AIR DECCAN

Business Policy and Strategic

Management - Case Discussion








SUBMITTED TO
Dr. Arya Kumar (Instructor In-Charge)
Dr. R. Raghunathan

SUBMITTED BY
Aviral Sharma (2013H149256P)
Rahul Papney (2013H149279P)
Prateek Singh Bapna (2013H149284P)
Vishal Bhandare (2013H149255P)

Introduction:
With the liberalization of Indian economy , deregulation and privatization came up in
aviation sector in India. This led to the emergence of lot of full service carriers . Air Deccan
Aviation , founded by Captain Gopinath in 1995 , was one of those full service carriers with
exception of being a first low cost carrier model in India. Captain Gopinath purchased his
first helicopter from Australia to start operations in India. The carrier aims to provide no-
frills air travel service , which is safe and economical , and provide on time service to its
customers. The airline has played a significant role in making the common mans dream to
fly come true.
Air Deccan was the first Indian airline to follow No -Frills , Low Cost business model .
Although , the business model was in same line as by western countries airlines like
Southwest Airlines and Jet Blue in the United States and Ryanair and wasyJet in Europe , it
differentiated itself by customizing its operation and facilities to suit Indian conditions.
The airlines target passengers comprised leisure , small business and corporate customers
belonging to the middle class and cost-conscious customers of the affluent class. The
airfares were comparable to railfares which prompted many upper class train passengers to
opt for Air Deccan services .
The carriers strategy always aligned with its vision and mission statement . It focused on
providing basic transportation services to its customers in an efficient manner . It devised
strategies to achieve high aircraft utilization in terms of flying hours. Air Deccan also
adopted the concept of Dynamic Pricing to optimize the load factor and the yield.

Problem Statement :
How to stay ahead of the competition in Low Cost Airline Business :
To stay market leader in low cost aviation sector , Air Deccan has to bring out continous
innovation in its strategy to stay ahead of its competitor . With the steady increase in the
number of low-cost players in the aviation industry , an imminent paradigm shift is in the
cards. The distribution models will need to be further enhanced to lower the number of
intermediaries in the chain such as travel agents etc . Online gateway ( Internet Reservation
System ) is one such solution but the penetration level is still low in India . This is one more
focus area for Air Deccan to be the market leader in the low cost airline segment . Other
aspect that Air Deccan need to focus upon is on its extensive growth plans . Air Deccan will
have to focus upon future merger & acquisitions , capital sourcing avenues for
strengthening its position in Indian low cost airline market.


Porter Analysis:

Threat of New Entrants (LOW)
It is easy to enter into this sector since there are very few entry barriers
The more new airlines that enter the market, the more saturated it becomes for everyone. Brand
name and frequent flier point also play a role
With the airline industry cruising deeper into red zone and losses mounting, government is planning
to erect a host of checks and balances on entry barriers to permit only serious and financially sound
aviation ventures to take off

Bargaining Power of Suppliers (HIGH)
All suppliers have tremendous bargaining power
There are few fuel providers and no reliable alternative to fuel
There are very few pilots in the job market and planes cannot be flown without pilots
Mechanics for airplanes are in short supply and planes cannot be flown without being serviced
Flight attendants provide services that cannot easily be replaced and customer satisfaction without
flight attendant would be detrimental

Bargaining Power of Buyers (MODERATE)
The bargaining power of buyers is moderate
Either buyer buys the ticket or not, one traveler does not hurt the airline. The demand for more
affordable air travel is quite robust. But still in India buyers power is moderate because some
alternatives are available

Availability of Substitutes (LOW)
When determining this we should consider time, money, personal preference, and convenience in
the air travel industry. No other product domestically competes directly with airlines in terms of
cost and speed of travel

Competitive Rivalry (HIGH)
Competition among players is extremely intense in many aspects.
Highly competitive industries generally earn low returns because the cost of competition is high. This can
spell disaster when times get tough in the economy


PEST ANALYSIS: THE INDIAN AIRLINE INDUSTRY
Political Factors:
Open Sky Policy
o Open Sky Policy is an policy concept that calls for the liberalization of the rules and
regulations of the aviation industry - especially commercial aviation - in order to create a
free-market environment for the airline industry.
o The policy states that the sky is not limited to regional or national carriers alone.
International players are also welcome to operate in India. The examples of the open sky
policy are Virgin Atlantic, Lufthansa, etc. flying in to Delhi.

