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‘An Assessment of Competitive Strategies implemented by Low-Cost Carriers in India’

by

AVNISH CHHABRIA

Student I.D-4060220

A Dissertation submitted in partial fulfilment of the

requirements for the Degree of Masters in Corporate Strategy and Governance at the University of

Nottingham

September 2007.

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Abstract  India, home to one-sixth of the world’s population, is quickly becoming one the world’s

economic engines. Its bureaucratic and outdated regulatory policies have been reformed resulting

in a four-fold increase in the number of scheduled airlines and a five-fold increase in the number

of aircraft operated. This study attempts to examine, in the light of the success of the low-cost

model first adopted by Southwest Airlines, the competitive strategies based on cost-leadership

and product differentiation that have been deployed by low-cost carriers (LCC) in India. . In

addition, this paper attempts to review how the new regulatory roadmap has transformed the

supply of domestic air services in the Indian Aviation industry.

A passenger survey conducted in Mumbai investigated the acceptance of LCCs in India. In

addition, it assessed the sensitivity of passengers to a change in fare and which factors or

attributes would encourage them to distinguish between LCCs. The study finds that there is

immense growth potential for LCCs in India on account of low fares leading passengers to

convert from rail to air traffic. However, infrastructural bottlenecks leading to delays and

cancellations are hindering the mindset of current or potential passengers. Hence, creating value

by attaining customer satisfaction and differentiation in product or services offered is the most

effective way for LCCs to gain market share and, with time, be able to sustain it.

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Acknowledgements  I wish to record my thanks and appreciation to all those who have played a role in the

preparation of this study. First of all, I would like to thank Ms. Margaret Woods for her

insightful comments and suggestions on how to conceptualize and focus my incessant stream of

new proposals and ideas. I am also indebted to Ankush Chhabria for his wise advice and support

throughout the course of this dissertation.

Furthermore, thanks are due to Vijay Bhatija a senior principal with the consulting practice for

the Sabre Airline Solutions® business, for his helpful comments and insights concerning the

destructive features of the Indian Civil Aviation Industry. In addition, his guidance proved

helpful in terms of culling through the research that deals with the low-cost carrier segment of

the Indian Civil Aviation Industry.

However, my greatest debt is to my parents, Ashok and Kiran Chhabria, who have taught me

from a young age the meaning and benefits of hard work and perseverance. But mostly, I am

grateful for their constant words of love and encouragement throughout my education. It is to

them that I dedicate this work.

 

 

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Table of Contents

INTRODUCTION ..................................................... ERROR! BOOKMARK NOT DEFINED.

DISSERTATION OBJECTIVES ........................... ERROR! BOOKMARK NOT DEFINED.

STRUCTURE ......................................................... ERROR! BOOKMARK NOT DEFINED.

CHAPTER I: OVERVIEW OF LOW-COST CARRIERS ........... ERROR! BOOKMARK NOT DEFINED.

THE LOW-COST MODEL ........................................................... ERROR! BOOKMARK NOT DEFINED. SOUTHWEST AIRLINE (THE PROTOTYPE) ................................. ERROR! BOOKMARK NOT DEFINED. ENTRY BARRIERS..................................................................... ERROR! BOOKMARK NOT DEFINED. JETBLUE AND RYANAIR (THE DIFFERENTIATED FOLLOWERS). ERROR! BOOKMARK NOT DEFINED. COMPETITION BASED ON PRODUCT DIFFERENTIATION ............ ERROR! BOOKMARK NOT DEFINED. STRATEGIES ............................................................................. ERROR! BOOKMARK NOT DEFINED. SUMMERY ................................................................................ ERROR! BOOKMARK NOT DEFINED.

CHAPTER II: INDIAN AVIATION SECTOR ........ ERROR! BOOKMARK NOT DEFINED.

CHARACTERISTICS ................................................................... ERROR! BOOKMARK NOT DEFINED. ENVIRONMENTAL SCANNING AND ANALYSIS .......................... ERROR! BOOKMARK NOT DEFINED. STRATEGIC GROUP ANALYSIS: ................................................ ERROR! BOOKMARK NOT DEFINED. S.W.O.T ANALYSIS OF THE INDUSTRY .................................... ERROR! BOOKMARK NOT DEFINED. REASONS FOR GROWTH IN THE LCC SECTOR .......................... ERROR! BOOKMARK NOT DEFINED. CHALLENGES FOR THE SECTOR................................................ ERROR! BOOKMARK NOT DEFINED. LOW-COST CARRIERS IN INDIA ................................................ ERROR! BOOKMARK NOT DEFINED. BUSINESS MODELS .................................................................. ERROR! BOOKMARK NOT DEFINED. STRATEGIES ADOPTED BY LCCS IN INDIA................................ ERROR! BOOKMARK NOT DEFINED. COMPETITION........................................................................... ERROR! BOOKMARK NOT DEFINED. FUTURE.................................................................................... ERROR! BOOKMARK NOT DEFINED.

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CHAPTER III: RESEARCH DESIGN AND METHODOLOGY ERROR! BOOKMARK NOT DEFINED.

SAMPLE SELECTION ................................................................. ERROR! BOOKMARK NOT DEFINED. PRESENTATION OF FINDINGS .......................................................... ERROR! BOOKMARK NOT DEFINED.

CHAPTER IV: ANALYSIS OF FINDINGS ............ ERROR! BOOKMARK NOT DEFINED.

CONCLUSION.......................................................... ERROR! BOOKMARK NOT DEFINED.

RECOMMENDATIONS........................................... ERROR! BOOKMARK NOT DEFINED.

A] FULL RECOVERY................................................................. ERROR! BOOKMARK NOT DEFINED. B] JUST CHECKIN’ IN ..................................................................... ERROR! BOOKMARK NOT DEFINED.

FURTHER RESEARCH ........................................... ERROR! BOOKMARK NOT DEFINED.

BIBLIOGRAPHY...................................................... ERROR! BOOKMARK NOT DEFINED.

APPENDIX I: WHERE RYANAIR CUTS ITS COSTS .............. ERROR! BOOKMARK NOT DEFINED.

APPENDIX II: OPERATING COST AND REVENUE FOR CARRIERS OF INTEREST.................................................................................... ERROR! BOOKMARK NOT DEFINED.

APPENDIX III: MARKET SHARE OF DOMESTIC ORIGIN AND DESTINATION PASSENGERS U.S. .................................................. ERROR! BOOKMARK NOT DEFINED.

APPENDIX IV: AIR DECCAN, SPICEJET, GOAIR .................. ERROR! BOOKMARK NOT DEFINED.

APPENDIX V: QUESTIONNAIRES ....................... ERROR! BOOKMARK NOT DEFINED.

APPENDIX VI: SUMMERY OF RESPONSES TO QUESTIONNAIRES .....................ERROR! BOOKMARK NOT DEFINED.

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Introduction  

"That's what everybody wants, to be a low-cost airline; their problems aside, it is the place to be".

Dave Swierenga, Former Economist for the Air Transport Association1

With more than 1 billion people— from diverse backgrounds in terms of religion, race,

language, color and customs — India is the second most populous country in the world and the

world’s largest liberal democracy2. A country that has traditionally endured economic challenges

has become the world’s second-fastest growing nation, behind China and has transformed itself

into a true economic powerhouse, resulting in rising income for the estimated 400 million people

in its middle class. According to the Airbus Global Market Forecast (2006-2025)3, both China

and India are set to become the world’s largest consumer markets within the next 25 years, with

a combined purchasing power six times greater than that of the United States today.

Several economic indicators have shown how far India has progressed. In 2006, India’s

companies realized better than 21 % on invested capital. From 2002 to 2006, the percentage of

non-performing loans dropped from about 16 percent to about 7 percent4. In 2006 India’s IT

services and back office work showed a fivefold increase to US$60 billion annual export

industry compared to US$12 billion in 2001. In addition, its outsourcing business base is

1 The Christian Monitor (2005)’How long can the big airlines survive (20/04/2005)’, http://www.csmonitor.com/2005/0420/p03s01-usec.html

2 See < http://news.gourt.com/Colleges-and-Universities/Magazines-and-E-zines/India.html>

3 http://www.airbus.com/en/myairbus/global_market_forcast.html.

4 http://www.ibef.org/economy/economicindicators.aspx

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growing at 30-40%per year. India’s GDP measured in terms of Purchasing Power Parity is

currently the third largest in the world5. According to the Economic Survey 2006 076, the years

2004-07 have been years of record growth in air traffic in India. During the period April-

September, 2006, international and domestic passengers recorded growth of 15.8% and 44.6%,

respectively, leading to an overall growth of 35.5% year-on-year. India’s airports handled 63.99

million domestic passengers in 2006/07, as compared to 32.04 million in 2003/04. In 2006,

airlines in India placed aircraft orders accounting for 11 % of the global total.

It’s not a coincidence that India’s Aviation sector has made such a turnaround. A number

of factors, specifically liberalization and deregulation, have significantly contributed to the

country’s transformation. “From being a service that few could afford, the sector has now

graduated to being a fiercely competitive industry with the presence of a number of private and

public airlines and several consumer-oriented offerings.” 7

Macro Fundamentals that have driven Aviation growth

Market size: India has a population of 1.1 billion of which the middle income group

constitutes around 400 million, which is more than the population of USA and that of EU

countries.

Demographics: 50% of the population is < 25 years old as a result of which the size of

the economically active segment will continue to grow for a number of decades (unlike

developed countries and even China).

5 See <http://en.wikipedia.org/wiki/Economy_of_india>

6 Economic survey 2006-2007, http://indiabudget.nic.in/es2006-07/esmain.htm

7 India Business Week(2006),’India Flying high(21/06/06), http://indiabusinessweek.com/Services/Transportation/flyhigh.html

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Economic growth: Average GDP growth of 6% p.a. sustained since 1991 and showing

signs of acceleration. The first quarter of FY06/07 registered 9.4% growth and the last

budget has established a target of 10%.

Trade and Investment: India has an increasingly open economy, with strong growth in

international trade, healthy foreign exchange reserves and increasing FDI.

Fueled by rising disposable incomes coupled with globalization and partial deregulation,

the domestic aviation market in India is witnessing an unparalleled proliferation of new entrants.

The majority of new entrants are low-cost carriers who, within 3 years of operation, captured

49% of market share presenting a significant challenge to existing public/private sector players

that operate in a largely oligopolistic market.

The Growth Opportunity in Indian Aviation

India’s airports handled 71.0 million domestic passengers in 2006/07, posting growth of almost 40% year-on-year, and over 25 million International passengers, up approx 15%

Growth is underpinned by economic expansion, increased capacity and price stimulation resulting from increased competition.

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India’s LCC growth phenomenon

India’s domestic airlines now offer 8,600 more flights and 1.7 million more seats every

year since 2003.

62% year on year growth in domestic low cost sector.

Low cost operations account for 44% of all flights within India [compared to 22% in UK

and 19% in US].

The Indian government recently lifted some very strict civil aviation regulations that

accelerated the process. The number of low-cost airlines has swelled from four to eight in a

matter of months; challenging the monopoly of rail services and providing greater options for the

country’s travelers.

Duncan Alexander, VP Business Development & Industry Relations at OAG, commented:

India’s domestic market is experiencing an unprecedented growth, attributed to the increased operations offered by several low cost carriers. As a result, nearly one in two flights within India is now operated by a low cost carrier. This is even more impressive considering that the low cost phenomenon is still in its infancy in the Indian market. It has already far outstripped the ratio in the UK and US, two of the most established low cost markets.8

Considerable world aviation attention is now focused on India, as evidenced by the 165

aircraft order by Indian carriers at the 2005 Paris air show priced at US$14.3 billion. According

to the Centre for Asia Pacific Aviation (2007)9, Indian airlines have ordered a total of 376

8 OAG (2007)’India’s Aviation growth phenomenon(05/06/2007)’, http://www.oag.com/oag/website/com/en/Press+Room/Press+Releases+2007/Indias+aviation+growth+phenomenon+05060701

9 CAPA(2007)’Indian Aviation; Aircraft and fleet plans’, http://indiaaviation.aero/news/index.php?option=com_content&task=blogcategory&id=16&Itemid=49

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aircraft over the last 18 months to be delivered by 2012. India is committed to a fleet growth of

164%, compared to a world average of only 2.7%. The sudden surge is the result of three factors:

the easing of tight regulatory constraints, a booming economy and the 400 million middle class

Indians that can now afford air travel.

There is a gold rush in the skies over India. In effect, a great number of venture capitalist

in the world, with the requisite 444 million rupees (US$10 million) to launch a private airline,

want to claim a share in this booming sector.10 To entrepreneurs who have seen the success of

low-cost airlines in the US and Europe, India is an enticing prospect in reason of its millions of

price-conscious consumers.11 Thus, India has now become the next milestone in global airline

development and aviation’s most dynamic market.

10 The Hindu Business Line(2005)’Low-cost airlines: They may need more than a wing and a prayer(26/06/05)’, http://www.blonnet.com/iw/2005/06/26/stories/2005062600521100.htm

11 Ibid.

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Dissertation Objectives  

The India aviation sector is one of the fastest growing in the world. Given this thriving

market, this study seeks to question what competitive strategies low-cost carriers (LCC) can

implement to gain an advantage and sustain passenger loyalty. It also seeks to assess the level of

differentiation strategies adopted by LCCs in account to competition. It is hypothesized that a

differentiated strategy is favorable to gain a sustainable competitive advantage in this market. In

addition, the outlook for LCCs has a large catchment in the upper fraction of 18 million

passengers that patronize the Indian Railways daily. That this study is relevant may be

determined by the immense growth potential of the ICAI, provided that it gathers enough depth

through development of infrastructure in the coming years.

Goals

To identify and analyze the core concepts of the low-cost model from available literature.

To examine the competitive situation in the Indian Airline industry followed by an

environmental scan to scrutinize the current concern faced by LCCs in addition to

heightened completion.

To apply core concepts to the current players of the LCC sector and highlight their

strategic objectives & future potential of competitive advantage.

Evaluate the survey responses to identify the perception of passengers and travel agents,

in regard to LCCs.

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This dissertation looks at the viability of the low-cost carrier in India by first making an

environmental scanning and internal analysis of factors that encompass the Indian aviation

industry. Coupled with reports from major newspapers, articles from the internet as well as

interviews with travelers, it moulds the strategic positioning that LCCs should take in order to

have an edge over the major air carriers and reason how they should sustain their competitive

advantage in such a vulnerable competitive industry. In addition, interview data gives a practical

analysis of the travel preference of the general public thus giving an indication of the acceptance

of these LCCs in India and suggest the necessary changes, if any, required for improvement.

Finally, a critique view of the LCC sector in India will be discussed, recommending the

key changes that carriers must embark onto, to remain competitive and sustain passenger growth.

However, due to its vulnerability to the ever changing external environment, it is recommended

that the analysis may only be valid for the next three years.

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Structure  

The study has been divided as follows; beginning with the Introduction as Section I.

Section II covers the review of some of the relevant research pertaining to LCC operation

principally in the USA and Europe. The dominance of the Southwest Airlines (SWA) model, the

prototype model for LCC entrants, is discussed along with a reference to those who have chosen

to deviate from it.

Section III makes a slight departure from normal practice by introducing secondary data before

primary data. However considerations based on textual continuity favored this practice.

Moreover in order to maintain economy, the secondary data is both presented and analyzed to a

boundless extent in this section. More specifically, it covers developments in the LCC segment

of the ICAI and the business models used, that parallel practices described in Section II for

which reason its discussion follows immediately after Section II.

Section IV is a brief detour outlining the research design and the methodology adopted for the

purpose of obtaining primary data. It outlines the assumptions underlying the selection of the

sample and some criteria for choosing/rejecting data.

Section V is the analysis of the findings and includes the limitations the research encountered in

the course of collecting the data.

Section VI mentions the conclusions derived from the analysis while

Section VII suggests recommendations and follow-up research in the light of the findings of the

study.

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Chapter I: Overview of Low‐cost Carriers 

"Let’s face it; if you're an airline and your name doesn't begin with Southwest, you are by default a bankruptcy candidate."

-Jamie Baker, an airline analyst at J.P. Morgan.12

Low-Cost Carriers (LCCs) have been in the limelight ever since Southwest Airlines

entered revenue service on 14th June 1971 (Knorr and Arndt, 2002). In about more than 30

years, SWA has become the fourth-largest airline in the USA (Ibid). Moreover, SWA has created

its own set of records in being “the most consistently profitable airlines ever as well as the safest

operator in the domestic US market” (Ibid).

