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Indian Low-Cost Airlines and Their Future Sustainability

A Strategic Analysis

Master's Thesis 2016 79 Pages

Business economics - Operations Research

Excerpt

TABLE OF CONTENTS

TITLE

ACKNOWLEDGEMENT:

ABSTRACT:

LIST OF FIGURES:

LIST OF TABLES:

ABBREVIATIONS:

1. INTRODUCTION

2. RESEARCH OBJECTIVES:

3. RESEARCH METHODOLOGY:
3.0. 1 RESEARCH APPROACH:
3.0. 2 QUANTITATIVE APPROACH:
3.1 SIGNIFICANCE OF THE STUDY:
3.2 RESEARCH QUESTIONS:
3.3 DATA COLLECTION
3.3.1 PRIMARY DATA:
SAMPLE SIZE:
TOOLS USED FOR DATA ANALYSIS:
PRE-TEST SURVEY:
3.3.2 SECONDARY DATA:

4. LITERATURE REVIEW:
4.0. 1 INDUSTRY/MARKET CHARACTERSTICS:
4.0. 2 STRATEGIC DIRECTION:

5. LOW COST BUSINESS MODEL:
5.1 LCC MODEL CHARACTERSTICS:
A. OPERATING MODEL
i. value chain:
ii. Cost Model:
iii. Organisation:
B. VALUE PROPOSITION
I. Target segment:
II. Product & service offering:
III. Revenue model:
5.2 LCC ACTIVITY CIRCLE:
I. Service:
II. Airports:
III. SCHEDULE:
IV. Sales:
V. Personnel:
VI. Aircrafts:
VII. Operations:
VIII. Pricing:
IX. Finance:
5.3 LCC cost advantages over Full service airlines:
5.4 BUSINESS STRATEGIES FOLLOWED BY LCCs IN INDIA:
5.4.1 SPICE JET:
i. Pricing strategy:
ii. Marketing strategy:
iii. Operational strategy:
5.4.1.1 STRATEGIC PLANS FOR FUTURE GROWTH:
i. Expansion plans:
ii. FDI INVESTMENTS:
iii. Ancillary revenues:
iv. Automation to sustain expansion:
5.4.2 GO AIR:
I. Go Air customer focus and corporate strategy:
II. Value added services:
III. Red-eye operations:
IV. Hub Model:
V. Slow fleet expansion plan:
VI. Flexi-fare:
VII. Go - Comfort:
5.4.3 INDIGO AIRLINES:
I. Achieving Low operating costs:
II. On-time performance and Reliability:
III. Continuous expansion:
IV. Pricing and Marketing strategy:
5.4.4 JETLITE:
1. No-Frills:
2. Sales distribution:
3. Dynamic pricing:
5.5 STRATEGIC ANALYSIS OF INDIAN AIRLINE INDUSTRY:
5.5.1 PEST ANALYSIS OF INDIAN AIRLINE INDUSTRY:
Political:
Economic:
Social:
Technological:
5.5.2 SWOT ANALYSIS OF INDIAN AIRLINE INDUSTRY:
5.5.3 PORTER’S FIVE FORCE STARTEGY ANALYSIS ON INDIAN LCCS:
1. Threat of new entrants:
a) Product differentiation:
b) Set-up costs:
c) Government regulations and its relations:
2. Bargaining power of suppliers:
3. Bargaining power of Buyers:
4. Threat of substitutes:
5. Competitive rivalry:
5.5.4 CURRENT SITUATION ANALYSIS:
5.6 CAN INDIAN LCCs CONTINUE THEIR GROWTH?
5.6.1 BENCHMARKING:
5.7 Are LCCs competitive advantages sustainable in the current Indian Aviation market:

6.1 LCC PASSENGERS SURVEY:
I. What is your Gender?
II. What is your age group?
III. Which Indian low cost airline does majority passengers prefer to travel?
IV. What made you to choose above airline as most preferred airline?
V. What factors influencing the most while choosing a LCC Airline?
VI. Does the Airfare’s preference makes an impact on choosing the LCC?
VII. What is the Overall customer satisfaction in Low cost airline travel?
VIII. Which areas should Indian LCC’s improve?
6.2 Passenger perception analysis:

7.0 CONCLUSION:
7.1 Recommendations:
1. Further liberalization of existing Aviation policies:
2. Dedicated low cost terminals and airports:
3. Privatization and modernizing existing airports:
4. Forming alliances:
5. Increased fleet and network expansion:
6. Increase sales and ancillary revenues:
7. Effective marketing:
8. Making LCCs sales 100% online:
9. Seasonal tourist packages:

REFERENCES:

APPENDICES

1.0 HISTORY OF INDIAN AIRLINE INDUSTRY IN BRIEF
1.0. 1 Evolution of Government Airlines:
1.0. 2 Establishment of Private Airlines:
1.0. 3 Market Shakeout:
1.0. 4 Growth of New Indian Airline Industry:

2. SURVEY:

ACKNOWLEDGEMENT

I would like to take this opportunity to express my gratitude towards my supervisor for his continuous support, guidance and encouragement which has led me to complete the dissertation in the due course of time.

I would like to thank all my professors who mentored the entire course. Their contribution throughout the course is invaluable.

Moreover, I would like to thank all my friends and family for their constant source of encouragement and support without which this dissertation couldn’t have completed.

ABSTRACT

The deregulation has revolutionized the air travel industry in India. The LCCs entry in India has been fulfilling the dream of many Indian people. However, in recent years, LCCs in India are facing huge operational losses and led few carriers to undergo bankruptcy. The impact of high fuel costs, government policies, strikes and infrastructure constraints has led Indian LCCs to pass through a turbulence period. These constraints together place a question mark on Indian LCCs future sustainability and their growth in Indian airline industry.

