flag carrier, through the market deregulation process, into an airline company.

Low-Cost Carriers (LCC)

The concept of ‘low-cost carriers’ or LCC originated in the United States with Southwest
Airlines at the beginning of the 1970s. In Europe, the Southwest model was copied in 1991,

5|Page
when the Irish company Ryanair, previously a traditional carrier, transformed itself into an
LCC and was followed by other LCCs in the United Kingdom (e.g. easyJet in 1995). An LCC is
defined as an airline company designed to have a competitive advantage in terms of costs
over an FSC. In order to achieve this advantage, an LCC relies on a simplified business
model (compared with the FSC).

1.5 Types of Aircraft Classes

1. First Class

First Class service is typically the priciest of the classes. Passengers seating in the first-class
section have more comfortable seating and are often given extravagant services. These
sections are usually occupied by celebrities and wealthy passengers.

2. Business Class

Business class (also known as executive class) flight tickets are also expensive, but much
more affordable than first class. The difference between the two is that business class has
fewer perks, but for a passenger that fly’s economy regularly, this is not an issue. Some
airlines have abandoned first class seating for this reason.

3. Economy Class

Economy Class cabins are broken down into two categories. “Regular Economy” and
“Premium Economy.”

Economy Class seating is the most basic of accommodations. Economy passengers receive
standard service with no real perks. Economy services range from airline to airline, but

6|Page
essentially, you’re flying Economy (also known as flying coach) to get from point A to point
B.

Premium Economy, is slightly better Economy Class seating, but must less extravagant than
Business Class or First Class. The name ranges with each airline, but the biggest difference
between regular and premium is the spacing of the seating and the quantity of menu items
available to you.

1.6 Advantages and Disadvantages

Advantages of Air Transport

1. High Speed

Air is the type of freight capable of traveling long distances in short periods of time. This
makes this model an optimum choice if the client has an urgent need to ship a product or if
their freight demands special standards of protection or acclimation. It is the quickest
transport mode and is therefore ideal for long-distance transport of goods. It takes less
time.

2. Fast Service

Air transportation offers convenient, reliable and fast services of transport. It is considered
the cheapest way to ship peregrinated goods. It offers a standard, convenient, reliable and
fast service.

3. Send almost everywhere your freight

7|Page
In regions that are not readily accessible to other modes of transport, air transport is
considered to be the only means of transport. Open to all regions, irrespective of land
interference. A vast network of airlines covering nearly the whole globe is available for
many airlines. This ensures that the package can be sent almost anywhere.

4. High Standard of Security

High standard of protection with a low risk of robbery and injury. Shipping by air has a
high degree of security since airport safety restrictions on cargo are strictly enforced.
Tightly controlled airport controls also minimise cargo theft and loss.

5. Natural Route

An aircraft can fly to any location without seeing any natural obstacles or barriers. Since
customs formalities are easily compiled. It eliminates the need for more time to seek
clearance. Air travel is used for relief operations during earthquakes, floods, accidents, and
famines.

6. There is less need for heavy packaging

Air exports, in general, entail less hard packaging than ocean shipments. This ensures you
save both time and money by not having to provide extra packaging services.

Disadvantages of Air Transport

Climate conditions that are adverse: Extreme weather will cause planes to be grounded and
airports to close, halting shipments for several days and rendering the service ineffective.

8|Page
1. Risky

Air travel is the riskiest mode of transport, since there can be considerable losses to goods,
customer and crews as a result of a minor crash. Compared to other means of travel, the
risks of collisions are higher.

2. Cost

Air travel is considered to be the most expensive means of transportation. The cost of
maintaining aircraft is higher and the costs for the building of aerodromes and avions are
much higher. That’s why air travel is so expensive that it gets beyond ordinary people’s
grasp.

3. Some Product Limitation

There is a whole variety of materials not suitable for such products, from explosives, gases,
batteries, fired solids and liquids, which cannot be shipped by air to name but a few.

4. Capacity for Small Carriage

The aircraft have no room and therefore are not ideal for carriage of voluminous and
cheaper materials. As is seen for rails, the load volume cannot be raised.

5. Enormous investment

Air travel calls for enormous spending in aerodrome building and servicing. It also calls for
professional, qualified and qualified staff that needs a significant investment.

9|Page
1.7 Factors affecting selection of Airlines

There are four major factors to consider when you’re trying to choose an airline:

 Price
 Convenience
 Loyalty program and rewards
 Elite status benefits

1. Price

Many businesses think choosing an airline (or anything, for that matter) is all about the
bottom line, and that the cheapest fare wins every time. However, while price is obviously
an important aspect of your decision, you shouldn’t necessarily go with the cheapest ticket.