Not surprisingly the success of Southwest has inspired many other operators both in the

USA and in Europe in the form of JetBlue, Ryanair and EasyJet to name only a few (Box and

Saxton, 2003), (Bhagavan et al. 2004). This review will examine the competitive strategies

adopted by some of the more successful operators and place them in an appropriate context to

help assess the relevance of such strategies for the growth of LCCs in the India Civil Aviation

Industry (ICAI).

12 Airline Restructuring, (08/09/06), http://www.ap.org/

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The Low‐cost Model 

All airlines have four broad components in their profit functions; the product of yield and

traffic equates to revenues and the product of unit costs and output equates to costs.

Even so it would be appropriate to list in a condensed form the typical features of the no-

frills product as mentioned in Lawton (2000):

One-class high-density seating.

No-flight food service apart from non-perishable snack items like peanuts. Eliminating

the galley sections allows for more seats, reduced turnaround times and lower cleaning

and cabin crew costs.

No advance seat assignment.

No frequent-flyer programmes.

No frequent traveler lounges at the airports.

No costly interlinking agreement with other airlines.

No participation in code-sharing or other forms of airline alliances.

Bypassing computer reservation systems and travels agents through direct selling and

telemarketing.

Introduction of paperless/electronic ticketing.

Specific use of only one type of aircraft in its fleets to save maintenance, training,

staffing and scheduling related cost savings.

Becoming the launch customer for newer types of aircraft to earn manufacturer’s

discounts (typically 30% of the list price).

Reducing infrastructure access costs by utilizing un-congested underused secondary

airports.

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Southwest Airline (The Prototype) 

The case of SWA is the obvious one to begin with especially since it has come to be

regarded as the prototype of LCCs and its strategic formula. “Low-cost, low-fare, no-frills, high

frequency, short-haul, point-to-point service instead of the established airlines traditional high-

cost, high-fare, full-service, hub and spoke operation” (Knorr and Arndt, 2002).However they

feel that it is still too early to make a definitive statement on the viability of LCCs, despite the

spectacular example of SWA. One reason for this, in their opinion, is the persistence of

significant barriers to entry that “shield incumbents effectively from low-fare competitors

including, in some cases SWA” (Ibid). The paper therefore mentions SWA’s survival and

subsequent rise in spite of the barriers as offering valuable insights into the nature of competition

in the airline industry; particularly those relating to the identification of post-deregulation

barriers. However, since SWA is, for historical reasons and on account of its financial

performance, the benchmark for prospective LCCs, it would be worthwhile to examine in detail

why SWA succeeded where others failed.

Southwest Airlines has focused primarily on reducing unit costs to increase traffic

through the lowest prices. There are five key elements in their strategy. First, utilize all the same

aircraft (737s) to reduce training and maintenance costs. Second, use less expensive secondary

airports near major centers to reduce transaction cost laden turnaround times and increases

productivity. Third, pay high attention to customer satisfaction to increase load factors. Fourth,

reduce booking costs through an aggressive Internet strategy. Finally, maintain lower labor costs

by more closely aligning interests between labor and management (Holloway, 1997).

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According to Petzinger (1995), SWA emulated the practice of “yield management by

offering discounted restricted fares against its own low unrestricted fares”. Given SWA’s already

existing substantial cost advantage, no major carrier could match such fares for a long while.

SWA managed to improve and stabilize its profits in consequence (Knorr and Arndt, 2002). Its

fare dispersion is the lowest among all major US carriers. The highest fares on SWA are about

twice the median fare for all passengers. For the domestic services of all other US carriers, it is at

least three times the median (Transportation Research Board 1999).

However Knorr and Arndt (2002) argue that SWA’s success should be assessed on the

basis of a broader business model that includes not only the standard features of the low-cost,

low-fares model but also “its specific approach to labor relations, financial and strategic

management.”The factors that differentiate SWA from other players and help it to sustain its

competitive advantages are the following:

High quality of service arising from point-to-point operations enabling them to be more

punctual.

Excellent labour relations in spite of having the highest degree of unionization by

creating a strong corporate culture that aligns the interests of different employee groups.

Unconventional advertising and Public Relations that includes industry recognition

through winning service and performance awards.

Adopting conservative financial strategies through relying on internally generated funds

for its growth, thereby securing better credit ratings and reducing its cost of finance.

Regarding ground transportation as its main competitor.

Protecting its profitable home base to ensure customer loyalty and being cautious in

adding new routes (Southwest Airlines 2000).

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Entry Barriers  

Having examined the features of the SWA model in detail, the entry barriers it faced will

be examined as they are particularly relevant for fresh entrants in the LCC sector. Knorr and

Arndt (2002) define four types of barriers, namely, legal, infrastructure, strategic and others.

They mention four types of legal barriers in the form of ownership rules, operating licenses,

route-specific traffic rights and parameter rules at airports. Infrastructural bottlenecks consist

mainly of lack of landing slots due to insufficient runway capacity, strategic hoarding of

available landing slots by incumbents (Langner, 1995) and access to vital ground facilities such

as gates.

A number of strategic barriers have been identified by various researchers1, Lavine (1987),

Weinhold (1995), United States General Accounting Office (1996), United States Department of

Transportation (1999), Merger/Menzies (2000). These include:

The incumbents’ strategic use of the most important distribution channels.

Loyalty schemes for passengers.

The threat of price and non-price predatory action against newcomers.

Other barriers to entry that are specifically significant for new entrants are:

Fear of perceived lower safety standards.

The need to overcome lack of brand and product awareness through advertising.

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It is not necessary to recount in detail in this review how SWA overcame most of these

barriers. Knorr and Arndt (2002) provide an adequate treatment of these issues to show how they

impeded SWA during its start-up phase but not before it narrowly escaped bankruptcy

(Freiberg/Freiberg, 1996).

According to Lederman and Januszewski (2003) a broader perspective on how SWA and

other LCCs have been able to succeed in spite of the barriers is that they offer a new and

differentiated product not previously available to the consumers. In other words, product

differentiation is an essential part of the entry strategy for LCCs.

Moreover they believe that to the extent that the LCCs’ strategy is “to offer a

combination of quality and price targeted at more price-sensitive consumers, high density routes

may be the ones where there is a sufficient demand for the LCCs to focus on only offering these

products”. Conversely they find little evidence that LCCs pursue a strategy of serving routes that

have little volume. This will be tested in context to India in the following sections to draft a more

concrete conclusion.

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JetBlue and Ryanair (The Differentiated Followers)  

The review will now examine the case of JetBlue (Box and Saxton, 2003) and Ryanair

(Bhagavan et al. 2004) mainly to examine the considerations if any that have led them to

differentiate their offerings from those of the prototype SWA. JetBlue seems to have obtained an

edge primarily through the extensive use of information technology and through adding

innovative features that served both to differentiate it and to anticipate customer concerns.

Bhagavan et al. (2004), apply Porter’s Five-Force framework to analyze the competitive

environment that emerged after the entry of Ryanair following deregulation of the European

airline industry. As will be seen in the subsequent section, Porter’s Five-Force framework

corresponds closely to the market structure of the Indian Civil Aviation Industry.

Ryanair achieved product differentiation primarily through offering meals and amenities

comparable to traditional operators but at a lower cost. It also focused on a simple fare and

targeted the large Irish immigrant population working in England, in which segment it secured

“hero status” (Ibid). It was only later that Ryanair focused on cost-reduction (on cost-leadership)

to build a new pricing model 50% to 90% below that of its competitors. In doing so, it aligned

itself on most features of SWA model described earlier, adding incremental revenue through

onboard sales and extensive advertising (even on the exterior of the planes).

According to Bhagavan et al. (2004), what Ryanair did was create a sub-segment of the

passenger transportation industry including its rivals from the cheaper on-ground modes and

low-cost carriers that sought to mimic the model.

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Lawton (1999) seems to support the above conclusions. In his view, low prices cannot be

sustained unless a company maximizes its operational efficiencies, which Ryanair did by

outsourcing non-core activities i.e. ground handling and partial maintenance to more efficient

operators. Moreover Lawton argues for, the creation of capabilities based on reliability and

quality of service, corporate culture and route network that an airline builds over time. In this

context, he singles out Ryanair for its success based on economies of scale (high-frequency

service and extensive route network) and its maverick culture in terms of its non-membership of

assorted airlines associations, non-participation in alliance and so on, as helping it build the

product differentiation that has contributed to its success.

However, Lawton believes that Ryanair’s strategic advantage may not be enough for

long-haul routes. It may need to refine its strategic fit to become successful in such segments

without abandoning its core values of low price, value for money and efficient service.

Furthermore its regional base, like that of Southwest, is its core strength and should not be

sacrificed to secure route expansions. It is interesting to note that Ryanair has not focused on

yield management, preferring instead to concentrate on load to ensure profitability.

In contrast, Holloway (1997) points out a high load factor alone may not ensure

profitability, citing the case of Aer Lingus that did not achieve a profit even with a load factor of

70.4%. What is more important in this context is the break-even load factor, which is best

achieved by a relentless trimming of costs, along every element of the value chain as shown in

the Appendix I Table 1.

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Competition Based on Product Differentiation   

The review will next address the issue of price competition amongst low-cost carriers.

Barbot (2004) takes a look at this aspect through an empirical study to confirm a theoretical

model. According to her, competition amongst LCCs is based on product differentiation. In this

respect Dudden (2004) divides LCCs into two segments, namely lowest cost carriers and lower

cost carriers. However Barbot (2004) considers five sources of differentiation as follows:

Airports of departure/arrival: whether they are main airports or secondary in nature.

Types of aircraft: whether Boeing 737 and/or Airbus 319.

Free services during the flight.

Passenger loyalty.

Differentiation in the supply of services related to the flight.

Alamdari and Fagan (2005) approach the issue of LCC competition in terms of the extent

to which their strategies adhere to the Southwest model. Their findings indicate that the

profitability or financial performance was correlated to the extent that the LCCs adhered to the

original low cost model.

Ryanair, for instance, has rigidly stuck to the SWA model. However, some of the later

LCCs have attempted to deviate from the original LCC business model even while they seek to

undercut the prices of incumbents on their routes.

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Strategies  

Alamdari and Fagan (2005) also examine the strategy of LCC in terms of the parameter

suggested by Porter’s model, namely in terms of the type of strategy followed by the LCC.

A cost leadership strategy is when a firm sets out to become the least cost producer in the

industry and to do so it exploits all sources at cost advantage. This seems to have been the

original price model that LCCs have followed (Doganes, 2000)

A differentiation strategy is one in which a company seems to be unique in its industry along

some dimensions that are widely valued by buyers. However Alamdari and Fagan (2005) add

that although LCCs have tried out this strategy, they have not been able to extract a price

premium on this basis.

A focus strategy is based upon the choice of a narrow competitive scope within an industry. In its

simplest terms, it involves adding value to the product or service and targeting it carefully at a

niche segment of the market. Corporate jet services could fall into this category.

However the ranking of the 10 LCCs considered in their study is correlated only with the

degree of adherence to the SWA model. When this is done, it is found that profitability is

strongly positively correlated with the degree of adherence.

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Figure 113

In measuring the degree of adherence Alamdari and Fagan matched the following

features they considered significant for the purpose; namely the nature of product offerings

(point-to-point services, one-way fares and so on), types of services offered and ticket

distribution facilities.

However they note that Southwest in its more mature avatar does not follow its original

model having, in the interviewing years, come to occupy “the middle ground between the low-

cost model and the FSC14 model” (Ibid). However, Southwest still adheres to the original

operational features of the model in its entirety.

13 Alamdari and Fagan 2005

14 FSC = Full Service Carrier

LCCs Adherence to the Product Features of the Original Low-Cost Model

25

Given the above consideration, the following graphic depicts the degree of adherence of

the 10 LCCs considered in the paper in percentage terms.

Figure 215

It must be noted that though Alamdari and Fagan (2005) found a strong degree of

correlation, (the linear regression coefficient was 0.702), their study is based, as they themselves

pointed out, on a small sample. However their conclusions are also supported by GCW Research,

2004 which indicated that “there was no clear evidence suggesting that higher yields would be

achieved by LCCs through provision of product extras.” Put another way, strategies based on

product differentiation have not been able to extract any kind of price premium by over the

standard SWA model.

15 Alamdari and Fagan 2005

LCCs Adherence to the Operational Features of the original Low-cost Model

26

Karivate (2003) gives some indications of why profitability of LCCs could be strongly

correlated to the degree of adherence to the original model. In this view, the lower cost structure

of a point-to-point network is a consequence of a number of factors such as significantly less

airport congestion at airports used by LCCs, lower airport fees/charges and lease rates at

secondary airports. Hubs in comparison need larger number of gates and personnel per flight. His

conclusions have been summarized in Appendix II Table 2. They also support the views of

Alamdari and Fagan (2005) where it is asserted that “the low-cost model which is built around

using a point-to-point network should continue to be a successful model for new entrants”.

Furthermore Najda (2003) finds that the presence of a LCC on a given route raises the

competitiveness of that route and supports Karivate (2003) to the extent that the emergence of

the LCC seems to “indicate a shift in the structure of the airline market away from the hub-and-

spoke networks and towards point-to-point networks”. A reinforcement of these views is found

in Richards (1996) who found that the potential presence of SWA lowers airfares measurably.

However he also adds that SWA does not seem to have the same impact in the above way in the

long haul market which is not in consonance with the views of Najda.

In general, Najda suggests that the presence of a LCC is positively “correlated with a

flatter price distribution, a higher degree of competitiveness and a decline in the relevance of

concentration, frequency, hubs and capacity constraints in predicting market prices”.

Given their effect on the nature of competition, LCCs could reasonably be expected to

show strong growth in the years following their emergence. Ito and Lee (2003) have conducted a

study that estimates the growth trends for the future particularly in terms of “the degree of LCC

27

penetration on the major network carriers” In addition their research supports the conclusion of

Najda (2003) by pointing out that major networks “also generate a substantial portion of their

domestic revenue” from the same markets that are likely to face competition from LCCs. Ito and

Lee (2003) found that “pre-entry passenger density served as a good prediction, maybe the single

most important factor, in determining LCC entry on a given route. Their findings on the growth

of LCC entry in comparison to that of network carriers have been shown in Appendix III Table

3.

These findings are in contrast to earlier studies by Borenstein (1989), Borenstein (1991)

and Ker Hedricks and Tar (1995) that suggested that the large hub and spoke carriers would be

able to erect significant entry barriers at their hubs, thereby preventing entry to LCCs and

allowing them to exercise considerable market power in flights originating from these airports.

Borenstein (1992) even went to the extent of suggesting that powerful network economies could

make competition in the post-deregulation era unworkable.

Binggeli and Pompeo (2002) suggest another reason why LCCs unlike network carrier

airlines have had such a good run. They “enjoy protection from business cycles, since in hard

times; more passengers seek less expensive travel alternatives”. However they point out that the

success of the LCCs is not a “simple copy-and-paste game” which perhaps explains why AB

Airlines, Color Air and Debonair went bankrupt (Ibid). Some of the other LCCs such as Buzz

and Go were acquired leading to a duopoly like situation with Ryanair and EasyJet between

themselves accounting for 88% of the schedules low-cost market in Europe (Ibid).

28

Summery  

Southwest and Ryanair are both very successful no frills budget airlines that operate on

the basis of low cost management, more frequent flights per aircraft and truly no frills to offer

cheap tickets. A couple of unique differences between the two are:

Southwest focuses on domestic travel, while Ryanair operates across Europe thus having to

depend on open skies to operate a new city. Southwest operates on point-to-point service while

Ryanair uses a hub and spoke method. Point-to-point service reduces turnaround time while

having to deal with the cons of insufficient demand while the hub and spoke method ensures the

flights are full. As both are operating under very different environments, their operating

structures are chosen to meet their needs. However, the most important similarities are the focus

on customer service and safety which was never compromised because of their lower fares.

In sum, the review discusses the features of the LCC model; explains the strategies that

LCCs have used to gain market share and profitability in the years following deregulation and

suggests reasons why some LCCs have been more dominant than others.

How will the no frills market fare in India and how will it affect the airline industry?

Its content is relevant for the discussion of the strategies that are likely to be adopted by

LCC entrants in the ICAI. Given the context provided by the review, it may be possible to assess

the likelihood of success of the strategies that have or may be adopted by Indian LCCs. The

analysis that follows will give a clearer picture of the Indian Airline industry for the next 5 years

to come.

29

Chapter II: Indian Aviation Sector  

The opening of the aviation sector has “resulted in a phenomenal spurt in the number of

airlines” particularly low-cost airlines (Kumar, 2005), resulting in competition that has led to a

reduction in fares on routes served by FSCs and the availability of additional seats at low fares

and the availability of the routes to all kinds of destinations.

