Managerial Economics Project Report

(Indian Airlines – An Oligopolistic Sector)

Industry – Aviation

Submitted to
Indian Institute of Management, Kozhikode

Submitted by
Yeshaswini Rajendra (ePGP-03-193)
INDIAN AVIATION INDUSTRY –AN OLIGOPOLISTIC SECTOR
ABSTRACT
Aviation sector in India has been transformed from an over regulated and under managed sector to be a more
open, liberal and investment friendly sector since 2004. Entry of low cost carriers, higher house hold incomes,
strong economic growth, increased FDI inflows, surging tourist inflow, increased cargo movement, sustained
business growth and supporting government policies are the major drivers for the growth of aviation sector in
India. Forecasts by AAI for the next 5 years have projected a sustainable growth rate of 16% for international and
20% for domestic aviation sector. Recognizing the exponential growth of air traffic in India, the Ministry of Civil
Aviation has been following a very liberal policy in the exchange of capacity entitlements / traffic rights. Domestic
airlines have been allowed to fly overseas, forge partnerships with foreign carriers while foreign carriers in turn
have been interlining with domestic airlines to access secondary destinations. The government has also tried to
ensure an environment conducive for growth of all stakeholders associated with Indian aviation segment. With the
rise in the number of airlines, growing passenger segment and route expansion, there is however a need for
Indian airports to have their infrastructure in place, which unfortunately at present is the weakest link in the chain.

This report will discuss about Airlines Sector as an Oligopolistic sector in Aviation Industry. Demonstration of
Oligopoly behavior of Airlines in Indian aviation sector, How Airlines Industry work and influence aviation sector
and get competitive advantage of their dominant position. Role of Aviation in responding to Indian economic
situation and take suitable action to stabilize aviation Industry in India. Relationship of Civil Aviation with Private
Airlines and Government funded Airlines and a collaborative approach to make this industry stabilize.
INTRODUCTION
The Indian economy has grown at an average rate of around 7% in the last decade. The rise in business and
leisure travel (both domestic and international) due to this growth, India emerging as a major origin and
destination for international travel have all had a significant impact on commercial aviation in India. According to
the airports authority of India (AAI), the passenger traffic is expected to grow at over 20% in the next five years.
Since 2009 there has been sharp increase in both domestic and international traffic carried by and in capacity of
Indian carriers. On the supply side, 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. By and large,
operating a commercial airline in India so far has not been a profitable business. In 2007, the industry witnessed a
wave of consolidations primarily to stem the tide of red ink. As the intensity of competition increases and the
environment for civil aviation in India changes, the airlines have to rethink their strategies.

CIVIL AVIATION INDUSTRY IN INDIA

Before 1953, all the airlines in India were private ones. In 1953, the government of India under the Air
Corporations Act nationalized and merged the eight private airlines that existed then and 1992 created two state-
run airlines out of them. In 1991, the Indian economy began to liberalize. It became more open and market-
oriented, and the process of deeper integration with the world economy had begun. These reforms were extended
to the civil aviation sector in 1994 when the Air Corporations Act of 1953 was repealed. This enabled the entry of
private carriers who could now offer scheduled services. The market did not grow large enough for all these
players to compete. There was a shake-out and many of the airlines went bankrupt. Jet Airways and Sahara
Airlines (became Air Sahara in 2000) are the only surviving carriers from that era. The year 2003 in many ways
was a watershed year for commercial aviation in India because for the first time, a low fare carrier—Air Deccan—
began its operation in India. It was also a turning point for demand and capacity which have had an explosive
growth since. While the annualized growth rate for the ten year period leading up to 2010 for Available Seat
Kilometers(ASK) and Revenue Passenger Kilometers(RPK) for domestic travel were 10.05 and 10.31 respectively
, the average growth rates in the three years from 2003 jumped to over 15.5% for ASK and over 22.5% for RPK,
respectively. This growth in ASK and RPK is largely due to the entry of new private airlines and the strategies they
followed. Kingfisher, Spice Jet, Go-Air, Paramount and IndiGo are the major private airlines that began operations
after 2003. The new entrants were pursuing a different strategy. Most of them were trying to compete as low cost
carriers (LCC).

An oligopoly is when four companies have more than 50% of the market Shares or they have captured. Here, four
companies have more than 50% of market share in terms of passenger and cargo movement and in terms of flight
count.

Sometimes, oligopolies can be present when companies have smaller market shares than the theory would
suggest, other times, oligopolies are not present even when companies have much larger market shares than
needed to cross the threshold level for oligopoly.

To boil down the economic theory into key bullet-point type concepts, oligopoly can be considered by marketplace
characteristics and marketplace behaviors.
 Figure 1. Oligopolistic vs. Competitive Pricing

MARKETPLACE CHARACTERISTICS

Small number of suppliers who between them control most of the market: We've spoken before about
measuring markets in terms of the total share owned by four and sometimes eight companies, but oligopolies can
sometimes have as many as about 20 different companies, depending on other conditions.
Scale Economies: Makes it unprofitable for more than a few firms to coexist in the market.

Barriers to Entry: It is difficult for new companies to enter the market. Maybe there are huge capital investments
required, long lead times, legislative restrictions, limited resources, or patent restrictions.
Common Product Types: Members of an oligopoly provide similar products, perhaps with no distinction at all
(e.g. raw materials such as metals and foodstuffs) or perhaps with distinction / branding but very similar
functionality (e.g. automobiles).

MARKETPLACE BEHAVIOURS

Interdependence: This is a key measure of an oligopoly. The actions of each company in the marketplace
influences the market as a whole, and will cause the other oligopolies to react/respond - not necessarily to copy,
but in some way or another to respond. This means that each company, in choosing new products, prices, or
other changes to their activities considers not just how the marketplace will respond but also how their fellow
oligopolies will respond.
Mergers and Collusion: Because there are few companies in an oligopoly, mergers or collusion give the
companies involved substantial extra marketplace control. Companies have a tendency/preference to merge or
collude with each other rather than to compete.
Non-price Competition: Oligopolies would prefer not to compete on price, preferring instead to create
differentiations of products (that may be as much illusion as reality) and to advertise and promote their brand and
products.
By all of these measures, airlines are exhibiting oligopolistic behavior as they have authority to decide their own
taxes and faire for passengers’ and cargo also.

THE “LCC” PHENOMENON IN INDIA

Southwest Airlines, now a major carrier in the U.S., operating local routes in Texas in the 1970s pioneered the low
cost carrier business model. In the early 1990s, the low cost carrier model was introduced in Europe. In India, the
model was introduced in 2003 by Air Deccan. However, the same descriptive label masks the significant
differences in ways the model has worked in India vs. U.S. and Europe. First, in terms of market share, LCCs
accounted for almost 30% of all domestic passengers carried in 2006. As of November 2006, it rose to 35%. This
rate of market penetration of LCCs is remarkable given that the market share was zero in August 2003. Low cost
carrier operations account for 44% of all flights within India compared to 22% in the U.K. and 19% in the U.S.