Therefore, this research is undertaken with an objective to conduct strategic analysis on Indian LCCs and examine their future sustainability in the market. The strategic analysis has identified the current situation, and the key challenges faced by Indian LCCs in current operating environment. The impact of internal and external environmental factors caused on Indian LCCs has been also discussed in this report. In addition, this report also discusses the various business strategies followed by major Indian LCCs like INDIGO, Go Air, Spice Jet and Jetlite. A survey has been conducted to identify the customer perception towards travel in LCCs. Data gathered through survey was analyzed to answer key research questions in the report. The analysis and findings have been presented with a set of recommendations that helps the Indian LCCs in upcoming days to improve their situation in the industry.

LIST OF FIGURES:

Figure 1: LCC MODEL CHARACTERSTICS

Figure 2: LCC activity circle

Figure 3: LCC cost advantages over FSA

Figure 4: ATF Vs Crude oil price

Figure 5: ATF fuel price for year 2015-2016.

Figure 6: PORTER’S FIVE FORCES CYCLE

Figure 7: Indian LCCs financial data for the period 2009-2015

Figure 8: Indian LCCs financial data represented in bar chart for the period 2009-2015 Figure 9: Domestic market share data for the period 2009-2015.

Figure 10: Benchmarking data

Figure 11: Indian LCCs load factor data for the years 2009-2015 Figure 12: Indian LCCs load factor data represented in bar chart.

Figure 13: Indian LCCs flight punctuality data for year 2015

Figure 14: Indian LCCs flights delay data for year 2015

Figure 15: Indian LCCs flight cancellations data for year 2015

Figure 16: survey Gender data

Figure 17: Survey Age group data

Figure 18: Most preferred LCC

Figure 19: Determining factors of preferred LCC

Figure 20: Influential factors for LCCs

Figure 21: Impact of Airfare on choosing LCCs

Figure 22: LCC traveler’s customer satisfaction level data

Figure 23: Represents the areas in which Indian LCCs must improve

LIST OF TABLES:

Table 1: Characteristics difference between FSA and LCC business models Table 2: SWOT analysis of Indian Airline Industry.

ABBREVIATIONS:

illustration not visible in this excerpt

1. INTRODUCTION

The airline industry deregulation in India has revolutionized air travel and increased the number of airlines in the Indian skies. The birth of LCCs (low cost carriers) in 1970s has completely changed the dynamics of this industry across the globe. Legendary carriers like Southwest Airlines in the USA, EasyJet and Ryanair in Europe, etc. are classic examples and inspiration for new and aspiring players across the globe. Particularly in India, air travel was earlier restricted to one class of society and catered by a select few carriers. The entry of LCCs broke this monopoly and has brought a great change in terms of affordability, no-frills, efficiency, increased connectivity, and coverage of tier II and III cities. This resulted in a steady increase of passengers, air traffic, and thereby, industry growth. This phenomenon has eventually led to the Indian government’s unveiling of LCCs open sky policy.

India’s aviation industry is one of the fastest growing in the world. The aviation industry in India started in December, 1912 with the opening of its first domestic route between Karachi and Delhi. An in-depth study has indicated that the industry has been revolutionized from a monopolistic to the highly competitive industry that we see today (Dhamija, 2009). In the early fifties, most of the operating airlines were merged into Indian Airlines or Air India, and this monopoly under the Air Corporations Act continued till about the 1990s. The introduction of open sky policy in 1991 broke the monopoly of these airlines and opened the opportunity for new players to operate in the Indian skies. (Dhamija 2009)

New carriers such as Air Sahara, Jet Airways, Damania, and East West Airways were among the early entrants. These new airlines were not started by well-established and financially strong Indian conglomerates like Tata and Birla. The new airlines developed their own identity in the market by providing various services to its customers. For example, the punctuality and service quality of Jet Airways made them the preferred choice among business travelers. Similarly, Damania Airways established itself as a luxury airline by offering upmarket on-board services to its customers. Likewise, Air Sahara focused on providing air connectivity to few untapped/under-served parts of the country. By 1994, only Jet Airways and Air Sahara could sustain in the market, whereas other new entrants failed to exhibit a proper strategy to survive in the Indian markets. Another revolution in this industry took place in 2003 with the entry of India’s first LCC (Air Deccan), which broke the cartel of existing big players (Air India, Indian Airlines, and Jet Airways). The LCCs business model has mostly been successful because of a huge untapped market (majority of the Indian population is middle class and cost conscious) and smarter business models of new players. Indian aviation industry is currently served by eight LCCs, which also includes no-frills service offerings of earlier behemoths like Air India and Jet Airways.

The primary objectives of this research are to identify the key challenges faced by India’s LCCs through strategic analysis (e.g. SWOT and Porter’s Five Forces model) and examine the internal/external environmental factors affecting the Indian aviation industry. Moreover, this report will also study the characteristics of existing LCCs’ business models vis-a-vis traditional/full-fledged players. A public survey has been used to broaden the study and unearth potential solutions expected by air travelers. Finally, this research paper will conclude with a set of recommendations based on the findings and analysis.

CHAPTER: 2 RESEARCH OBJECTIVES

- To analyze the main characteristics of a typical Low-Cost carrier model and enlighten several cost advantages compared with the tradition service airline business model.
- To study about the history of Indian Airline Industry and conduct PESTEL and SWOT analysis on it.
- To evaluate the current situation and identify the key challenges faced by LCCs in India using PORTER’S FIVE FORCE STRATEGY AND SWOT ANALYSIS
- To study various strategies implemented by LCCs in India.
- To identify whether LCCs in India can continue their growth?
- To identify whether Indian LCCs competitive advantages are sustainable?

CHAPTER: 3 RESEARCH METHODOLOGY

It includes the methods and techniques which are used to answer the key research questions.

3.0. 1 RESEARCH APPROACH:

This research will conduct strategic analysis (e.g. SWOT and Porter’s Five Forces model) to identify the key challenges faced by India’s LCCs and examine the internal/external environmental factors affecting the Indian aviation industry. Moreover, it also identifies the current situation of LCCs in India and determine the loopholes that restricts the further growth of LCCs in Indian airline industry. In addition, this report will also study the characteristics of existing LCCs’ business models vis-a-vis traditional/full-fledged players.

