Economics Aviation (2)
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Transcript of Economics Aviation (2)
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7/27/2019 Economics Aviation (2)
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Managerial Economics Project
Topic: Airline Industry
Group Members:Nikhil Kele 24
Harshvardhan Chavan 77Nikhil Kasat 85Sanket Madavi 88Umesh Mahajan 89Rohan Jadhav 103
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Agenda Indian Scenario
Methodology
Statistical Tools used: Regression
Analysis Findings from Survey : Validation of
Hypothesis
World Airline Industry Report Managerial Aspects
References
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History of Airline Industry in India
Genesis on Feb 18, 1911
In 1932, JRD Tata launched the
TATA Airlines
In 1948, Air India International
came into being between Indian
Govt. and AIR India (TATA Airline)
The Indian Scenario
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The Indian Scenario
1986: Private sector players permitted as Air taxioperatorsPlayers including Jet, Air Sahara, NEPC Sky liner,
East West, Modiluft etc. started service
1994: Private Carriers permitted to operatescheduled servicesSix operators granted license however
Only Jet and Air Sahara able to service
2003: Entry of low cost carriersAir Deccan, Spicejet, Go Air, Indigo
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Medium Term Growth Forecast
India GDP: 10.2 % p.a.
Domestic Air travel: 20-25 %
WTTC Travel & Tourism : 8.8 %
Over the next 10 years
Characteristics
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Air Passenger market up 12 %
Domestic Airlines have struggled with losses, debt andgrounded aircraft
India needs to add at least 15% to the current strengthof 400 aircraft
Indian carriers added 30 aircraft in 2011 but kingfishergrounded 20 planes fighting a debt of rs 1600 cr
Low cost carriers like Indigo, GoAir, SpiceJet to add 29carriers
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The aviation sector contributes INR 912 billion (1.5%) to
Indian GDP.
INR 147 billion directly contributed through the output
of the aviation sector
INR 107 billion indirectly contributed through the
aviation sectors supply chain
INR 77 billion contributed through the spending by
the employees of the aviation sector and its supply
chain.
In addition there are INR 582 billion in catalytic
benefits through tourism
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The aviation sector supports 8.8 million jobs in India.
276,000 jobs directly supported by the aviationsector
841,000 jobs indirectly supported through theaviation sectors supply chain
605,000 jobs supported through the spending bythe employees of the aviation sector and itssupply chain.
In addition there are a further 7.1 million peopleemployed through the catalytic (tourism) effectsof aviation.
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26%
18%
19%
5%
13%
19%
Market Share
Jet Airways
Air India
Indigo
Go Air
SpicejetKingfisher
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Few firms provide services different enough - in
terms of quality, frills offered, and frequent flyer
programs - for each firm to have some control
over the price of their service.
The strategy of each firm depends on the
behavior of rival firms.
Slight increase in passengers and especially
business class passengers
Aviation in Asia still attracting passengers mainly
in India and China
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Drivers to Growth of the Indian Aviation Sector
Increase in Consumerism
Increasing Tourists Travel
Increasing Business Travel Entry of Low Cost Carriers
Untapped Market
Rising Disposable incomes
Rising Middle Class Population
Increasing Competition
Government Reform Measures
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Issues of Concern
High fuel prices only a part of the problem
Rising Aircraft lease rentals a bigger issue
0
10
20
30
40
50
60
70
80
2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
atf price in india(domestic) (in 000/kiloleter) domestic
atf price in india(domestic) (in
000/kiloleter) domestic
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Mounting losses of the airlines
The new Ground Handling policy
High Aviation Turbine Fuel (ATF) prices
High airport charges
Shortage of qualified pilots and
technical manpower
Safety and security issues
Closure of old airports
Congestion at airports
High taxation
Issues of Concern
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Traffic Enplaned Passengers RPK = Revenue Passenger Kilometer One paying passenger transported 1 kilometer Yield = Revenue per RPK Average fare paid by passengers, per kilometer
flown PDEW = Passenger trips per day each way A common way to measure OD marketdemand
Airline Demand = Traffic + Rejected DemandRejected Demand or Spill = Passengersunable to find seats to fly
Airline SystemWide Measures
E
(
o
u
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Airline Supply ASK = Available Seat Kilometer One aircraft seat flown one kilometer Unit Cost = Operating Expense per ASK(CASK)
Average operating cost per unit of output
Airline Performance Average Load Factor (LF)= RPM/ASM Average Leg Load Factor (ALLF) = LF/ #
of Flights Average Network or System Load Factor (ALF)= RPM/ASMUnit Revenue = Revenue/ASM (RASM) Total Passenger Trip Time
Airline SystemWide Measures
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Indian Domestic Traffic (RPK and ASK)
0
10000
20000
30000
40000
50000
60000
70000
80000
RPK(Mn)
ASK(Mn)
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Indian Domestic Traffic (Passenger load factor)
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10
20
30
40
50
60
70
80
90
Load Factor(%)
Load Factor(%)
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Operating Profit = RPK x Yield ASK x Unit Cost(Revenue) (Operating Expenses)
Use of any of the individual terms as indicators
of airline success can be misleading
High Yield is not desirable if ALF is toolow Low unit cost is of little value if Revenues
are weak High ALF can be the result of selling alarge proportion of seats at low fares
Basic Airline Profit Equation
Q
Price
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Airline Profit Maximizing Strategies
Intended Benefit Strategy Pitfalls
Cutting Fares/ Yields Stimulate Demand The price cut must generate a
disproportional increase in total
demand, elastic demand
Increasing Fares/Yields Increase Revenue The price increase can be
revenue positive if demand isinelastic
Increase Flights (ASK) Stimulate Demand Increases Operational Costs
Decrease Flights (ASK) Reduce Operational
Costs
Lower Frequencies made lead
to market share
losses and lost demand
Improve Passenger
Service Quality
Stimulate Demand Increases Operational Costs
Reduce Passenger
Service Quality
Reduce Operational
Costs
Excessive cuts can reduce
market share and
demand
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Flight Leg (or flight sector or flight segment) Nonstop operation of an aircraft between A and B, withassociated departure and arrival times
Flight One or more flight legs operated consecutively by asingle aircraft (usually) and labeled with a single flightnumber
Route Consecutive links in a network served by single flight
numbers
Passenger Paths or Itineraries Combination of flight legs chosen by passengers in aOD market
to complete a journey
Airline Supply Terminology
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Centre for Asia Pacific Aviation (CAPA) forecasts
that domestic air traffic will rise by 35%-40% till
2012
International traffic growth by 15%, taking total
market to 100 mn passengers by 2012
Govt. plans to invest US$ 10 billion to modernize
existing airports by 2012 Govt. is planning to develop around 300 unused
airstrips
Potential for Growth
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Vision 2020 by the ministry of civil aviation to create
infrastructure to handle 280 mn passengers by 2020
Indian airports expected to handle more than 60 mn
domestic passengers and 3.4 mn tonnes of cargo perannum
Investment opportunities of US$ 110 bn envisaged upto
2020 with US$ 80 bn in new aircraft and US$ 30 bn in
infrastructure
A report by Ernst & Young says the maintenance, repair
and overhaul (MRO) can absorb up to US$ 120 bn worth
of investments by 2020
Potential for Growth