The second significant difference has to do with the relationship between low cost and low fare. In U.S. and
Europe, the LCCs offering low fares are also truly low cost operations. In India, the airlines that offer low fares are
in reality not low cost operations. They are LCCs in name only. Among the LCCs in India, Spice Jet has the
lowest unit cost at 6.2 cents per ASK, which is comparable with Southwest, Easy Jet, and Jet Blue. But this is
more than twice that of the best performer, Air Asia with unit cost of slightly over 3 cents per ASK. For another
Indian carrier Jet-Lite, it is 7.2 cents per ASK. Jet Lite is the reincarnation of Air Sahara after it was acquired by
Jet Airways in April 2007. There were operating losses for Air Deccan in 2004-05 and 2005-06. Moreover, while
the operating revenue per RPK went up by 9.4 percent, the operating expenses went up by 30.65 percent, this
flies in the face of what LCCs outside India like RyanAir have done when they were in a similar stage of their
growth. RyanAir ruthlessly focused on lowering costs while finding ways to enhance revenues by selling food and
drinks during flight to captive passengers and selling services such as insurance, hotel reservations, and rental
cars on its website. Air Deccan seems to have followed similar strategy in terms of charging for baggage (by
offering limited baggage allowance) and food, and expanding capacity in face of losses, but with a crucial
difference—it did not share the obsession of RyanAir and Air Asia to reduce costs. Typically, LCCs provide point-
to-point service avoiding connecting flights and baggage transfers while FSCs base their operation on a hub-and-
spoke system. Air Deccan has deviated from the LCC business model in the sense that instead it has a hub-and-
spoke type operation to connect metros with smaller towns. It also provides point-to-point service between metros
and large cities. Industry analysts have pointed out that this has increased the costs for Air Deccan.
There are serious doubts about whether LCCs (as we know them elsewhere in the world) exist in India. According
to Bill Franke, the Managing Director of leading airline investment firm Indigo Partners, “There is not a single
airline in India that operates a true low cost structure under the current conditions. Similar views were expressed
by Narendra Goyal, the founder and chairman of Jet Airways, the largest private airlines and the only airlines in
India that has remained profitable over the years. He questions the feasibility of LCCs in India because of lack of
infrastructure and skills. He says “India has nothing called low-cost, only low-fare and low-margin. This is irrational
pricing which will make the whole industry sick. Despite these views, it appears that Jet Airways has not given up
on the LCC model. It is interesting to note that Jet Lite (previously Air Sahara), the recent acquisition of Jet
Airways, is being run as a short-haul (for domestic routes) and long-haul (for overseas routes) LCC. Its seems like
an aviation industry is following there own rule and regulation and they themselves decide as what next to be
done. During the LCCs airlines are deciding the fare for passenger and cargo for their own was irrespective to
cost incurred. These oligopoly structure and policies have a different impact on industry.

IMPACT OF LCCs
The so-called LCCs in India have expanded the market for air travel in India through their low fares but without
being profitable and their oligopoly policies. They have made air travel accessible to the middle class. Some
travelers who were using trains and buses have swiched to traveling by LCCs because of the low fares. Spice Jet
for instance, has targeted passengers who are traveling by air-conditioned classes in Indian Railways. They have
also made pricing more competitive. They set off a price war with the incumbent full service carriers (FSCs)
Indian, Jet Airways, and Air Sahara. The FSCs started discounting fares by as much as 60%-70% in some routes
to match the prices of LCCs. This in turn has hurt their revenues, margins, and market shares. For instance, Jet
Airways, which controlled about 50% of the domestic market in 2003, saw its share (including that of its
acquisition Jet Lite) drop to about one-third by 2007. Lower fares also meant more frequent travel. Low cost air
travel has created both depth and width of demand which has percolated to non-metro towns and Tier-II cities as
well.

OLIGOPOLISTIC COMPTITION EFFECTS

Oligopolistic competition in most cases leads to collaboration of the business firms on issues like raising the
prices of various goods and subdue production process. Under other given market conditions, the competition
between the sellers acquires a violent form, on the rounds of lowering the prices and increasing the production.
Collaboration of various firms also brings about stabilization in the unsteady markets.

CURRENT PLAYERS, PERFORMANCE AND CONSOLIDATIONS

There is no question that all the airlines in India are having financial difficulties. Even Jet Airways has seen its
market share and profits decline and stock price plummet by 40% since 2005. There are couple of factors that
account for this. One factor is the inability of the airlines to reduce costs, and the other is the “irrational” pricing
that set in after the advent of LCCs. They have chased market share, i.e., revenue maximization and forced the
incumbents to match their low prices. They have been successful in taking the market share from the FSCs. From
2006 until mid-2007, the incumbent FSCs have been losing market share to LCCs at a rate of close to 1.5% per
month. While revenue maximization may seem like a good short term strategy to enter the market, sooner or later
—and sooner is better—the LCCs have to be become profitable. That has not happened so far. These depressing
financial conditions can lead only to two types of outcomes for the airlines—either some of them go bust in a
market shake-out or they merge/get acquired by other airlines or business groups. Whereas in the 1990s, many
private carriers went bust, now the industry is witnessing a wave of consolidations. 2007 became a landmark year
in the industry because of the major consolidations that took place during the year.

The following are the major examples of consolidation in the Indian aviation industry. What is striking about these
consolidations is that two of them are between carriers which have made heavy losses!

Indian Airlines and Air India: These two national carriers enjoyed monopoly power in the industry until the Air
Corporations Act was repealed. As mentioned earlier, intense competition from private carriers is the main reason
for steep decline in their market share and profits. Indian Airlines, which had a monopoly on domestic services
until 1994, had its market share decline from 100% to 17% since. The combined entity NACIL has now a fleet of
112 aircraft, about a third of the national strength.

Jet Airways and Air Sahara: Jet Airways acquired Air Sahara in April 2007 for $346m that has since been
rebranded as a low-cost carrier, called Jet Lite. This is an outright purchase making Jet Lite a 100% subsidiary of
Jet Airways.

