Air Deccan Implementing the Low Cost Model in India

CASE STUDY

Made By: Group 11

Rachit Tiwari

Piyush Kumar Raghav

Gaurav Kumar Agarwal

Pankaj Jain

Namit modi

Devendra Tadhiyal

R K Soni

Made By: Group 11

Rachit Tiwari

Piyush Kumar Raghav

Gaurav Kumar Agarwal

Pankaj Jain

Namit modi

Devendra Tadhiyal

R K Soni

The Indian economy has grown at an

average rate of around 8% in the last decade: The rise in business

and leisure travel (both domestic

and international

Since 2003, when low fare travel in India

was ushered in, a number of low

cost carriers (LCC) have

entered to serve this fast growing

market

However, all of the LCC carriers and—with rare exceptions—even the full

service carriers (FSC) charging

higher fares have been making

losses.

Operating a commercial

airline in India so far has not been

a profitable business

An Overview

Major players in the Industry

Positioning of Different Carriers:

BOOM AND BUST IN INDIAN AVIATION INDUSTRY

Monopoly of Air India and Indian Airlines

The Emergence of a New Indian Airline Industry

In 2003, Captain Gopinath’s started Air DeccanThus, began the boom phase in the airlines industry .

Restructuring of the Industry

Jet-Sahara merger

Kingfisher-Air Deccan merger

Air India-Indian Airlines

merger

Point to point service

Do not provide frills

Minimum number of air hostesses on the flight

Removing business class, storage space for the meals and limited seat pitch

do not issue tickets to Passengers

Try to minimize capital costs and costs of the crew and hangerage

Save on distribution costs

Low Cost Carriers:

Air Deccan

• Empowering every Indian to flyVision:

• To demystify air travel by providing reliable, low cost and safe travel to the common man by constantly driving down the fares as an on going mission.

Mission:

Corporate (middle-level employees),

small and medium

enterprises (SMEs),

AC/ Second class travelers (middle class)

of Indian Railways.

Air Deccan’s targeting

Concentrated on unconnected regional areas

Two pronged fleet strategy

Lease with AIRBUS

Quick turnaround

High Frequency

Lean Staffing

Reduced expenses on Cabin crew

Booking/customer touch points

Dynamic fare pricing

The Business Strategy

Expansion Plans

Open to

Foreign

investments

as well as

buyouts

Convenience

to

passengers

Ancillary Revenues

Automation to sustain expansion

Strategies for Future sustenance

Airlines No. of aircrafts No. of Flights (daily)

Utilization of aircraft (Flights/Aircraft)

Average fleet age (in years)

Air India 108 - - 11.9

Jet Airways 87 400 4.597 4.5

Kingfisher Airlines 75 218 2.906 2.2

JetLite 24 250 10.416 6.5

Sweating its assets

No Frills

This means that it does not offer any complementary services offered by other full-service airlines.

Complimentary services include multi-cuisine food, airport lounges, magazines, entertainment, etc.

Incur not only the basic cost of food but also the cost of oven, microwave, preheated food cabins and serving trolleys.

Moreover, the aircraft becomes lighter as a result of offloading of heating appliances which increases the fuel efficiency of the aircraft.

This reduces costs associated with food, appliances, heating and serving (stewards and stewardess) thus, resulting in major costs savings.

Online booking and IVR ticketing

Eliminates the need for commissions payable to

middlemen.

Obviates the need of ticketing agents and additional

workers, thus cutting down the wage bill.

The paperwork associated with transactions is

considerably reduced.

The tickets are sent online to the email address of the

customer and the customer can get a printout of the

ticket himself.

Cuts the cost of transactions resulting in lower ticket

prices.

• The tickets are priced according to the availability and demand of tickets.

• The marginal cost of flying an additional customer is very low.

• It earns its revenues not only from the sale of tickets but also from the sale of food items and any other service for which it charges over and above the price of the ticket.

Dynamic Pricing

The airline plans to offer the fuselage, the exterior of the aircraft body, and

in-flight space for advertising.