The four principal players that have emerged over the last few years in this sector and,

more importantly, are already operational are GoAir, SpiceJet, Kingfisher Airlines and Air

Deccan.

It is a phase of rapid growth in the industry due to huge build-up of capacity in the LCC

space, with capacity growing at approximately 45% annually. This has induced a phase of

intense price competition with the incumbent full service carriers (Jet, Indian, and Air Sahara)

dis-counting up to 60-70% for certain routes to match the new entrant’s ticket prices.

This, coupled with costs pressures (a key cost element, ATF price, went up

approximately 35% in recent months, while staff costs are also rising on the back of shortage of

trained personnel), is exerting bottom-line pressure.

According to the Centre for Asia Pacific Aviation (Sanyal, 2005), about 5 new low-cost

airlines are due to start operations in India in the next two years. What is feeding “the Gold Rush

phenomenon” is the initial response to the new airlines (Mehra et al. 2005). For instance,

SpiceJet with a fleet of 3 aircraft claims an occupancy rate of 95%, Kingfisher with a fleet of 2

planes has over 80% while Air Deccan and GoAir’s average for the last 18 months is 85%.

30

The growth in supply is overshadowed by the extremely strong demand growth, led

primarily by the conversion of train/bus passengers to air travel, as well as by the fact that low

fares have allowed passengers to fly more frequently. There has, therefore, been an increase in

both the width and depth of consumption. However, the regulatory environment, infrastructure

and tax policy have not kept pace with the industry’s growth.

Enactment of the open sky policy between India and SAARC countries, increase in

bilateral entitlements with the EU and the US, and aggressive promotion of India as an attractive

tourism spot helped India attract 3.7 million tourists in 2005-0616.

This market is growing at 15% per annum and India is expected to attract 6 million

tourists by 201017. Also, increasing per capita income has led to an increase in disposable

incomes, leading to greater spend on leisure and holidays and business travel has risen sharply

with increasing MNC presence. Smaller cities are also well connected now. Passenger traffic has

increased and over 21 million seats have been sold, resulting in a growth of over 50%. The

Indian travel market is expected to triple to $51 billion by 2011 from $16.5 billion in 2006-07.

16 http://www.airportsindia.org.in/

17 Ibid

31

Characteristics  

The aviation market is under penetrated as its annual passenger traffic is only 50 million.

India has only .05 no. of passenger trips per year as compared to 2.02 of United States. This

factor also depends upon the relatively low number of airports in India in comparison to the US.

1953: Nationalization of Aircraft Industry

Consequently, assets of 9 existing companies transferred to two entities in the aviation sector

controlled by the Government:

Indian Airlines, primarily serving domestic sectors

Air India, primarily serving the international sectors

Implication

Aviation became a preferred mode of transport for elite class

Restricted Growth of Aviation Industry

High Cost structure

Underdevelopment of infrastructure

1986: Private Sector Players permitted as Air taxi operators

Players including Jet, Air Sahara, NEPC, 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

32

2003: Entry of low cost carriers

Air Deccan, Spice Jet, Go Air, Indigo

Implication

Aviation has become affordable with check fares and discount schemes

Various Operators with different business model

Huge growth foreseen in the Aviation Industry

33

Environmental Scanning and Analysis  

Environmental analysis is fundamental in all industries, to gauge the conditions under

which it operates, especially the Airline industry in India that is so vulnerable to external factors

such as terrorism, war, disease outbreak (SARS and Bird flu in recent months) and government

regulations. These factors constantly evolve through time due to the changing environment and

thus affect the strategic decision making of managers. Macro Environment Analysis:

Macro Environmental

Analysis

Economic

Growing middle class income

Consistent GDP growth of more than 8% and double digit projection

Hike in average salary14% (highest) in the world

Operating cost

Political/Legal

Open Sky Policy Deregulations in different spheres Privatization of airline FDI limits :49 % for airlines

100% for airports

Socio/Cultural

Growing middle class 2006 : 400 mn

Increase in leisure travel by tourists:18 % in 2006

Foreign tourists in 2006 : 3.2 mn

Tourism industry growth in 2006 : 9.1 %

Technological:

Modernization and privatization of airports

Suitable aircraft type E-ticketing through internet Self-serve check-in kiosks

34

The following looks into the current Macro business environment of the Airline Industry

in India which a LCC should take into consideration before molding its strategic setup plan.

Companies and their suppliers, marketing intermediaries, customers, competitors and public all

operate in a macro environment of forces and trends that shape opportunities and post threats.

POLITICAL:

Open Sky Policy

Deregulations in different spheres

Low entry barriers

FDI limits : 49 % for airlines

100% for airports

Capt. G R Gopinath, MD of Air Deccan:

What we are witnessing today is the birth of a new industry. Aviation is no longer a taboo, and it is now becoming an integral part of the country’s economic development.18

The Open-sky policy came in April 1990. The policy allowed air taxi- operators to

operate flights from any airport, both on a charter and a non charter basis and to decide their own

flight schedules, cargo and passenger fares19. Since then aviation industry has shown tremendous

growth. In 2007 the FDI limits in case of airports has been extended to 100%. This is due to the

fact that Government has realized the importance of capital investment in Airline industry.

Perhaps agreeing with Capt. Gopinath and other industry observers, the Indian government last

September implemented aggressive policy changes and bilateral air service agreements with 18 Aviation: Airborne, Every other month, a new low-cost or "value" carrier is taking to the air. A look at the players, the models - and the sustainability of the business. (27/06/06), http://www.businessworldindia.com/jun2705/coverstory01.asp

19 See < http://www.tcil.com/ca.asp>

35

more than 15 nations including the United States and the United Kingdom, almost instantly

increasing the number of flights into and out of India.

Airline Weekly

Frequencies

Aug -04

Weekly

Frequencies

Aug-06

Air India 12 27

British Airways 19 42

Jet Airways 0 27

Virgin Atlantic 3 14

Total 34 110

Source: Centre for Asia Pacific Aviation20

In October, the government raised the foreign investment limit in the local aviation sector

from 40 percent to 49 percent, and non-resident Indian investment up to 100 percent is now

permissible in domestic airlines without government approval. However, the government policy

bars foreign airlines from taking a stake in a domestic airline.

During the past 12 months, India has signed a number of open-skies agreements,

signaling its readiness to modernize aviation policies. Already, the Indian government’s new

openness is showing results, including21:

20 http://www.centreforaviation.com/aviation/Centre_for_Asia_Pacific_Aviation_India/

21 Hindu Business Line(2006)’See the open sky and reach for it(26/01/06)’, http://www.thehindubusinessline.com/2006/01/26/stories/2005012602200900.htm

Example of Bilateral Liberalisation UK-India Route

No. Frequencies UP 235%

No. of Airlines UP from 3 to 5

36

Bilateral pacts with Sri Lanka and Singapore

Granting multiple-carrier status to Indian aircraft by three Association of Southeast Asian

nation countries — Singapore, Malaysia and Thailand;

Allowing low-cost airlines from these ASEAN countries to enter India;

Permitting private Indian airlines with five years of flying experience to fly to all global

destinations except the Gulf. Until now, private local airlines were only allowed to

operate within the country.

ECONOMIC:

Growing middle class income

Consistent GDP growth of more than 8% and projected rate in two digits

Hike in average salary 14%(highest) in the world

Tourism industry growth :8.8 %in 2005

These factors look at the well being of the country in terms of growth and stability,

India’s disposable income, the GDP per capita and other money related matters. However, with

economic downturn happening more often than before, people are looking at saving cost,

choosing budget air travel for business and pleasure. Air Deccan and SpiceJet did better than

most of the LCC during the past couple of months when there was a dip in the travel industry

due to world events such as terrorism and war. Their operating costs are much lower thus

enabling them to pull through any crisis better. Rising Fuel prices in recent months however

could pump up operating costs making it difficult for budget carriers to offer low fares.

37

Source: Edelweiss Capital 22

SOCIO-CULTURAL:

Growing middle class :

1993-1999 : 39.5 m to 56.7 m households

2005 : 300 mn

2010 : 400 mn (Estimated)

Increase in leisure travel by tourists by 15 % in 2005

Foreign tourists in 2006 : 3.2 mn

Tourism industry growth in 2005 : 8.8 %

The main Socio Cultural factor affecting the Aviation industry is the impetus provided by

the rising middle class their lifestyle, social mobility, demographics, income distribution,

education level, etc. From the 39.5 million in 1993 the middle class has increased to 322 million

in 2006. It is also projected to increase to 500 million in 2010.

Another factor is the increase in the leisure travel by the urban Indian. Another thrust to

aviation is given by flourishing tourism industry in India which is one of the fastest growing 22 http://www.edelcap.com/pages/research/homepdf/Eelweiss.pdf

A socio-economic revolution is underway in India as the consumer profile becomes increasingly middle class.

38

tourism industries in the world. The rise of no frills budget travel in India makes it possible for

these less affluent to take the air—“Empower every Common Man in Indian to fly” is the vision

of Air Deccan23.

TECHNOLOGICAL:

These factors look at technological advancements in the Airline Industry. New aircraft

developments in terms of load capacity and flight range could have a great impact on air travel.

Airbus has already received orders for its super jumbo A380. This symbolizes the European

firms stunning reversal of fortune leaving its US rival Boeing in the wake as it will hold up to

800 passengers, virtually swallow the biggest Boeing 747 which comes with a maximum of 450

seats.

The other developments that stunned the airline industry is the introduction of long haul

aircraft, Airbus A340-500 allow Indian Airlines to fly non-stop for 16-18 hrs from India to USA

direct. In response Boeing has revealed plans to use lightweight non-metal materials to build half

of its proposed new 7E7 jetliner, which will reduce fuel burn and maintenance costs. Such

developments would be beneficial for no frills budget airline

Suitable aircraft types need to be considered for operating a LCC and to deduce

maintenance cost, a single aircraft type is utilized. The revolution of ticket-less travel made

possible by the internet has enabled airlines to cut down on ticketing operating cost and at the

same time be accessible anytime, anywhere. This has reduced ticketing costs and increased

operating efficiency.

23 http://www.flyairdeccan.net/Mission_Vision.htm

39

Modernization and Privatization of Airports ; Introduction of modern technology for

efficient handling of Aircraft ,Passenger & Cargo at Airports ; e.g. Installing ILS

(Instrument Landing System) , CAT-3 system at Airports and In Aircrafts respectively

Developing Greenfield Airports with Private Sector ( Bangalore Airport Cooperation Ltd)

Strategic Group Analysis: 

Competitive Landscape

40

S.W.O.T Analysis of the Industry 

STRENGTH

Growing tourism: Due to growth in tourism, there has been an increase in number of the international and domestic passengers. The estimated growth of domestic passenger segment is at 50% per annum and growth for international passenger segment is 25%

Rising income levels: Due to the rise in income levels, the disposable income is also higher which are expected to enhance the number of flyers.

WEAKNESS

Under penetrated Market : The total passenger traffic was only 50 million as on 31st Dec 2005 amounting to only 0.05 trips per annum as compared to developed nations like United States have 2.02 trips per annum.

Untapped Air Cargo Market: Air cargo market has not yet been fully taped in the Indian markets and is expected that in thecoming year’s large number of players will have dedicated fleets.

Infrastructural constraints: The infrastructure development has not kept pace with the growth in aviation services sector leading to a bottleneck. Huge investment requirement for physical infrastructure for airports.

Absence of institutionalized funding

OPPORTUNITIES

Expecting investments: Huge investments are expected to take place in aviation sector in near future. It is estimated that by 2012 investment of about US $30 billion will be made.

Expected Market Size: Average growth of aviation sector is about 25%-30% and the expected market size is projected to grow upto100 million by 2010.

THREATS

Shortage of trained Pilots: There is a shortage of trained pilots, co-pilots and ground staff which is severely limiting growth prospects.

Shortage of Airports: There is a shortage of airport facilities, parking bays, air traffic control facilities and takeoff and landing slots.

Crippling “Oil Shock” High prices: Though enough number of

low cost carriers already exists in the industry, majority of the population is still not able to fly to other destinations.

41

Reasons for Growth in the LCC Sector24 

Low entry barriers: Currently, capital of $ 10 million or less is enough to launch an

airline. Private airlines are known to hire foreign pilots, get expatriates or retired

personnel from the Air force or PSU airlines in senior management positions. Further,

airlines outsource functions such as ground handling, aircraft maintenance, revenue

accounting, IT infrastructure, ground handling, check-in, reservations, catering, training,

loyalty and programme management. Airlines are also known to take on contract

employees such as cabin crew, ticketing and check-in agents.

Rising income levels and demographic profile: Though India’s GDP at $3100 is rather

low compared to developed countries, India is shifting, at least in metro and urban

centers- where IT and BPO industries have made the younger generation prosperous.

Demographically it has the highest % of people within 20-25 among 50 million strong

middle class, with high earning potential. All this contributes for the boost in domestic

travel, particularly from a low base of 18 mn passengers

Foreign equity allowed: Foreign equity of 495 and NRI investment of 100% is

permissible in domestic airlines without govt. approval. However policy bars foreign

airlines from taking a stake in a domestic airline

Attraction of foreign shores: Jet and Sahara have gone international by starting

operations, first to SAARC countries, and then to South-East Asia, the UK and the US.

After years of domestic operations many others too will be entitled to fly overseas by

using unutilized bilateral entitlements to Indian carriers

24 The Hindu(2006)’It is Boom time in the Airline industry(11/12/2006)’, http://www.thehindu.com/edu/2006/12/11/stories/2006121100531100.htm

42

Glamour of the Airlines: No industry other than the film-making industry is as

glamorous as the airlines. Airline tycoons from the last century, like Howard Hughes, Sir

Richard Branson and Dr.Vijay Mallya today, have been idolized .Airlines have an aura of

glamour around then, and high net worth individuals can always toy with the idea of

owning an airline. All the above factors seem to have resulted in a “ME TOO” rush to

launch domestic airlines in India.

Untapped potential of India’s tourism: Currently India attracts 3.2 million tourists every

year, while China gets 10 times the number. Tourist arrivals in India are expected to grow

exponentially especially due to the open sky policy between India and SAARC countries

and the increase in bilateral entitlements with the EU & US.25

25 India Business Week(2006)’India Flying High (21/06/06)’ http://indiabusinessweek.com/Services/Transportation/flyhigh.html

43

Challenges for the Sector26

The growth of the aviation sector in India and capacity expansion by carriers has posted

challenges on several fronts. These include safety concerns, declining returns, shortage of

workers and professionals, and lack of accompanying capacity and infrastructure. Moreover, stiff

competition and rising fuel costs are also negatively impacting the industry.

Regional connectivity: One of the biggest challenges facing the aviation sector in India is

to be able to provide regional connectivity. What is hampering the growth of the regional

connectivity is the lack of airports.

Declining yields: LCCs and other entrants together now command a market share of

47%. Legacy carriers are being forced to match LCC fares, during a time of scaling costs.

Increasing growth prospects have attracted & are likely to attract more players, which

will lead to more competition. All this has resulted in lower returns for the entire sector

Rising fuel prices: As fuel prices have climbed, the inverse relationship between fuel

prices and airline stock prices has been demonstrated. Moreover, this rise has lead to an

increase in air fares

Gaps in infrastructure: Airport and traffic control (ATC) infrastructure is inadequate to

support growth. While a start has been made to upgrade the infrastructure, the results will

be visible only after 2-3 years.

Employee shortage: There is clearly a shortage of trained and skilled manpower in the

aviation sector as a consequence of which there is cut-throat competition for employees

26 Aviation industry in India,(21/07/07); http://www.iloveindia.com/economy-of-india/aviation-industry.html

44

which, in turn, is driving wages to unsustainable levels. Moreover, the industry is unable

to retain talented employees.

Trunk routes: It is also a matter of concern that the trunk routes, at present, are not fully

exploited. One of the reasons being lack of genuine competition. The entry of new

players would ensure that air fares are brought to realistic levels, hence leading to better

cost and revenue management, increased productivity and better services. This in turn

would stimulate demand and lead to growth.

High input costs: Apart from the above mentioned factors some of the reasons for high

input costs are:-

Increase in manpower costs due to shortage of technical personnel

Withholding tax on interest repayments on foreign currency loan for aircraft acquisition.