Air Deccan and Kingfisher Airlines: India's first low-cost carrier, Air Deccan, which started the low fare boom in
India, reported a $43 million loss for the fourth quarter ending June 2007. To keep afloat, Air Deccan sold 26% of
stake in May 2007 at $136 million to the flamboyant liquor baron Vijay Mallya's then two-year-old Kingfisher
Airlines, which itself was losing about $250,000 a day! This stake was later increased to 46%. The business
models of these two airlines seem to be as diametrically opposite as the personalities of Mr. Gopinath (founder of
Air Deccan) and Mr. Mallya—all the more likely why these two will not be merged and will continue to be run as
separate entities. By this strategic move, both the airlines plan to improve performance and save money by
sharing facilities and staff. After consolidations, one is likely to see the three groups, i.e., NACIL, Jet Airways, and
Kingfisher, controlling over 80% of the market. Most likely, there will be 2-3 carriers operating in domestic FSC
space, 5-6 carriers in the domestic LCC space and NACIL, Jet Airways, Jet Lite—and soon to be joined in 2009
by Kingfisher—in the international space. The consumer is likely to be the biggest loser after these consolidations.
Ticket prices for LCCs and FSCs went up by an average of 10% in 2007 compared to the fares in 2006 (Table 8).
It is possible that LCCs may lose the marginal customers, the top-end train travelers who were lured by the low
fares of LCCs.

Air India and Indian Airlines: The Indian government has cleared the merger of two state-run carriers Air-India
and Indian (Indian Airlines Ltd).Government will continue to be the sole owner of the merger entity and has made
it clear that the public sector character of the merged airline would be maintained. But the Government may look
for IPO after getting approval of a committee consisting of Finance Ministry. The merger of the two airlines would
enable them to leverage their combined assets and capital better and build a strong and sustainable business.
The potential synergies are expected to enhance the new combined airline’s profitability by over US$133 million
per annum, or about four per cent, of their current combined assets. By 2010-11, when all the new aircraft ordered
by the two carriers are inducted into the fleet, the merged entity’s employee-aircraft ratio would come be about
200:1, comparable with any major global airline. While Air-India has ordered 68 Boeing planes, Indian has
finalized the acquisition of 43 Airbus aircraft. According to the report submitted by Accenture, there will be no
manpower rationalization as the consultancy has suggested ‘careful integration’ of manpower at various levels. It
has also suggested a top-to bottom integration of the employees. It is proposed that the pay-scales be revised to
bring parity in promotion procedures.

DIFFERENTIATED AIRLINES OLIGOPOLY

Each seller in an imperfectly competitive market faces a negatively sloped demand curve for his product,
permitting him some control of the price of his product. In an oligopoly, a few firms produce the same product,
while in monopolistic competition, many firms produce differentiated but similar products. In a differentiated
oligopoly, a few firms produce products different enough for each firm to have its own downward sloping demand
curve. As with a perfectly competitive firm or a monopoly, the differentiated oligopoly firm produces at a profit
maximizing level of output where marginal cost equals marginal revenue. The firm finds the price it will charge
customers at the profit maximizing level of output (Qm) from the demand curve, and sets price to Pm. As we can
see, the firm is earning economic profits since price exceeds average total cost at the profit maximizing level of
output.
 Figure 2. Price Discrimination by IA

PRICING MECHANISM
Price and quantity are determined by the interaction of demand and supply in the market. However, given the
large number of buyers, firms can decide prices at which they will sell tickets. In fact, in the airlines sector, firms
go in for third degree price discrimination and segment the market, charging a higher price to the market with a
relatively inelastic demand (such as fares between business and economy class travelers, or between emergency
travel and leisure travel by providing apex fares). The low cost airlines follow this different pricing strategy.
Customers booking early with carriers such as Air Deccan will normally find much lower prices if they are
prepared to commit themselves to a flight by booking early, on the justification that consumer’s demand for a
particular flight becomes more inelastic the nearer to the time of the service.

The term ‘‘revenue management’’ is commonly used to describe most aspects of airlines’ pricing and seat-
inventory control decisions; but in reality, revenue managers primarily practice seat-inventory control. Formally,
revenue management describes a process of setting fares for each route (origin and destination pair) and each
set of restrictions (nonstop, time-of-day, day-of-week, refundable, advance purchase, first class or coach, and
Saturday-night stayover) and limiting the number of seats available at each fare. In the language of economics,
revenue management increases airlines’ profits in three ways –

o Implements peak-load pricing.

o Implements third-degree price discrimination. That is, fare restrictions screen customers and segment
them by their sensitivity to price and potentially by their demand uncertainty. For instance, Indian Airlines
apex fares (for booking one week or three weeks in advance).
o Implements an inventory control system for coping with uncertain demand.
 Figure 3. Pricing Mechanism

MARKET EQUILIBIUM THROUGH THE COURNOT MODEL

The Cournot model assumes that each firm takes the output of the other firm as given. If Indian Airlines output is
assumed to stay the same, Jet will maximize profits by setting MR=MC. The result is shown. In the Cournot
framework the equilibrium is at the intersection of the two reaction functions. These are just the profit-maximizing
conditions rearranged.

The revenue of both a competitive firm and of a monopolist depends only on the firm's own output: for a
competitive firm we assume that the firm's output does not affect the price, and for a monopolist there are no
other firms in the market. For a duopolistic, however, revenue depends on both its own output and the other firm's
output.

We conclude that the firms' outputs and the price are different in Cournot-Nash equilibrium than they are in a
competitive equilibrium. As the demand curve slopes down, price exceeds marginal cost, so that, as for a
monopoly, the total output produced by the firms is less than the competitive output. An implication is that, as for a
monopoly, the Nash equilibrium outcome in a Cournot duopoly is not Pareto efficient.
 Figure 4. Market Equilibrium through the Cournot Model

DOMINANT FIRM PRICE LEADERSHIP - Where the dominant firm sets the price for the whole industry.

Figure 5. Dominant Firm Price Leadership

The leader sets a price, PL based on their own MC and MR curves, but taking into account the other firms cost
curves. The price needs to be high enough to stop other firms making losses, which would attract the competition
commission to investigate the market.

NON-COLLUSIVE OLIGOPOLY; KINKED DEMAND CURVE THEORY

This model assumes Non-price competition; two demand curves; and elastic and an inelastic. The model aims to
explain price stability by the use of these two demand curves.
Firm increases their price

Figure 6. When Firm Increases their Price

If the firm raises the price from Pe to P1 they will make a net loss in TR so not pursue this pricing policy,
assuming the firm is aiming to maximize total revenue, as the pale blue area is larger than the grey area.

Firm decreases their price

Figure 7. When Firm Decreases their Price

Oligopolies have advantages and disadvantages. The firm can act against the consumer by reducing consumer
surplus, producing a lower quality product, reduce consumer’s choice and behave in a collusive manner to exploit
the consumer as a monopolist.

DOMESTIC AIRLINES
Over the past few years, the number of domestic airlines increased which led to a reduction in fares (till 2010)
facilitating the increase in passenger growth. Launching of the low cost airline model by Air Deccan in 2003,
initiated a series of new airlines coming in the aviation sector taking the total number of airlines to ten. A spate of
mergers and acquisitions started in 2006 has reduced the number of scheduled airlines from ten to the current
seven which include National Aviation Company of India Limited (Air India, Indian Airlines and Air India Express
brand); Jet Airways (Jet Airways and Jetlite brand); Kingfisher Airlines (Kingfisher and Air Deccan (now Kingfisher
Red) brand); SpiceJet, IndiGo Airlines; Go Air and Paramount Airlines. NACIL, Jet Airways and Kingfisher-Air
Deccan combine have permission to fly international routes.