Secondly, for collecting and analyzing the required data for this research, inductive approach is utilized where the primary data is collected in a form of survey through a defined sample size population. The data collected through a survey will be analyzed to draw conclusions and answer key research questions.

3.0. 2 QUANTITATIVE APPROACH:

This research has been done using quantitative approach that rely on statistical and numerical forms of data collected through polls, surveys, questionnaires or other such methods. The primary data that required for this research are going to be gathered through a survey and secondary data is gathered from various sources available online in the form of books, cited journals and so on.

3.1 SIGNIFICANCE OF THE STUDY:

Indian aviation market is one of the largest and growing markets in the world. It has a tremendous opportunity in terms of passenger growth due to the large middle class population. Despite of all existing opportunities in the industry, Indian LCCs still incur huge losses ever year. Moreover, Indian aviation industry itself poses many challenges for the airlines that impact their growth and revenue. These drawbacks in the industry has already forced out legacy airlines like kingfisher airlines to undergo bankrupt and this may continue with other airlines if the same situation exists. Analyzing the above situation, as a researcher I felt the need to identify the current situation and challenges faced by LCCs in India and propose some recommendations that could improve the LCCs condition.

The below research questions will be answered based on the primary resources collected through a survey.

- Which Low cost airline does majority passengers prefer to travel?
- Which factors influence the most while choosing a low-cost Airline?
- Does the Airfare’s preference makes an impact on choosing the LCC?
- Which areas must Indian LCC’s improve?
- What is the Overall customer satisfaction in Low cost airline travel?

3.3 DATA COLLECTION

3.3.1 PRIMARY DATA:

A survey method is employed as a primary resource tool for conducting research on this topic. The reason behind the choosing survey method is because it got potential in describing the characteristics of a large population and provide broad capability for gathering accurate sample. This in turn helps the researcher for carrying analysis and form conclusions in an effective manner. Moreover, this research method is inexpensive and consumes less time for gathering the data from a targeted population to answer key research questions. The mode of method chosen for conducting survey is through online and social media. The survey questions will address the variables like customer preferred LCC, customer satisfaction, airfares, airline switching and customer satisfaction on LCC. These variables will be used to answer the research questions formulated in the survey by analyzing the survey data.

SAMPLE SIZE:

The survey is conducted on a sample size of 100 people among the demography of LCC flyers in the age group of 18 to 55 years old. The technique used on collecting sample size was convenience sampling.

TOOLS USED FOR DATA ANALYSIS:

online platform tools are used for analyzing the data as it provides the way to extract data from any format and helps us to represent the data in user friendly manner.

PRE-TEST SURVEY:

A pre-test survey has been conducted on a small number of respondents to receive their feedback about the survey in terms of survey content, understandability and satisfaction. Few questions have been modified as some of the respondents finds difficult to understand.

3.3.2 SECONDARY DATA:

The secondary data used for building the theoretical background of this topic constitutes the data from various journals and books published relevant to this topic. Aside, several government websites are used to extract the latest figures of the airline’s operational performance. Moreover, the official airline and its related websites, reports published by an academy of management were also used to extract necessary data for this topic.

CHAPTER: 4 LITERATURE REVIEW

4.0 LITERATURE REVIEW:

Europe and America have traditionally enjoyed supremacy when it comes to Low-cost Carrier (LCC) aviation operations (Vasigh & Fleming, 2016). However, this phenomenon is spreading to other parts of the world creating competition for the models employed in Europe and America (Budd & Ison, 2013). India is one example economy that has an aviation sector that operates a thriving LCC market segment. Since the year 2003, several low-cost carrier airlines have entered the Indian market to offer their services (Vasigh & Fleming, 2016). Today, the LCC market has operators such as Go Air, Spice Jet, Air Asia India, JETLITE, and INDIGO. In fact, the low-cost carriers occupy over 65% of the market in India. Therefore, the market is very competitive and some airlines have sought consolidation or convergence in terms of product and pricing (Kumar & Natarajan, 2015). It is also noted that most of these airlines are experiencing difficult times in terms of profitability. Fuel is a major item in the expenditure of airlines and it is estimated to take at least half of all operational costs (Lück, 2016). To cut costs and maintain profitability, some airlines have sought consolidation in the post-2007 period. Example acquisitions to achieve this strategy include the purchase of Air Sahara by Jet Airlines and Deccan by Kingfisher.

The entry of several LCCs in the pre-2007 period could have contributed greatly to the current state of the industry. Even with low pricing and consolidation to achieve cost advantages, the LCCs in India have been struggling to ensure profitability. In the 2012-13 periods, the LCCs made a loss of at least Rs. 10,000 crores and the debts in the industry were estimated at Rs

78,0 crores (CAPA, 2013). In this period, only Go Air and INDIGO were profitable. This has major indications for the operating environment in India. The high cost of fuel, operational costs, and economic slump are some of the reasons these airlines aren’t profitable (CAPA, 2013). This prompts management in these airlines to analyse their operations and find potential areas for operational improvements. In understanding the strategic direction that these airlines need to take, it is first important to understand the characteristics of the LCCs and the market they operate in.

4.0. 1 INDUSTRY/MARKET CHARACTERSTICS:

One major characteristic of the LCCs in India is that they have adopted common features that make them comparable with other LCCs around the world. One major feature is direct ticketing where a major cost saving is made by bypassing agents and other booking systems (Oldorf, 2013). This strategy ensures that airlines collect revenues even before flights are utilized by passengers. The LCCs also have standardized fleets and their approach ensures lower maintenance costs. The LCCs can also leverage their position in the market and negotiate to increase the seating capacity with manufacturers by reconsidering the designs.

Another important factor to note for the LCCs in India is that even though they occupy 65% of the market, the overall market has effectively turned into the current 100% low fares market (CAPA, 2013). This is because the customers travelling using the full-service carriers (FSCs) such as Jet Airways and Air India still pay fares that are close to the LCC charges in the economy class. Therefore, the market in India can be virtually termed as 100% low fares market (CAPA, 2013). This poses a major challenge for the industry because it is difficult for a low-cost operator to differentiate their product from this perspective. Therefore, it is difficult for LCCs to pose a significant challenge to the FSCs based on lower fares. Hence, LCCs must base their competition on other features, but not the price when competing against themselves with the larger carriers.