FDI limits
o Foreign equity up to 100% is allowed by the means of automatic approvals pertaining to
establishment of Greenfield airports.
o Foreign equity up to 74% is allowed by the means of automatic approvals pertaining to the
existing airports.
o Foreign equity up to 100% is allowed by the means of special permission from Foreign
Investment Promotion Board, Ministry of Finance, pertaining to the existing airports.
o 100% tax exemption for airport projects for a period of 10 years.
o Up to 49% of foreign equity is allowed by the means of automatic approvals pertaining to
the domestic air transport services.
o Up to 100% of NRI investment is allowed by the means of automatic approvals pertaining to
the domestic air transport services.
o 74% FDI is permissible in cargo and non-scheduled airlines.

Economic Factors:
Contribution to the Indian economy: Since the industry is operating in Indian economy, the revenue
generated by the company adds to economy.
Rising cost of fuel: The fuel price is rising because the subsidies govt. is providing are being taken
off. Indian airline companies pay one of the highest ATF rates in the world.
Investment in the sector of aviation.
The growth of the middle income group family affects the aviation sector: In today's world with
increasing income of middle class, people prefer to go by air because it saves time at is all new a
different experience.
Business cycles have a wide reaching impact on the airline industry. During recession, airline is
considered a luxury & therefore spending on air travel is cut which leads to reduce prices. During
prosperity phase people indulge themselves in travel & prices increase.
Even the SARS outbreak in the Far East was a major cause for slump in the airline industry.
The Indian carriers are deeply affected when many flights are cancelled due to internal (employee
relations) as well as external problems.
The loss of income for airlines led to higher operational costs not only due to low demand but also
due to higher insurance costs, which increased after the WTC bombing.

Social Factors:
Development of cities leads to better services and airports: Metro cities first had airports but with
development of the country new airports are being built up.
Employment opportunities: The aviation sector provided a lot of employment opportunities
because the industry is so vast that a lot of people can be employed.
Safety regulations.
The changing travel habits of people have very wide implications for the airline industry.

Technological Factors:
The growth of e-commerce and e-ticketing is now adopt the airline companies for the facilities and
services to the customers.
Satellite based navigation system is the most advanced technological factor.
Modernization and privatization of the airports.
Developing green field airports with private sector for example in Bangalore, the Airport
Corporation Limited.
Better airport infrastructure, means better handling of airplanes, which can help reduce
maintenance cost. It also facilitates more flights to such destinations.

GENERIC STRATEGIES MODEL
Cost Leadership Strategy:
The airline followed a "lean-and-mean" staffing model, aimed at maintaining a low aircraft-to-
employee ratio, thereby reducing the costs.
By using the smaller aircraft (ATR42 - a 48 seater plane) for shorter flights and for regional
destinations, Air Deccan significantly reduced the costs incurred as infrastructure usage fees.
The airline reduced its employees by automating some of its processes, e.g. Online Reservation
System.
The company employees 'no frills, low cost' business model which has helped them to reduce their
fare by approximately 30% as compared to the full service airlines.
Air Deccan's unique pricing model was another strategy which went a long way in optimizing the
airline's yield management and load factor. (In the aviation industry, load factor is the ratio of
revenue passenger (or cargo ton) miles to the available seat (or cargo ton) miles.)

Differentiation Strategy:
Air Deccan has been characterized by two features - Single Class and Narrow Seating. This leads to
an increase in number of seats available, and thus increase the revenue as well.
The airlines had a tie up with Cafe Coffee Day, which would be its single point vendor for food and
beverages.
In order to reach out to a larger customer base, Air Deccan partnered with HPCL Petrol Retail
Outlets and Reliance Web World Retail Outlets.
They thought of offering services to those routes where there were no airline services or those
which did not have adequate flights.