Domestic passengers carried by Indian domestic carriers (In

Lakhs)

120
Passengers (In Lakhs)

100
2006
80
2007
60 2008
2009
40
2010
20

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et

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De
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Ai

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Sp

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Je
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In

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Source: Airports Authority of India (AAI)

Airlines
AIRPORTS
There are around 454 airports/airstrips in the country which includes operational, non operational, abandoned and
disused airports, whose ownership pattern is illustrated in figure 4. In India, Airports Authority of India (AAI) is the
authority for the development and management of airport infrastructure and air traffic management. With the rise
in the number of airlines, growing passenger segment and route expansion, there is a need for Indian airports to
have their infrastructure in place, which unfortunately at present is the weakest link in the chain. The Government
has acknowledged the infrastructure deficiency and has wisely sought private sector participation to facilitate
infrastructure improvements (modernization of Delhi and Mumbai airports, commissioning of Greenfield projects at
Hyderabad and Bengaluru, modernization of 35 non metro airports). The estimated investments at Delhi airport
are in the order of Rs. 7,531 crores; while that at Mumbai airport is estimated to be in the region of Rs. 11,553
crores. Greenfield airport projects have also been proposed at Goa, Navi Mumbai, Pune, Greater Noida and
Kannur. The objective is to develop facilities conforming to international standards and try to encourage the
domestic operators to shift base, so as to decongest the major airports. AAI is also planning to identify non
operational airports that could be put to use to provide better air connectivity in the country. AAI is in the process
of carrying out feasibility studies for this purpose. The Civil Aviation Ministry has set a target of getting around 500
airports operational in the country by 2020. This will include renovation of used airports, developing Greenfield
airports, establishing merchant and low cost airports and airports dedicated to movement of cargo and logistics.
 Ownership pattern of the airports/ airstrips
(operational / non-operational)

61, 13%
138, 30%

158, 36%

97, 21%

Source: Five Year Planning Commission’s working group report on Civil Aviation.
Defence Department AAI State Government Private Owners
AIRCRAFT MANUFACTURERS
Hindustan Aeronautics Limited (HAL), based in Bangalore, is one of Asia’s largest aerospace companies. Under
the management of the Ministry of Defense, the company is mainly involved in manufacturing and assembling
aircraft, navigation and related communication equipment, as well as operating airports. National Aerospace
Laboratories (NAL) is India’s second largest aerospace firm after HAL. The firm closely operates with HAL, DRDO
and ISRO and has the prime responsibility of developing civilian aircrafts in India. NAL is presently designing an
aircraft that can carry 90 passengers on short flights, and compete with planes of Franco-Italian aircraft maker
ATR in Indian skies. International aircraft manufacturers, Boeing and Airbus are buoyant about the potential and
opportunity in he Indian aviation space. In addition, with the fleet expansion plans of non-scheduled airline
operators, small aircraft manufacturers are also expected to garner aircraft orders from the Indian air taxi players.

Growth trends in the non-scheduled operators and aircrafts

250

200
In Number

150

100

50

0
1992

1993

1994

1997

1998

1999

2003

2004

2005

2007

2009
1990

1991

1995

1996

2000

2001

2002

2006

2008

2010

Year
Source: Airports Authority of India (AAI)
Number of Operators Nunmer of Aircraft
GROWTH DRIVERS
The factors contributing to the air traffic growth can be broadly classified into economic and policy factors. Entry of
low cost carriers, higher house hold incomes, strong economic growth, increased FDI inflows, surging tourist
Inflow, increased cargo movement, strong business growth and supporting government policies are the major
drivers for the growth of aviation sector in India.

ECONOMIC FACTOR
o Liberalization and economic reforms undertaken by the government
o Fast expansion of industries in consonance with economic reforms
o Emergence of service sector
o Average GDP growth of around 8.9% during the last 5 years
o Increase in inbound and outbound tourists and medical tourism
o Over 300 million strong middle class
o Disposable incomes expected to increase at an average of 8.5% p.a. till 2015
o Emergence of low cost airlines
o The organized retail boom that would require the need for timely delivery thus contributing to the growth in
the air cargo segment.
o Corporate showing increasing preference for private jets and air charter services

POLICY FACTOR
o Modernization and setting up new airports across country
o City side development of non metro airports
o Providing international airport status to major tier I and tier II cities
o Open sky policy
o Policy of license to new scheduled operators
o Permission to acquire new aircrafts
o Permission of private operators to operate on international sectors
o Encouraging private investments in airlines and airport infrastructure
o Facilitative foreign direct investment norms
o Liberal bilateral service agreements
o Emphasis on development through PPP mode

MOVEMENT
What drives the aviation dream is the growth potential, estimated to be 25 percent with domestic players like
Indian Airlines, Jet Airways, Kingfisher Airlines, SpiceJet, Air Deccan, GoAir and Air Sahara carrying 25 million
passengers every year. In spite of the downturn, key players are ramping up to fight the battle.

Passenger / Cargo forecast till 2016-17

Aircraft Movements Passenger Cargo
Year (in 000) (in million) (in 000 tones)
International Domestic International Domestic International Domestic
2005-06 Base
190.89 647.4 22.36 50.98 920.15 483.8
Year
Growth rate (%) 13.2 14.7 15.9 19.9 12.1 10.1
2006-07 216.14 737.94 25.85 60.91 1028.66 531.64
2007-08 243.91 843.1 29.85 72.87 1151.05 584.61
2008-09 275.58 965.54 34.53 87.31 1289.26 643.31
2009-10 311.74 1108.39 40.01 104.75 1445.5 708.39
2010-11 353.09 1275.38 46.45 125.84 1622.33 780.6
2011-12 400.45 1470.99 54.04 151.36 1822.69 860.78
Growth rate (%) 10.5 9.8 16.2 13.3 12.8 8.4
 2012-13 441.58 1653.63 61.04 175.64 1998.45 931.91
2013-14 487.36 1862.08 69.05 203.99 2192.47 1009.47
2014-15 538.38 2100.35 78.23 237.13 2406.81 1094.07
2015-16 595.29 2373.13 88.78 275.9 2643.73 1186.39
2016-17 658.89 2685.9 100.93 321.28 2905.79 1287.18
Source: DGCA

- (Forecast upto 2010-11 based on study by "Foundation for Aviation and Sustainable Tourism - April 1996".)
- Forecast from 2012-2017 is taken at the rate of 6% based on a report of AAI. Growth in aviation industry can
also viewed from macro economic perspective. A study by NCAER3 pointed out that one per cent increase in
GDP required one per cent increase in air passenger traffic and 1.3 per cent increase in air cargo traffic. In the
first three years of the Tenth plan, the air transport has grown at an average rate of 7 per cent per annum as
against the planned estimate of 5 per cent. During the year 2004-05, air transport witnessed a very high growth of
22 per cent in passenger traffic and 20 per cent in air cargo.