45

Low‐cost Carriers in India  

The KEY players in the LCC segment

Airline Owner Business

Air Deccan Captain G R Gopinath Helicopter Charters

Indigo InterGlobe Enterprises Global Travel Technology

SpiceJet Royal Holding Services Royal Airways/ Kusagra family

Kingfisher Airlines UB Group Breweries/distilleries

GoAir Bloomberg Dyeing Textiles

For a clear updated and analytical review of the current LCC’s in India refer to Appendix IV

Air Deccan27: Market share 21.3 %

SpiceJet28: Market share 7.8 %

GoAir29: Market share 4 %

Kingfisher: Market share 8.2%

27 For Strategies and SWOT of Air Deccan refer to Appendix IV A

28 For Strategies and SWOT of SpiceJet refer to Appendix IV B

29 For Strategies and SWOT of GoAir refer to Appendix IV C

Beyond the Core Business

Some of India’s carriers are capitalized by successful businesses in other industries. The financial strength, powerful leadership and well-known brands of these companies provide the initial stability many start–up airlines lack.

46

Low‐Cost Carrier Growth 

India’s aviation sector enjoyed a healthy 11 percent increase in domestic passengers from

2003 to 2004, which further grew to an exceptional 25 percent in 2005, coinciding with the

launch of Air Deccan, India’s first LCC. The impact of Air Deccan can be clearly seen on its

Guwahati-Delhi route. After the carrier began serving the route in October 2004, the average

daily passenger load increased from 162 to 215 while fares declined from an average of 6,000

INR (US$135) to 4,000 INR (US$90). The clear correlation in the demand and the price of air

travel in India reinforces what has been observed in other sectors: that India is a price-sensitive

market with huge sales potential at low prices. This especially bodes well for the growing ranks

of India’s low-fare airlines.

Year Passengers

(millions)

% Change

2002-03 28.90 9.6 %

2003-04 32.04 10.9 %

2004-05 40.10 25.0 %

2005-06 50.98 56.7 %

2006-07 63.99 39.7 %

Source: India Ministry of Civil Aviation30

30 http://civilaviation.nic.in/

Domestic Passenger Traffic Growth in India

2002-2006

Low-cost carriers in India have gained a more prominent position in the past 4 years, fueling a significant increase in air travelers.

47

While the rise in gross domestic product and a changing urban lifestyle is leading to a

higher propensity to travel, much of the growth of air passengers driven by the LCC segment is

coming from the conversion of rail passengers (see Competition on track). “Approximately 20

percent to 25 percent of all our passengers are first-time flyers,” said Gaurav Agarwal, head of

marketing for Air Deccan.31 “We grow the market in part by lowering prices on established

routes and getting the train customers to fly. In each of our flights, we get at least 40 to 50

passengers who get off the trains.”32

India has a significant indigenous travel market; the state-run railway network

accommodates roughly 5 billion total passenger trips, of which approximately two billion are

long-distance domestic trips, while the number of domestic air passengers is only 15 million.

Every day, 800,000 passengers travel by first- and second-class air conditioned rail, compared to

just 80,000 airline seats available.

At the right price, some railway passengers, those traveling in the more elite classes, are

likely to shift from rail to air travel. “What we do is price between two spectrums,” said Sanjay

Kumar33, general manager of sales and marketing for SpiceJet. “Our highest fare is around 20

percent to 40 percent lower than the normal economy fare of full-service airlines, and our lowest

fare is close to the air conditioned fare on Indian Railways.”

31 BBC(2005)’Indian Low cost airline expands (25/08/05’), http://news.bbc.co.uk/1/hi/business/3598122.stm

32 Ibid

33 The Financial Express (2006)’ SpiceJet on Performance(27/12/06)’, http://www.financialexpress.com/news/story/187898/

48

It is no surprise that the Ministry of Civil Aviation34 estimates air passenger numbers to

grow to 59 million by 2010. Low-cost carriers, which transported an estimated 6.3 million

passengers in 2005 and 2006, or approximately 20 percent of total domestic passengers, are also

ramping up capacity to prepare for further growth based on fleet orders already placed with

aircraft manufacturers. The market share of low-cost carriers is likely to approach 41 percent by

next year.

34 Ministry of Civil Aviation, http://civilaviation.nic.in/

India’s LCCs such as SpiceJet and Air Deccan, are growing their market share by winning business from the country’s railway system. Approximately 30-35% of Air Deccan passengers are first-time flyers, many of whom have previously travelled via rail.

49

Business Models 

In India, similar to other regions of the world, LCCs with a mix of business models are

emerging. Air Deccan, approaches the market as an add-on retailer. “We make no efforts to lure

high-end passengers; our target is the smart traveler who values his money,” said Air Deccan’s

CEO, Capt. G R Gopinath35. Air Deccan does this by offering some of the lowest cost

alternatives on key routes.

In October, Air Deccan launched an in-flight shopping scheme called “Brand for Less”

with AVA Merchandising, part of the Indian arm of the global merchandising group Envision

Merchandising. “This will also help us get incremental revenue, which will help us reduce fares

further,” said Capt. Gopinath36.

Other new startups are incorporating a pure-play strategy by focusing on their air product

with low fares and low costs. SpiceJet’s stated goal is to be “a low-fare, no-frills airline that aims

to make air travel accessible to everyone.” “We are looking at purely a low-cost model,” said

Kumar37. Likewise, GoAir expresses its desire to be “commoditizing air travel” and promises “a

quality-consistent, quality-assured and time efficient product through affordable fares.”38

35 Express Travel World(2007)’Game theory of Aviation players ( 14/01/07)’, http://www.expresstravelworld.com/200511/airwaves.shtml

36 Ibid

37 The Hindu Business line(2006)’SpiceJet plans fleet acquisition (02/06/06)’, http://www.thehindubusinessline.com/2006/06/02/stories/2006060202630900.htm

38 GoAir commences operations to Chennai- The peoples airline (10/12/2005), http://www.goair.in/news_dec05.asp

50

Recent trends focus on development of more hybrid business models in India. Paramount,

for example, represents an upscale pure-play business model and aspires “to provide world-class

designer products and unparalleled comfort, giving true value for money.”39

The airline targets the business travel market and offers premium-class services on its

flights but not economy class. Kingfisher Airlines, on the other hand, has adopted many

characteristics of traditional full-service carriers. The carrier’s motto says it all, “The Kingfisher

class experience aims to take air travel beyond just getting from here to there.” This includes

seatback in-flight entertainment, extra-wide seating, pre-assigned seats and meal service. In

addition, Kingfisher Airlines confirmed orders for 20 ATR 72-500 turboprops, which Nigel

Harwood, Kingfisher’s chief operating officer, describes as “feeder aircraft” for the carrier’s

Airbus routes40. This clearly implies a network route structure as Kingfisher Airlines grows.

Similar to their global brethren, Indian LCCs have embraced long-held marketing strategies:

price competition and differentiation. Although business models in India may be closely related

to their global counterparts, Indian LCCs have uniquely adapted themselves to their market.

Some aviation leaders in India dispute that the country’s LCCs really have a cost advantage.

39 Paramount Customer Commitment, http://www.paramountairways.com/customer_commitment.html

40 15 Additional ATR Aircraft for Kingfisher Airlines, Toulouse (19/02/06) , http://www.eads.net/1024/en/pressdb/archiv/2006/2006/20060219_atr_kingfisher.html

51

Business Model Detail Global prototype

India Carrier

Add-on retailers Demonstrate a singular focus on managing costs and being the lowest cost player in the markets they serve. Offer a highly basic product and rely on very aggressive low fares to stimulate demand. Rather than targeting a specific customer segment, these carriers seek to attract a broad base of customers through low fares. Developing ancillary revenues like on board sales and fees for baggage are critical for building profitability and further subsidizing even lower fares

Ryanair Air Deccan

Pure Plays Build brand based on “every day low price” concept and offer a basic product. Utilize low fares to stimulate new demand, but profitability is driven predominantly by air travel as opposed to ancillary revenues

Southwest SpiceJet GoAir

Upscale Pure Plays Maintain cost conscious approach but provide a more sophisticated product that often includes frills such as larger seats, in-flight entertainment and business class seating. Brand is based on customer experience, while pricing reflects value versus other similar product offerings in the market place

jetBlue Paramount

Transitional Represent a hybrid between low-cost carriers and traditional carriers. Make tradeoffs involving complexity of their business model and costs such as developing a network route structure rather than point to point and forming alliances with other carriers through code sharing or interlining

Gol Kingfisher Airlines

Low-Cost Carrier Business Models

A study of low-cost carriers identified five predominant business models, which represent a continuum. There are many carriers that use a hybrid of these models, but they generally represent the unique strategies observed in the industry

52

“With two-thirds of your fixed costs that you can’t touch be it fuel, navigation charges,

landing fees, pilots’ salaries it doesn’t make sense to me,” said Naresh Goyal, chairman and

founder of Jet Airways in a recent Airline Business article.41

However, LCCs still are able to achieve numerous benefits due to their business model.

Kapil Kaul from the Centre for Asia Pacific Aviation estimates that Indian LCCs can reduce

their costs by 15 percent to 20 percent versus legacy carriers by adhering to a simplified business

model.42

SpiceJet’s Kumar is even more optimistic. “What is controllable with us? Staff

utilization, distribution costs, operational issues, high route density and aircraft utilization

benefits, and manpower capabilities such as multi-tasking,” he said. “With that kind of structure

in place, you could probably realistically achieve cost differentiation of 20 percent to 40 percent

versus a full-service airline such as Jet Airways or Indian Airlines.”43

To contain costs, Air Deccan doesn’t even provide free newspapers because it would

require more time for attendants to clean the aircraft between flights.

LCCs in India are also highly innovative in managing their sales and distribution

channels. Like other developing economies, internet and credit card penetration is

characteristically low in India. However, rather than relying largely on traditional distribution

channels, LCCs have developed new sales channels to reach the broadest possible customer base.

41 Flight Global (2005)’Naresh Goyal: Jet propelled (21/11/05)’, http://www.flightglobal.com/articles/2005/11/21/202980/naresh-goyal-jet-propelled.html

42 India set to become World’s leading LCC market, (13/08/2006); http://planenews.com/modules.php?name=News&file=article&sid=5571

43 http://avindia.blogspot.com/2006_07_30_archive.html

53

In March 2005, Air Deccan entered a partnership with Hindustan Petroleum Corp. Ltd., a

petroleum refiner and retailer with 4,400 retail outlets, which enables the carrier to sell tickets

through HPCL’s gas stations. In addition, Air Deccan has recently implemented technology

giving its customers the ability to book flights via cell phones using NGPay’s mobile payment

platform.44

The future appears bright for LCCs in India. Yet, while air travel is expected to grow by

more than 30 percent a year in the coming years, many believe that India, like the more mature

LCC regions in the world, will eventually see more consolidation. Kaul predicts that by 2010,

there will be just three large LCCs in India, with other three or four smaller regional players.45

44 Air Deccan partners Indiatimes,(12/10/2006), http://www.m-travel.com/news/2005/10/air_deccan_part.html

45 CAPA(2007)’Kapil Kaul states necessity for Indian sector consolidation(11/06/07)’; http://indiaaviation.aero/news/index.php?option=com_content&task=view&id=3418&Itemid=59

54

Airline Start Date Expected Fleet Size Time Frame

Air Deccan August 2003 75 2010

SpiceJet May 2005 20 2008

GoAir November 2005 36 2009

Kingfisher Airlines May 2005 65 2010

Paramount October 2005 10 2010

Magicair Announced 20 2008

Indus Announced 10 2007

IndiGo Announced 100 2012

East-West Announced 40 2010

Total 376

Source: Centre for Asia Pacific Aviation 46

46 Asian LCCs to take 20% share of Asia Pacific(12/06/2007); http://www.travelindustrydeals.com/news/2095

Expected LCC Fleet Growth in India

The liberalization of the Indian air transport market has created opportunities for new airlines, many of which have adopted an LCC operating model and have announced aggressive fleet growth plans. Almost 400 additional aircrafts will be flying the skies over India.

55

Strategies adopted by LCCs in India 

Whether LCCs have a future in India will depend much on whether they can keep costs

low. Typically LCCs in other countries have followed in large part, the SWA model (pure-plays)

described in the previous section to minimize costs, typically at 30% – 40% below those of full-

service carriers (FSC). More specifically, these costs are derived from a combination of lower

distribution costs, modified aircraft design and lower operational costs (Sanyal, 2005).

To examine the issue more comprehensively, the specific strategies of the 4 principal

operators will now be compared on the SWA model to obtain a preliminary ranking in terms of

their adherence to the model and thereby assess to what extent they emphasize a reduction in

cost. In this respect GoAir and SpiceJet match each other very closely in terms of the following

parameters.

No free in-flight food service.

No advance seat assignment.

No frequent traveler lounges at the airports.

No interlinking agreement with other airlines.

Introduction of paperless/electronic ticketing.

Competing primarily with ground transportation.

Kingfisher may not to be regarded as a true LCC because it provides a fair degree of frills

in adherence to the Transitional model with a desire to attract the business class traveler. To that

extent, its primary catchment area may be considered to be business travelers from other FSCs.

56

Given these considerations, it may be the case that no LCC in India will be able to

duplicate in its entirety the LCC model thereby increasing the break-even load estimated to be as

high as 90%47 . However what tilts the scale in the favor of the LCC is the huge pent-up demand

in the domestic aviation sector that has resulted in nearly every LCC flight operating at almost-

full capacity, “With the outpouring of passengers, Air Deccan, for instance, has managed to

show a profits of INR 1 Crore (ten million) in the very first year of its operation” (Mehra et al.

2005). And Kingfisher too is hopeful of making a profit in a year’s time.

The demand side hence looks extremely bullish given that the Indian Railways carry as

many as 17 million long distance passengers every day which is much more than what Indian

airlines carry in one year (Venu, 2005). Even if a small fraction of this were to be diverted to

LCCs, it would result in a huge expansion of the market.

It is not astonishing that Indian LCCs, even those whose flights are set to become

operational, have been active at the recent Paris show and placed orders for as much as 125 of

the 280 aircraft that were ordered in all.

According to J.W. Lobo, Managing Director of Air One Feeder Airline Private Limited, that

went operational in August 2005, “The market lies in very small towns where 90 or 95 people

need to fly by cities each day. We have identified 311 such cities in India and 40% of the

demand is going to come from these cities”48.

47 FINANCIAL EXPRESS, 2005, Low Cost Airlines off to a Flying Start, Financial Express, 3 June

48 Rediff Business(2005)’Budget airlines unlock huge demand in India(29/06/05)’, http://inhome.rediff.com/money/2005/jun/29air.htm

57

It is the size of this huge market that is making LCC operators confident that they will

find the competition a stimulant to identify the notes that suit them best. As Seema Luthria, Vice

President of Inter Globe Enterprises puts it “India is such a vast country, it actually needs more

planes”49

European aircraft manufacturer Airbus S.A.S is now estimating that India will need as

many as 570 aircraft by 2023 (Phadnis, 2006). The reason for more airplanes is that as the

demand increases, LCCs unlike firms in other industries, have to keep their prices low.

Hence the game is of necessity; low margin high-volume gain. As Air Deccan Managing

Director, Captain G. R. Gopinath puts it, “we want to increase our profits through higher

volumes even if the margins are low, we want to play a volume game”50. Even so, the bottom

line is that despite the margin of safety provided by the high market volume, the focus of LCCs

must remain on reducing costs or more specifically the break-even load factor. Hence they must

consider every avenue that is feasible for securing goals, right from online ticketing, ancillary

services, and reduced turnaround times towards payment for in-flight services.

What remains primary is that LCCs provide punctual and courteous service at low fares.

If they do so they will find that they attract/retain more passengers than is done by “multi-course

meals offered in traditional airlines”, not to forget the much higher volume that would result if

ground passengers switch to the air to reach to their destinations far more quickly than they

could. 49 Ibid

50 Business line; Air Deccan beats on volume game,(14/02/2005), http://www.thehindubusinessline.com/2005/02/14/stories/2005021400860500.htm

58

Differentiation Strategies 

Generally LCCs would seek to pursue a strategy that increases volume to enhance

occupancy levels and yet retain customer loyalty, in at least a small niche of the market. For

instance Air Deccan is seeking to secure its niche by attracting a new generation of passengers;

traditionally those that have travelled by rail (Jayanth, 2005) and are first-time airline passengers.

It has done so by introducing lower fares than ever before through a graded fare structure in

which the earlier you book, the lower the fare. (Ibid)

However not all are of the opinion that a simple low-fare strategy is feasible for every

player. According to Nures Sayeed, Vice President SpiceJet which launched its low-cost carrier

in May 2005, “It is not possible for 10 or more airlines to perform well in a market that is highly

competitive. A dropout of some players is very likely” (Hussain, 2005). A major shakeout of

players is thus expected.

