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:
Players
JET AIRWAYS
NACIL
AIR DECCAN
AIR SAHARA
2014:
Players
INDIGO
SPICE JET
NACIL
JET AIRWAYS

Market share
36.1
30.8
12.1
11

Total

Market share
29.5
19.8
19.1
17.1

90% (Oligopoly)
HHI-2500

Total
85.5% (Oligopoly)
HHI-2000

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:
1 CAR (Civil Aviation Requirements) essentials:
1- To operate only as a domestic carrier, an
operator has to have a minimum fleet
requirement of 5 aircrafts.
2- A minimum equity of INR 200 mn to INR 500 mn
3- 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
2 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
3 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
1- New entrants had access to only 50% of the
routes so they had a very limited pool of free
slots
4 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
5 Lack of proper airport infrastructure and high airport
charges:
1- 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

1- 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.
2- 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 - LOW

Power of suppliers - HIGH

Power of buyers - HIGH

Threat of substitutes - HIGH

Rivalry among competitor - HIGH

Requirement of all the legal

permissions to enter into the
new
market
High investment cost
Suppliers of ATF are limited so
high competition for that
Large number of choices to
select
from
Not much difference in the
cost of
switching
Other modes of transport
(railways and roadways)
Advancement of technology
which
is 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?

Allianc
Spice
Jet
Go
Jet
Air
e
Factor Indigo Jet
Airways
Air Kingfisher Lite India
Air
PLF
85.1 82.5
78.6
78.2
78
72.9 66.6
BELF 71.7 81.2
78.6
79.3
95
70.3 99.6

AirAsia
80
64

AUR

10.9

9.8

11.9

13.5

10.9

9.9

7.4

16

100
90
80
70
60
50
40

PLF
BEL
F

30
20

10
0

AUR

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
1
2
3
4
5

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:
Resource

Valuable

Rare

Costly to

Organizatio
n
Advantage

Aircraft
Yes
Load factor Yes

No
Yes

imitate
No
No

Human
Resource

Yes

Yes

Yes

Operations Yes

Yes

Yes

Yes

Temporary
Temporary
Sustainabl
e

Yes

Sustainabl
e

Sustainabl
Breakeven Yes
Yes
Yes
Yes
e
load 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;
1 Fuel hedging
2 Fuel saving aircrafts in the crew
3 Optimizing crew and aircraft utilization
4 Superior airline management system
5 Automation of baggage handling process
6 Lowest turnaround time

7 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.