Aircraft Movements
Movements (in 000 )

4000
3500
3000 International
2500
2000 Domestic
1500
1000 Total
500
0
8

6
6

4
-0

-1

-1

-1
-0

-1
07

15
05

09

11

13
20

20

20

20

20

20

Year
Passenger Movements
Movements (In Million)

350
300
250
200 International
150 Domestic
100
50
0
20 -0 6

20 -0 7

20 -0 8

20 1 1

20 -1 2

20 -1 3

20 -1 6

7
20 -09

20 -1 0

20 -14

20 -1 5

-1
-
05

06

07

10

11

15

16
08

09

12

13

14
20

Year
 Cargo Movements

Movements (in 000

3500
3000

tones)
2500
2000 International
1500 Domestic
1000
500
0

2
6

6
-0

-0

-1

-1

-1
-1
07

09

11
05

13

15
20

20

20

20

20

20
Year
Source: Airports Authority of India (AAI)

Growth in India's civil aviation sector, for many years stunted by bureaucracy and political interference, is now
booming at an estimated 25 percent per year. The intense competition ushered in by new entrants — and the
strategic response by existing players — will drive further market growth. This expansion is being fuelled by
annual economic growth of about 8 percent, rising incomes, cash-rich middle class, a reformist government and
an ambitious plan to modernize the country's aviation infrastructure. The Indian aviation industry is growing at a
rapid pace, thanks to air transport deregulation, emergence of new operators, lower fares and large untapped
demand for air travel. The New Delhi office of the Center for Asia Pacific Aviation (CAPA), a Sydney-based
aviation consultancy, says airlines in India may be selling about 50 million tickets a year by 2010, compared with
around 19 million in 2008. Another study conducted by KPMG suggests that the air passenger traffic is likely to
reach 100 million in 2009-10.

NCAER – (National Council for Applied Economic Research), India's premier economic research institution,
specializing in policy research, surveys etc. The main drivers of air traffic are economic upswing, concentration of
population, industries and liberalization leading to higher propensity to travel. The spike in air passenger traffic is
largely triggered by the emergence of low-cost carriers in the domestic sector. The penetration of low-cost carriers
in small towns, coupled with exceptionally low airfares comparable with railway AC fares has raised the
competition to a new level. India is the only country where the number of air travelers a year equals the number of
rail passengers in a day. The growth potential in this sector is further leveraged by the first-time flyers queuing up
to fly. The Government has also come up with some initiatives in the right direction which aids the growth of
aviation industry such as strong political will and improved policy environment: Electricity Act, Draft Maritime
Policy, Draft Civil Aviation policy, ring fencing of funds earmarked for infrastructure, nomination of implementation
authorities, urgency to bring about commercial viability, momentum of private participation, innovative financing
concepts like ‘Public Private Partnerships’ and ‘Viability Gap Funding’ etc The aviation industry is almost an under
penetrated market with total passenger traffic being 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. Air Cargo has
not yet been fully taped in the Indian markets and is expected that in the coming years large no of players would
have dedicated fleets The key challenge for Indian aviation companies is to convert strong traffic and revenue
growth to profits for which yields need to stabilize. Even then airlines are taking self decided taxes on the air fair
for passengers and cargo.

CIVIL AVIATION: BEFORE AND AFTER LIBERALIZATION

BEFORE LIBERALIZATION
The cost of travel in India was amongst the highest in the world. The two state-owned Domestic & international
carriers, Indian Airlines (IA) and Air India (AI) dominated the market until recently. Built on huge cost and as full-
service providers they justified these high airfares. Viability Gap Funding’ – A scheme which is meant to reduce
capital cost of projects by credit enhancement and to make them viable and attractive for private investments
through supplementary grant funding. With no competition from any front, the state-run airlines enjoyed a
monopoly. From their position of strength, they pressurized the state machinery to obstruct foreign airlines from
expanding flights to India and also to restrain the growth of private sector players. As a retaliatory measure foreign
players hindered the growth of Indian airlines by not accommodating any deals with them. In the early 1990s,
steps were taken to liberalize the aviation sector and the rest what we witness today is history.

AFTER LIBERALISATION
From the consumers perspective; choice of airlines have increased, fares have reduced significantly, and
increased routes is another big major advantages. From the airlines perspective; Commercial freedom is the
biggest advantage along with increased foreign investment. From the airport perspective; increased number of air
passengers and aircraft contributing to increased revenue in form of landing charges and consumer spending at
airports the great advantage. All these factors have directly and indirectly contributed to the economy in form of
increased tax revenues, increased employment opportunities and increased inflow of FDI, increased tourism etc.

PROBLEMS IN INDIAN CIVIL AVIATION

The most restricted industry faces serious setbacks even after liberalization and privatization. Infect such
initiatives have caused new problems. Infrastructure bottlenecks: There is hardly an airport with more than one
runway. Also, none of the runways can handle wide bodies like the A380. There is serious shortage of parking
bays. Ground facilities are hardly sufficient to process the current passenger volume. While the offer of cheap
tickets and the convenience of choosing between different airlines and flight timings are luring domestic flyers,
there are other issues that need attention. If one talks to regular flyers today one will come across endless tales of
how flights circle above airports, waiting to land, or they are made to wait endlessly in aircraft because of the long
queues of planes either waiting to take off or land.

Traffic Jam: Airport privatization is facing rough weather. The ground infrastructure of metro airports is very poor.
Delhi and Mumbai together handle around 60 percent of India’s passenger traffic. It typically takes 10 to 15
minutes for any flight to land in Delhi or Mumbai airports. Under foggy conditions, it may go up to 40 to 45
minutes. It may be noted that each minute of flying over the airport burns around fuel worth Rs.1000

Taxation policy: The taxation policies of the Indian government are also adversely affecting airlines operations.
The aviation turbine fuel (ATF) price in India, which is reportedly subject to 8 per cent excise duty, and a high
sales tax averaging well above 25 per cent, is on the high side. Airlines in India have to spend 30 per cent of their
operating costs on ATF while the international average is 10 to 15 per cent.

Productivity: The legacy carriers5 are replacing their high-cost labor with new blood which would result in lower
wages as less senior people means lower wages. At the same time, low cost carriers will be maturing and with
older work force comes higher salaries. The most difficult problem facing the legacy carriers will be the transition
to higher productivity. Senior workers will be hesitant and it will be difficult tot change the culture. The low-cost
carriers will face aircraft that are older. Older aircraft requires more maintenance and more time out of service as
the longer maintenance cycles are more intense.