An analysis of the prices or charges by some of these carriers shows that Go Air and INDIGO charged between INR5000-5200 while Spice Jet was charging fares close the INR5000 range (CAPA, 2013). For the large carriers, Jet Airways was charging fares of INR5632. However, the charges for Jet Airways includes the contribution for a premium cabin, and this suggests that the real fare was close the INR5000 level charged by the LCCs (CAPA, 2013). Another important aspect to consider is that the LCCs operate using the same aircraft and airports in India. They also offer high-frequency flights to major destinations - this means that there is little to distinguish the LCCs from the full-service carriers. Further, their reliability, performance, cabin crew, and flight strategy are like those of FSCs. Their baggage allowance and consistency are also like those of FSCs (Oldorf, 2013). In fact, in some areas such as cabin crew, the LCCs can offer a superior service compared to that of larger carriers. Therefore, from the perspective of the travellers, there is little to distinguish the LCCs from the FSCs in India when looking at the economy class offered by the FSCs. Where the FSCs are offering premium cabins, it could be limited to certain routes such as the Delhi-Mumbai-Bangalore routes during the peak hours.

The analysis presented above shows little difference between the LCCs and FSCs and this has several drawbacks for the low-cost carriers. It means that the LCCs cannot outcompete their FSC rivals on price/fares since the charges per passenger are close when compared to the FSC economy class. Further, in terms of service quality, cabin crew, ticketing approaches, and frequency, the service offered by these two classes of carriers is similar. This leaves very little room for LCCs to compete with the larger carriers. However, as LCCs continue to compete in this market, it is possible that customers are likely to prefer them as economic factors also come into play. Where the LCCs offer a high-quality service, it is possible for customers to shift towards them (Akamavia et al., 2015). The LCCs have an opportunity since more corporate travellers are shifting towards their service considering that their quality of services is similar to that offered by larger carriers in the economy class. They also have an opportunity because of the increasing number of passengers, especially for shorter flights. Further, there are ample sources of aircraft for leasing meaning that they do not have to purchase and maintain new planes. Even with these advantages, the LCCS need to embark on new strategies to compete in this dynamic market.

4.0. 2 STRATEGIC DIRECTION:

Given that the FSCs have more resources and the inability of LCCs to compete on the price with larger carriers, the LCCs need to develop new strategies to remain competitive. One major strategy that is highlighted above is leasing of second-hand aircraft which provides lower acquisition costs (Oldorf, 2013). Further, with new LCC start-ups, it is easier to lease the aircraft and avoid the delays that come with ordering new planes. The long-term use of new aircraft is also a viable model, but it is not advisable for new companies, especially where there are little resources and uncertainty regarding future operations. With this strategy, the airline opts to purchase a new aircraft and fly the asset for a long time before it is withdrawn from the fleet. This strategy has obvious advantages in terms of low maintenance costs and higher quality of service. Further, the LCC can opt to hire out such a place when it is not in use to boost their revenue.

The other important strategy to evaluate is related to financial resources. The LCCs operating in this market must gather substantial financial resources to fund their operations (Oldorf, 2013). When LCCs operate with little resources, their quality of service is affected as the firm attempts to lower costs by opting for cheaper options. For instance, in fleet acquisition, it is important for new LCCs to gather substantial resources so that they purchase new aircraft. The ability to place negotiated orders with manufacturers and get discounts is an important strategy to lower the cost (Oldorf, 2013). Further, when the LCCs operate new aircraft, the operational costs are lower leading to long-term cost savings. For new entrants, it is highly advisable to approach the Indian market with more resources to ensure that they gain from massive cost savings associated with new assets and streamlined operations. Therefore, the LCCs have the option to choose between the leasing strategy and the acquisition strategy as each has its advantages. The idea is for the company to make a choice between these strategies and stick with the chosen approach to gain from its benefits.

Literature analysis conducted above establishes that the domestic market continues to remain challenging for LCCs, since they cannot compete on the price with larger carriers. In response to this market situation, it is important for the LCCs to focus on shorter routes since the longer ones aren’t profitable for them. Evidence from the Indigo exit of the Delhi/Mumbai-Singapore route shows that the longer routes aren’t profitable for the LCCs (CAPA, 2013). Even though Spice Jet still plies the Guangzhou-Delhi 6-hour route, it is notable that the LCCs are struggling with the longer routes (CAPA, 2013). Therefore, it is important, as an element of strategy, for the LCCs to focus on the shorter routes with flights of up to four hours. In this approach, it is possible that the airlines will lower operational costs and attract more passengers. In such routes, there are many people travelling for business and leisure - this is likely to increase the income for the carriers as they seek to compete with the larger companies (Bambe et al., 2013). In this strategy, it is also possible for the airlines to take advantage of their domestic fleet through overnight operations. Such a strategy allows the airline to improve aircraft utilization. Lower costs and better maximization of performance are the expected outcomes when such a strategy is selected.

The strategy adopted by the LCCs also needs to have some elements of marketing and branding so that these airlines can reach more customers. Low-cost airlines need to brand themselves as the cheaper alternatives offering better value for money to Indian customers. Their market niche contains middle-class workers and leisure travellers with smaller budgets compared to the upper- class. For this class of customers, it is important to reassure them that the airline is charging affordable prices and such a price will give the customer maximum value (Sarangaa & Rajiv Nagpalb, 2016).

When the LCCs improve their strategy, they are more likely to cut costs and establish long-term gains. The gains that are achieved in the areas of operation costs are likely to translate into profitability in the long-term. Further, since the FSCs are offering flights at a similar pricing point, eating into their market share through optional service enhancements can pull more customers towards the LCC brands. When the LCCs raise more capital, they are likely to survive in the short-term so that they can establish profitability in the long term. The strategy to focus on the shorter flights can also establish growth if it leads to cost savings. Further, it is likely to pull more customers towards the LCCs, especially those on short business trips within India and the neighbouring countries.

