Airdeccan Case Analysis

8/2/2019 Airdeccan Case Analysis

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BACKGROUND OF LOW COST AIRLINE INDUSTRY

A low-cost carrier or low-cost airline (also known as a no-frills, discount or budget carrier or

airline) is an airline that generally has lower fares. To make up for revenue lost in decreased

ticket prices, the airline may charge for extras like food, priority boarding, seat allocating,

and baggage etc.

The term originated within the airline industry referring to airlines with a lower operating

cost structure than their competitors. While the term is often applied to any carrier with low

ticket prices and limited services, regardless of their operating models, low-cost carriers

should not be confused with regional airlines that operate short flights without service, or

with full-service airlines offering some reduced fares.

Business model

Low-cost carrier business model practices include:

a single passenger class a single type of aircraft (commonly the Airbus A320 or Boeing 737 families),

reducing training and servicing costs

a minimum set of optional equipment on the aircraft, further reducing costs ofacquisition and maintenance, as well as keeping the weight of the aircraft lower and

thus saving fuel:

no AVOD etc.; often excluding conveniences such as ACARS and autothrottle no in-flight entertainment systems made available no seat recliners, seat pockets, window blinds or seat headrest covers a simple fare scheme, such as charging one-way tickets half that of round-trips

(typically fares increase as the plane fills up, which rewards early reservations)

flying to cheaper, less congested secondary airports and flying early in the morning orlate in the evening to avoid air traffic delays and take advantage of lower landing fees

fast turnaround times (allowing maximum use of aircraft) unreserved seating (encouraging passengers to board early and quickly, thus further

decreasing turnaround times)

simplified routes, emphasizing point-to-point transit instead of transfers at hubs (againenhancing aircraft use and eliminating disruption due to delayed passengers or

luggage missing connecting flights)

encourage the use of direct flights. Luggage is not automatically transferred from oneflight to another, even if both flights are with the same company.

generation of ancillary revenue from a variety of activities, such as la carte featuresand commission-based products

emphasis on direct sales of tickets, especially over the Internet (avoiding fees andcommissions paid to travel agents and computer reservations systems)

employees working in multiple roles, for instance flight attendants also cleaning theaircraft or working as gate agents (limiting personnel costs)


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a disinclination to handle Special Service passengers, for instance by placing a higherage limit on unaccompanied minors than full service carriers

aggressive fuel hedging programs passengers paying charges for extras, such as hold luggage, online check in and

priority boarding avoiding using jetways to board and alight passengers by using a mobile stairway

which is a cheaper alternative.

not supplying meals in a flight, but offering snacks, sandwiches and drinks instead topurchase on board

no refunds or transfers to later flights in the event of missed flights, i.e. if the aircraftleaves on time without a passenger who arrived late, he will have to buy a wholly new

ticket for the next flight.

Not every low-cost carrier implements all of the above points. For example, some try to

differentiate themselves with allocated seating, while others operate more than one aircraft

type, still others will have relatively high operating costs but lower fares. JetBlue for instance

has in-flight entertainment (i.e. LiveTV) in every passenger seat.

The price policy of the low cost carriers is usually very dynamic, with discounts and tickets

in promotion. Even if the advertised price may be very low, sometimes it does not include

charges & taxes.

As the number of low-cost carriers has grown, these airlines have begun to compete with one

another in addition to the traditional carriers. In the US, airlines have responded by

introducing variations to the model. Frontier Airlines and JetBlue Airways advertise satellitetelevision. Advertiser-supported Skybus Airlines launched from Columbus in 2007, but

ceased operations in April, 2008. In Europe, the emphasis has remained on reducing costs

and no-frills service. In 2004, Ryanair announced proposals to eliminate reclining seats,

window blinds, seat headrest covers, and seat pockets from its aircraft.

The budget airlines frequently offer flights at low pricesoften flights are advertised as free

(plus applicable taxes, fees and charges.) Perhaps as many (or as few) as ten percent of the

seats on any flight are offered at the lowest price, and are the first to sell. The prices steadily

rise thereafter to a point where they can be comparable or more expensive than a flight on a

full-service carrier.

Additional expenses charged can border on the fraudulent, such as levying a credit card

charge where credit card is the only payment method accepted.

Traditional perceptions of the "low-cost carrier" as a stripped-down, no-frills airline, as seen

on Southwest Airlines, have been changing as new entrants to the market adapt the business

model in new ways. AirTran Airways and Spirit Airlines offer a premium cabin while

Frontier and JetBlue offer live in-flight television, sometimes for an extra fee. AirTran has

XM Satellite Radio available at every seat. Frontier, JetBlue, and AirTran all use assigned

seating. Some airlines even have services not available on some legacy carriers, such as mood

lighting, found in Virgin America.


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Criticism

Some elements of the low-cost model have been subject to criticism by Governments and

Regulators, and in the UK in particular the issue of "Unbundling" of ancillary charges by

both low-cost carriers and other airlines (showing airport fees, taxes as separate charges

rather than as part of the advertised fare) to make the "headline fare" appear lower has

resulted in enforcement action. Believing that this amounts to a misleading approach to

pricing, the Office of Fair Trading (OFT) in February 2007 gave all carriers and travel

companies three months to include all fixed non-optional costs in their basic advertised

prices. Although the full service carriers had complied within the specified timescales, the

low-cost carriers have been less successful in this respect, leading to the prospect of legal

action by the OFT.