It is expected to generate revenues worth Rs 50-60 lakh

a month from the move.

Advertising revenues

Low cost or Value carrier ??

CORPORATE STRATEGY AND CUSTOMER FOCUS

To offer its passengers a consistent, quality-assured and time efficient performance at affordable fares.

Targets the 1st, 2nd and 3rd A/C Railway passengers and Volvo Bus Passengers.

Fares - 40% lower than traditional airlines

HUB MODEL• Emulates point-to-point strategy of South

West Airlines• first increases flights in the existing network – spreads costs across different overheads. It utilize

crew, fuel and aircraft more.• Used mostly in metros and Tier-2– Higher income levels : higher occupancy rate– Better infrastructure

COMPARATIVE ANALYSIS

Repositioning to Value Carrier Airlines– Kingfisher Red– GoAir to GoComfort– JetLite

AIRLINE TYPES OF AIRCRAFTS

JetLite Boeing 737 series and Canadian Regional Jets 200 Series.

GoAir Airbus A320s (leased and purchased)

SpiceJet Boeing 737-800Boeing 737-900

Indigo Airbus A320

AirDeccan/Kingfisher Red 48 and 72 seater ATRs on the regional routes and the 180-seater A320 on the trunk routes.

2. Fleet Of Aircraft Utilized

AIRLINE MODEL ADOPTED

JetLite Point to point between metros, hub-n-spoke for non-metros to metros and vice-versa or between non-metros

GoAir Hub/Point-to-point model

SpiceJet Point-to-point, and regional hub-n-spoke

Indigo Point-to-point model

AirDeccan/Kingfisher Red Hub-n-spoke model

3. Models adopted

Low cost v/s low fare• Spice Jet has lowest unit cost at 6.2 cents per ASK;

– Comparable with Southwest, Easy Jet, and Jet Blue. Twice that of Air Asia with unit cost of 3 cents per ASK.

• Usually, LCCs provide point-to-point service while FSCs work on hub-and-spoke system. – Air Deccan has deviated from the LCC business model ;

has a hub-and-spoke model to connect metros with towns.

– This has increased its costs. Bill Franke, Managing Director of leading airline investmentfirm Indigo Partners – “There is not a single airline in India that operates a true low cost

structure, only low-fare and low-margin.”

Is the LCC business model in India sustainable?

• Low-fare airlines have common features.– Easy to replicate and are integral to LCC in India. As a result, they do not

offer a sustainable competitive advantage.

• Typically, a low-fare airline chooses routes that are not already operated by other low-fare airlines. – Head-on competition -> price war -> benefits consumers -> not profitable

to the airlines.

• Government has to improve airport infrastructure if this model is to succeed.– Increase in air traffic not matched with the increase in the infrastructure;

leads to long halts and waiting of these planes, delays besides loss of precious air fuel.

• Shorthaul services impose cost disadvantages. – Quick turnarounds to achieve high utilization become critical.

• Air fuel constitute the largest share of expenses.– The under-developed commodity hedging market puts a stumbling

block on these companies to hedge against fluctuating prices of air fuel.

• The cost of procuring new fleet. Aircrafts need to have at least 80% occupancy of seats to be viable in long run. – Must explore low-cost routes, less time taking routes, rather than

hauling on the same popular routes, if they wish to remain viable in long run.

• Requirement for trained commanders to operate these flights.– Severe demand supply gap -> price hike -> increasing cost.

Future Outlook• Chased market share, i.e., revenue maximization and forced the

incumbents to match their low prices. – While revenue maximization is a good short term strategy to enter the

market, sooner or later, LCCs have to be become profitable. – 2 outcomes — either they go bust in a market shake-out or they

merge/get acquired by other airlines.

Near term challenges– Realizing the benefits of the consolidations.– Realigning their competitive strategies to become profitable. – Pursuing aggressive cost reduction. – The availability of capital. – Constraints due to poor infrastructure for aviation in India.

Not new among foreign low-cost carriers; have either merged or sold off their business due to long-run un-sustainability.