In order to avoid being smothered by the competition, various players are seeking to

position their offerings on factors other than price. Thus SpiceJet is positioning itself as an airline

that offers low fares and flies on schedule.51

While Coimbatore based Paramount Airways using the Upscale Pure Plays model plans

to have fares slightly higher than that of low-cost airlines since it plans to offer frills to those of

its travelers who would normally travel business class on full-service airlines.52

51 Deepak Arora; Spice, Kingfisher hot up fare war in Indian skies, (21/05/06), http://www.thetribuneonline.com/aviation-archives03.htm

59

According to Girish Shah, marketing head, Kingfisher Airlines, “there is a limit to a

reduction in airline fares”53. In this view, LCCs would need to find multiple ways of earning

revenue from flights.

Mr. Thiagarajan, Managing Director, Paramount Airways, opines that what air travelers

seek are “low fares coupled with a comfortable travel experience”54

These views appear to be in consonance with the views of Lederman and Januszewski

(2003) who believe that “product differentiation is an essential part of the entry strategy of

LCCs”. As of now, the scope for product differentiation seems limited and it may be unnecessary

given that there seems to be enough room for growth for all players. Moreover, there may not

exist that much scope for product differentiation achieved through cost-leadership strategies

mainly because the LCC segment is still in a nascent stage and its infrastructure is not developed

to the extent required to support differentiated services.

52 Business line; Paramount orders 15 more Embraers worth $600m,( 21/03/2007), http://www.thehindubusinessline.com/2007/03/24/stories/2007032401880500.htm

53 Ensuring the travelers enjoy the ‘Good Times’ with Kingfisher Airlines,(15/02/2007), http://www.airlineinformation.org/publications/Issue6_shah_kingfisher.html

54 Paramount to enter western Indian skies,(27/02/2007), http://indianaerodef.wordpress.com/category/paramount-airways/

60

Competition 

There are three kinds of competitive scenarios that seem most relevant for a strategic assessment

of the LCC sector. These include the following:

Competition between LCCs and FSCs

Although in the longer run, the prime catchment area for LCC will be those customers

that currently patronize ground transportation; the short-term impact of their entry is experienced

directly by FSCs since its cost differential is a very attractive feature for those travelers who are

inclined to consider the frills as dispensable. Hence it is no wonder that FSCs have begun

thinking of offering their own low cost alternatives to the services provided by LCCs. However

as the American experience showed, these services are likely to cannibalize sales from their own

passengers and make the parent airline bankrupt.

This could be one reason why apart from proposals, such services have not taken off.

While legacy carriers are all for improving yields, they are under constant pressure from the

LCCs, which are offering thousands of tickets at lower prices on the same routes. Defending the

budget airlines, Air Deccan MD G.R. Gopinath says, “Competition is a business reality in every

industry and the fat cats should not expect us to change our model. Our costs are much lower

than the others and we can afford to offer lower fares.”55

55 Air Transport World, Too Much, Too Soon; Indian airlines have had their boom. Now they are headed for the bust,( January 2007), p.51, http://www.atwonline.com/magazine/article.html?articleID=1813

61

However what is evident that the introduction of LCCs on regular metro routes has

resulted in a reduction of the airfares traditionally charged by Indian FSCs leading thereby to a

rationalization of fare-structure on these sectors to the benefit of the passengers (Mehra et al.

2005).

Competition amongst LCCs

Over the last few years 5 new LCC have gone operational causing immense competition,

by lowering fares to grab market share in a market of rising prices. Yet for the airlines, ground

realities are harsh. Relentless oil prices and competition have ensured that most of their growth is

profitless. Carriers are overlapping each other's networks and aggressive pricing has resulted in

yields that often are below breakeven levels. Unfortunately, the losses come at a time when most

are introducing new aircraft and launching new services, ensuring that cash outflow is even

higher. Industry analysts predict a round of consolidation by the end of 2009, even as there are

no signs that the overcapacity situation will ease anytime soon.56

Longtime India watcher Peter Harbison, executive chairman of the Centre for Asia

Pacific Aviation, says, “In a market where fares on most routes are probably 25% below

sustainable levels, no one can be fully insulated and only the best-funded will survive.”57

Many, like Paramount, IndiGo, GoAir and Kingfisher, were launched by large business

groups attracted by the visibility and potential of the airline industry. They are being funded by

revenues from more successful businesses such as alcohol sales in the case of Kingfisher and

56 Air Transport World, Too Much, Too Soon; Indian airlines have had their boom. Now they are headed for the bust,( January 2007), p.51, http://www.atwonline.com/magazine/article.html?articleID=1813

57 Ibid, p3

62

textiles for Go Air and Paramount. Notwithstanding the pedigree, there is obviously a limit to the

cash-burning ability of the promoters.

Every airline has to decide on its own pricing. But the difference between average costs

and average revenues is now about 50% and so LCC’s need to be more responsible. As in several

other markets, there is polarization, with full-fare airlines such as Jet, Indian and Sahara on one

side of the fence and LCCs like Air Deccan, SpiceJet, Go Air and Kingfisher on the other. These

four together have about 230 aircrafts on order. The big question yet remains whether the market

can handle all of this lift.58

Air Deccan's reputation for burning cash to grab market share has been strengthened by

its poor financial performance in 2006. It has about 22% of the domestic market but losses for

the last year were $24 million and it has run through much of the money it raised in its IPO.

Air Deccan's pursuit of market share has stretched resources and emboldened

competition. Adding to its challenges, its service reputation has taken a beating owing to

cancellations and delays to the extent that rival LCCs are careful to position themselves as very

“un-Deccan-like.”

Doubts also persist about the viability of the LCC model in a high-cost market like India

where domestic airlines have to pay excise duties of 50%-60%. All the vital input costs like lease

rentals, fuel, interest rates and salaries have gone up. The revenue side has to keep pace and with

such fierce competition leading to reduced fares and low yields, the scenario looks quite

doubtful.

58 Ibid

63

Passenger traffic grew by 28% in 2005-06, whereas domestic seat capacity grew by

almost 40% leaving carriers with an excess of seats and a lower load factor. Most analysts agree

that the level of losses is unsustainable and will drive some new and potential entrants out.

Despite this challenging environment, up to 4 startups are planning to launch.

Among those carrying on unfazed is Bruce Ashby, CEO of India's newest LCC startup

IndiGo. “The situation is not the same for every airline and what you do with the market makes a

huge difference,” he says. IndiGo, which has a fleet of six planes, now has a huge stake in the

future with an order for 100 aircrafts by 2012. “We will focus on relentless cost-cutting and will

offer affordable rather than cheap fares” IndiGo has a target of an average fare of INR 3,000

(about $55) system wide and is aiming for a 65%-70% load factor.59

Indian carriers have flirted unsuccessfully with the concept of consolidation. New

partnerships between airlines are expected to emerge in the months ahead to address

overcapacity, skills and airport capacity shortages and to prevent losses. It is quite possible that a

full-service carrier may acquire an LCC within the next 12 months, say some analysts.

Some airlines also eventually may defer their aircraft deliveries to buy more time. It is

very clear that no one is willing to give up easily.

59 IndiGo takes deliver of its fifth brand new Airbus A320,(23/12/2006), http://aviablue.blogspot.com/

64

Competition between LCCs and Rail services

For every passenger who boards an airplane in India, roughly more than 360 passengers

board trains. At first glance, these statistics seem like a windfall for the country’s centrally

managed rail system, but in fact, they show the enormity of the potential air travel market. And,

recently launched LCC’s are stepping in hoping to lure this market into discovering the benefits

of flight.

In particular, they are targeting India’s upper-class rail passengers, who account for about

20 percent of rail’s revenues. Perhaps for the first time in its more than 150-year history, India’s

rail system is facing direct competition. For decades, rail has been the country’s principal mode

of passenger and freight transportation, playing a key role in the economic and social

development of the country. More than 60,000 kilometers of track and 8,000 trains carry more

than 14 million people each day throughout all parts of the country and to neighboring Nepal,

Bangladesh and Pakistan.

Air-conditioned express trains, introduced as an alternative to once prohibitively

expensive air travel, connect most major cities. The majority of rail passengers, however, travel

in overcrowded and sometimes outdated lower-class carriages. For most of India’s population,

rail is the least expensive and most popular mode of transportation. But that is all changing.

65

Rail Full Fare Promotional /Discount

Rail First A/C 4,180 INR NA

Rail Second A/C 2,230 INR NA

Rail Third A/C 1,490 INR NA

Airline Full Fare Promotional/Discount

SpiceJet 3,660 INR 2,260 INR

Air Deccan 3,575 INR 2,828 INR

GoAir 3,600 INR 2,250 INR

Kingfisher Airlines 3,970 INR NA

The recent emergence of LCCs is placing air travel within reach of thousands of middle-

class Indians eager for alternatives to a sometimes congested and unpredictable rail system.

Perhaps more importantly, these airlines are stimulating economic growth and development by

focusing services on secondary cities and towns with airstrips that have gone unused since the

end of World War II rather than the country’s handful of crowded, big-city airports with

established carriers.

Indian RAIL vs. AIR Fare Competition

Although rail remains the dominant mode of transport in India, fares offered by LCC may soon begin to attract passengers, particularly those travelling in First-and Second-class A/C rail cars. The three week advance purchase fares on LCC’s from Delhi-Mumbai, for example, are comparable to those offered by rail in premium classes.

Low-Cost

Rail Classes

66

The results are encouraging. Due to increased accessibility, these secondary locations are

now being evaluated with interest by businesses desiring to expand or relocate from

overpopulated areas. With fares as low as 487 rupees (£ 6 ), passengers can fly to these

destinations once only accessible by train, arriving in a fraction of the time. Does this mean

India’s rail system is destined to become obsolete? Not so likely. First, it’s important to realize

For 150 years, rail service has been the most common means of travel in India, but the increase in LCC in the country and a much improved economy presents enormous opportunities to convert these rail passengers to the air.

67

that the majority of India’s population will most likely continue to utilize the rail system as its

primary mode of transportation for a number of reasons.

Despite plunging air fares, some will never be able to afford the price of an airline ticket.

Others will have no interest in experiencing the unfamiliar. And for many people, it’s a matter of

convenience. For example, an hour and- a-half train or bus ride may be required to reach the

nearest airport from a remote village, followed by an average one- to two-hour wait at the airport

to check in, clear security and board the aircraft. After a two-hour flight, another hour-long train

trip to the final destination is required for a total of 5-6 hours. The same trip via train may take

seven hours, but the majority of cities, towns and villages have centrally located train stations

with easy access to neighborhoods and businesses. Getting from point A to point B may take

longer, but it’s not nearly as complex.

What it does mean is that India’s rail system must upgrade and reposition itself to

effectively compete in the 21st century. Progress has been slow, but the appearance of LCC’s

with competitive fares may prove to be the catalysts needed to jump start this enormous project.

As an integral part of India’s past and present culture and economy, the country’s rail system is

not likely to disappear despite the challenges it currently faces internally and externally. Even

with the upstart of several LCC’s last year, Indian Railways’ passenger traffic grew by 10

percent and its earnings by 12 percent.

The good news, therefore, for both the rail and air travel businesses is that India’s

transportation sector is experiencing extreme growth in passenger demand fueled by a

developing economy. More than ever, this vast nation of more than 1 billion people is on the

move, and its citizens now have more choices than ever before for getting to their destination

68

Rail stations in India serve 13 million passengers each day to various parts of the country and neighboring countries.

69

FUTURE  

India’s Aviation Infrastructure preparing for takeoff

The future of Indian aviation market is glittering .India is sitting on the threshold of air

transport revolution .With the emergence of Low Cost Carriers the rules of the game have been

changed dramatically. Within four years a lot has been changed in the aviation industry in the

form of tumbling Big names and emergence of new players. The low cost carrier is the BUZZ

word

The following is the forecast for the no. of passengers in the coming years .

India’s “air travel revolution,” declared last December by Civil Aviation Minister Praful

Patel, won a major skirmish when the Indian government approved bids by two public/private

partnerships pledging 184 billion rupees (US$3.5 billion) to modernize the country’s Mumbai

and Delhi airports.

70

The airports in Mumbai and Delhi handle half the total air traffic in India 540 and 460

flights/daily, respectively. According to projections, the airports will handle three times more

traffic by 2010, numbers that imply Mumbai and Delhi will be as busy as Hartsfield-Jackson

Atlanta International Airport and Chicago O’Hare International Airport are today. 60

The market is growing. The potential is great. But can the infrastructure support the rapid

growth?

Detractors have decades of inertia to back them up. Aviation tourism writer Rabindra

Seth said, “Airport infrastructure has always been built for yesterday, never for tomorrow.” 61

Overregulation and mismanagement have left a legacy of a grossly underdeveloped air transport

industry plagued by delays, safety concerns, low customer satisfaction levels and operational

problems.

According to the Business Standard, delays of anywhere up to an hour have become par

for the course in airports such as Delhi and Mumbai62. Both airports typically handle 25 to 28

flights an hour, compared to 40 per hour per runway at most international airports. Lack of

adequate runways increases airport turnaround time. Extra fuel for delayed landings and takeoffs

in India may cost each air carrier nearly 7 billion rupees (US$131 million) annually.63

60 The Tribune news, Govt awards bids for Delhi, Mumbai airports:Reliance unhappy; Mumbai airport staff begins stir,(01/02/2006), http://www.tribuneindia.com/2006/20060201/main1.htm

61 The Tribune, When PM’s plane landed on paraffin lamp-lit runway,(16/01/2005), http://www.tribuneindia.com/2005/20050116/biz.htm#5

62 Business Standard(2007)’Nortel upgrades networks at four airports(18/08/2007)’, http://www.businessstandard.com/common/storypage_c.php?leftnm=10&autono=298323

63 Asia Times; Boom pangs in India’s Aviation industry,(06/12/2005), http://www.atimes.com/atimes/South_Asia/GL06Df02.html

71

Skies Cleared for Change

Modernizing India’s airport infrastructure is a monumental task. But India’s Secretary for

Civil Aviation Ajay Prasad is optimistic the country’s politicians have finally grasped the need

for urgent reforms if the country is to take advantage of the unprecedented upsurge in its

economy. He cites “blue sky” reforms currently being implemented based on recommendations

of the Naresh Chandra Committee64. The Chandra Committee, named for its chairman, recently

published an extensive report on problems within the aviation sector, identifying four key steps

to solving them:65

Establish a level playing field and remove the extortionate tax regime via lower taxes and

charges across the entire industry.

Promote private equity participation by reducing barriers to entry.

64 http://civilaviation.nic.in/moca/nccommittereport.pdf.

65 Developing a Community Civil aviation policy towards the republic of India, http://eur-lex.europa.eu/LexUriServ/site/en/com/2005/com2005_0409en01.pdf

By 2010, India’s govt. will revamp its main airports, to help relieve congestion due to increased traffic

72

Strengthen the Directorate General of Civil Aviation by ensuring it is adequately manned

to regulate all important disciplines such as airworthiness, flight operations and

monitoring air traffic control services.66

Develop institutional mechanisms that provide support for socially desirable but

uneconomic services.

The New Delhi and Mumbai deals are evidence of the government’s commitment to change.

In addition to these international upgrades, Unique Zurich Airport AG recently began

constructing a new, privately owned airfield in Bangalore, the “Silicon Valley” of India and very

soon its biotech hub. The Aviation Authority of India has also proposed to modernize 35 non-

metro airports to world-class standards. Another 50 are being considered for improvement.

Under the proposed plan, the government will adopt a “cluster approach” where five airports in a

zone will be grouped together under a joint venture.

“Since there are many small airports in a zone that are loss making, we are going to club

them with the profit-making airports in a particular zone or region,” said Prime Minister Patel.

“This will help fund the modernization program of the airports as well as development of all the

airports that will happen simultaneously. By 2010, the work is expected to be completed.”67

Other short-term measures meant to clear India’s runways include:

Proposed relief packages aimed at high fuel taxes and navigation charges.

Finalization of a long-term national civil aviation policy.

Approval of private companies to sell jet fuel.

66 See < http://civilaviation.nic.in/moca/nccommittereport.pdf>

67 Rediff (2006)’How Praful Patel has changes Indian skies,(24/10/2006)’, http://www.rediff.com/money/2006/oct/24spec.htm

73

Agreement allowing third-party ground handling.

Revamping of how routes are awarded.

Incorporating air traffic control.

Limited open skies to cater for peak season requirements.

Liberalizing international routes with neighboring countries comprising the 10-member

Association of Southeast Asian Nations.

A flexible approach to airport financing and easing of foreign direct investment, with

74% allowed without government approval for airports and up to 49 % in airlines. Non-

resident Indians can take a 100 % stake in domestic airlines without approvals.

The government promises major structural reforms are just months away from being announced.

The skies over India are worth watching.

