AIR ASIA INDIA: CLASH FOR THE INDIAN SKIES

By X1

Question: 1

What is the market structure prevalent in the Indian aviation sector? The number of airline players in the Indian aviation declined by nearly half between 2005 & 2014. Can this statement be taken to safely conclude that the degree of market power within Indian aviation increased/doubled during the period?

The market structure prevalent in the Indian aviation industry is oligopoly. This can be measured by the CR4 index i.e. the concentration ratio of the top four players. Concentration ratios are the most common measures of market power. The four-firm concentration ratio measures the percentage of total industry output attributable to the top four companies. Another measure of concentration is

the Herfindahl-Hirschman Index.

2005:PlayersMarket shareTotalJET AIRWAYS36.190% (Oligopoly)NACIL30.8HHI-2500AIR DECCAN12.1

AIR SAHARA11

2014:

PlayersMarket shareTotalINDIGO29.585.5% (Oligopoly)SPICE JET19.8HHI-2000NACIL19.1

JET AIRWAYS17.1

From the above table it can be inferred that the market power has reduced currently when compared to 2005. But this can be accounted to a number of new players evolving, mergers and acquisitions etc.. In this type of market the biggest threat is new entrants. Only the players who were able to operate effectively still remain. There have been cases of price wars between them. Thus the market power is still low and the demand supply curve will be kinked. If one player raises the price, the others wont. Where as if one lowers the prices the other players will try to offer even lower prices. This has limited the power of the airline operators in the market since they do not operate by collusion or cartels.Question: 2

What are the barriers to entry faced by new entrants, such as AirAsia India, in the Indian aviation market?

With so many low cost carriers in operation, there is an intense competition in the Indian aviation industry. Stung by this competition, the Indian aviation industry has introduced strict entry barriers, which will limit the competition. Apart from this, there are several other challenges in the Indian aviation sector which a new entrant has to overcome to make its airline functional in the Indian skies. The barriers and challenges faced by these new entrants can be listed as follows:CAR (Civil Aviation Requirements) essentials:

To operate only as a domestic carrier, an operator has to have a minimum fleet requirement of 5 aircrafts. A minimum equity of INR 200 mn to INR 500 mn

To be able to operate of international routes the 5/20 rule was applicable, according to which a carrier needs to possess mandatory more than 5 years of operational experience and a fleet size of 20 aircrafts

Lack of trained and skilled manpower: with the increase in the number of airlines the requirements for trained staff is also increasing and with more entrants there will be a shortage of skilled and trained manpower

Slot allocation policies: new entrants have no access to pre-allocated slots whereas the old players could retain prime slots based on their usage of those routes and historic precedence

New entrants had access to only 50% of the routes so they had a very limited pool of free slots

High cost of ATF : Due to the multitude of cascading taxes by different government entities. This increased the cost of operations drastically, hence for any new entrant high ATF price is a major financial challenge

Lack of proper airport infrastructure and high airport charges:

Poor infrastructure is of grave concern since its causing congestion to the already existing players; with new entrants it will be even harder to accommodate them. Also the availability of slots becomes limited due to this It increases the operational expenses in the form of extra fuel usage when there is a delay in landing due to unavailability of landing space. The low cost carriers have to bear the high airport charges due to unavailability of secondary airports in India

Question: 3

Can the Indian aviation market be termed a contestable market?

Porters five forces:

Threat of new entrant - LOWRequirement of all the legal

permissions to enter into the new

market

Power of suppliers - HIGHHigh investment cost

Suppliers of ATF are limited so

Power of buyers - HIGH

high competition for that

Large number of choices to select

from

Not much difference in the cost of

Threat of substitutes - HIGHswitching

Other modes of transport

(railways and roadways)

Advancement of technology which

Rivalry among competitor - HIGHis minimizing distance

The services provided by the

airline industry is more or less the

same

High exit barriers

High competition due to various

LCC like jet airways, Go air, spice

jet etc.

From the above analysis it is obvious that the Indian aviation industry is not suitable for new entrants but for a company who are well established abroad and are known for LCC operation, the Indian market with (60-70%) being held by LCC should be a very easy target. But this requires the right set of strategies like routes, pricing, promotions and the must of all the efficient operations. It is known that a dozen or so operators went out because of their operational losses than any other factor.Though the aviation industry is like a fortress looks strong, it is not impregnable with the right ammunition.Question: 4

Analyze the demand-supply dynamics within the Indian aviation market. How do these dynamics impact AirAsia India?