CHAPTER: 5 STRATEGIC ANALYSIS

The LCC business model is one of the biggest trend in business models today which brought a great change in global markets. Low-cost model is initially initiated by the emerging countries. However, low-cost model has spread rapidly throughout the developed countries in a very short span of time. Through globalization, many multinational companies in developed countries followed this LCC model trend, which has played a key role in sharing innovation and knowledge. Moreover, this business model also ensures additional value creation to their products and services.

(Kachaner. Et.al. 2011, P.43), defined LCC model as “A truly new value proposition that addresses both existing and new customers and is supported by a novel operating model”.

The concept of understanding LCC business model varies from person to person. However, sometimes realized that lower cost doesn’t mean lowering the quality of product or service. (Kachaner.et.al. 2011) described four key rules which points out to prevent misunderstanding of the low-cost business model. The four key points are:

- “Low cost is not low margin; it can be highly profitable.
- Low cost is not low quality; it usually entails a narrow range.
- Low cost is not cheap imitation; it is true innovation.
- Low cost is not unbranded; it is frequently supported by potent brands”. (Kachaner.et.al. 2011, Pg. 43)

The low-cost carrier concept was started in late sixties by Rollin-king with Herb Kelleher. They were not aware that the plan sketched on a napkin would result to spark a revolution in global air travel (narasimha, 2015).

Low cost carrier has got many features that differentiate it from traditional airlines. Some of the LCC features includes no-frills, no-lounges, use of secondary airports, online ticket sales and so on. But, the features of traditional airlines are exactly vice-versa of LCCs. Most importantly, in today’s aviation environment, LCC business model explores new strategies and concepts with significant developments such as long-haul operations, forming alliances and processing code share agreements with other carriers. The characteristics of LCC were studied below to have a better idea about LCC business model.

5.1 LCC MODEL CHARACTERSTICS:

As Per (Hellquist et.al 2012), LCC business model relies on two elements:

- Value proposition

- Operating model

The below figure details the LCC model characteristics:

illustration not visible in this excerpt

Figure 1: LCC MODEL CHARACTERSTICS

Source: (kachaner et al.2012)

The LCC operating business model contains three sub elements:

- Value chain
- cost model
- organisation

A. OPERATING MODEL

i. value chain:

The value chain mainly focusses on improving the value for the service/products offered through various activities. The main objective is to achieve an optimized asset base where innovators must outsource additional activities and retain core functions in the company. The importance of doing this used to lower the maintenance costs, leverage up-to-date and standardized assets to facilitate scale up. (Kachaner et. Al, 2012)

ii. Cost Model:

The delivery of a value proposition is in line with the cost model by setting up a target for the cost. The firm uses cost model as an initial point and can work backwards to meet the specific target. In practice, a low-cost action is implemented from sourcing to distribution for achieving the specific target. However, high investments in the areas of firm critical value proposition would benefit the organization to achieve their target. (Kachenar et al, 2012)

iii. Organisation:

The organization must develop their own effective organization plan and ensure all the employees in the organization must be aware of the organization plan and know the main objectives of LCC business model. The organization must encourage and support entrepreneurial activities in the organization. Human resource policy must be radical and the company must adopt a right person to the right position mentality while choosing a candidate for specific job position. (Kachenar et al, 2012)

B. VALUE PROPOSITION

The value proposition also includes three sub-elements in the business model which are:

- Target segments
- Product or service offering
- Revenue model

I. Target segment:

The core idea of this business model is to focus on a price-sensitive customer segment. While determining the price-sensitive customer segment, the customer segment borders should be clearly defined and must include customer preferences and acceptance towards services and products offered.

II. Product & service offering:

The LCC business model must focus on developing a unique utmost offers rather than focusing on insignificant ones. The airline must strictly avoid any frills or service that create cost on them. Kachenar defined the importance of developing a brand by saying that “Brand can be important to establish presence and trust as can designing high core service standards” (Kachaner.et.al. 2011, p.44). The unbundling of product or service may rise an opportunity to provide extreme offers to customers which in turn may generate huge cash flows for the company.

III. Revenue model:

The LCC business model must focus on its customer segment in which price plays a major role. The airline must develop a plan to change their customer segment for using any additional services or products. Moreover, the LCC must offer no frills as airline passenger is aware of their core products and services. Pegasus airline CEO stated that eliminating all kind of frills offered to targeted customer segment would help to generate strong cash flows for LCC airlines.

5.2 LCC ACTIVITY CIRCLE:

The main purpose of the activity circle is to identify the characteristics of Low cost carriers in airline industry. The activity circle elements include personnel, airports, service, sales, aircrafts, schedule, finance, pricing and operations. The LCCs in the airline industry adopts any of these elements and implement in their business model depending upon the factors like cost strategy, pricing and market. The below picture depicts characteristic elements in the LCC activity circle:

illustration not visible in this excerpt

Figure 2: LCC activity circle

Source: (Vesper Mann & Holztrattner,2010)

I. Service:

The low-cost carrier will cut costs and reduce the delays on ground by offering no free baggage allowance, no meals, no seat allocation and so on. These are key elements in the unbundling process of services which makes low cost carries to offer cheap fares to its customers. Moreover, allowing additional baggage and providing meals during flight results in high fuel consumption which ultimately burdens the airline cost and higher fares on passengers. (Air scoop, 2011).

Aside, LCCs can reduce their operational delays by not assigning any seats to its passengers where its customers try to be early in the airport for grabbing better seating location. During Brussels innovation convention 2011, Michael O Leory CEO of Ryan air stated that check-in baggage service was most time taking task for any LCCs which must be avoided for improving the efficiency of an airline. (O’Leary, M. 2011)

The intention of LCCs to offer lower fares for its customers enables LCC to provide one- class of service on their aircrafts by avoiding business and first class services. This resulted LCCs to accommodate more economy seats which increased their capacity and overcome the risk of flying empty with business class seats. Moreover, this eliminated additional airport costs by avoiding lounges at the airport.