74

Chapter III: Research Design and Methodology 

The primary data consists mainly of inputs derived from answers to two types of

questionnaires provided by LCC airline travelers and travel agents. It was also decided to obtain

response, by aviation analysts but as will be explained shortly, these responses were not

considered in the final evaluation and hence do not form part of this study. One reason the

primary research consists mainly of responses to questionnaires, is that the LCC industry is still

in its fledgling stages in India and hence hard data regarding operations and financial outcomes

is still in a nascent stage and therefore difficult to access. Although it is true that most data that is

obtained from the questionnaire format appear to be in the form of attitudinal responses, the

questionnaires desired were mainly used to provide identification of factors rather than assess

their intensity. Since India has some major shortcomings to be regarded as a true LCC segment

on the world map, these factors are regressed against the world leaders and recommendations

have been made accordingly.

75

Sample Selection 

The sample of LCC airline travelers was obtained from those who alighted from flights

terminating at the Mumbai Chhatrapati Shivaji Airport (Terminal 1-A & 1-B) .Also the ratio of

frequency of flights per day by these airlines that arrive is roughly 2:3:5 for GoAir (GA),

SpiceJet (SJ) and Air Deccan (AD) respectively. Hence the ratio of the responses that were

obtained was expected to be in a similar proportion.

The responses were obtained by soliciting passengers emanating from LCC arrivals at

Mumbai Chhatrapati Shivaji Airport; GoAir at Terminal 1-A, SpiceJet and Air Deccan at

Terminal 1-B. This was done through two volunteer pairs (one male, one female), who

distributed the questionnaire samples. In order to facilitate this process, it was decided to offer

these passengers some refreshments as an inducement which proved to be quite helpful in

practice. Of the 550 passengers who initially agreed to answer the questionnaire, only about 153

of them completed it. This is not so astounding as it appears, as quite a few of these potential

respondents were interrupted during the process of answering the question; by cell-phone calls or

found that the process required more time than they could spare on were distracted by other

concerns.

Of the 153 responses obtained. GA accounted for 18, SJ for 41 and AD 94 approximately

in the ratio of 1:2.3:5.2. However not all responses were chosen since this would bias the sample

on the favor of the perceptions of AD travelers. Hence it was decided to use the ratio 2:3:5, the

ratio of flights per day and to limit the number of responses considered for selection to 60, 90 or

120. The last two sizes were rejected because that would have meant selecting virtually all the

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GA respondents, a process that would have again biased the chosen sample. Hence the sample

size was taken as 60 with responses being selected through a random procedure resulting in a

final set of responses containing 12, 18 and 30 from GA, SJ and AD respectively. These are the

final set of responses that have been considered in the analysis, which has been described in the

subsequent section.

The sample selection process for the travel agents was easier in the sense that they could

be contacted via email and selected more consistently of the 40 travel agents who were

contacted, 32 were selected, the process terminating with the choice of the last agent. The

parameter enabling selection required that the travel agent accept LCC bookings in some form or

the other. However this was not as simple as it seems for none of the agents accepted LCC

bookings on a commission basis. What they did was to make block bookings of tickets for in-

demand sectors and dispose them at a premium to prospective travelers/customers. It must be

noted in passing that this implies a high load factor for LCCs which ensures that such tickets are

sold out since cancellation charges for low-cost airlines are higher than those for FSCs (Dey,

2005).

Another factor that distinguished sample selection in this case was that the carrier ratios

were not considered since the LCCs in question had not been in operation long enough( <5

years) to establish them as brands. Hence the demand ratio for tickets was not considered a

significant parameter especially since LCC competition per se is not the chief objective of the

study.

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As mentioned earlier, it was initially decided to include the responses of analysts from

the aviation sector. However this proposal was dropped because the sample size was too small

and that the responses that were required could only have been made reliably if more empirical

data was available. This limitation was pointed out by one of the sampled analysts and his

observations were confirmed by the others.

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Presentation of Findings 

The two questionnaires used were to gather information on the perception of LCC’s.

The passenger survey investigated the sensitivity of passengers to a change in fare and which

factors/attributes would encourage them to distinguish between operational LCC’s.

1) How frequently do you currently fly?

Most of the passenger respondents were frequent flyers that flew at least once a week or more

often (72%).

2) How frequently did you fly two years back?

However the second response was at variance with the first in the sense that almost 50% of these

travelers flew less than once a month two years back.

3) What factors do you rate most highly when selecting an airline?

The factors that they rated most highly when selecting an airline were cost (51%) and punctuality

(38%).

4) What of the following alternative modes of transport do you currently use?

Most of the respondents used rail transport (69%) as an alternative mode of transport, making it

valid enough to generalize that LCC’s are in direct competition with the Indian Railway system.

Although not part of the formal responses required by the study, it was found that, rail transport

was used when time was not an issue (recreational travel) and when people travelled in family

groups in which case availability of service/frills was a serious consideration.

5) What of the following would you rate the most undesirable attribute of low-cost carriers?

As expected, in line with the response to Question 3, delays were considered the most

undesirable attribute of LCCs (88%).

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These responses have primarily been elicited to identify the most important factor. However the

response percentages for the other factors can be used to determine, if needed to, those which are

significant.

Having got the most expected responses from the passenger interview, the same

consideration of factor-identification is applicable to the responses obtained from the Travel

Agents. However this data complements that obtained from the passengers and gives a more

complete description of the demand side of the market structure of the LCC airline industry.

1) To what extent has your volume of air business grown over the last two years?

As for the responses themselves, they point to a significant increase in the volume of air

business, (64%)

2) To what do you mainly attribute the increase in airline business travel?

As expected, the increase in business travel was directly proportional to the lower cost of air

travel (82%).

3) What segment constitutes the bulk of your bookings?

Most bookings comprised of business travel (39%) although the figure could be higher since

some of the travel that is undertaken under the personal head is probably for business purposes.

4) What impact has the introduction of budget airlines had on your airline strategy?

The respondents had some difficulty answering this question, since they felt they could not

quantify the impact of the outcome of the introduction of the LCCs with certainty. However most

agreed (70%) that the most likely impact was the increase in turnover resulting from lower costs.

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5) Which line of other business has been the most affected by the introduction of budget

airline?

Again, as expected about 57% agreed that rail traffic was heavily affected, while 39% held the

view that full-service carriers were the ones most affected by the introduction of budget airlines.

Not astoundingly, 85% of these respondents mentioned in passing that they felt

threatened by the possibility of online bookings for LCCs since the bulk of their income was

obtained from regular air travelers that have been patronizing FSCs all these years, in which case

their current increase in turnover may not be sustainable in the future.

In summary, the results of the survey conducted were in line with the survey reports

obtained from journals, newspapers and the internet. LCC’s are widely accepted by the majority,

giving a positive indication of the success of budget travel in India. Cost is the primary factor

distinguishing choice of LCC. While delays were regarded unnecessary, punctuality also lead to

an identifiable feature between LCC. Both the surveys confirmed the railway system as the

biggest loss bearers. LCC’s have lead to an increase in airline business with both business and

leisure passengers getting swirled in by the attractive fares. Finally, most people in the survey

felt that there is a market for LCC in India. Some of these feedbacks form very good discussion

points later in the dissertation.

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Chapter IV: Analysis of Findings   

The findings represent the demand side of the LCC structure resulting from the

introduction of the LCC in the ICAI. It would be appropriate at this stage to mention their

limitations in order to place the analysis in perspective. On account of the relatively recent

introduction of LCCs in the ICAI (< 4 years), the LCC segment has yet to stabilize and/or mature

as a market. As of now, the three carriers AD, SJ and GA are considered as dominant players and

are used as benchmarks for the new entrants in this segment. But the structure is bound to

change, as more players enter the market. Their strategies are yet unclear and hence the future of

the LCC segment is significantly dependent on how they choose to compete.

Moreover, it should be kept in mind that on account of the small size of the samples, the

findings are preliminary in nature and hence need to be substantiated by further studies. Also, for

the time being, it has been assumed that LCC traffic at Mumbai is similar in terms of its

characteristics to traffic at other airports. However as the LCC industry matures this may not be

the case. It is in the context of these considerations that the findings of the present study have

been evaluated.

Competitive Price with Good support service

According to the survey, the most attractive feature that draws a traveler to a particular

LCC is the price on offer. As the words “low-cost” imply, all the carriers have basically adopted

an overall Cost Focus strategy to compete in a particular segment of the market. The competitive

scope is narrow since it specializes on short haul flights of 4hrs or less as shown by the success

of budget airlines in the US and Europe; and is further substantiated by the survey conducted. A

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Cost strategy is attractive as air travel has become a search good (known function) rather than an

experience good, as more people are exposed to flying compared to before, treating it as a mode

of transportation over railways.

Cost Focus positioning strategy certainly works well against traditional FSC but how will

it fare against LCC operating in the same sandbox?

“We have said that when we have more competition, we will just have to lower our price…we

can go very low. That’s the only formulae we know,” quoted Captain Gopinath MD Air Deccan,

making AD the cost leader in the segment68. However Cost leadership is not sustainable as it can

be imitated easily and the proximity in differentiation is lost.

Staff services, punctuality, safety standards, customer satisfaction and feedback; are all

good support services that Ryanair uses to differentiate itself from its competitors in Europe.

Such is the success in support services that LCCs should try to emulate, as 88% of the

respondents regarded delays as the most undesirable attribute.

Kingfisher the promising new entrant has taken the first step in offering hotel bookings,

car rentals etc at subsidized rates thereby providing travelers a one-stop service solution, which

justifies its pricing a little over the LCC market. Even a perceived differentiation through the

right branding and image will allow carriers to stand out among its competitors

68 The Hindu Business line, ‘Common Man’ to endorse Air Deccan, (05/05/2005), http://www.thehindubusinessline.com/2005/05/05/stories/2005050501590400.htm

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Product differentiation

Lederman and Januszewski (2003) mention that LCCs need to differentiate their services

in order to carve out a niche for themselves. However the extent to which GA, SJ and AD have

successfully differentiated themselves could not be tested because these airlines have started

operations in the recent past and are still in the process of shaping their offerings.

Moreover the primary data could not test the existence of product differentiation because

the travelers interviewed most probably would have travelled on only one of GA/SJ/AD. It was

primarily for this reason that the questionnaire did not seek to establish how their services

differed from one another. However research shows that SJ differentiates itself with Better on-

time performance and fewer cancellations than competitors, AD uses in flight shopping and GA

by adding new destinations every quarter creates differentiation.

Even so, product differentiation could arise by default if these airlines are distinguished

by the routes and type of passengers they cater to, especially if a LCC on a given route does not

have to compete with another LCC.

Route structure

Other focus strategies include the routes undertaken by these airlines. From the strategic

groups formed in the previous section, we realize that no more than 2 budget airlines offer

similar routes. But for instance, if they decide to, on account of the lack of secondary airports or

alternative profitable routes, to compete on the same routes as the current operators do, the

viability of the LCC segment will probably be doubtful.

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Strategies

The application of cost focus and certain differentiation focus strategy, results in an

overall “Best-Cost” strategy and there have been numerous success stories (EasyJet, JetBlue)

behind firms adopting such a ‘Stuck-in-the-middle’ strategy; and prove to be necessary when

competing firms are already into such an approach together with implementing firm having a

technical lead over its rivals.

Moreover the present study is constrained by the fact that it has not been able to

undertake any kind of investigation examining the supply side of the LCC segments, namely an

analysis of costs whether current or prospective to be able to critically evaluate the Effective

Cost Management strategy deployed by the LCCs.

Although Secondary research shows that LCCs use an overall cost leadership as their

primary strategy, having an effective cost management strategy would facilitate them to achieve

their business objective of selling at low price yet earning profit. LCCs will thrive by reining in

operating costs in the following ways

1) Flying a single type of aircraft to cut maintenance costs: Although SJ is the only carrier

operating with a fleet of 18 Boieng 737-800 giving it economies of scale, AD operates 3

different types of fleets resulting in excessive staff thereby increasing its breakeven load.

2) Operating from secondary airports : Due to lack of secondary airports in India all these

years, LCC have been forced to pay higher landing fees thereby increasing cost, but with

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the new reforms of the NCC69 the scenario is bound to change and LCC can exploit this

opportunity to their benefit.

3) Direct E-ticketing sales: The penetration of internet over the past few years in India has

shown astounding results70, thereby facilitating LCCS to eliminate middlemen mark-up.

Travel agents charge an additional 10-20% of the cost in order to cover their own

resource cost, thereby defeating the purpose of cost strategy used by LCCs.

4) Change in Airline culture: This would enable resource versatility. Mismanagement and

incapable staff of the current LCCs comes at a cost to the entire airline. Pilots and cabin

crews need to be trained from first aid to baggage handling to be able to double up when

needed. The culture needs to be changed whereby everyone in the company is viewed to

be equal, thereby enabling LCCs to save on labour costs and offer lower fares to

customers.

Adherence to the prototype model

It would be appropriate to identifying the degree of adherence of Indian LCCs to the

prototype SWA model. As discussed and analyzed in the secondary data that examines the

features of Indian LCC operators, SJ is the LCC that comes closest to the SWA model. On

account of the paucity of time that was available for interviews with LCC travelers, the relevance

of some key features was not tested in the interviews, namely, the absence of frills was not tested

directly. Hence whether a particular LCC fits the SWA model or not has been assessed only on

69 NCC= Naresh Chandra Committee

70 Internet Penetration in India ,(July 2006), http://www.zinnov.com/presentation/India_Internet_Penetration.pdf

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the basis of published data. Accordingly we may assign equal first ranking to SJ and GA for the

extent to which they match the SWA model followed by AD.

What is relevant in this respect is that a limited adherence and differentiation is a good

predictor of profitability (Ryanair, Alamdari and Fagan 2005). Since AD has already reported a

profit of INR 11 million in its second year of operation (with a load factor of 94.8%)71 , our use

of the SWA model seems to be validated.

Determinants of Success

It must be also noted that the SWA model focuses exclusively on cost whereas

profitability is a function of both costs and revenues and so the reported profitability of AD may

be more dependent on the high load factor it enjoys. In case another LCC chooses to operate on

the same routes as AD, the load factor may decrease and lead to losses. Alternatively since both

GA and AD still have some more scope in terms of complying with the SWA model (using

secondary airports, reducing turnaround times), there is every likelihood that the breakeven load

factor could decline from the current value of 90%.Furthermore it is increasingly likely that, the

load factor will remain high given the results of this research; more than 50% of the current

passengers flew less than once a month 2 years back and passenger rail traffic is yet to migrate in

significant numbers to LCCs

71 The Hindu Business Line; Drop in fares boosts Air Deccan’s profits,(31/05/06), http://www.thehindubusinessline.com/2006/11/01/stories/2004110101540500.htm

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However, it must be mentioned that AD reports that as many as 40% of its travelers are

first-time flyers, this justifies our findings on rail and FSC being the most affected businesses by

the introduction of LCC.

Assuming that the same holds good for GA and SJ, on account of the high load factors

reported by them, it seems probable that the high load factor is sustained by business class

travelers migrating from FSC. If one assumes further that increasing awareness and familiarity

with air travel is likely to provide greater momentum to such migration, the future of the LCC

segment seems assured assuming that load factor remains high even as the break-even load factor

declines.

Given such a promising scenario, it would be expected that Indian FSCs would be likely

to protect their turf by putting in place significant barriers to entry, those that Knorr and Arndt

(2002) refer to when SWA began its operations. However no such delicate barriers are on record

except those occurring on account of infrastructural bottlenecks, low availability of landing slots

or of secondary airports or so on. However there do exist plans on paper for Indian Airlines (IA),

the Government owned domestic FSC and Jet Airways (Jetlite) to commence operations on their

own version of LCCs by the year end.

The legal barriers that exist have been rendered ineffective because the Government of

India through the Naresh Chandra Committee report has gone out of its way to facilitate LCCs

growth in India (see pg.66)

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Looking at all the forces directed towards the growth of LCCs in India, it would be appropriate at

this stage to provide a strategic context for Indian LCCs through the use of a ;

Micro Environment Analysis:

Industry Rivalry / Competitors

High Emergence of new LCC Traditional airline setting up

subsidiary budget airline Sustenance possible by

differentiation

Supplier Power

High to medium Major airline

able to drive price, quality and flexibility of suppliers

Use of Similar aircraft for economies of scale

Threat of new Entrants

High Major airline setting up budget

air to extend reach Low/medium entry barriers No established LCC brand

Buyer power

Low Rapid price

erosion High cost in

switching to FSC Choice of LCC

Threat of Substitutes

Medium to low Rail and road transport

loosing losing volume LCC

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Potential Entrants: This Looks and entry and exit barriers of the airline industry

Entry barriers are medium-high ,due to the increase of LCC entry in India , the government has

decided to levy excess scrutiny on new potential entrants ,owing to overcapacity, hence the need

for approval of operating license from the govt. and obtaining the necessary air rights before

flying including safety and security audits could take up to 1-3 years .