REASONS FOR ALLIANCES & JOINT VENTURE IN CIVIL AVIATION

The salient features that favored the alliances and joint ventures in airlines are as follows: Capital intensity,
service orientation, Limited manufacturers, High level of regulation, low margins and tendency to consolidate and
outsource.

Capital intensity: The modern jet aircraft are products of intensive research and commercial application and are
hence very costly. This implies that airlines companies should have the ability to mobilize enormous resources for
acquisition and maintenance of their fleets.

Service Orientation: As the basic aircraft gives little scope for product differentiation, airlines are harping on high
level of on-time performance, wide network that offers better connectivity, better in-flight services, attractive
frequent flyer’s programmed, superior lounge facilities etc. to attract passengers. Airlines are, thus, dependent on
the skills of the flying crew and pleasant behavior of the cabin crew for attracting and retaining passengers.

Limited manufacturers: Most of the aircraft are manufactured by two manufacturers: Airbus Industries and The
Boeing Company. As a result, basic features like carrying capacity, speed, range and facilities offered are likely to
be similar for same type of aircraft operated by different airlines.

High level of regulation: Operations of the air transport industry are governed by the agreements entered into
between countries in which the aircraft are registered. These agreements prescribe the names of the carriers that
can operate between the countries, the frequency, seating capacity and rights to pick up and discharge
passengers. Countries have to enter into bilateral agreements for these rights. Government support is, therefore,
essential for the survival of the airline industry.
High level of concentration: Although there were more than 700 airlines in the world, the top seven (in terms of
revenue) accounted for 33% of the total tonne kilometers performed in 1996. Again, approximately 35% of the
total volume of scheduled passenger, freight and mail traffic was accounted for by the airlines of the United
States. On international services, about 18% of all traffic was carried by the airlines of United States.

Low Margins: Almost all the airlines are running under losses. If at all any airlines showed profits, it is only
marginal. Generally any capital intensive industry would book low or negligible profits.

Weak Financials: The Laws of supply and demand in economics were not working for civil aviation business. “In
the law of economics, lower prices lead to increase in demand and in turn lead to higher revenues. In the airline
business, there has been a reduction in fares resulting in an increase in demand for seats. But the industry does
not experience a corresponding increase in revenues; in fact, the reverse is happening.” Cumulatively, the losses
reported by various airlines exceeded Rs.2000 crores in 2006.

Declining Yield: Intense competition is leading to falling yields. This issue got compounded by the very high
prices of aviation turbine fuel (ATF). Airlines are not able make up for the frequent and steep increase in prices of
ATF through price adjustments. It is noteworthy to mention that ATF prices account for around 30 - 45% of an
airline’s operating cost. Hefty taxes imposed by Central and State government is another reason for low margins.
The additional service tax imposed on business class and first class passengers also affected custom from a
sector that has been paying handsome prices.

High cost of Operation: The steep decline in fleet strength and the ageing fleet make cost of operations still
costlier for Indian Airlines. Today, the average age of the Indian Airlines fleets over 17 years; these include fuel
guzzlers like A 300 and B 737. With the new order by IA for 43 aircraft, the average age would fall to less than 8
years.

Poor Infrastructure: Air transport follows road transport case in India. Development of road infrastructure was
not matching the production of cars. Similarly Airport infrastructure is far behind the acquisition of aircraft.
Presently, there is increase in demand for air travel and this has stimulated the investments in airport
infrastructure. Upgradations with huge investment are carried out at Delhi, Mumbai, Bangalore, Hyderabad,
Cochin airport. Due consideration is given to smaller airports.

Poor brand image: Customer service and network are the main aspects of the product offered by airlines. Since
it is a service industry, only the quality of service will ensure success in business. AI’s product has suffered on
these counts in the recent past due to which it has lost its business to other airlines.

Lower fleet capacity: AI’s fleet size is only 26, which is significantly less when compared with other international
airlines. British Airways has 256 aircraft while Singapore Airlines is having 80 aircraft. Even after the merger
between Air India and Indian, there will be only 112 flights in total. All other private carriers also don’t have
commendable fleet size to meet the growing demand. But almost all the airlines have ordered for aircrafts in big
numbers. Fleet acquisition will be a successful only if there is access to adequate capital.

Inability for differentiation: Being a capital intensive industry, it is difficult for the airlines to differentiate in the
aircrafts they run. Hence the differentiation has to be in service – with frills or no-frill service.

STRATEGIC INITIATIVES IN CIVIL AVIATION

The Ministry of Civil Aviation has taken some serious steps after privatization which was actually pending for a
long duration.

Revenue from Real Estate: All most all the airports, be it be Bangalore International Airport (BIAl), Cochin
international airport (CIAL) or Hyderabad International airport(HIAL) – all of them have unanimous decision to
earn diversified revenue from their huge re al estate land with them. The promoters of BIAL are planning to lease
out a 300-acre corridor along the access road. CIAL expects to attract Rs.3, 500 Crore of investment in real
estate. It will lease some of its land, enter into joint ventures, and may even pick up equity in some projects. It is
the same story for HIAL. All this flows from civil aviation ministry policies on airport infrastructure of 1997 and
2002.

The New Business Model

% of Revenues Expected
Area for Commercial
Airport Real Estate Plans Expected from Investment
Development (Acres)
Real Estate (Crore)

Hotels, Office Space,

BIAL 300 Not available Rs.2,000
Malls
HIAL 600-800 Not available Not available Rs.5,000
Golf course, 4 hotels,
CIAL 300 70-80 Rs.3,500
convention centre
Source: Business World, Bushman & Wake field

Joint venture for support services: IA’s joint venture on maintenance, repairs and overhaul is also being
extended to take of the maintenance of air frame and other engineering services. IA has been offering a lot of
ground handling operations for other airlines. In all 23 foreign airlines, including British Airways and Lufthansa are
provided ground handling services by IA in 16 stations. Some 25,000 third party flights are covered by these
stations.

Alliance with low-cost carrier: Jet airways have acquired Air Sahara for $500 million. It is also trying for an
alliance with Air Deccan - the largest low-cost carrier in the country. The alliance would be on various fronts –
sharing of engineering infrastructure, exchange of passengers when flights are cancelled, and combination offers
and so on.

Merger by authoritative bodies: The Airports Authority of India (AAI) was formed after the merger of the
International Airports Authority of India and the National Airports Authority by way of the Airports Authority Act
(No.55 of 1994). It came into existence on April 1, 1995. The AAI is keen on establishing world-class airports in
the country.