Many low-cost carriers show a zero cost for some flights. Most charge additional fees for

airport check-in, baggage check-in, 'handling charges', seat allocation and credit card

processing. These charges are non-refundable even in the case of cancellation by the airline.

Low-cost carriers regularly weigh carry-on bags, check them for size and impose high

penalty charges for any carry-ons exceeding their stipulations. Ryanair requires that

passengers' airport purchases fit within their carry-on bag.

No-frills long-haul flights

The first airline offering no-frills transatlantic service was Freddie Laker's Laker Airways,

which operated its famous "Skytrain" service between London and New York City during thelate 1970s. The service was suspended after Laker's competitors, British Airways and Pan

Am, were able to price Skytrain out of the market.

It has been suggested that the Airbus A380, able to hold up to 853 passengers in an all

Economy layout, would enable true low-cost long-haul service. While the per-seat costs of

such an aircraft would be lower than the competition, there are fewer cost savings possible in

a long-haul operation and therefore a long-haul low-cost operator would find it harder to

differentiate itself from a conventional airline. In particular, low-cost carriers typically fly

their aircraft for more hours and flights each day, scheduling the first departure early in the

morning and the last arrival late at night. However, long-haul aircraft scheduling is more

determined by timezone constraints (e.g. leaving the US East Coast in the evening and

arriving in Europe the following morning), and the longer flight times mean there is less

scope to increase aircraft utilization by adding one or two more short flights each day.

In 2004 the Irish company Aer Lingus lowered its prices to compete with companies such as

Ryanair on shorthaul, however they maintain a full service on transatlantic flights. Late in

2004 the Canadian airline Zoom Airlines also started selling transatlantic flights between

Glasgow, UK; Manchester, UK; and Canada for 89.

Australia's Jetstar has operated international flights since 2005, when they began service toChristchurch, New Zealand. In late 2006, more international services began. Departing from


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Sydney, Melbourne and Brisbane, they fly to popular tourist destinations within 10 hours of

Australia such as Honolulu, Japan, Vietnam, Thailand, Malaysia and more. With the delivery

of new planes, they hope to fly to the continental US and Europe.

In April 2006, the industry magazine Airline Business analysed the potential for low-cost

long-haul service and concluded that a number of Asian carriers, including AirAsia, were

closest to making such a model work. On November 2, 2007, AirAsia X, a subsidiary of

AirAsia and Virgin Group flew its inaugural flight from Kuala Lumpur, Malaysia to Gold

Coast, Australia. AirAsia X claims that it is the first true low-cost long-haul carrier since the

end of Sir Freddie Laker era.

In August 2006, Zoom Airlines announced that it was to establish a UK subsidiary probably

based at Gatwick Airport, to offer low-cost long-haul flights to the USA and India. The

company suspended all its operations from 28 August 2008 due to financial problems related

to the high fuel price.

On 26 October 2006, Oasis Hong Kong Airlines started flying from Hong Kong to London

Gatwick Airport (delayed by one day because Russia suspended fly-over rights for that flight

an hour before the flight's scheduled departure). The cheapest prices for flights between Hong

Kong to London could be as low at 75 (approximately US$150) per leg (not including taxes

and other charges) for economy class and 470 (approximately US$940) per leg for business

class for the same route. From 28 June 2007, a second long-haul route to Vancouver, British

Columbia was started. The company ceased operations on 9 April 2008, after over 1 billion

HKD of losses.

In late 2007, Cebu Pacific, the Philippine based low cost carrier, announced intentions to

launch non-stop Pacific flights from the Philippines to the United States West Coast and other

US cities by around mid-2009.

On March 11 2009, AirAsia X started its first low cost long-haul service into Europe to

London Stansted, England. The daily flights to Stansted are operated by two leased Airbus

A340-300 aircraft. A one way economy class ticket often costs 150 and the Premium class

one way often costs 350.

US Airways calls itself a low-cost airline, however usually its international fares are equal to

other major carriers.

Low-cost business only carriers

A trend from the mid-2000s was the formation of new low-cost carriers exclusively targeting

the long-haul business market, with aircraft configured for a single class of service, initially

on transatlantic routings. Probably best described as "fewer frills" rather than "no frills", the

initial entrants in this market utilised second-hand, mid-sized, twin jets such as Boeing 757

and Boeing 767 in an attempt to service the lucrative London-US Eastern Seaboard market:

Eos Airlines, which ceased operating on 27 April 2008


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Maxjet, which has ceased its scheduled business flights, but is planning to restart as aluxury charter carrier

Silverjet, which ceased operations on 30 May 2008.Airline revenue from non-ticket sources, which is called ancillary revenue, has become an

important financial component for low-cost carriers (LCCs) in Europe and is being adopted

by all types of airlines throughout the world. Ancillary revenue has been defined as,

Revenue beyond the sale of tickets that are generated by direct sales to passengers, or

indirectly as a part of the travel experience. Ancillary revenue has been further defined to

include these categories: la carte features, commission-based products, and frequent flier

activities.

