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

An Overview

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

Major players in the Industry

Positioning of Different Carriers:

BOOM AND BUST IN INDIAN AVIATION INDUSTRY

The Emergence of a New Indian Airline Industry Monopoly of Air India and Indian Airlines

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

Restructuring of the Industry

Jet-Sahara merger

Kingfisher-Air Deccan merger

Air IndiaIndian Airlines merger

Low Cost Carriers:

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

Air Deccan

Vision: Mission:

Empowering every Indian to fly

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.

Air

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The Business Strategy

Strategies for Future sustenance

Expansion Plans

Sweating its assets

Airlines

No. of aircrafts

No. of (daily)

Flights Utilization of Average fleet aircraft age (in years) (Flights/Aircraft) 4.597 2.906 10.416 11.9 4.5 2.2 6.5

Air India Jet Airways

108 87

400 218 250

Kingfisher Airlines 75 JetLite 24

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.

Dynamic Pricing
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.

Advertising revenues

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.

Low cost or Value carrier ??

CORPORATE STRATEGY AND CUSTOMER FOCUS

To offer its passengers a consistent, qualityassured 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

2. Fleet
AIRLINE

Of Aircraft Utilized
TYPES OF AIRCRAFTS

JetLite

Boeing 737 series and Canadian Regional Jets 200 Series. Airbus A320s purchased) Boeing 737-800 Boeing 737-900 Airbus A320 (leased and

GoAir

SpiceJet

Indigo

AirDeccan/Kingfisher Red

48 and 72 seater ATRs on the regional routes and the 180-seater A320 on the trunk routes.

3. Models adopted
AIRLINE MODEL ADOPTED

JetLite

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

GoAir

SpiceJet

Point-to-point, and regional hub-nspoke Point-to-point model

Indigo

AirDeccan/Kingfisher Red

Hub-n-spoke model

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 investment firm 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.