Consolidation approach: Despite competition, there seems to be camaraderie between the private airlines. Air
Deccan has given one of its Airbuses to Kingfisher so that its pilots can train. Also there are strategic alliances
especially in sharing infrastructure at airports and inventory. There are also reports about joint bidding for aircraft
manufacturers so as to get a good deal. Indian Airlines and Air India have decided to jointly tender for ground
handling at the GMR Hyderabad International Airport (GHIAL). Singapore air terminal service (SATS) was
selected by GMR as the JV partner with 49% share holding, while Air India and Indian Airlines both jointly hold the
remaining 51%. Perhaps one of the most published deals is stopping poaching of pilots from one other’s airlines.
As airlines in India find their niches (at home and abroad)

WILL THE NEW LOW-FARE AIRLINES SURVIVE?

The launch of new low-fare airlines raises important questions about the viability of this business model in the
Indian context. Thus far, we have only one airline that is based on this model - Air Deccan - and this airline has
not been in operation for long enough to reach any conclusions. Besides, Air Deccan has been “accommodated”
by the existing players for a number of reasons – it started by serving new routes to small towns that are not
served by the existing domestic carriers; it (so far) lacks the capacity to take away substantial traffic; and there is
enough additional demand for air travel at lower price levels to increase the size of the market without triggering
off a bruising fight for market share.

What does international experience tell us? Low-fare airlines outside India have many configurational features in
common – a single type of aircraft to facilitate pilot training, maintenance and aircraft utilization; no free food
service to save costs and reduce turnaround times; no inter-line transfer of baggage; direct selling to avoid
commissions to travel agents, etc. These configurational features are easy to replicate and it is no surprise that
many of these are an integral part of the announced plans of the new airlines in India. But it is important to
remember that as a result of their replicability, they do not, by themselves, offer a sustainable competitive
advantage.

The dynamics of a low-fare airline are equally important. Typically, a successful low-fare airline (like RyanAir or
Jet Blue) chooses routes that are not already operated by other low-fare airlines. It increases demand for air traffic
by cutting fares, and provides frequent services to saturate the route. In contrast, head-on competition between
two low-fare carriers on the same route often results in a price war that benefits consumers but is not profitable to
the airlines themselves. Interestingly, the new low fare airlines in India are not targeting distinctive routes. Instead,
they seem to be moving towards creating huge capacities on the trunk routes. There is therefore a good chance
that a price war will break out as these capacities come on stream. In the U.S., U.K., and continental Europe,
routes that have existing “full-service” carriers are fair game for entry by low-fare airlines because full-service
airlines confront irreconcilable trade-offs in responding to the low fare airline’s fare-cutting. Their existing contracts
with unions make it difficult to emulate the low cost structure of the new entrants, and a “no-frills” policy conflicts
with their brand image. Full service airlines including British Airways and Lufthansa started low-fare subsidiaries
to take on the new competition, but these have not been as successful because of a lack of flexibility that arises
from their heritage. However, private carriers like Jet-Airways and Sahara do not have these disadvantages and
should therefore be in a position to respond aggressively to the low-fare airlines if necessary. Internationally, low-
fare carriers have tended to focus on short-haul routes, where low fares can persuade customers to switch from
other modes of transport with significant benefits in terms of travel time.

Since short haul services impose other cost disadvantages on an airline, quick turnarounds to achieve high
utilization become critical. Clearly, on-time passage is an important value proposition for this type of service and
delays are extremely annoying to passengers. One way low-fare airlines in other countries have addressed this
issue is to use small airports that are not plagued by the congestion and delays of the larger ones. However, in
the Indian context, this option does not exist, and the existing airports are already reporting congestion delays
which will only get worse over time. Running a low-fare airline is a major managerial challenge. While the
common configurational model seeks to achieve efficiency of capital utilization, these efficiency benefits can be
“held-up” by inter-functional barriers. Lack of individual motivation or lack of coordination between groups of
employees or between the airline and external agencies (air traffic control, refueling, etc.) can undermine these
efficiencies. The most successful low-fare airline in the world, South West Airlines, has a number of organizational
practices that have given it a unique capability – labeled by one author as “relationship coordination” – that allows
it to not only overcome these problems but align individual, group and organizational objectives. These include
hiring employees for their “relational competence”, forming a partnership with unions, and building long- term
relationships with suppliers. Thus, international experience suggests that to be successful, the new low-fare
airlines in India will have to do more than emulate the configurations of their role models abroad – they will need
to be careful in route selection, and build internal coordination through carefully chosen organizational practices.
In addition, the government will need to improve airport infrastructure quickly if this model is to succeed.

OUTLOOK FOR THE FUTURE

The long-term outlook for the airlines in India (the ones that survive the current shake-out) appears promising. As
long as the Indian economy’s growth is strong, they can count on continued growth in demand (for both domestic
and international air travel), albeit at a slower rate than the rates for the last three years. Currently, only one
percent of India’s more than one 1995 billion population travel by air. The airlines’ plans to expand capacity and
replace ageing fleet aggressively should enable them to meet this growing demand more efficiently. But in the
near term, they have to face significant challenges such as:

o Realizing the benefits of the consolidations;

o Realigning their competitive strategies to become profitable;
o Pursuing aggressive cost reduction;
o The availability of capital;
o Constraints due to poor infrastructure for aviation in India.

NEW STRATEGIES
One of the strategic decision variables that has already been adjusted is pricing. Vijay Mallya’s views may give a
clue as to what pricing strategies the airlines may follow in the near term. "The days of discounting and cut-price
ticketing are over. Airfares are going to reflect the actual costs of operation. All of them." Also, he does not believe
that hike in prices will dampen the demand.

There is some evidence to suggest he may be right. According to a survey conducted by Center for Asia Pacific
Aviation (CAPA), 67% of Full Service Carrier (FSC) passengers and 51% of Low Cost Carrier (LCC), passengers
would still have traveled by air if the fare had been double and, 57.5% of FSC passengers would fly with an FSC
rather than an LCC even if the trip was personal and self-financed.

Another strategic change will be in the business models. Jet Airways is now concentrating on expanding its
international operations targeting passengers of Indian origin (there are about 30 million in the Indian Diaspora)
who travel to India mainly from U.S., U.K., Canada, European countries, and South Africa. It has established a
hub in Brussels and in August 2007 inaugurated flights from India to U.S. This strategy helps Jet Airways escape
the brutal competition in the domestic sector. It hopes to generate more than half of its revenues in 2009 from the
more lucrative international flights. Its only Indian competitor for such long haul flights would be Air India, part of
NACIL, which it can out-compete due to Jet’s superior service advantage. Jet Airways will also enjoy the first
mover advantage among the Indian private airlines for at least couple of years, because other private carriers are
not allowed to have overseas operations unless they have been in domestic business for at least five years. This
policy has frustrated Kingfisher, which has already placed orders for five of the giant double-decker 600
passenger A380 aircraft in preparation for entering the international market in 2009. Kingfisher and Spice Jet have
lobbied for the waiting period to be changed to three years, but the government is likely to stand firm on its current
policy.