History

European consumers would likely attribute the birth of this movement to Europes largest

low fare airline - Ryanair. Michael O'Leary, Chief Executive of the airline, describedancillary revenue during a 2001 interview in the UK Sunday Times. The other airlines are

asking how they can put up fares. We are asking how we could get rid of them.

The unorthodox business model envisioned by OLeary uses commissions from pay-per-view

entertainment, onboard shopping, internet gaming, car hire and hotel bookings to eventually

replace the revenue from selling airline seats. Consumers may someday fly for free, but

airline executives already benefit from the bottom line boost provided by ancillary revenue.

OLearys radical idea catalyzed an industry-wide trend to coax more revenue from the

profit-challenged airline business.

Management at competing airlines often ridiculed the path pursued by Ryanair. Traditional

carriers defined their product distinction by bundling many amenities into the price of an

airline ticket. At the same time, low cost carriers had not yet embraced the option of selling

an unbundled airline experience.

Passenger reaction

Airlines can boost their revenues by "unbundling" the travel experience by charging separate

fees for services such as checked baggage and beverages served onboard. Low cost carriers

such as easyJet and Ryanair have generated significant profit from ancillary revenue.However, the consumer backlash from charging fees (for services included in the price of a

ticket by other airlines) can damage a carrier's reputation. For example, "European Skyway

Robbery" was the headline written by noted travel columnist Peter Greenberg to warn

consumers of abusive overcharging for baggage fees in Europe by easyJet and other carriers.

The world's largest carriers are not immune from the public backlash against aggressive

ancillary revenue actions. British Airways also wanted to boost its ancillary revenue with

higher baggage fees during 2007. The carrier eventually backed down after the public outcry

became too great. These have turned airlines into finding ways to increase ancillary revenue

without hurting their brand.


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Need for airlines

The unrelenting increase in the price of jet fuel has greatly impacted the economics of the

airline business. When combined with other factors, the outcome has created considerable

challenges for traditional airlines and low fare carriers.

2007 has been especially difficult as the price oil reached the neighborhood of $100 per

barrel during late 2007. Concurrent with this, Ryanair announced record half-year profits.

Announcing these results Ryanairs CEO, Michael O'Leary, said: These record profits

reflect a 20% growth in passenger volumes, a 1% decline in yields, and strong ancillary

growth. Ancillary revenues grew by 54% to 252 million, due to improved penetration of car

hire, hotels, travel insurance, as well as strong onboard sales and excess baggage revenues.

Ancillaries now account for just over 16% of total revenues as we make steady progress

towards our 20% target.

Ryanairs 408 million profit, along with ancillary revenues of 252 million, confirmed whatthe airline industry has already realized. Ancillary revenue activities have become a

necessary ingredient in the profit mix of successful airlines.

Other airlines all over the world also report ancillary revenue from legacy airlines to low cost

carriers. The following lists total ancillary revenue reported by these airlines for fiscal year

2006: easyJet 189,476,508, Aer Lingus 63,407,000, SkyEurope 10,827,000, AirAsia

(Malaysia) 22,713,479.

Types

A la carte features: amenities a consumer can order while travelling. The list continues to

grow and the following lists typical activities: 1) onboard sales of food and beverages, 2)

checking of baggage and excess baggage, 3) assigned seats or better seats such as aisle rows,

4) call center support for reservations, 5) fees charged for purchases made with credit cards,

and 6) early boarding benefits.

Commission-based products: commissions earned by airlines on the sale of hotel

accommodations, car rentals and travel insurance. These primarily involve the airlines web

site, but it can include the sale of duty-free and consumer products on board aircraft.

Frequent flyer programs: The frequent flyer category is defined by the sale of miles or points

to program partners such as hotel chains and car rental companies, co-branded credit cards

(co-branding), online malls, retailers, and communication services.

Industry agreement largely exists for inclusion of la carte features and commission-based

products under the ancillary revenue banner. These are perfectly aligned with Ryanairs

current ancillary revenue activities. Frequent flyer activities represent an inclusion that is

growing in acceptance.

Airbus has shipped 4,291 A320 series aircraft since their certification/first delivery in early

1988, with another 2,257 on firm order (as of 31 May 2010). In comparison, Boeing has


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shipped 6,409 737s since late 1967, with 4,903 of those deliveries since 1988, and has a

further 2,000 on firm order (as of 31 May 2010). Based on figures since 1988 when they first

entered direct competition, Airbus delivered on average 194 A320 series aircraft per annum,

while on average 221 Boeing 737s were delivered.

TRAITS OF G.R. GOPINATH AS AN ENTREPRENEUR

Capt G R Gopinath or Gorur Ramaswamy Iyengar Gopinath or 'Gopi' as he is affectionately

called was born in a Hassan Iyengar family of the remote village ofGorur, Karnataka.

Starting his studies in a village school, he completed his further schooling at Sainik School,

Bijapur. Thereafter he joined the distinguished National Defence Academy and later

graduated from the Indian Military Academy as a commissioned officer in the Indian Army.

He then went on to serve the Army for eight years. He currently lives in Bangalore with his

wife and 2 daughters, Pallavi and Krithika. He had contested in 2009 lok sabha elections as

an independent candidate but he lost it. In 2009 Gopinath started Deccan 360 freight and

logistics operation.

