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Domestic Airlines

:Price Leveraging

Group Member :

Ishan Sodi

Priyanka Babar

Prateek

Rajeshwari R.Guruprasad

Rohit Bebarta

Rubina

Sahil

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The ChangeThere has been a marked change in the civil

aviation scenery in India.

. Whereas prior to 1992 when the two public sectorairlines, namely Air-India and Indian Airlines enjoyeda monopoly in the domestic sector, today a dozenairlines are competing for a market share.

The domestic passenger and cargo traffic recorded agrowth rate of 44.6% and 8.7%, and theinternational passenger and cargo traffic recordedgrowth rates of 15.8% and 13.8% respectivelyduring 2006-071.

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The substantial growth of customer traffic in

Indian aviation industry is mostly due to:

low fares offered by Low Cost Carriers (LCC).

Scheduled domestic air services are nowavailable from 75 airports as against just 50earlier.

International Players making a beeline to

enter this emerging market.Numbers of Flights operating: 2500 per day.

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THE PLAYERS Domestic air market can be divided into 2 major

segments:- Premium- x y z

- No frills: e r tStart up players -Omega Air, Magic Air,Premier Star Air andMDLR Airlines.

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Current Market Share

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Indian Aviation Timeline

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Contd

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DETERMINANTS OF PRICING

1.ATF

ATF refers to air turbine fuelwhich is used by airlines in itsoperations.

ATF contributes to the 40 % ofoperation cost

It includes freight charges from gulf toIndia ,Customs Duty, DomesticTransportation and various taxes.

India usually Pay higher ATF charges as

compared to other countries.

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2.Lease Rental

Private operators except Air India have leasedaircraft from USA and Europe.

They pay on average $375000 to $500000 permonth depending on the aircraft

They contribute almost 33 % of operationalcost.

They generally have to pay their rents indollar terms.

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3.Airport Charges

It is the basic fees that is charged by airports

from airlines

This include parking fees, landing fees , stop

paging fees and aero bridge expenses

New airport charges more than established

one to cover up all the cost incurred

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4.Other factors

Advertising and Promotional Expenses

Technology employed by the airlines

Current Financial position

Prices set by other airlines competing in the

present environment.

Pilot fees Government regulation.

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Airfare

WAR

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No Frills- Air Deccan

The credit for triggering this price offensive goes to

Air Deccan. Inspired by the Irish carrier Ryan Air, Air Deccan

offered airfares as low as Rs 500 plus taxes on theMumbai-Delhi sector.

Air Deccan's normal fares are much lower than whatpassengers are used to paying for air travel on JetAirways, Indian Airlines or Air Sahara.

It is a 'no frills airline', meaning that the airline has cut

out all the add-on costs of travel and focuses on gettingpeople from one location to another safely.

This seems to have sent the leading domestic carriers IndianAirlines, Jet Airways and Air Sahara into a tizzy and each airline is now

going all out to ensure they it doesn't lose out to the new low-costairlines or to each other.

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Indian AirlinesThe airlines worked on

upgrading their frequent fliers programmes (FFP)and apex.

Indian Airlines has revised its frequent flier programme toenable those with even a single boarding pass to qualify

to enter the frequent flyer club.

The Indian Airlines FFP has been merged with Air-India's

programme, which will allow international passengers to

earn mileage points. If you fly Indian Airlines, you'll get

Air-India milea e oints.

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JOURNEY

Began operations on with two Boeing 737-200

aircraft on 3December 1993 . Revamped and Rebranded in 2000.

Boosted the Fleet in 2002 and Introduced New PriceSchemes

Price Schemes :

First Airlines to start innovative Pricing model ratherthan APEX Model.

Sixer and Super Sixer Schemesin 2002 Six refers tothe six zones for 25k.These schemes offered more to thecustomers than their competitors.

Square Drive Scheme ( Family Pack) 4k-2.5k

Steal a Seat - Bidding process started from Base price Re 1/-

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Air Sahara offered to accept frequent flier miles earned on

other airlines in its own rewards program. Users had to earn an

equal number of miles on Air Sahara, however, before they

could be exchanged for free travel or consumer goods.

According to the company, 1,000 people signed up for the

program in the first two weeks.

Air Sahara brought a live acoustic band on board certain long-haul flights during February 2002. In another marketing

scheme, the company teamed with Standard Chartered Bank to

offer fliers the "Instabuy" program providing interest-free credit

for air travel.

Air Sahara is also planning to launch a 'dynamic fare' model.

Under this model, fares will be based on the daily market

demand. In short, Air Sahara, too, will sell vacant seats at lower

fares

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JET AIRWAYS

Started commercial airline operations on 5th May

1993

Headed by Mr Naresh Goyal

Indias third largest airline

Operates three airlines-Jet Airways,Jet Lite and Jet

Airways konnect

Jet Lite was earlier Air Sahara which was taken over

by Jet Airways in 12th April 1997

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Jet Airways a premium class carrierJet Lite and Jet Airways konnect are low cost carriers

Schemes Offered By Jet Airways :

Frequent Flyer Scheme

APEX pricing Scheme

Cash Back Offer

Jet Privilege Scheme : Extended its points partnerships

to Accor Hotels and Langham Hotels International.

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THE STRATEGIES

Some of the methods that were used are

as follows:

APEX fares

Low price tags

Internet auctions.

Bulk purchases. Last day fares.

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WHAT IS APEX? Apex IS ADVANCE PURCHASE EXCURSION FARE. It is a non-

cancellable return fare offered at a heavy discount on the

conditions:

Tickets are purchased at least 21 days in

advance

Minimum gap between departures range from one to six

weeks.