II. Airports:

According to (VesperMann et al,2010), primary airports play a monopoly in the aviation industry. However, the entry of secondary airports in industry has changed the situation by providing lower landing fees, faster turnarounds and lesser congestion. The LCCs tries to reduce their airport costs which accounts roughly 12% of their total operational costs through secondary airports. (Doganis, 2000)

However, secondary airports possess some drawbacks mainly their location which is usually located away for the city Centre. The drawbacks in secondary airports led LCCs like EasyJet to adopt a different airport strategy that enabled them to fly to Low cost terminals in primary airports. These low-cost terminals in primary airports provide easy access to city centers that drawn the attention of many LCCs. (Warnock-smith and porter, 2005)

III. SCHEDULE:

Low cost carries provide services on point-to-point short haul routes for overcoming the domino effect resulted by air traffic delays from connecting passengers. This could help the LCCs to eliminate delays in their operations.

Since, LCCs have low entry and exit barriers due to their low-level of investment compared to full service airlines, the number of destinations offered by LCCs is quite high and dynamic. This aspect made low-cost carriers to implement a multi base system in various countries resulted in high traffic flow.

Moreover, LCCs operations were accepted by secondary airports as they play a key role in airport cash flows (Porsio,2010). All the above factors helped the LCCs to operate new destinations and to exit from non-profitable routes. Moreover, low landing charges from secondary airports benefit the LCCs to increase their take-off and landing frequencies which provides competitive advantage by offering wider ranges of flight schedules to its customers (Alamdarai &Fagan, 2005).

IV. Sales:

Employee costs is one of the significant expense for any carrier. LCCs try to minimize their employee costs by providing all their services like, ticketing, check-in and sales through online. This makes LCCs to avoid agency costs and global distribution system fees (Chang & Shao,2010).

The full-service airline (FSA) uses GDS (global distribution system) which covers flights, hotels and car rentals at one place. However, GDS companies charges higher fee on airlines using these services. So, LCCs prefer to provide services through their online web page which helps them to reduce their employee’s number and control cost substantially by avoiding travel agent’s fees.

The frequent flyer programme offered by FSA is not implemented by majority of LCCs, as it incurs additional costs by providing free flights to its frequent flyers. (Klophaus, 2005)

V. Personnel:

The low-cost airline manages to find efficient and productive crew members who like to accept the pay roll and work condition offered by an LCC. The personnel in LCC have tight work schedule and receives less benefits compared to full service airline.

Moreover, LCCs crew members have additional responsibility such as cleaning the cabin, assisting with ticketing service. Aside, LCCs avoid work unions which usually support for strikes and salary negotiations (Alamdarai et al, 2005).

VI. Aircrafts:

Aircrafts are very expensive to acquire and maintain as every additional minute it stays on the ground creates extra expense for the airline. Therefore, it is very essential for LCCs to maximize their utilization rate and make shorter turnarounds for achieving break-even load factors and profits. As per (Dobruszkes 2005), “In the air transport sector, economies of density are essential and much more effective in reducing unit costs than economies of scale” (pg. 250). Aside, LCCs use one type of aircraft fleet which is usually A320 and B737. These aircraft models are highly fuel efficient and best suitable for LCC operations.

VII. Operations:

As per (Porsio 2010), LCCs can minimize their costs by keeping focus on their operations as it operates short-haul routes to avoid crew layover costs. Moreover, LCCs can minimize their crew members by increasing their responsibility and avoid cleaning services on the ground for having faster turnarounds. Their operational efficiency also depends upon ground services who are responsible for baggage loading, refueling and so on. So, efficient operations play a key role in LCC business approach as it can lower many operational costs which eventually generate profits for the airline.

VIII. Pricing:

The pricing strategy of low-cost airline completely varies from traditional airlines because Low cost airline fare depends on unbundling the services to exclude no-frills from the original ticket price. Moreover, LCCs pricing is said to be dynamic as it collects an additional fee from its passengers for using their product/service additionally (O’Connell & Williams 2005).

IX. Finance:

The finance structure of low-cost airlines mainly relies on ancillary revenues. As stated earlier, unbundling of services/products that the LCC offer will generate more revenue for them. Services that provide ancillary revenues are seat selection fee, extra baggage, in-flight food, booking fee and so on. The ancillary revenues of LCCs like RYAN AIR & EASY JET contribute 22.1% and 19.2% of revenue to their overall revenues as per internet sources (ideaworks, n.d.).

The table below describes the characteristic differences exist between the business models of LCC and FSA:

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Table 1: Characteristics difference between FSA and LCC business models Source: (Chowdhury 2007, Pg.8)

In recent years, to overcome the competition from full service airlines, low-cost carriers have started implementing mix strategies (LCC & FSA).

5.3 LCC cost advantages over Full service airlines:

To have cost advantages, many LCCs adopted various strategic operations and distribution efficiencies in their business by providing only few services to their passengers.

- The LCCs maximise their ancillary revenues through extra baggage and refreshment sales. They also charge its passengers additionally for use of in-flight services and products (narasimha, 2015).
- The LCCs minimise their operating costs by providing services from secondary airports. This helps LCCs to have lower airport fess and thus reduce their operational costs.
- LCCs gain competitive advantage over full service airlines in sales distribution by offering it through online which overcome agent fees.
- The low-cost airline has reduced operational, training and maintenance costs by providing services through a single aircraft fleet type.
- The LCC have a high aircraft utilisation rate and lower fleet age compared to legacy airlines which reduce maintenance expenses.
- The LCC operate with high seating density and maximum load factors to achieve lower operating costs. (Doganis 2000)

The below picture shows the strategic measures that generate cost advantages for Low cost carrier compared to full service airline (FSA):

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Figure 3: LCC cost advantages over FSA Source: (Doganis 2000)

5.4 BUSINESS STRATEGIES FOLLOWED BY LCCs IN INDIA:

5.4.1 SPICE JET:

Spice Jet is an Indian low cost airline based in Gurgaon, New Delhi. The airline started its operations on May 23rd 2005 and currently positioned itself as a fourth largest carrier in the Indian market with a market share of 13.2% as per 2016 statistics (SpiceJet, n.d.). It currently operates 293 daily flights to 40 destinations which include six international destinations. Its fleet size includes B737 and Bombardier -Q400 aircraft models. Spice jet have been awarded as ‘Best LCC in south Asia and central Asia region’ by Skytrax in 2007 (SpiceJet, n.d.).