In 1995, the Indian government started the reforms process by encouraging entrepreneurship.

In the next year he stated a private sector commercial helicopter service, Deccan Aviation. In

2003 he launched India's first low-cost airline, Air Deccan which was later purchased and

merged into Kingfisher Airlines

Awards and Honours given to G.R. Gopinath

2005 - Rajyotsava Award (Karnataka)

2007 - Chevalier de la legion dHonneur(France)Personality of the Decade Award (K.G. Foundation)

Sir M Visvesvaraya Memorial Award (Federation of Karnataka Chambers of Commerce &

Industry)

1. From growing fruits and vegetables he moved into sericulture wherein he developedan eco friendly method of silk farming. He was always looking for opportunities in

the market and his development of new eco friendly method of silk farming shows

that he was not only concerned of profits in his ventures for innovation but was alsoconcerned about environment and society benefits his innovations could give.

2. A series of business ventures followed, but his passion and steely determination sawhim steer each one to success. The best example other than the success story of Air

Deccan would be that he set up a heli-chartered service in 1995 and it took only 5

years for this service to become Indias largest heli charter Company.

3. In early 2002, While changing flights at the Phoenix Sky Harbor International airportGopinath was impressed by how a mid-level American airport was handling twice the

number of flights as whole of India. He was not just impressed but saw an

opportunity tailor made for India. He instantly analysed the applicability of his plan

in Indian context and started working on that as soon as he returned back to India.
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And in only one year he was ready with a commercial air passenger service plying

single route (Bangalore-Hubli-Banglore) as a unit of DAPL.

4. He targeted the segment of the society which was never targeted by any company ofAviation industry. It was too risky but he was ready to break the barriers of

perception that middle class is expected to travel on duty only by road or rail howeverurgent the need. He saw potential in segments no one ever thought of.

5. After the commencement of Air Deccan a lot of other companies followed him andentered in Low Cost Airlines Segment.

6. He was looking up for making the Air travel cheaper and cheaper and so he put inmany innovative ideas for the same some of which were not even effecting the

comfort of the passengers like converting the airplane into a Billboard.

7. He always had a clear and ambitious vision. I believe that for India to be adeveloped country, every Indian should be able to fly. In all developed countries, the

common man flies he said.

8. He changed the whole face of Indian Aviation Industry and the growth rate of thisindustry increased many fold after the commencement of Air Deccan.

ENTREPRENEURIAL STRATEGIES ADOPTED:

Planning phase Strategy-

The entrepreneur who was the pioneer of Air Deccan, Mr. Gorur Ramaswamy Gopinath

planned a low cost airline venture. The idea itself gave a competitive advantage against other

players in the Airline Industry of India. In fact, Mr. Gopinath figured out angles to competewith the Indian Railways with the vision of Empowering every Indian to fly.

Penetrating the market:

Air Deccan wished to target three market segments:-

1. Leisure Travellers this segment comprised of people who travelled for holiday and

pleasure, with the unique character of advance planning. This segment was price elastic and

under penetrated.

2. Business travellers this segment included those who owned small and mediumenterprises, travelled by ac classes on train, and were cost and time conscious.

3. Corporate TravellersThis segment consisted of those working in large corporations

and was frequent fliers.

For the first segment, the strategy was to plan an advance- booking facility with theattraction of fares starting low and increasing as the date of travel neared.

For the second segment, the strategy was to allure the cost and time consciousbusiness travellers who could save on hotel bills by avoiding overnight stays.


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For the third segment, the strategy was to attract the big corporations by reducingtheir travel expenditures incurred by their employees.

Such a penetration strategy would help Mr. Gopinaths aspiration to eye on every segment,

paving the way for a successful venture.

Implementing the low-cost idea:

Eliminate all frills like hot meals, frequent flier programs, Full complement of flightattendance, etc.

Installing new passenger seats by saving the storage space. Increasing the seat factor by 20 % by eliminating business class, reducing seat pitch

and removing couple of galleys.

Reducing time for cleaning the aircraft by doing away with food and drinks and thusenabling quicker turnarounds.

No issuing of tickets thus reducing cost of printing and processing. Selling snacks and non- alcoholic drinks generating revenue. Introducing online booking of tickets and removing intermediaries. Eliminating toll free calling by customers. Introducing point-to-point service that saves time and cost.

Keeping the promise of sticking to low fares to customers was the key motive of Air Deccan.

And for this, Mr. Gopinath wanted its marketing strategy to be cantered on pricing,

distribution, and mutually beneficial alliances.

Pricing-

There were three options under consideration for pricing the air tickets. These are:-

1. Keeping the fares below existing full service carriers.

2. Adopting two tiers of pricing- higher tier resembling 1st option, and lower tier

having really low fares compatible with that of railways.

3. Pricing all tickets between high fares of existing airlines and low fares of railways.

Distribution-

Removal of intermediaries and using Internet for selling tickets making it cost effective.