Focus Strategy:
The major target segment of Air Deccan were people who are frequent business travelers and AC
train travelers. There was a huge potential in this market segment.

VALUE CHAIN ANALYSIS
Primary Activities:
1. Operations:
Air Deccan's fleet has both ATR and Airbus which were used to cater to its trunk as well as regional
routes.
Single class seating in the aircrafts offered single fare system, thereby reducing overhead costs.
Air Deccan followed the worldwide low-cost carrier strategy of flying on point-to-point routes.
Aircrafts with less seats (ATR 42-a 48 seater plane).
Route Extension to Airports where there were no airlines available or not adequate facilities
available.
No frills-low cost policy.
The airline reduced the turn-around time and planned other processes for cost reduction.
High aircraft utilization was the first of Air Deccan's strategies as it would directly result in high
revenue generation.
It reduced its operational costs by simplifying its operations, by using technology and by
outsourcing processes that were not core to the business.

2. Distribution:
By introducing several innovations in its distribution channels, the airline succeeded in reducing its
distribution costs substantially.
Air Deccan developed an Internet-based Centralized Reservation System (CRS), which centralized
customers' reservations, through channels such as Internet, call centers and travel agents.
Customers' had a facility to book tickets through mobile phones by just sending in an SMS.

3. Marketing and Sales:
The airline utilized its marketing and promotional programs effectively to highlight the competitive
advantage it enjoyed as a result of its low fares.
The airline customized marketing campaigns for its diverse customer segments.
Air Deccan selected cartoonist R. K. Laxman's famous mascot 'The Common Man' as its brand
ambassador.

Secondary Activities:
1. Procurement:
The airline outsourced the non-core processes.
Outsourcing of several operations offered Air Deccan a distinct advantage.

2. Technology Development:
The CRS was an internet based reservation system was developed which offered variety of activities
ranging from reservations, schedules, fares, payment gateway integration, and departure control
system and document production.

3. Human Resource Management:
The employee strength of the airline is approximately 2600 in June 2006.
The Attrition rate of Air Deccan was 15-20% for the same period.
The airline has relatively flat organizational structure which encouraged employees to be
accountable and develop a sense of ownership and pride in their work.

Recommendation:


In the coming years, both full-service and low cost carriers will have to face many unanswered questions
and explore many novel horizons. However amidst all these uncertainties, there is one certainty . the
Indian aviation sector has immense untapped potential.
Sustainable Growth
As a middle class population constitutes majority of its market, the prospects for low cost airlines seem
bright. By 2010,the low cost airline market share will be 50%,predicts Kapil Kaul,CEO, Centre for Asia
Pacific region(CAPA).These low cost carriers have changed the dynamics of the aviation sector. Full
service airline have also reduced their fares significantly. Full service airlines may initiate price wars by
further reducing their pricing to compete with low-cost airlines. With several low cost entrants into the
industry, an immense paradigm shift is in the cards. The acquisition of another airlines is also a viable
option in the future.
For these low cost airlines distribution models will evolve further to remove intermediaries, such as travel
agents, and will focus of direct selling and other alternative options such as retail stores etc. The
progressive growth of airline industries will lead to enhanced salaries and hence increased airline budgets.

Introducing IPO
To have additional financial flexibility to ensure its long-term growth introducing IPO is a good option for
Air Deccan. This will establish a relationship of airlines with the capital markets to expand its fleet and
enhance engineering and operational capabilities. This will also enhance Air Deccans Brand image among
common man.


Captain Gopinath realized that Air Deccan had pioneered the low-cost air carrier business model in India,
and that many innovations contributed to its success. At the same time, because of its success, Captain
Gopinath realized that he had many new competitors and many more potentially waiting to enter with
even more innovations.