Indian Aviation Industry

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ABSTRACT Our project aims at studying the microeconomic factors corresponding to the Indian Airline Industry. The airline industry grapples with high costs which affects its profits. So the factor inputs have been closely studied. Initially a monopolistic market with Air India as the single dominant player, it has evolved into oligopolistic competition over the years with the entry of private players followed by the introduction of Low Cost Carriers. Change in government policies opened up air travel to middle and upper-middle income consumers. The pricing mechanism in this industry has been analysed which is revenue management mechanism which includes third degree price discrimination. The sensitivity of demand with respect to price was found to differ based on the opportunity cost of time. The closest substitute for airline in India is the railway. Roadway and waterways are weak substitutes except in sectors where infrastructure is well developed. Regression Analysis was performed to find the effect of ATF prices, per capita income and train fares on the demand. The results were consistent with the expectations except in the case of ATF prices.

1. Industry Overview: The Indian Aviation Industry has been going through a turbulent phase over the past several years facing multiple headwinds – high oil prices and limited pricing power contributed by industry wide over capacity and periods of subdued demand growth. India, one of the fastest growing aviation markets in the world, has come a long way since 1991 when the Indian Government announced the open skies policy. At present India is the world‟s 9th largest civil aviation market. The industry has seen a lot of bullish tendencies in the post reform era, very much mapping the improving growth trajectory of the economy. The global financial crisis that started in September 2008 and following slowdown in world economy hit the aviation industries across the world. Indian carriers too had their share of troubles. But as the Indian economy recovered rapidly from the trough witnessed in the December quarter of 2008, demand for aviation industry too has begun to improve and the industry has seen strong rebound over the second half of FY10. The sector is currently witnessing a lot of setback due to economic slowdown hitting the aviation sector globally. 2. Chief Characteristics of Airline Industry: a. Capital Intensive: It‟s a capital intensive business which requires huge amounts of money to operate effectively. The industry requires capital for expensive equipment like aircrafts, maintenance systems, control towers, simulators etc. b. Labour Intensive: Airlines need personals like pilots, crew members, security guards, cleaners, engineers etc. It‟s a very labour intensive industry and nearly one-third of the revenue is used for the payment of workforce. c. Thin Profit Margin: The profit margin is very thin in this industry. It averages to about 1-2% only. 3. History of the Industry: Civil aviation was introduced in India in December 1912 with Tata Airlines. Tata Airlines was renamed as Air India in 1946. In early 1948, a joint sector company, Air India International Ltd., was established by the Government of India and Air India. Due to deteriorating financial conditions of existing airlines, in 1953, the government nationalized the airlines via the Air Corporations Act, 1953, which gave birth to Indian Airlines and Air India. The Act gave monopoly power to Indian Airlines to operate on domestic scheduled services ruling out any other operator. Air India became the single Indian carrier to operate on international routes excluding some routes to the neighbouring countries which were given to Indian Airlines. The second phase of the sector began in the year 1986. In this period, the private sector players were granted permission to operate as air taxi operators. In 2003, Air Deccan gave India its first Low Cost Carrier (LCC) or no frills airline which was a turning point in the...
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