Managerial Economics Project Topic: Airline Industry

Group Members: Nikhil Kele 24 Harshvardhan Chavan 77 Nikhil Kasat 85 Sanket Madavi 88 Umesh Mahajan 89 Rohan Jadhav 103

Agenda
Indian Scenario Methodology Statistical Tools used: Regression Analysis Findings from Survey : Validation of Hypothesis World Airline Industry Report Managerial Aspects References

The Indian Scenario

History of Airline Industry in India

Genesis on Feb 18, 1911

In 1932, JRD Tata launched the TATA Airlines

In 1948, Air India International came into being between Indian Govt. and AIR India (TATA Airline)

The Indian Scenario

1986: Private sector players permitted as Air taxi operators

Players including Jet, Air Sahara, NEPC Sky liner, East West, Modiluft etc. started service

1994: Private Carriers permitted to operate scheduled services

Six operators granted license however Only Jet and Air Sahara able to service

2003: Entry of low cost carriers

Air Deccan, Spicejet, Go Air, Indigo

Characteristics

Medium Term Growth Forecast

India GDP: 10.2 % p.a.

Domestic Air travel: 20-25 %

WTTC Travel & Tourism : 8.8 % Over the next 10 years

 Air Passenger market up 12 % Domestic Airlines have struggled with losses, debt and grounded aircraft India needs to add at least 15% to the current strength of 400 aircraft Indian carriers added 30 aircraft in 2011 but kingfisher grounded 20 planes fighting a debt of rs 1600 cr Low cost carriers like Indigo, GoAir, SpiceJet to add 29 carriers

The aviation sector contributes INR 912 billion (1.5%) to Indian GDP.

INR 147 billion directly contributed through the output

of the aviation sector INR 107 billion indirectly contributed through the

aviation sectors supply chain

INR 77 billion contributed through the spending by the employees of the aviation sector and its supply chain. In addition there are INR 582 billion in catalytic benefits through tourism

The aviation sector supports 8.8 million jobs in India. 276,000 jobs directly supported by the aviation sector 841,000 jobs indirectly supported through the aviation sectors supply chain 605,000 jobs supported through the spending by the employees of the aviation sector and its supply chain. In addition there are a further 7.1 million people employed through the catalytic (tourism) effects of aviation.

Market Share

19% 26%

Jet Airways Air India

13% 5% 19% 18%

Indigo
Go Air Spicejet Kingfisher

 Few firms provide services different enough - in terms of quality, frills offered, and frequent flyer programs - for each firm to have some control over the price of their service. The strategy of each firm depends on the behavior of rival firms. Slight increase in passengers and especially business class passengers Aviation in Asia still attracting passengers mainly in India and China

Comparison of Domestic and International Passengers

400 350 300 250 200

Passenger (in million) International Passenger (in million) Domestic

150
100 50 0

Drivers to Growth of the Indian Aviation Sector

Increase in Consumerism Increasing Tourists Travel Increasing Business Travel Entry of Low Cost Carriers Untapped Market Rising Disposable incomes Rising Middle Class Population Increasing Competition Government Reform Measures

Issues of Concern

High fuel prices only a part of the problem Rising Aircraft lease rentals a bigger issue
80 70 60 50 40 30 20 10 0 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
atf price in india(domestic) (in 000/kiloleter) domestic

atf price in india(domestic) (in 000/kiloleter) domestic

Issues of Concern

Mounting losses of the airlines The new Ground Handling policy High Aviation Turbine Fuel (ATF) prices High airport charges Shortage of qualified pilots and technical manpower Safety and security issues Closure of old airports Congestion at airports High taxation

Airline SystemWide Measures

Traffic Enplaned Passengers

RPK = Revenue Passenger Kilometer One paying passenger transported 1 kilometer Yield = Revenue per RPK Average fare paid by passengers, per kilometer flown PDEW = Passenger trips per day each way A common way to measure OD market demand

Airline Demand = Traffic + Rejected Demand

Rejected Demand or Spill = Passengers unable to find seats to fly

Ex (C

op un

Airline SystemWide Measures

Airline Supply

ASK = Available Seat Kilometer One aircraft seat flown one kilometer Unit Cost = Operating Expense per ASK (CASK) Average operating cost per unit of output

Airline Performance

Average Load Factor (LF)= RPM/ASM Average Leg Load Factor (ALLF) = LF/ # of Flights Average Network or System Load Factor (ALF) = RPM/ASM Unit Revenue = Revenue/ASM (RASM) Total Passenger Trip Time

Indian Domestic Traffic (RPK and ASK)

80000 70000 60000 50000 40000 30000 20000 10000 0

RPK(Mn) ASK(Mn)

Indian Domestic Traffic (Passenger load factor)

Load Factor(%)
90 80 70 60 50 40 30 Load Factor(%)

20
10 0

Basic Airline Profit Equation

Operating Profit = RPK x Yield ASK x Unit Cost (Revenue) (Operating Expenses) Use of any of the individual terms as indicators of airline success can be misleading High Yield is not desirable if ALF is too low Low unit cost is of little value if Revenues are weak High ALF can be the result of selling a large proportion of seats at low fares

Price

Airline Profit Maximizing Strategies

Intended Benefit
Cutting Fares/ Yields Stimulate Demand

Strategy Pitfalls
The price cut must generate a disproportional increase in total demand, elastic demand The price increase can be revenue positive if demand is inelastic Increases Operational Costs Lower Frequencies made lead to market share losses and lost demand Increases Operational Costs Excessive cuts can reduce market share and demand

Increasing Fares/Yields

Increase Revenue

Increase Flights (ASK) Decrease Flights (ASK)

Stimulate Demand Reduce Operational Costs Stimulate Demand Reduce Operational Costs

Improve Passenger Service Quality Reduce Passenger Service Quality

Airline Supply Terminology

Flight Leg (or flight sector or flight segment)

Nonstop operation of an aircraft between A and B, with associated departure and arrival times

Flight

One or more flight legs operated consecutively by a single aircraft (usually) and labeled with a single flight number

Route

Consecutive links in a network served by single flight numbers

Passenger Paths or Itineraries

Combination of flight legs chosen by passengers in a OD market to complete a journey

Potential for Growth

Centre for Asia Pacific Aviation (CAPA) forecasts that domestic air traffic will rise by 35%-40% till 2012

International traffic growth by 15%, taking total

market to 100 mn passengers by 2012 Govt. plans to invest US$ 10 billion to modernize

existing airports by 2012

Govt. is planning to develop around 300 unused airstrips

Potential for Growth

Vision 2020 by the ministry of civil aviation to create infrastructure to handle 280 mn passengers by 2020 Indian airports expected to handle more than 60 mn domestic passengers and 3.4 mn tonnes of cargo per annum Investment opportunities of US$ 110 bn envisaged upto 2020 with US$ 80 bn in new aircraft and US$ 30 bn in infrastructure A report by Ernst & Young says the maintenance, repair and overhaul (MRO) can absorb up to US$ 120 bn worth of investments by 2020