An interesting business model being tried out is long-haul low cost carrier. Air India Express which is part of
NACIL and Jet Lite are flying international routes using this model. This model is different from and more
complicated than the short-haul LCC model. For instance, passengers are willing to pay for more comforts during
long flights. Airlines have to serve food and maintain a larger crew. It is difficult to achieve the same level of cost
advantage as short-haul LCCs. Moreover, Jet Lite and Air India Express are likely to face stiff competition from
regional carriers such as UAE (United Arab Emirates) based Air Arabia which is also a long-haul LCC. Whether
the long-haul LCC model will be profitable remains to be seen, but other LCCs (e.g., Air Asia and Ryanair) are
trying to use this model as well.

COST CHALLENGES
The main cost items in airline business are fuel, labor, charges for landing, en-route navigation, depreciation on
aircraft, ground equipment and property (depreciation), outside service expenses (ground handling), financial
expenses, and other expenses. Labor is not a significant cost in India, as it is only around 10% of total costs,
unlike the United States of America where it is 40%. However, costs for skilled labor like pilots are on the rise in
India because of skills shortage. India will need 6,000 more pilots to meet the passenger traffic over the next
decade. This, rather than availability of aircraft, could become the bottleneck and limit the growth of capacity. In
India, fuel is the main component of cost, accounting for about 37%-38% of the total cost, and this cannot be
reduced by the airlines alone without the intervention of government [2]. The operating cost is usually adversely
affected by variables like Aviation Turbine Fuel (ATF) prices and congestion at major airports, which lead to
higher operating cost and huge losses. In India, the price of ATF is around 70% higher than in most countries,
leading to a much higher cost-variable for low-cost carriers. The ministry of civil aviation is working with the
various ministries and the state governments reduce taxes on ATF, and with oil companies in India to rationalize
the ATF prices. But with crude oil prices going above $100 a barrel, the government—which wants to reduce its
oil import bill—will be hard pressed even to hold ATF prices steady let alone to reduce it. In fact, the government
has not reduced the tariffs on ATF in the 2008-09 budget. All this makes operating a LCC in India much more of a
challenge. For all the airlines in India, in the near term, cost containment rather than cost reduction appears to be
a more realistic and feasible goal.

EXPANSION PLANS AND CONSTRAINTS

The three consolidated airline groups have aggressive fleet expansion plans. According to Centre for Asia Pacific
Aviation (CAPA), Indian carriers have approximately 480 aircraft on order (some of it for replacement than
expansion) for delivery through to around 2012, against a fleet size of 310 aircraft today. It estimates that India’s
fleet will reach approximately 500-550 by the end of 2010. The major airlines also need an infusion of capital to
finance their growth. NACIL plans to offer 10-20 percent stakes to the public to raise cash. There has been talk
since 2006 of Kingfisher (which is part of the UB group) floating an IPO. Air Deccan has found a different route—it
sold its options on new aircraft orders to raise US$100 million [9]. The Indian government is considering raising
the foreign direct investment (FDI) ceiling in civil aviation, which is currently at 49%. According to Civil Aviation
Minister Praful Patel, India's civil aviation industry will attract investments worth $150 billion in the next 10 years.
The other major factors limiting growth are infrastructure related. The 24 international and customs airports put
together account for 94% of traffic, and the balance is spread over 36 smaller airports. Congestion at the airports
leads to aircraft circling sometimes for about an hour before they can land. New Delhi airport which is designed to
handle about 7 million passengers per year is already handling twice that many. Mumbai and New Delhi airports
are being expanded, while Bangalore and Hyderabad will get new airports in 2008. The next 3-5 years will be an
exciting and challenging time for airlines in India. It will be quite an achievement if some of them turn a profit in
that period.

OLIGOPOLIES HAVE ADVANTAGES AND DISADVANTAGES

Oligopolies have advantages and disadvantages. The firm can act against the consumer by reducing consumer
surplus, producing a lower quality product, reduce consumer’s choice and behave in a collusive manner to exploit
the consumer as a monopolist.

ARE OLIGOPOLIES GOOD OR BAD

Not all oligopolies are bad. Some can be good. The extra profit potential for a company in an oligopolistic market
can be used to fund new product development, service enhancements, and so on (think computers for a vivid
example of this). And the large sized companies can enjoy substantial economies of scale as a result of their
large sales volumes. But, for reasons beyond the purview of this article series, airlines are seldom profitable, and
in any case, even if they had excess profit to invest in R&D, most of the need for R&D in the airline/aviation
industry lies in related fields - aircraft design and manufacture and air traffic control in particular. And, as
discussed in the second part of this series, the nature of the airline business does not allow for economies of
scale; indeed, paradoxically, the bigger airlines are less efficient than the small ones. So neither of the two main
potential benefits of oligopolies applies to the airline oligopoly. Let's hope the two downsides of oligopolies also
don't apply. They are on risk of inefficiency, and a concentration of wealth and social power.

Oligopolies can be even more inefficient than monopolies. Monopolies are more closely subject to legislative and
social scrutiny, oligopolies are less visible so can get away with more. Many people don't even know what an
oligopoly is, thinking there to be only two types of market - monopolistic and competitive. As we saw in the second
part of this series, the bigger the airline (and therefore the more it is part of the oligopolistic process) the higher its
costs and the less efficient it was (which its profits did not grow in line with its costs/revenue). Airlines would
seem to suffer from this downside aspect of oligopolies. Doesn't that describe the airlines and their very efficient
government lobbying processes? They have an amazing example to stall passenger friendly legislation, and to
draw out requirements for expensive retrofits to their fleets proposed by the NTSB on safety grounds. Aren't the
airlines hovering in the 'too big to fail' category, possibly abusing the Chapter 11 process, and being subject to
supportive Presidential intervention in the past when it seemed they were about to be impacted by labor strikes?

It seems that while airlines have neither of the redeeming upsides to their oligopolistic nature, they do suffer
strongly from both the classic two downsides.

SUMMARY

The airlines meet the classic tests for being oligopolies - both the quantitative numerical test and the more
qualitative other observations of their characteristics and behaviors. Although oligopolies can sometimes bring
consumer benefits, the airline tie-ups seem to do no such thing, but rather bring out the potential downside
negative aspects of such business arrangements. Recent mergers approvals have cemented in place the
oligopolistic nature of the airlines.

REFERENCES
http://www.dgca.nic.in/
http://civilaviation.nic.in/
www.jetairways.com
www.paramountairways.com/
www.flykingfisher.com/
indian-airlines.nic.in/
www.spicejet.com/
www.goindigo.in/
http://www.easyjet.com/en/about/investorrelations_financialreports.html
www.cs-territories.com
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