The airline focused on two-pronged strategy of cost control and developing its ancillary revenues. It adapted a basic ‘Low-cost airline’ model by offering point-to-point operations, no frills, internet sales, single class of service and so on. Various strategies followed by the Spice Jet airline were discussed below:

i. Pricing strategy:

Spice Jet entered the market by offering 9000 seats at a fare of Rs.?99for 99 days. Furthermore, it came up with a promotional scheme on selected destinations by offering seats at a price of ?999. Their marketing proposition is to offer ‘great guest services and low spicy fares everyday’ to its price conscious customers. The aim of this is to draw the attention of Indian Railways AC coach traveler’s by offering several schemes like ‘Book two air tickets, pay for one’(SpiceJet, n.d.).

ii. Marketing strategy:

The airline marketing strategy mainly rely on word-of-mouth marketing. Aside, it also makes use of internet channels and print media to promote its brand image. A survey conducted by the airline reveals that 42% of its travelers are repeat customers and 90% of its travelers would recommend Spice Jet to others through word-of-mouth (slideshare, n.d.). Its market sustainability depends upon the quality of service provided to its travelers.

iii. Operational strategy:

Porters stated that the organization must deliver a differentiation to gain competitive advantage over its rivals. As a part of its operational strategy, Spice Jet has formed several partnerships with various global companies to increase their safety and reliability standards. It has several tie ups with leading MRO organizations like KLM to handle its maintenance operations. Spice Jet had made several investments in information technology(IT) sector to enhance its operational efficiency and its operations are controlled by the support of leading firms like Russell Adams and Tech log.

All the above strategic moves had helped Spice Jet to achieve the lowest cost of 6cents/available seat kilometer in 2008 (DGCA, n.d.).

5.4.1.1 STRATEGIC PLANS FOR FUTURE GROWTH:
i. Expansion plans:

It commenced its operations with five B737 aircrafts. Currently, it has 38 aircrafts in their fleet with two variant aircrafts serving its 40 destinations. Moreover, its order logbook consists of forty-two B737 aircrafts which will be delivered by 2017. The financial hurdles faced by the

airline in the past two years has not stopped airline expansion plans. In 2015 Dubai conference, Spice Jet was having talks with Airbus and Boeing for a possible order of 100 new aircrafts (SpiceJet, n.d.).

ii. FDI INVESTMENTS:

The FDI policy in the Indian aviation industry has helped the Spice Jet to some extent in attracting foreign investors. In 2008, $80Million have been invested by billionaire Wilbur Ross. Moreover, Spice Jet would welcome any foreign airlines who wish to be a strategic partner with them.

iii. Ancillary revenues:

This revenue is most important for any LCCs as they contribute at least 20% to the overall revenue(SpiceJet, n.d.). So, Spice Jet charges extra fees from its passengers through extra baggage, in-flight meals and so on. Moreover, it made a tie-up with UK based online retailer ‘Underpounds.com’ to improve on board sales.

iv. Automation to sustain expansion:

It is the first low cost carrier in India to use high end automated business solution in its operations. This automated process would support its expansion plans of the cargo market and handles its operations seamlessly in the areas of flight planning, bill tracking, cargo reservations and so on. (slideshare, n.d.)

5.4.2 GO AIR:

It is an Indian LCC based in Mumbai which commenced is operations from 2006. Currently, Go Air operates to 22 destinations with a fleet size of 19 aircrafts providing 140 daily flights and 975 weekly flights approximately. Various Strategies followed by Go Air in the Indian market were discussed below:

I. Go Air customer focus and corporate strategy:

It’s ‘Fly Smart’ slogan offers consistent, quality assured and efficient service to its customers. Go Air offers 40% lower fares compared to full service airlines and mainly targets Indian Railway passengers to benefit them through the strategically planned fare structure. Aside, it focusses on providing the best on-time performance, quality service and quick turn arounds to its passengers. Furthermore, it had tie-up with Radixx international, a global leader in providing automated aviation and travel related software solutions.

II. Value added services:

As a part of its strategy, Go Air doesn’t rely completely on online sales. It provided various distribution channels for its travelers to book their tickets through Go travel café’s, travel agents and so on. It provided in-flight snacks and meals as a complimentary to its passengers (Go Air, n.d.).

III. Red-eye operations:

This is also known as off-peak operations where Go Air operate its flights from 21:00hrs to 05:00hrs. This implicate the strategy of foreign airlines and several advantages of this strategy are:

- Reduced infrastructure constraints due to night operations.
- High utilisation of resources
- Lowers the airfare due to reduced operating costs.
- Most importantly, this strategy is used for connecting Tier-2 and metro cities in India.

IV. Hub Model:

Go Air followed the South-West airline strategy to be a strong player and gain market at hub rather than expanding across the country. Go Air started its operations by providing services to and fro from Bombay. Currently, it serves 22 destinations across India. The advantage of hub model is that the airline gets benefited from optimum utilization of its crew and aircraft as it provides services from only one hub. Moreover, the chosen hub will be a Tier-2 or metro city which is usually equipped with better facilities, infrastructure and contain high levels of income in a target segment. (Go Air, n.d.)

