Managerial Economics

An Analysis of Profitability of the Airlines Industry in India

Prepared By Group 2 | Section F

Arnab Chowdhury PGP 26329 Arunkumar R PGP 26330 Avinash Madhavan PGP 26331 Raygonda Birajdar PGP 26332 Biswajit Mohanty PGP 26333 Chinmay Desai PGP 26334 David Sangma PGP 26335 Desegan P PGP 26336

Introduction
History of Aviation in India Current Scenario Factors increasing profitability Factors decreasing profitability Comparative analysis with foreign carriers

History of Aviation in India

1910 -Bhupinder Singh, first Indian to have an airplane 1912 - First air flight between Karachi and Delhi 1931 - JRD Tata awarded Indias first pilot licence 1932 - Tata Aviation Services set up by JRD Tata 1945 Deccan Airways set up by Nizam and Tata

History of Aviation in India

1948 - Government of India took over Tata Airlines 1953 - Enactment of Air Corporations Act 50s 80s - Monopoly of Air India starts 1986 - complaints by Tourism sector, insufficient capacity 1989 - permission for private sector to operate Air Taxis 1992 - East West and Jet Airways commence operations

Current Scenario
Open Skies Policy Recent Growth
Government Regulations Entry of Low Cost Carriers Increasing Competition

Recent Air India Strike Response to Economic Crisis Market Share Analysis Oligopolistic market

Market Share for the year 2009-2010

Factors Increasing Profitability

Tourism
Burgeoning Indian Middle Class
Consumerism Rail Travel Partially Inferior Good for Generation Y

Government & State Tourism Campaigns Medical Tourism New Forms of Tourism (Eco-, Heritage-, Adventure-) Airlines Tourist Packages
Economies of Scale and Transaction Cost Theory

Factors Increasing Profitability

Population and Geography

2nd Largest Population 7th Largest Country by Size All 3 modes of overland travel - Air, Rail & Roadnecessary Consumers perspective:
Longer the distance Greater the Opportunity Costs

Airlines perspective:
Longer the distances Lower the Average Total costs Greater the number of travelers Lower the Average Total Costs

Factors Increasing Profitability

Improvement in Airport Infrastructure

Public Private Partnerships (PPP)

Mumbai (GVK), Delhi (GMR), Hyderabad, Bangalore T3 Terminal at Delhi & Rajiv Gandhi Airport at Hyderabad

Airport Authority of India

Metro - Kolkata & Chennai 35 non-metro cities and 23 other airports

Modernization and expansion of Brownfield Airports

More flights per location Economies of Density

Development of Greenfield Airports

More airports Economies of Scale

Factors Increasing Profitability

Effect of Govt. Policies
Liberalization of air services Revised agreements in air services International operation by private airlines Regional air connectivity Cargo operations National Aviation Company of India

Factors Increasing Profitability

Effect of service quality
Taiwan survey-Service attracts customers Luxury class- Business class Vs Economic Class In-flight Service & Air port Services Presentability - Age, weight, Height of Air hostesses

Factors Increasing Profitability

Effects of e-commerce
Booking- a click away 24X7, any place Reduced customer contact costs Increased transparency and updated information Increased consumer demand

Factors Decreasing Profitability

High ATF cost Shortage of skilled labor Shortage in supply of aircraft Competitive pricing Other factors

Factors Decreasing Profitability

High ATF Price:

High price in India compared to other countries such as Singapore (approx 600%) Sales Tax Custom duty Excise duty Lack of transparency in pricing Monopoly of PSU oil companies

Factors Decreasing Profitability

Shortage of skilled labor

Market expansion increase in demand for pilots No proportionate growth in supply New market equilibrium Higher salary Principal Agent Problem

Factors Decreasing Profitability

Shortage of aircraft supply
Monopolistic market by Boeing and Airbus

Technology driven industry High entry cost

Increase in demand for aircrafts causes

High lease cost High aircraft price Operation cut

Factors Decreasing Profitability

Competitive pricing
Increase in market higher number of leisure travelers Introduction of Low cost Carriers A shift from monopolistic competition Increase in number of players pressure on revenue and profit Distributed market share - Oligopoly

Factors Decreasing Profitability

Other factors
Recession Entry of new players High airport charges

Conclusion
Fallouts of Air India - Indian Airlines merger Booming service sector demand Private-Public Partnerships Improvement in metrics Impediments and Growth

Thank you

HAPPY FLYING