Supply side parameter: Available seat kilometers (ASK) This is used to assess capacity growth in the aviation industry

Demand side parameter: Revenue passenger kilometers (RPK) This is used to assess the revenue generated by airlines from passenger traffic.

Exhibit four reveals the excess supply available in the industry. There are too many players with an huge fleet. Indian air penetration rates is extremely unfavorable ie 0.04 air trips per capita per annum. Whereas China is nearly five times above us. In spite of increasing population, per capita income, and GDP etc. air travel is not a viable option for India. There are very low cost substitutes such as trains and buses. The excess supply was around 19000 units for the year 2011-12. Considering all the above factors it is not going to be easy for AirAsia to establish themselves in the market. But owing to their expertise in LCC operations around the world and the lowest pricing they are going to adopt AirAsia may change the outlook of air travel in India thus helping to bridge the gap between the supply and demand. Thus it is not just occupying a dominant position in the existing customer base but also by attracting new customers AirAsia can flourish in the Indian market.

Question: 5

How will an assessment of rival firms reactions shape AirAsia Indias pricing strategy?

SpiceJetGo

JetAirAlliance

FactorIndigoJetAirwaysAirKingfisherLiteIndiaAirAirAsiaPLF85.182.578.678.27872.966.6

80BELF71.781.278.679.39570.399.6

64AUR10.99.811.913.5

10.99.97.416100

90

80

70

60

50

PLF

40

30

BELF

20

10

AUR

0

From the above charts it can be inferred that AirAsia has the lowest breakeven load factor of 64% and also it has the highest operating time of 16 hours and also a record turn around time of 20 minutes. These parameters will lead to operational efficiency, which is the prime need in the aviation industry. Thus the pricing policy of any rivals will not affect AirAsia is anyway because of the following reasons

Lowest operational costs

Deep pockets

Highest operation time

Lowest turn around time

Lowest break even load factor

Also AirAsia has promised to cut the fares by 35% because it can afford to do so. Whereas the other players do not have the freedom or resources to take a loss by lowering their prices. Thus in any pricing war, AirAsia can quote the lowest and be safe.

Question: 6

What strategies should AirAsia follow to survive and grow in the Indian aviation market?

VRIO analysis:

ResourceValuableRareCostly toOrganizationAdvantage

imitate

AircraftYesNoNo

TemporaryLoad factorYesYesNo

TemporaryHumanYesYesYesYesSustainableResource

OperationsYesYesYesYesSustainable

BreakevenYesYesYesYesSustainableload factor

AirAsia must capitalize on its internal strengths to compete in the Indian market.

Aircraft: The aircraft must be leased rather than owning them. This gives a competitive edge because the average age of the fleet will be less when compared to others. The maintenance costs will be low. This is an effective strategy adopted by airlines like Indigo.

Load factor: The load factor of 80% though appears to be satisfactory, other Indian LCCs like Indigo and Spice Jet have a load factor of around 85%. This means effective scheduling and operations. AirAsia must concentrate on increasing its load factor to gain a competitive advantage.

Human resource: A well-motivated human resource is the success behind every operation. Thus the focus on trainings and other skill development should be high. Also analysis says that the lack of skilled manpower may be a problem in the future. Lack of adequate trained and skilled workforce would pose a challenge.

Operations: All the airlines that have shut down all these years are due to poor operations and operation losses. Data says that the total operation losses amount to around INR 260 billion. This explains the importance of efficient operations in the airline industry. Thus to facilitate effective operations the following must be done;

Fuel hedging

Fuel saving aircrafts in the crew

Optimizing crew and aircraft utilization

Superior airline management system

Automation of baggage handling process

Lowest turnaround time

Highest flying time

Pricing & promotions: AirAsia has promised to cut the fares by 35% because it can afford to do so. Whereas the other players do not have the freedom or resources to take a loss by lowering their prices. Thus in any pricing war, AirAsia can quote the lowest and be safe.

Mergers and acquisition: The route and slot problems can be partly eliminated by strategic mergers and acquisition of sick airlines.