In addition, huge investment is needed to setup necessary infrastructure, although new

aircraft can be leased for a given period of time to assess the viability of a route. Given the huge

potential demand for domestic air travel, considerable economies of scale can be effected as can

be seen from the fact that IndiGo (Mehra. et al. 2005), one of the new entrants has already placed

an order for 100 aircraft with Airbus Industry even through it is yet to commence operations.

Though entry barriers are high, the lucrative returns of no frills budget airlines looks set

to catapult itself in the airline industry in India. Since all the operational LCCs are rather new, it

is difficult to identify any operator with significant brand power in the segment unless AD

having the first mover advantage followed by SJ are considered dominant bench markers.

Potential entrants are great with major airlines setting up budget subsidiary and other

private companies ready to join the battle of budget air travel. Barriers can further be reduced by

joint ventures, alliances and bilateral agreements.

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Suppliers:

Suppliers for such a specialized industry are limited and many command a high to

medium threat. Such threats are more evident for LCC than FSC since being bigger with an

extended line of aircrafts and other infrastructure enables them to drive supplier price and

quality. This could lead to an increase in operating cost for budget airlines. One way to curb this

threat is to have the same aircraft type to enjoy economies of scale. As of now, suppliers such as

airports do have some power over LCCs due to restriction or landing slots. However, airline

manufacturers like Boeing and Airbus Industry are going out of their way to woo Indian LCCs.

Hence LCCs may be said to have in an overall sense more leverage with suppliers and hence in a

better competitive position.

Substitutes:

This looks at the other modes of transport to get from point A to point B besides flying;

this would include Train, bus/coach and cars. Some of these could be direct substitutes while

others may not, depending on the destination and the mode of transportation able to reach the

destination. Hence threat of substitutes is medium as many places accessible by flight in a couple

of hours may take other modes a few days and some are not accessible at all.

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Testing the modes of transport from Mumbai- Ahmedabad

Mode of Transport Time taken Cost Comfort /5

LCC : SpiceJet 1hr 10min 1799 INR ( $ 45) 3

Railway : Shatabdi express 6hr 30min 1355 INR ( $ 33) 2

Bus: Volvo A/C Deluxe 7hr 05 min 850 INR ($ 21) 2.5

Car : Self drive 6hr 600 INR ($ 15) 4

From the test, it is clearly visible that consumers have substitutes to the LCC air travel and their

choice depends on their scarce resources.

Since LCCs like Kingfisher, GoAir, SpiceJet and Air Deccan are the only operators on

the routes they fly (with some exceptions), the threat of substitutes is relatively low. The

substitutes that do exist are the FSCs and road/rail network, as tested above. But in the current

scenario and as tested in the research, what one sees is that FSCs and the railway networks are

losing volume to LCCs and not the other way around.

Connectivity Convenience cost

ROUTE

Mumbai – Ahmedabad

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Buyers’:

This threat looks at the bargaining power of passengers which could potentially drive

down prices. Since the switching cost is low buyers have preference of carriers to choose, but

given the current scenario the LCCs again have a leveraged advantage since buyers cannot

switch to other LCCs (since there exists only one LCC on most non metro routes) or will not

switch to FSCs. The buyers that exist are sensitive to price as tested above, but since LCCs seek

to operate on cost leadership strategy, they will attract buyers rather than lose them.

Industry Rivalry/Competitors:

Inter firm rivalry among LCC in India in on an upsurge with new potential entrants and

current players choosing to compete on similar routes. Operations costs are same for all airlines,

irrespective of the model. All LCCs pay the same landing and parking charges, route navigation

fees, etc.

Price competition amongst LCCs in India in the recent months has been on an upsurge,

leaving them in an unenviable position in terms of competitive advantage; since a LCC operator

is now, more likely to have another LCC competitor on a given route, and new players who

slash prices for a piece of market share. Since the primary objective of transporting from Point A

to point B is evident, the level of product differentiation is not high as tested above, thus

intensifying competition in the industry.

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The country’s airlines market leader Jet Airways (FSC) has decided that Air Sahara,

which it recently acquired will start operations under the name of “Jetlite”. “Jetlite will be

positioned somewhere in between a so-called low fare and full service carrier. In case of

cancellation or delays, passengers flying on Jetlite would be accommodated on Jet

Airways.”This kind of differentiation will lead to sustainable competitive advantage in the

market.

This feature also enables LCCs to be reminiscent if they wish to follow the Pure Plays

model (SWA) in its entirety. In other words, product differentiation is not just necessary but also

desirable to establish a pre-emptive campaign to carve a special niche and safeguard it against

potential competition. However except for AD, neither SJ nor GA has chosen to depart in any

significant way from the prototype Southwest model.

Place Deccan Air Spice Jet Go Air Air IndiaEconomy Class Economy Class Economy Class Economy Class

Mumbai-Bangalore 2224 2399 3100 2962Mumbai-Delhi 2024 2599 3400 3171Mumbai-Chennai 1724 2799 3600 3335Delhi-Bangalore 7274 7399 N.A. N.A.Delhi-Mumbai 2024 2899 3200 N.A.Delhi-Chennai 4749 5799 5900 N.A.Chennai-Bangalore 824 1399 N.A. 1481Chennai-Mumbai 3278 3199 N.A. N.A.Chennai-Delhi 3224 4499 3900 N.A.Bangalore-Chennai 1249 1199 N.A. 2962Bangalore-Mumbai 1524 2699 N.A. 3171Bangalore-Delhi 5424 6499 N.A. 3335

Hence it is clearly evident from the above table that lowest fares are charged by Air Deccan.

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However it must be noted that GA, SJ and AD have all adopted some kind of yield

management programmes in which tickets are cheaper the earlier one books them. Such is the

pent-up demand for air travel that on the day SJ opened up its bookings for the Mumbai –

Ahmedabad sector; it got as many as 41000 bookings on the first day itself according to Business

India Intelligence. LCC correlation if it does occur on routes served by more than one LCC is

likely to be in form of competitive yield management programmes, something that would fall

under the usual category of a cost-leadership strategy.

The research findings substantiated cost as an important consideration and reinforced the

view that LCCs need not differentiate their offerings much as long as they provided cost

leadership. However, punctuality too was rated highly significant and if a player is not a cost

leader, only differentiated services would help eliminate this negative perception.

More generally, Najda (2003) reported that the presence of an LCC on any given route

has the effect of lowering prices on that route. This has happened in dramatic fashion to the

extent that even FSCs like Indian Airlines (IA) and Jet Airways (JA) have been offering apex

and check fares in their own version of yield management to prevent their customers migrating

to LCCs. The responses of the travel agents to Question 272 also confirmed this trend and hence

supported the conclusions of Najda (2003) as also those of Richards (1996)

Given such an impact, the prospects for LCC traffic growth in India are quite bright

especially if in the view of Pompeo and Binggeli (2002), LCCs “enjoy protection from business

cycles.”

72 To what do you mainly attribute the increase in airline business travel?

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Furthermore the Government is in proactive mode to modernize infrastructure, including

the building of secondary airports to accommodate the anticipated increase in domestic aviation

and facilitating sector growth through the approval of private companies to sell jet fuel which

would reason a further reduction of a major cost component for the LCCs (see pg 64)

Hence there exists substantial scope for Indian LCCs to adopt a diverse range of business

models ranging from an Add-on Retailers model (Air Deccan), to demonstrate a singular focus

on managing costs and being the lowest-cost player in the market they serve or a Pure Plays

model (SpiceJet , GoAir) obtaining a greater degree of adherence to the SWA model by building

brand based on “every-day low-price” and offer a basic product which bodes well for a reduction

of the break-even load factor ,unless they wish to go the high-way by using the Upscale pure

plays model(Paramount) ; maintaining a cost-conscious approach but provide a more

sophisticated product that often includes frills such as larger seats, in-flight entertainment and

business-class seating.

The options are galore it’s the direction (market they wish to serve) that is principal.

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Conclusion  

The conclusions of the study are preliminary in nature since the Indian LCC sector is still

in a fledgling state with only five LCC operators in service while AD, the largest in service, has

yet to complete four years of service. AD and SJ the principal operators have chosen to adopt the

SWA low-cost model although, given the infrastructural constraints that exist, the degree of

adherence is not too high. Since these constraints are expected to be eliminated in the short-to-

medium term, the future for those LCCs that copy the SWA model seems bright unless they start

competing with each other on the same routes. However given the immense scope for growth in

the form of air routes between Indian small towns, such competition seems unlikely thereby

providing new LCC entrants the flexibility and scope to identify new routes with potential.

Having said that, operators like KF that have positioned themselves above LCCs as value

for money airlines and others seek to straddle the middle segment between LCCs and FSCs

could be in danger if they do not achieve sufficient degree of product differentiation. Being

priced higher than the LCCs, KF is not likely to benefit from the rail passengers migrating to

LCCs. What KF may be hoping for is that business class passengers migrate from FSCs to its

offerings. But the danger here is that this is not a large volume game and that KF may not be able

to attract such customers on account of inertia, loyalty or more simply, lack of enough offerings

on these routes.

As the Porter’s Five-Forces model demonstrates, the strategic outlook for LCCs is bright.

Perhaps this explains why we there are so many prospective entrants in the Indian LCC sector.

More specifically, there is a huge upside on the demand front, especially if high-end rail

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travellers migrate from rail services to airline traffic. In addition, the demand scenario looks

upbeat on account of the increase in Indian domestic tourism (Nichani 2005).

In quantitative terms, what all this translates into is a progressive lowering of the

breakeven load factor (as Indian LCC airliners move up the learning curve or are able to access

aviation fuel at international rates or as more of secondary airports come up leading to lower

operational costs) and a high load factor thereby ensuring greater profitability. However it must

also be stressed that following the SWA model is not a simple copy-and-paste formulae but may

require much by way of corporate and cultural restructuring. In this respect, LCCs may have to

adopt some degree of product differentiation if only to acquire the brand power and identity

required to build customer loyalty.

A look at the future of the Indian Aviation sector seeks to favor LCCs, thus creating a

strain on traditional FSCs. Current airlines need to review and reinvent their business models

strategically, by emphasizing their focus on customer value, in order to stay competitive. They

could benefit from reassessing the core services that customers are offered and clearly

differentiate themselves from competitors. They need to recognize the particular market segment

that offers them the most niches and focus on those routes, while abandoning or working with

other carriers on less profitable routes. However, the primary goal of each low-cost carrier must

be to offer a complete solution to the traveler

Finally, competition will continue to thrive and will reach a point of consolidation, where

mergers, acquisitions, alliance and partnerships will lead to the ouster of certain carriers on the

grounds of undercapitalization and poor management skills. The redundancy of certain carriers

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will lead to an oligopolistic market structure with greater market share in the hands of few

dominant players. Air Deccan with its first mover advantage coupled with Go Air and SpiceJet

which are managed in close adherence to the SWA model will probably be the gainers in the

expected consolidation process. Finally, although the scope for additional differentiation seems

limited owing to market constraints, Kingfisher could well be the surprise performer in this

category. However, the ultimate winner in this travel phenomenon is perhaps the air passenger

and no more, with numerous choices and low cost.

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Recommendations  

In conjunction with the above research findings; Cost and Punctuality (Delays) were the highest

graded distinguishing factors passengers responded to, when choosing an Airline. Keeping these

responses in mind, the following recommendations are made for LCCs to implement:

A] Full Recovery  

Through the use of integrated, advanced decision-support systems, LCCs in India can quickly

and effectively overcome unexpected schedule disruptions.

Airline flight schedules and operations are susceptible to unexpected disruptions that

result from crew shortages, severe weather patterns, system congestion and aircraft failures.

These problems are exacerbated in emerging countries with still-developing airport and air traffic

control systems that are straining to support airline traffic levels. The phenomenal growth of

passenger traffic and aircraft movements in India, as a result of deregulation is a case in point.

Since 1990, India’s domestic airline industry has experienced more than 100 percent growth in

aircraft movements, with almost 6 LCCs in operation and more than 5 new airlines starting or

planning to start operations in an already congested environment.

At the same time, there have not been any significant improvements or expansion of

Airport facilities. (See India’s Infrastructure preparing for takeoff). Even before this massive

growth in commercial air traffic, India’s airlines were exposed to restrictive operations as it is a

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well-known fact that airport and air traffic control facilities in the country are barely able to

support commercial airline operations.

Like most operating environments, the Indian domestic airline market is often prone to

disruptive weather patterns. During November through January, airports in cities such as Delhi

are closed for periods of up to five hours due to early morning and late evening fog. This has a

significant impact on the daily operations of scheduled carriers. Airports are sometimes closed

for several days due to extremely heavy rains during the monsoon season. On August 2006, both

the international and domestic airports in Mumbai (the financial center and major gateway city)

were closed for runway flooding. Granted, they both share the same runways, along with the

military base. Once the airports re-opened, scheduled carriers were forced by the government to

reduce their operations by 30 percent for three subsequent days.

Working under such demanding conditions, LCCs in India need to integrate a fully

functional advanced decision-support system as an operational and innovative tool for schedule

recovery73. An effective schedule recovery system should consider aircraft maintenance routings,

crew connection assignments, passenger origin-and-destination itineraries, operational

constraints (air traffic slots, airport slots, curfews, gates, weather alerts), and relevant market

considerations (coverage, revenue, equipment requirements) to accurately account for typical

decision making within an airline. Decisions on whether to cancel or delay a scheduled flight

have to be based on the bottom-line benefit to the airline.74

It’s not just important to consider the number of passengers on the aircraft, but also what

revenue contribution comes from the flight. In addition, an airline controller has to consider all 73 M. D. D.Clarke. The airline schedule recovery problem, 1997. International Center for Air Transportation, Massachusetts Institute of Technology

74 Ibid.

101

possible solution options including potential equipment substitutions and dynamic flight

schedule adjustments. Such decision making procedures require timely access to passenger

itinerary data in conjunction with aircraft and crew assignments.75An effective decision support

system would derive all the requirement data and information directly from the centralized flight

operations database, and suggestions proposed by the system would adhere to prevailing

operating conditions and restrictions.

For instance, if a particular airport is unable to support operations of a specific type of

aircraft, the system should not assign that aircraft type to operate into the given airport. Of

course, the solution generated by the decision-support system will depend on the integrity and

accuracy of the data stored in the centralized database76. If an aircraft’s minimum equipment list

is not updated after a scheduled maintenance event, the system should inadvertently prevent the

aircraft from being assigned to a specific flight with special operational requirements. As such,

the successful deployment of Decision-support system will dictate a well-established data

management procedure.77

One of the benefits of implementing a DSS is establishing consistent decision making

across the airline. In many cases, individual airline controllers make split decisions that have a

significant impact on the carrier’s profitability. But by standardizing the decision-making

process, managers can be confident that the optimum decision has been made based on

suggestions provided by DSS. Decisions made that consider all aspects of the airline’s operations

75 A.Abdelghany, G. Ekollu, R. Narasimhan, and K. Abdelghany.(2004) A proactive crew recovery decision support tool for commercial airlines during irregular operations. Annals of Operations Research, 127:309-331.

76 J.F.Bard, G. Yu, and M.F. Arguello.(2001) Optimizing aircraft routines in response to grounding and delays. IIE Transactions, 33:931-947.

77 L.W.Clarke, C.A.Hane, E.L.Johnson, G.L.Nemhauser.(1996) Maintenance and crew considerations in fleet assignment. Transportation Science,30(3): 249-260.

102

(resources, costs and revenue) will ensure that the airline is always focused on the bottom line.78

In addition, the ability to make quick yet accurate operations decisions will enable LCCs to

maintain their competitive market position in India.

For carriers in rapid growth mode such as Air Deccan, SpiceJet and GoAir, having a

scalable decision- support tool in place will support smooth operations even in uncharted skies.

78 R. Freling, R.M. Lentink, and A. P. M. Wagelmans, (2001); A decision support system for crew planning in passenger transportation using a flexible branch-and-price algorithm. Economic Institute Report EI 2001-29, Erasmus University Rotterdam, Econometric Institute, 2001. 3.1

103

After the downturn of the industry in 2000/2001, the domestic India air transportation industry is displaying significant growth in terms of aircraft in operation, number of passengers carried and number of available seat kilometers. Such growth is putting a strain on infrastructure, which can further complicate efforts to recover from schedule disruptions.