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Marketing Alliance-

To reduce risk in operation, leverage mutual skills and reduce costs, the Air Deccan entered

the following alliances:-

1. Indian publishing house, Bennett Coleman & Co.for selling tickets.

2. Jigrahak Mobility Solution for internet technology.

3. Hyderabad Aircraft Maintenance Company for maintenance, repair and overhaul.

The Business Phase Strategy-

1. Concentrated on unconnected regional areas-Air Deccan did not connect with the metros initially. They entered the regional areas, which

were disconnected, but promised capacity traffic.

2. Two pronged fleet strategy-Air Deccan was flying 48 and 72 seater ATRs on their regional routes and 180 seater A320

on the trunk routes. The logic behind this was that smaller aircrafts were suitable for the

shorter runways at regional airports, while the jet aircrafts on the trunk routes helped to

achieve higher capacity and carry passengers over a longer range than ATRs.

3. Lease with Airbus-They entered into an operating lease with the Airbus wherein the title remained with theaircraft owner while the operator paid up rental payments which were tax deductible and

reduced not only the capital expenditure on the balance sheet but also operators exposure to

uncertainty of the aircrafts residual value at the time of disposal.

4. Lean staffing-It adopted lean and mean approach to staffing levels and aimed at maintaining a low

aircraft to employee ratio to keep operating costs lower.

5. Pricing-Air Deccan kept graded Pricing structure:

Lowest priced tickets, booked weeks ahead of schedule which would comprise 25%

of total seats in an aircraft.

Higher priced tickets as the date of departure neared.

The pricing strategy for a particular flight was governed by factors like day and month of the

year, competitive schedules of that day, competitive pricing, events and festivals, and

historicity.

Air Deccan through this Dynamic pricing, sought to maximize revenue.


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6. Marketing Alliance-In addition to the formation of the alliances mentioned in the planning phase, Air Deccan

made alliance with:-

1. Hindustan Petroleum Corp. for selling of tickets through internet enabled computers.

2. Reliance Web World for selling tickets through its nationwide retail chain of

Broadband internet centres.

3. Indian Railways for selling airline tickets to the wait-listed rail passengers.

4. Tieup with Caf Coffee Day.

5. Tie up with ICICI for travel agent purchase card.

7.

Alternative Revenue Channels-

Air Deccan used most parts of its aircraft as advertising bill boards. Storage bins,headrests, tray tables, baggage tags and even boarding passes were utilized for the

same.

Even the magazines distributed to the passengers generated revenue throughadvertising sales.

There was an In flight Shopping Scheme called Brand for less Customers had to pay for food and beverages, headsets of television and various other

items in flight.

Promotion of this low cost airline was done through television channels, newspapers, and

radio channels.

SWOT Analysis

Strength:

1. The entrepreneurial success and experience gained from previous start-ups of G.R.Gopinath surely is one of the greatest strengths of Air Deccan.

2. Deccan hade quite an experience in aviation industry as it already had charteredhelicopters.India's largest private Heli-charter company.

3. Highest Load Efficiency.4. Flies to destinations in Hinterland5. A lean and mean Approach to staffing.6. Operations expanded into Sri Lanka7. Leader in LCC Segment, First to target the middle class. It would surely give Air

Deccan the First mover advantage

8. Highest market share in the LCC Segment is also one of the greatest strengths of AirDeccan.


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Weakness:

1. There were constant harping about poor customer service and no free food.2. Being a low cost airline, the employee strength is minimal, and thus, coordination and

procedures take their toll.

3. Delay in flights was a major bottleneck for Air Deccan4. Air Deccan has no back up aircraft. The airline quite often cancelled its flights to

different destinations due to engineering and other problems.

5. Full refund that it offers passengers is meaningless because a transfer to anotherairline is probably thrice as expensive. So passengers could not fully rely on Air

Deccan for some important travel and need to have their own backup in Train or other

Airline Services.

6. They do not have any customer loyalty programs, and the customer database is notbeing utilized to it potential.

7. Focus was exclusive on South Indian Markets.8. Very Limited Advertisement.9. Already reached the threshold of cost Efficiency10.Image plagued by frequent breakdowns and near misses and breakdowns.11.Some other weaknesses leading to problems not only to Air Deccan but to all the

airlines Companies are

a. Infrastructural Constraintsb. Shortage of Airport Facilities.c. Air Traffic control facilitiesd. Takeoff and Landing Slots

Opportunities:

1. No low cost Airlines was there in India when Air Deccan started its venture.2. India has a population over 1 billion and Indian railways had the highest share of

Transportation facilities. The Aviation market was under- penetrated.

3. 15 million Travel by Train Daily, of which 700,000 travel by A.C. Even 5% of theAC passengers if convinced for Air Travel it will give a big Market in LCC Segment.

4. Increase in leisure travels by tourists increased by 15% in 2005. And foreign touristsare also increasing at quite a rate every year.

5. It is easy to create Airways Capacity than Road and rail transport.6. Rising Income level and Demographic profile of the population. The upgrading

phenomenon plying in the market where everyone was trying to upgrade themselves

to upper section and Low cost Airlines had the power to satisfy this need of the

middle class as Air Travel has always been a status symbol for the people.

7. Extensive network to exploit the booming Air cargo Business. It was still untapped tothe extent it could be.

8. Plenty of Scope for expansion of operations.9. Could start Contractual Employment.


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10.There were a lot of options of outsourcing with which one can provide Qualityservices to their customers without worrying about the underlying details and

concentrating on the Basics of the Business.

