Effect of Oil Prices on Airlines Industry

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Oil Inflation &
Airlines Industry

Prepared for
Prof. Mahima Sharma
Faculty Member
Jaipuria Institute of Management

Prepared by
Shailesh Bharadwaj (cft07_128)
Sanjeev Prasad (cft07_130)
Sarita Singh (cft07_131)
Saurabh Bansal (cft07_135)
Shashank Anand ( cft07_138)
Students, PGDM- Trimester-4

July 31, 2008

This report has been made to draw the attention of the people how the aviation industry has been dependent upon the Oil prices. Since the research has been done in the prospect of International Business so only those aspects have been covered that shows the dependency of the industry on the other countries. As we know that India is one of the fastest growing countries. It has become the most demanded business hub that attracts every company to do their business in India. Aviation is also one of the most attracting business sector that fully requires the cooperation of other countries for growth. In India many companies has come and doing their business very successfully. But these days increase in oil prices due to depreciation in dollar has compelled the companies to retrospect upon their strategies. Although this problem is worldwide but its effects are not similar so in international business every decision becomes very crucial. Our report shows those crucial elements that led all domestic as well as foreign aviation companies to think again on their plans.

Trends in Indian Aviation Industry

1. Consolidation in aviation sector:
The rise in the number of alliances in aviation industry will help in further growth of aviation sector in India. The Jet-Sahara merger is probably just the beginning. The recent 26% stake acquisition by the Dr. Vijay Mallya (United Breweries group) in the low-cost carrier Deccan Aviation is further confirmation that the Indian aviation industry is looking forward to more consolidations. [pic] [pic]

2. The number of passengers traveling by air is on the rise: With passenger boardings expected to double by 2025, and aircraft operations expected to triple by the same time, the number of passengers traveling by air is on rise. [pic] [pic]


3. For the traveling public, price is paramount in choosing a carrier. Due to the Internet and round-the-clock search capability, airfares are fully transparent to the public and travelers are choosing the lowest price option. Air travel is now a commodity business, and legacy carriers will have to adapt further to a low-cost/low-fare environment in order to survive. Even business travelers, who have been less price-sensitive, are resisting fare increases. The only premiums that travelers are willing to pay for are time-of-day and direct flights, not the brand. 4. Capacity is growing without much constraint.

Indian carriers are placing orders for new aircraft for delivery in the coming period, without clear plans to retire older planes. They are also adding significant numbers of regional jets. The air taxi fleet is also expanding rapidly. Kingfisher Airlines has already ordered 5 Airbus A380 aircrafts that will operate on international routes.

5. Different cost structure
Cost structures will continue to handicap legacy carriers as they compete with newer airlines, as well as with overseas carriers. Low cost carriers are posing great threats to legacy carriers, as a result of which they are restructuring their pricing policies. Apart from this, they are also facing competition from overseas players.

6. Oil prices are not expected to fall.
The public sector oil marketing companies (OMCs) have raised the prices of Aviation Turbine Fuel (ATF) by 3.5 per cent, in line with the rise in international oil prices. This is likely to trigger a marginal increase in airfares.

7. Outsourcing:
Private airlines are known to hire foreign pilots, get expatriates or retired personnel from the Air Force or PSU airlines, in senior management positions. Further, they outsource such functions as ground...
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