104

B] Just Checkin’ In 

Congestion in India’s airports as a result of the substantial rise in air traffic over the past few

years can be streamlined through effective self-serve check-in technology.

An overall surge in air travel expected in India in the coming years will be fueled by

more carriers entering the market, pushing airfares down to make air travel more affordable;

improved air transport infrastructure, which will make the industry more efficient; and the

continued growth of the Indian economy, providing citizens more disposable income.

The current volume of 17 million domestic air passengers a year pales in comparison

with the rail passenger volume of more than 12.5 million/day. However, air traffic is expected to

grow to 50 million passengers a year in the next five years.

As air traffic continues to grow in the coming years in India, airlines will need automated

solutions to adequately process travelers. With a middle class expected to grow to 450 million by

2010 and with new open-skies agreements and deregulation of India’s air transport industry,

many airlines are excited about the prospects of the India travel market.

The test!!

Unfortunately, there is a dark side to all of this optimism, at least in the near term. The

Indian government offered open-skies opportunities to the private sector in 1993, creating much-

needed competition. The move resulted in the creation of new airlines, such as SpiceJet, GoAir

and Air Deccan, with an overall decrease in the cost of air travel and an increase in consumer

demand.

105

But the cost of this liberalization in India has been severe congestion at many of India’s key

airports, most of which were built in the 1950s. Two airports Mumbai and New Delhi account

for approximately 52 % of India’s air traffic.

Unless Indian LCCs take the necessary steps, increased traffic at India’s airports will lead

to longer lines at check-in, which could adversely impact customer satisfaction.

As Newcomers enter the fiercely competitive LCC market and air fares become more and more affordable, many of the country’s residents are filling up India’s airports, which are rapidly becoming over crowded.

106

The Solution

By automating some of the check-in functions, India’s LCC have the ability to provide an

enhanced level of service while still controlling costs. Automating check-in functions offers

customers self-service capabilities, thereby freeing agents to handle special needs.79

A tool such as Self-serve Check-in, which provides components such as self-service

kiosks and Web check-in, can help carriers in India effectively manage traffic flow. The Check-

in component’s unsurpassed departure control capabilities simplify traveler processing, both on

and off airport grounds, as well as provide the most definitive and much awaited airport

automation solution available in today’s transportation industry.80

After implementing the Check-in component Southwest and Ryanair, airlines have

realized resource cost savings of up to 20 percent, primarily through staff re-allocation or cost

avoidance achieved, by eliminating the need for additional staff to handle operational increases.81

Airlines utilizing the Check-in component would realize considerable benefits, including:

Increased revenue opportunities: Faster check-in and shorter lines increase traveler

satisfaction, resulting in repeat business.82

Reduced operational costs: Self-service options reduce the need for additional airport

staff and enable growth at a lower cost.

79 See<http://www.caw2002tca.ca/perspectives/Perspectives_06-08_telework_en.pdf>

80 Kiosk Marketplace; Paper airline tickets on the decline; self-serve check-in on the rise (24/03/05), http://www.kioskmarketplace.com/article.php?id=14379&na=1

81 CNN; Self-serve fliers boost airline productivity,(03/12/2003), http://www.cnn.com/2003/TRAVEL/11/03/self.serve.travel.ap/

82 See < http://www.sabreairlinesolutions.com/products/pdfs/SabreSonic_Check-in.pdf>

107

Optimized staff utilization: Enhanced traveler-processing options enable staff to improve

service to customers outside of the traditional ticketing and check-in counters.83

Streamlined deployment: Airport traveler processing solutions simplify application

deployment and maintenance through an application service provider approach, ensuring

uniformity across an airline’s operational network.(Canton, 2004)

For airports in India, the transition to self-service check-in alone, Internet and CUSS

kiosks, could alleviate many of the symptoms of developing infrastructure. Processing

passengers away from small, congested ticketing and check-in areas will streamline this airport

centric activity, helping key airports in India cope with the increase in passenger volumes until

longer-term infrastructure projects are completed.

LCCs in India could integrate with the booming IT industry to deliver Web check-in

capabilities for domestic travelers. Air Deccan, SpiceJet and GoAir should implement several

dozen kiosks during the next few years to help improve the airport experience for its passengers

and further differentiate the airline from an ever-increasing number of competitors.

Once perceived as added benefits, services such as electronic ticketing and self-service

check-in are now seen as standard offerings by seasoned business travelers across the globe. As

India seeks to increase air travel to and from the country, these services must be considered and

incorporated into the design of upgraded and new airport infrastructure.

Fortunately, the groundwork has been laid and the Indian government and Indian carriers

alike are working towards an improved airport environment to support a very bright future.

83 Ibid

108

Further Research  

The findings of this study are necessarily of a preliminary nature, partly on account of the

recent emergence of the LCC segment and partly on account of the small number of currently

operational players. Even so it was possible to undertake a study of this kind on account of the

availability of two kinds of strategic paradigm, namely the SWA model and Porter’s Five-Forces

model. The former provided a tested strategic approach whose viability has been demonstrated

empirically by the successes of Southwest Airlines and Ryanair. The latter provided the strategic

underpinning enabling a broader look and derivation of prognostications.

The study focused primarily on the demand-side of the market, namely the practices of

the LCC entrants in this respect and sought to corroborate the validity of these practices using

primary data.

In sum the study proved to be useful in the sense that it threw up several interesting

possibilities for further study. For instance, it indicates the need to examine progress made in

eliminating infrastructural and entry barriers to enable LCCs to adhere more closely to the tried

and tested SWA model. This could either be done directly by establishing the nature and degree

of these changes or by a quantitative study that examines the relationship between break-even

pay load and the particular strategy adopted by the LCC.

Although it is quite possible that an Indian LCC comes up with an idiosyncratic strategy,

this study interprets the emergence of two kinds of strategies, namely those that are more or less

109

strict adherents of the SWA model or those that differentiate their services to exploit a unique

feature of the industry.

There is also scope for supplementary studies that seek to establish a degree a correlation

between LCC passenger traffic and rail traffic on given routes. It would also be interesting to

examine whether LCC services in India remain limited to only short-haul routes or whether they

enter medium-haul routes without compromising their cost structure.

Finally from the policy angle, there is sufficient scope to examine the impact of various

kinds of policy changes such as those enabling greater airport modernizations to accommodate

larger aircraft like the Airbus A-380. Hence it would be an interesting exercise to see which of

the players are likely to exploit these changes and respond to them proactively to obtain greater

market share and profitability.

(Word count: 20,423)

110

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Appendix I  

 

Table 1  

Where Ryanair cuts its costs 

118

Appendix II 

Table 2  

 

Operating Cost and Revenue for Carriers of Interest 

119

Appendix III 

Table 3  

 

Market Share of Domestic Origin and Destination Passengers in the U.S. (1990 – 2002) 

120

Appendix IV 

A) Air Deccan: 

Come SIMPLYFLY with us…

Market share: 21.3%

Air Deccan, India’s largest and fastest growing low cost carrier, began operations in August 2003 with 1 aircraft and 4 flights a day and is today the fastest growing airline flying over 350 flights a day, spanning the length and breadth of the country while connecting 65 destinations. Air Deccan has the largest network in India and is presently operating a modern fleet of 44 aircraft.

Vision: “Empower every Indian to fly”

Mission: To demystify air travel in India by providing reliable, low cost and safe travel to the common man by constantly driving down the air fares as an ongoing mission

Marketing Strategy: Air Deccan has adopted a unique marketing strategy. As evident from its vision statement, it has endeavored to make every Indian fly. Every Indian is not a rich man, so it has targeted the middle class Indian for its market. The middle class population of India is enormous and increasing at a prompt pace, and Air Deccan saw a prosperous future with them.

Some strategies adopted by Air Deccan are:

• In flight magazine for revenue generating • In flight shopping scheme called “Brand for less” – AVA Merchandising • Tie-up with Café Coffee Day • ICICI-Travel agent purchase card • Tie-ups with HPCL and Reliance Web World • Strong focus on “Low Fare” • Communicates value proposition through public relations, advertising, direct marketing,

and internet. • Emphasis on “fly made possible” and “better lifestyle through Air travel” • Offers ticket package called ‘Value Flier’ to the Leisure Customers

121

S.W.O.T Analysis of Air Deccan 

STRENGTHS

First mover advantage; wider coverage of the country than any other carrier; better infrastructure available in terms of parking space and airport counters.

Lower lease rents to start with, so lower costs.

Dedicated and committed leadership ‘Lean-and Mean’ approach to staffing,

Start-up costs lower than competitors in terms of pilot’s and other staff salaries.

Economies of scale as most competitors have between two and five aircraft. Deccan has a fleet of 44

Highest load efficiency

WEAKNESS

Focuses almost exclusively on South Indian markets.

Image plagued by frequent breakdown and near misses.

Very limited advertising. Already reached the threshold of cost

efficiency

OPPORTUNITIES

Extensive network to exploit the booming Air cargo business.

Plenty of scope for expansion of operations.

Could start “Contractual Employment” Strengthen its position in the Chartered

Flight segment.

THREATS

High attrition rate. The threat of new entrants in the LCC

segment esp. GoAir, Spice Jet , Indigo and Jagson airlines

High risk perception

CHALANGES

Operational efficiency: reducing delays and flight cancellations Brand perception: Deccan’s service is associated with poor quality Processes and training people: poorly-trained staff at airports that falls apart in a

crisis situation Encouraging everyone in the airline to think “low cost” More aircraft bases needed to be able to exploit economies of scale better

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B) SpiceJet Airlines: 

Flying for everyone

Market share: 7.5 %

SpiceJet is a low-cost airline based in New Delhi in India. The CEO and chairman of the company is Mr. Siddhanta Sharma. It is one of India's newest start-up private airlines promoted by Ajay Singh, Sanjay Malhotra and the Kansangra family. It began its services in May 2005. Previously it was known as Royal Airways. One of the other cost-cutting features of SpiceJet is to allow only 20 kgs of luggage with each passenger

Vision: SpiceJet’s mission is to be become India’s preferred low-cost airline, delivering the lowest air fares with the highest customer value, to price sensitive customers. We hope to fulfill everyone’s dream of flying!

With India’s economic and business growth, the percentage of traveling population is burgeoning. More and more Indians are traveling for both business and pleasure and everyone needs to save both time and money. SpiceJet’s vision is to answer the need, to ensure that flying is no longer only for CEOs and business travelers, but for everyone.

Mission: To become India’s preferred low-cost airline, delivering the lowest air fares with the highest consumer value, to price sensitive consumers.

Marketing Strategy

• Entered with Rs. 99 fares for first 99 days offering ‘low everyday spicey fares’ • Aims to compete with Indian Railway’s AC segment • Aims at future fleet expansion to increase market share

As on February 2007 the Spice Jet fleet includes:

11 Boieng 737-800 (plus 15 on order)

On order – 5 Boieng 737-900 ER.

As on today, spice jet has 71 daily flights across its 15 destinations in India.

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S.W.O.T Analysis of SpiceJet 

STRENGTHS

Better on-time performance and less cancellations than competitors

Brand perception quite positive Single fleet type, so costs can be kept

lower A sustainable scaling up plan that’s on

course Consumers feel fares are lower than

other competing carriers’

WEAKNESS

Small fleet structure Concentration only on North-West-South

Indian Sectors Small load efficiency compared to its

biggest competitor in LCC i.e. Air Deccan

OPPORTUNITIES

Future fleet expansion will increase market share.

Attractive fares and up to date quality service will generate a huge customer base comprising of frequent flyers.

THREATS

High attrition rate. The threat of new entrants in the LCC

segment. High risk perception

CHALANGES

One of the challenges for the company is its small fleet structure.

Processes and training of people: poorly trained staff at the airports

Commitment to the business; three months after it started, one of the main shareholders wanted to sell out

Employee : aircraft ratio quite high at present Encouraging everyone in the air line to think “Low cost” Another challenge for the company is to grab the market

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C) GoAir Airlines 

To FLY SMART

Market share: 3.5%

GoAir Airlines is a low-cost budget airline based in Mumbai, India. The airline is promoted by Wadia Group, which has been synonymous with leading Indian companies, through its brands Britannia and Bombay Dyeing. It is the brainchild of Jeh Wadia, who is the Managing Director of GoAir Airways.

The airline was established in June 2004. On 9 June 2005 GoAir announced that it intended to launch operations in October 2005 with a fleet of 20 leased Airbus A320 aircraft. It started operations on 4 November 2005. An order for 10 aircraft from the Airbus A320 family (with options for 10 more) was announced in July 2006. GoAir announced in mid-January 2007 that it plans to sell a large minority ownership position to assist it with funds for continued expansion as well as to improve chances for the sale and leaseback of additional A320 aircraft.

Vision: Go Air Airlines has been showcased as “The People's Airline”

Mission: 'Commoditizing air travel' by offering airline seats at marginally higher train prices to all cities in India. The airlines theme line is “Experience the Difference” and its objective is to offer its passengers a quality consistent, quality assured and time efficient product through affordable fares. GoAir's business model has been created on the 'punctuality, affordability and convenience' model.

Strategy: GoAir's route network spans prominent business and leisure destinations, across India. The route network will provide a value for money option for both business and leisure travelers, without compromising on either safety or service. The airline operates between popular sectors like Mumbai to Ahmedabad, Delhi to Mumbai, Chennai to Delhi, Bangalore to Ahmedabad and Mumbai to Goa, among others. GoAir will soon cover more routes like Bhavnagar, Aurangabad, Kolhapur, Rajkot, Bhopal, Madurai and Kozhikode, at competitive prices in the coming months. Adding new destinations to facilitate travel will be part of GoAir's aggressive strategy.

125

S.W.O.T Analysis of GoAir 

STRENGTHS

Go Air has been promoted by Wadia group, Mumbai based and majority owner of Bombay Dyeing and Britannia Industries, so the base is strong.

GoAir Free Fares.

WEAKNESS

Small network : Only in Southern and Western India with the first nine A30s

One of the challenges for the company is its small fleet structure.

Poor load efficiency compared to Air Deccan and SpiceJet.

OPPORTUNITIES

Future fleet expansion will increase market share.

Flight network extension.

Attractive fares and up to date quality services will generate a huge customer base comprising of Frequent Flyers

THREATS

High attrition rate.

Threat of new entrants into the LCC segment

Huge risk perception

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Appendix V 

Questionnaires  Questionnaire I: Passenger Interview  1. How frequently do you currently fly?

a) Less than once a month b) Once – twice a month c) Once a week d) More often

2. How frequently did you fly two years back?

a) Less than once a month b) Once – twice a month c) Once a week d) More often

3. What factors do you rate most highly when selecting an airline?

a) Cost b) Punctuality c) Availability of seats d) Services

4. What of the following alternative modes of transport do you currently use?

a) Road transport (bus) b) Rail transport c) Car d) None of the above

5. What of the following would you rate the most undesirable attribute of low-cost carriers?

a) Delays b) Lack of frills / amenities c) Availability of seats d) Customer support services

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Questionnaire II: Travel Agents 1. To what extent has your volume of air business grown over the last two years?

a) More than 40% per annum b) Between 25% and 45% per annum c) Between 10% and 25% per annum d) Less than 10% per annum

2. To what do you mainly attribute the increase in airline business travel?

a) Lower cost of air travel b) Increase in domestic tourism c) Increase in availability of seats d) Other (please mention)

3. What segment constitutes the bulk of your bookings?

a) Business Travel b) Personal Travel c) Tourist bookings d) Other (please mention)

4. What impact has the introduction of budget airlines had on your airline strategy?

a) Decrease in sales of full-service carriers b) Increase in turnover resulting from lower costs c) Increase in profitability d) Decrease in profitability

5. Which line of other business has been the most affected by the introduction of budget airline?

a) Road traffic b) Rail traffic c) Full-service carriers d) Other services

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Appendix VI Summary of Responses to Questionnaires

Passengers

No. of Respondents: 60 1 a 7 12%

b 10 16%

c 26 43%

d 17 29%

2 a 20 33%

b 19 32%

c 14 24%

d 7 11%

3 a 30 51%

b 23 38%

c 4 6%

d 3 5%

4 a 8 14%

b 42 69%

c 6 10%

d 4 7%

5 a 53 88%

b 4 7%

c 2 3%

d 1 2%

Travel Agents

No. of Respondents: 32

1 a 20 64%

b 5 16%

c 4 12%

d 3 9%

2 a 26 82%

b 4 11%

c 1 3%

d 1 3%

3 a 12 39%

b 8 24%

c 7 22%

d 5 16%

4 a 4 13%

b 22 70%

c 4 13%

d 2 5%

5 a 2 5%

b 18 57%

c 12 39%

d 0 0%