Threat:

1. High Attrition rate: The fierce competition among airlines has affected the operationsof Air Deccan too. Several airhostesses of the airline had left for jobs with foreign

airlines while 15 co-pilots have joined Indian Airlines.

2. Kingfisher started its operations with value-added services at low tariffs.Though the segment targeted is different, and the routes do not clash for time being, it

sure promises competition in future.

3. The threat of New Entrants into (LCC) segment esp. GO AIR, Spice Jet, Indigo andJagson Airlines. There were many quite well Aviation industry companies which

could easily use the strategy followed by Air Deccan to lure the passengers at

comparatively lower prices as they are better experienced and have more

infrastructural support.

4. High Risk Perception. This was a totally new experiment on Indian market.Resistance to change might play a very negative role in the plan to change the

perception of the people.

5. Low Entry Barrier and open Sky Policies could give a great opportunity to newentrants.

Market Analysis

The Indian aviation sector has shown enormous growth in the past decade.

This sector is a collection of multiple functions like airports, airlines, ground handling, airtraffic control, safety, security, etc. 1 The major challenges faced by the aviation sector isfierce competition, rising fuel prices, and infrastructure bottlenecks. The major players in thissector are Air India, Jet Airways, Kingfisher Airlines, Spicejet, Indigo, GoAir, andParamount Airways. Out of these; Air India, Jet Airways, and Kingfisher Airlines are fullservice carriers while the others are low cost carriers. Air India, Jet Airways, and KingfisherAirlines also offer low cost services. The low cost subsidiary of Air India is Air India

Express, while that of Jet Airways is JetLite; and that of Kingfisher Airlines is KingfisherRed (erstwhile Air Deccan).

It all began with Air Deccan introducing rock bottom fares equaling the AC IItier trainfares. In response to that, all major leading airlines slashed rates. In July 2006, around 3.1million seats were created, out of which only 2.5 million seats were being occupied. 70 percent of all those travelers travelled on discounted fares. The result was that all the airlineswere bleeding with heavy losses.

Other reasons for losses were increasing price of Aviation Turbine Fuel (ATF) and otheroperational costs. Air Traffic Control (ATC) delays are also proving to be very expensive.

For a minute of delay by the ATC, an aircraft burns Rs. 2500 worth of fuel. Despite all this,
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the obligation to keep prices low and competitive still remains.2 The fares have deliberatelybeen kept at low levels to stimulate demand. 3

There was a rapid increase in air travelers in 2007 when the number of domestic passengersincreased by about 40 percent. This encouraged nearly all the airlines to buy new aircraft,

despite the fact that the losses amounted to around Rs. 2000 crores on account of rising ATFprices and payments of aircraft. Due to increase in the number of planes, coupled with theincrease in the number of passengers, immense pressure was exerted on the aviationinfrastructure. The Ministry of Civil Aviation handled this situation through policies thatencourage private or merchant airports. An example of this being the new Rajiv GandhiInternational Airport in Hyderabad, which was developed by GMR.

When ATF prices did fall in November 2008, it did not, however, result in low passengerfares. The airlines claimed that they were still making losses, and this was an opportune timeto make good their losses.But due to the economic slowdown and the terror attacks inMumbai, passenger occupancy was on a record low. In December 2008, when Air India

reduced fares, other airlines had to follow suit due to mounting pressures from all quarters. The fare cuts were expected to boost passenger occupancy. In January 2009, the increase inbookings was not proportionate with the reduction in fares. Though the move has increasedflight occupancy from 60 per cent to 65 percent, industry experts opined that the industry hasto achieve more than 70 percent to break even.

By the end of 2009, passenger traffic was up by 6 to 7 per cent. Passengers carried bydomestic airlines from January-April, 2010 were 162.82 lakhs as against 133.41 lakhs in thecorresponding period of year 2009 thereby registering a growth of 22.05%. The totaldomestic passengers carried by the scheduled airlines of India in the month of April, 2010were 41.88 lakhs.India as a country is cost conscious, and hence Indians prefer low costcarriers over full service carriers. Hence, full service carriers are facing a greater challenge interms of passenger occupancy. Paramount Airways, Indigo and Spicejet have posted profitsin 2010 while all others have posted losses.

Indias civil aviation sector is ranked ninth in the world. It is set to be among the top five in

the world in the next five years.

As given in the case study the market share of various companies as of October 2005 isshown below:


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Airline-wise details of market share of scheduled domestic airlines for the month of April,2010 are as follows: (Source: Directorate General of Civil Aviation (DGCA)).

Competitor Analysis:

Air Deccans major competitors are listed below:

1. Jet Airways2. Spicejet3. Indian Airlines

Detailed analyses of these are as follows:

1) Jet Airways: Jet Airways is an airline based in Mumbai. It is India's third largest airline

after Air India and Kingfisher Airlines. It operates over 400 daily flights to 64 destinations

Jet Airways

35%

Indian Airlines

28%

Air Sahara

12%

Air Deccan

11%

King Fisher

6%

Spicejet

5%

Others

3%

Market Share as of October 2005

012345

6789

10

Market Share (in lakhs)

Market Share (in lakhs)


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worldwide. Jet Airways is widely regarded as India's biggest and best airline. It's a privately

owned, full service airline that commenced operating in mid 1993. It's now captured almost

23% of the market, and has bases in Delhi, Mumbai, Pune, Kolkata, Hyderabad, Chennai, and

Bangalore.