Maximum gap between departures is 12 to 24 weeks.

There are no stopovers.

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Advantages of APEX

Planning of operations for airline

companies.

Profit of the airline companies increased.

Helped in modernization of airports.

Led to the introduction of new LCCs.

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Disadvantages of APEX Planning air travel three weeks in advance was not

very convenient

The tickets in this scheme were non refundable.

No flexibility as tickets under this scheme could not

be rescheduled.

Very few tickets were offered by aircraft companies

under this scheme.

It led to the congestion of airports.

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Effects of APEX

Led to increase in the number of customers.

Loss of airline companies minimized as with the increase

of passengers the aircraft ran to their full capacity.

It brought a veritable boom in tourism sector.

It was able to lure the middle class people who preferred

to travel by trains.

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Dynamic Price

Maximise the number of seats sold, airlines divide the

seats in an aircraft into several classes and sell them

at different prices.

Pay only a fraction of what passengers who book last

will pay. Fares are based on the daily market demand.

Ticket allocations per fare block are made purely on

daily demand.

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BULK PURCHASE One can save an additional 20% - 70% by buying

Bulk/Negotiated Airfares also known as "Consolidator

Airfares", without most of the advance purchase restrictions

(70% savings apply to one-way airfare).

Bulk purchase" sells directly to the public as well, in addition

to wholesaling to travel agencies . The "Bucket Shop" often

would be a "Consolidator" on one-hand, negotiating their own

deals directly with Airlines, and also buy from other

Consolidators in their country and or from other counties.

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FACTORS WHICH HELPED TOBRING DOWN THE PRICE IN 2002

1. Open Sky Policy:

The signatories are allowed to fly over the skies of India.

EFFECT:

--Tourist arrivals in India are expected to grow

exponentially,

-- The increase in number of international tourists will

percolate down to increase in domestic passengers.

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2. Deregulation:

Requirements to become a scheduled operator air carrier in

India have being reformed, the reduced restrictions on foreign

direct investment is 49% for flights and 100% for airports.

EFFECT:

Entry into the air travel industry is not only cheaper, but also

affordable to new operators

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3.Modernization of Airports

The Indian Cabinet has approved a

proposal mandating the state-run

airport operator to modernize 35

airports in second-tier cities within

the next two years.Effect:

Improved infrastructure would lead to rise

in no. of travelers and also so

would encourage more operators.

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4. Abolishment of

Taxes

Foreign Travel Tax (FTT) Rs500 and 15% inland

air travel tax (IATT) charged on Basic airfare

has been abolished by the government to

reduce fares.

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5. Reduction on ExciseDuty

The excise duty on ATF was reduced from

16 to 8 per cent

The average domestic price of ATF is 99 per cent higher than prices in foreigncountries and affects domestic airlines drastically as ATF accounts for 30 to 40

per cent of operating costs

Effect :

It would lead to low fares thus giving a boost to air travel

The government has reduced the average age of aircraft being imported into India for

commercial airline operations by five years.

Effect: It would lead to increase in imports of aircraft thus can discourage more

operators coming in and improve services

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6. Landing Charges abolished

Landing charges for aircraft with less than 80

seats were abolished

Landing charges for larger aircraft have been

reduced by 15% with effect from February

11,2004.

Effect: Reduction in cost.

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Economic Prosperity Of India

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Effect:

The rise in income levels along with introductionof no-frills flights will lead to

Rise in no of travellers, More investments in aviation,

More competition and

Rise in industrialization leading to more need

of air transport..

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PRICING & THE ECONOMIC CONCEPTS

The method taken here is to dynamically modulateprices over time by adjusting the number of seatsavailable in each pre-defined fare class. Advantageis taken of a natural segmentation in theconsumers: business travelers for whom theflight dates and timings are primary and faresare secondary; casual travelers for

whom prices are

important prices are important andthe dates/timings are flexible;

and hybrids for whomboth factors are at an equal level ofimportance.

Quantity Per Period

MC=AC

ice

B

QD

Q3

Q2

Q1

O

P3

P2

P1

P0

Price,Cost per unit

First Degree Discrimination

First degree Price Discrimination: Professor Baumolshows that effective competition does not necessarily

impose uniform prices. More provocatively,competitivepressures can force all firms to adopt discriminatoryprices if consumers cannot easily resell a product.

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PRICING . . .

A restricted model was estimated, where price

discrimination is assumed not to vary with market

concentration.

The regression equation comes out to be:

P = 8922.81 1629.9 DAYS - 831.1273 DEPTIME

26.9095 DUR

The coefficient of determination or R2 comes out to be is

0.9283

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PRICING The adjusted R2 is 0.8746. This means that variation in

the duration of journey and departure time and advance

purchase explains 87.46% of the variation in air fare

While performing the t test, the value of the calculated t

statistic for departure time Duration of flight and

advance purchase is more than the critical t value of

3.182. This shows that the three parameters are

statistically significant and shares significant relationship

with the airfare. Means they have a great impact on the

variation in prices

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PRICING

The study proved that not only price discrimination

can work well in monopolistic competition but also

in imperfect completion Also price discrimination

works well only when price elasticity of demand are

different in different situations. Here we have

studied for Airlines with with more firms in the

market, price discrimination can increase or

decrease.

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Conclusion

Some FAQs:

Were the schemes effective?? Does the pricecutting undermine firm's viability in the longrun??

There are may factors which determine theprice of an air ticket.

The innovative schemes initiated by the airlinesway back in 2002 were definitely effective in

increasing the customer base.The price cutting schemes are in tandem with

government policies and are viable as long asthe external factors for pricing are under

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Thank You

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