For example, my friend is a CA for one of the largest accounting firms in the world.
Business-class tickets to London or Sydney are simply billed to the client. In his case, price
is almost a non-factor when choosing flights. On the other hand, my younger brother is a
music minister at an up-and-coming church in Charleston, SC. When he has to purchase
airfare for a conference, training or retreat, price is nearly the only thing that matters.

When paying for your flights, a business credit card has several benefits and built-in tools
to help you or your office’s travel manager stay organized. My top choice for airfare is the
Business Gold Rewards Card from American Express OPEN, which earns 3 Membership
Rewards points per dollar in your choice of one category out of five options, including
airfare purchased directly from airlines. You’ll also earn 2 points per dollar in the other
categories, with bonus points limited to the first $100,000 spent in each category. Other

10 | P a g e
features like baggage insurance and OPEN Savings make this card a solid choice for most
businesses.

If you’re already set on a specific airline, a co-branded card like the United Mileage plus
Explorer Business Card or Citi Advantage Executive World Elite MasterCard offer perks
like free checked bags and 2 miles per dollar on purchases with the airline. You might also
consider a card that earns transferable points — the Amex Business Gold Card is a good
option if you prefer Delta, while the Ink plus Business Card is a strong choice for united
flyers, and the Starwood Preferred Guest Business Credit Card from American Express
offers good value for American Airlines loyalists

2. Convenience

The airline you select for business travel should make life easy for you and your team.
Consider the following factors when making your decision:

Routes: A large route network would be one of my top factors when choosing an airline.
If international travel is necessary, I want to book one ticket and travel via code shares so I
can check in just once to my final destination, and not worry about missed connections on
separate tickets or rechecking baggage. Nonstop is always preferable for business
travelers, so help your employees out and book a nonstop United flight even if you’re a
Delta die-hard and don’t mind connecting in Atlanta.

Airline product: The highs and lows of the legacy carriers are well known, but make sure
you look at other options like Alaska, JetBlue, Southwest, Virgin America and Frontier.
Company morale is often one of the most ignored aspects of the workplace. Do what you

11 | P a g e
can to make sure you and your employees aren’t dreading a weekly 3-hour flight on a CRJ-
700 when a comfortable JetBlue A320 carrying live satellite TV flies the same route.

An airline’s hard product is most important on long-haul flights. A completely lie-flat Japan
Airlines Sky Suite versus an angled lie-flat American legacy plane can make a huge
difference on a 14-hour transpacific flight. Make sure you research which configuration
you’ll be flying in order to be as comfortable as possible (or to at least be mentally
prepared for a flight with few amenities).

X-Factors: Customer service, on-time performance and airport locations should also be a
part of your convenience equation. Nothing makes me switch airlines faster than constant
delays, lost baggage and apathetic customer service when the airline is at fault. If I’m
traveling on business, I want to get from A to B as efficiently as possible so I can minimize
my time away from home.

3. Loyalty Programs

Your mileage balance can pay large dividends on business travel. If you know your travel
budget and you fly airlines with revenue-based frequent flyer programs then you should be
able to estimate your returns once you have a proper valuation for the miles you’ll earn.
Different miles are worth different amounts, so naturally, there’s good reason to choose an
airline with valuable rewards. For that reason, I would have a hard time choosing Delta as
my business airline on the basis of the Sky Miles program.

In addition to personal accounts, most airlines now offer business rewards programs like
Delta Sky Bonus and American Airlines Business Extra. At the core, each of these business

12 | P a g e
frequent flyer programs operates similarly. A single, centralized account is created for
each registered business. Employees of that business can enter the separate business
frequent flyer number on their reservations in addition to their personal frequent flyer
number, and the business is credited with all revenue spent.

4. Elite Status Benefits

Airline status and its benefits can certainly make the road warrior’s travels a little less
weary. TPG contributor Eric Rosen did a comprehensive comparison on which airline elite
status is the best, and I agree with his conclusion. The winner for most valuable status is
probably American Airlines. The flying requirements are in line with the industry; the
airline hasn’t instituted any spending requirements; and when you reach the upper tiers,
you get some great benefits like complimentary upgrades, super valuable system wide
upgrades and decent mileage-earning bonuses starting at the middle tier status.

Each market, region, and airport is unique. In addition, each airline is unique, with some
common business plan features but different capabilities and approaches to the markets
served. Each individual consumer makes a discreet choice regarding where, when, and how
he or she will book, purchase, and travel by air. Accordingly, a research approach has been
developed for this study that uses a revealed preference approach, with a focus on the
interrelationships of airline and passenger choice factors that have been demonstrated by
events and trends, and the characteristics of multi-airport regions that affect those choices.

13 | P a g e