The airline is known for its outstanding in-flight service, food, punctuality, and baggage

handling. Staff are extremely efficient and courteous, and will go out of their way to ensure

that you're comfortable and well looked after.

Marketing strategy:

Jet Airways has partnered with UTV to launch the online contest 'Cannes calling',wherein winners got a chance to attend the Cannes Film Festival 2009 along with a

companion.

Jet is trying to highlight its product superiority.Swot Analysis of Jet Airways:

Strength

Has created a good image among the Indian fliers. Trusted Airline by the Corporate

Weakness

Competition from the LCCsOpportunity

Strongly positioned in the International routes Has presence in every segment

Threats

LCCs eating up the market share Rising Fuel Costs

Rising Labour Costs

2) Air India: Air India is state-owned, and administered as part of the National Aviation

Company of India Limited - which was created in 2007 to facilitate Air India's merger with

Indian Airlines. Air India is the 16th largest airline in Asia, serving 25 destinations

worldwide, and, with its affiliated carriers, serves over 100 cities.

Around 2006-07, the airlines began showing signs of financial distress. The combined losses

for Air India and Indian Airlines in 2006-07 were Rs 771 crores. After the merger of the

airlines, this went up to Rs 7200 crores by March 2009.This was followed by restructuring

plans which are still in progress. In July 2009, SBI Capital Markets Ltd was appointed to

prepare a road map for the recovery of the airline. The carrier cancelled the purchase of six


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Boeing 777-300ER in July 2009 and sold three Airbus A300 and one Boeing 747-300M in

March 2009 for $ 18.75 million to survive the financial crunch.

SWOT Analysis of Air India

Strength

Air India has been the largest air carrier in India in terms of traffic volume andcompany assets.

It owns the most updated fleet and competent repairs and maintenanceexpertise.

Its information systems are advanced and compatible with its operation andservice.

It has a good reputation in both international and domestic markets, qualityservice and the age-old Goodwill that has still kept it alive in the interests of

the rescue operators.

Has financial backing of the GovernmentWeaknesses

Air India is operating across broad international and domestic marketscompeting with world leading giant airlines as well as local small operators.

This lack of clarity on the strategic direction largely dilutes its capabilities and

confuses its brand within markets.

Low profitability and utilization of capacity. Growing Competitor base and entry of Low-Cost Carriers (LCCs) The airlines high-cost structure and the compulsions of being a public sector

unit are the reasons and it had been making a loss and shall continue to make

losses for some more quarters.

Opportunities

India airline industry is growing faster and will continue to grow as the GDPincreases, and the trend is predicted to continue once the slowdown recedes.

Worldwide deregulations make the skies more accessible; the route agreementis easier to be achieved. The number of foreign visitors and investors to India

is increasing rapidly.

Complementary industry like tourism will increase demand for airline service.The Civil Aviation Ministrys strong regulation and protection provides

opportunities for consolidation and optimization.

Customers are getting wealthier, tend to be less price-conscious and prefer tochoose quality service over cost.

Threats


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Air India faces imminent aggressive competition from world leading airlinesand price wars triggered by domestic players.

The Indian Railway Ministry has dramatically improved speed and services intheir medium/long distant routes, attracting passengers away from air service,

with prices almost at par with the low cost carriers.

3) Spicejet: Kal Airways Pvt. Ltd. operating as SpiceJet is a low-cost airline headquartered in

Gurgaon, India. It began service in May 2005 and by 2008, it was India's second-largest low-

cost airline in terms of market share. SpiceJet was voted as the best low-cost airline in South

Asia and Central Asia region by Skytrax in 2007.

SWOT analysis of Spicejet:

Strength

Strong backing by the Promoters LCC segment is ever growing in the country

Weakness

Low visibility amongst LCCOpportunity

Middle Class taking to the skiesThreats

Strong competition in LCC segment Rising Fuel Costs Rising Labour Costs

From the competitor analysis we can say that Air Deccan is facing a stiff competition from

both Jet Airways and Air Indian. Where Jet Airways is the most favoured by corporate and

has grabbed a major market share then Air India has the backing of government and a great

goodwill among the customers with high class maintenance staff.

After going through the market analysis and the competitor analysis, the next step is to find

where Air India stand in the BCG matrix.


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BOSTON CONSULTANCY GROUP ANALYSIS

YEAR no.of growth ratePassengers (mn)

1996 10.4 -1997 11.2 7.7%1998 11.5 (1.3)%1999 12.0 4.3%2000 12.7 5.8%2001 13.7 7.9%2002 12.8 (6.6)%2003 13.9 8.6%2004 15.7 12.9%2005 19.9 26.8%2006 24.87 25.00%

MARKET SHARE AS OF OCTOBER

%MKT SHARE

CARRIER 2005 2006JET 35 46INDIAN AIRLINES 28 25AIR SAHARA 12 -AIR DECCAN 11 13KINGFISHER 6 8SPICEJET 5 6OTHERS 3 2

BCG MATRIX FOR AIR DECCAN 2005

30%

26.8%

Market

Growth rate 15%

11

Relative market share


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BCG MATRIX FOR AIR DECCAN 2006

30%

25.00%

Market

Growth rate 15%

0%

13

Relative market share

Analysis from BCG Matrix:

BCG matrix analysis of both the years shows that Air Deccan had been fairly performing well. In both

the year the matrix plotted shows that Air Deccan lays in the star region of the matrix. This means that

the company has fair chances to prosper in the future.

But the actual facts contradict the predictions of BCG matrix. The company merged in the very next

year that is in 2007. This probably means that apart from market share holding and market growth

rate, there are other factors too that affect the future prospects of an organization.

Financial Statement Analysis

1) Profit margin:

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

2003 2004 2005

Profit Margin

Profit Margin


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From the graph we can clearly see that profit margin for Air Deccan kept on declining over the year.

To explore more we try to find the asset turnover ratio which is shown in the graph below:

From the graph we can clearly say that decrease in profit is because of the reason that the asset

turnover ratio has also decreased over the years. It signals that the firm is not able to make use of its

resources properly.

2) Current ratio:

From the graph we can see that the firms current ratio has never been favourable i.e. the firm has

taken a lot of loans.

The above scenario was before the merger with Kingfisher Airlines and it is not suggesting a very

good situation for the firm.

Scenario after the merger:

1) Profit margin:

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2003 2004 2005

Asset turnover

Asset turnover

Current Ratio0

0.2

0.4

0.6

0.8

2003

2004 2005

Current Ratio

Current Ratio


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Even after the merger the profit margin is still below zero as shown in the above picture.

2) Current Ratio:

Even the current ratio is not favourable even after the merger.

Analysis & Conclusion

The vision of Captain G. R. Gopinath to create a whole new market for customers who

could fly economically could be achieved only via his will-power, futuristic outlook and

strong determination. His entrepreneurial skills will not just inspire us, but also the

generations to come. It was not that roads were made smooth for him, but it was his

courage to move in the toughest roads. He did not let his dreams die in the vague of losses

that were suffered by Air Deccan; rather he took the great move of merger withKingfisher to keep his company growing. This clearly shows his futuristic outlook,

-100%

-80%

-60%

-40%

-20%

0%

Mar '10 Mar '09 Mar '08 Jun '07

Profit Margin

0

0.2

0.4

0.6

0.8

1

Mar '10 Mar '09 Mar '08 Jun '07

Current Ratio


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instead of perishing with the limited funds; he rather merged with a giant firm, and

eventually got his share. He has again revived himself with Deccan 360.

LCC has revolutionised the Indian Aviation industry. But soon after Air Deccan came

into view, there grew a lot of competition in the aviation market. First challenge that grew

in for Air Deccan was to keep its market share protected and then to ultimately run the

company with profit. Captain G. R. Gopinath had somehow proved to be ineffective in

retaining the market share of Air Deccan and thus the profits also started slipping down.

Than the day came when our entrepreneur had to choose among the two things, first was

his company which was running at huge loss and second was a merger being offered by

Mr. Vijay Mallya.

So Captain chose to get the company going with a bigger name of Kingfisher, and thus a

merger deal was signed. Captain along with his angel investors got his share, though a

position was offered to Captain which he accepted whole-heartedly. The case focuses on

the fact that how the skills of an entrepreneur, and his believe in himself gave way to a

whole new concept.

It was not easy for Captain G. R. Gopinath to arrange for funds, but he had all his plans in

his mind and therefore, could he get the help from his friend and angel investors.

Throughout his journey, he had seen lots of ups and downs, but he never laid back. Then,

came the competitors of Air Deccan. With the Open Sky Policy, the competition

increased. And there came a merger of Air Deccan Company with Kingfisher Airlines.

Mode of action for the company

With the merger of Air Deccan with the Kingfisher, a new spark came into view. But, this

was also short run, as the merged company Kingfisher Red is still under the face of

absence of profit, or we can say that could not come out of the losses. And the losses are

still showing an increasing trend. The companys market share has also dropped down.

From gaining the first mover advantage, the company has slowly gone down. So where

lies the fault. While keeping these points in mind, we would like to suggest some

measures for the company to revive its profit and to again be the market leader:-

i. Focus from where it startedThe primary focus of the company was the common man. And in the main

sequence, it forgot about the common man. So once again it should focus on the

common man. The promotions and pricing strategy should be more relevant to the

middle-class people and should reach them by time. It can also take the help of

mobile phones.

ii. Building brand loyaltyBrand building has become important in every aspect. So it has to take some good

measures to build its brand.

iii. Focus on the target customersPrime focus of Air Deccan should be on its target customers.

iv. Regional connectivity


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This is one area, in which it still needs to work high.

v. Burden of high debt should be off-loadedDebt should be reduced, as it is very high.

vi. Should shift its prime focus from South IndiaThe company should focus on India as a whole, and not segregate in parts.vii. Frequent breakdowns should be avoided

Documents

Airdeccan Case Analysis