V. Slow fleet expansion plan:

Go Air doesn’t believe in aggressive expansion plan as it may cause financial burden on airline during an off-peak period. So, the airline has come up with a slow fleet expansion plan which would support its business model without affecting its operating profits. Furthermore, it doesn’t make any new aircraft orders until it gets a better deal from aircraft manufacturers. Go Air made a deal with Air France engineering for USD$40M to handle its future A320 fleet maintenance. This is a clear indication which tells how Go Air combined its future strategies in to their current strategy by monitoring its costs effectively. (sify.com)

VI. Flexi-fare:

- It’s a new scheme launched by Go Air, where its passengers can make changes to their itinerary at free of cost.
- This flexi-fare has brought down cancellation charges to Rs.200 where it rivals charges around Rs.500 to Rs.700 from their passengers. (SlideShare)
- This scheme mainly concentrate on frequent business fliers who bring the major revenue to the airline.
- The airline pays back or charges extra for any difference in price to its customers on their bookings.

The objective of this scheme is to gain competitive advantage, gain brand loyalty and serve niche market.

VII. Go - Comfort:

Go Air has launched ‘Go-comfort’, a premium class to align its strategy with the latest trends in aviation environment. ‘Go-Comfort’ is a business class offered at a price of the full-service airline economy class. It provides complimentary food, premium check-in and extra leg room to its travelers. This action helped the airline sustainability to position itself as a value carrier in the market. Moreover, the airline aimed to create ‘value for the money product’ where fliers need to ‘pay more to get more’.

5.4.3 INDIGO AIRLINES:

It is an Indian budget airline headquartered at Gurgaon which began its operations in mid-2006. Indigo is the fastest growing airline in India with a market share of 36.8% as per Feb-2016 statistics. The airline offers services to 40 destinations through 719 daily flights and its current fleet consists of 111 A320 aircrafts (GoindiGo.in, n.d.). INDIGO airline is the only Indian LCC generating profits for five consecutive years and have been awarded as the ‘Best low cost carrier’ by Skytrax for years 2010-2014 (GoindiGo.in, n.d.). For being a successful LCC in India, Indigo adopted a three-prolonged low cost strategy in its business model which as follows:

I. Achieving Low operating costs:

Indigo has utilized every possible opportunity that could help to lower their operational costs. Firstly, the airline managed to reduce the weight of the aircraft by designing its aircraft seats as light as possible by maintaining the standards. This resulted to have a low fuel consumption rate for each aircraft. Secondly, it uses a single aircraft fleet type in same configurations for all its aircrafts which in turn reduced its crew training and maintenance costs.

Furthermore, Indigo makes its aircrafts to fly on average 12hrs/day compared to 8-10hrs/day recorded by its rivals. This two hours of additional operations makes Indigo to achieve one extra flight/day that contributes to generate additional revenue for the airline by having faster turnaround time ranging around 20-22 minutes. Aside, it managed to reduce its inventory costs by forming a tie-up with Air France who stocks the necessary components required by Indigo. (DGCA, n.d.)

II. On-time performance and Reliability:

Indigo was successful in gaining loyal customers without any loyalty programs by maintaining a high on-time performance. Indigo recorded on-time performance about 90% in 2015 which is quite high compared to its rivals (DGCA, n.d.). It established a centralized operation control Centre to support its high on-time performance. The function of this Centre used to monitor weather conditions and provide information in advance to ground staff regarding the snags faced by the aircraft during flight. Aside, it also used to anticipate delays and provide necessary action for overcoming it.

III. Continuous expansion:

Indigo expansion plans are in much calculated way as it usually assesses and consolidate its position when it reaches a new city and only then it commences further flights from that city. Moreover, Indigo aircraft order logbook consists of 425 A320-neo new aircrafts which will be delivered from 2016 to support its continuous expansion in the Indian market. (Go Air, n.d.)

IV. Pricing and Marketing strategy:

Price is a crucial element for any LCC to sustain in the business. Indigo cost control division plays a key role in offering low fares to its traveler’s. This department uses a computer-generated mechanism to determine the fuel amount required for travelling from point-A to Point-B due to the high fuel price in India. So, its price formula lies in the fact that diminishment in fuel and operational expenses tends to offer low fares to its customers by maintaining its core strategies.

Marketing involves a huge investment for the airline. Indigo cut its marketing expenses by using cost-effective channels like the internet, social media and word-of-mouth. The word-of-mouth serve as an important tool for indigo’s marketing to promote its brand image.

5.4.4 JETLITE:

It is a subsidiary carrier of Jet airways which is formed by acquiring Air Sahara in April 2007. JETLITE positioned itself as a value carrier between the full-service airline and low cost airline. It offered less frills compared to its parent company, but frequent flier scheme is added to JETLITE. Its current fleet consists of 9 aircrafts serving 56 destinations in India (jetkonnect.in, n.d.). Strategies followed by JETLITE to sustain in the market as follows:

1. No-Frills:

JETLITE operates as a no-frills low cost airline where it eliminated a provision of in-flight meals unless if it is pre-booked by the passenger. Thus, the airline could eliminate additional on-board equipment like ovens, trolleys, and so on. This in turn reduced the weight of aircraft and contributed towards low fuel consumption.

2. Sales distribution:

JetLite avoided travel agents and middle men commission fees, by making all its sales through online and IVR system. Moreover, this system has eliminated paper works as ticket details were directly sent to passenger emails and phones and contributing to reduced operational costs.

3. Dynamic pricing:

JetLite uses a dynamic pricing approach to sell its tickets, where the price of air ticket will be fixed based upon the availability and demand on the route. The airline tries to generate maximum revenues by selling maximum number of tickets, as a marginal cost of flying additional passenger is very low in the airline industry. Moreover, the airline generates ancillary revenues through inflight sales and additional services offered to its passengers. Aside, JetLite enhance its ancillary revenues by using aircraft fuselage and interiors as advertising platforms for interested companies.

5.5 STRATEGIC ANALYSIS OF INDIAN AIRLINE INDUSTRY:

The Indian aviation industry is highly competitive and unstable where it is subjected to heavy taxes imposed by the government authorities. Thus, many carriers like kingfisher, Air Deccan has undergone bankruptcy. However, few LCCs like INDIGO, SPICE JET, JETLITE and GO AIR still managed to sustain in the market through their effective strategies.

A strategic analysis is carried below to identify the impact on LCCs business resulted by Indian aviation internal and external environmental factors. This strategic analysis helps us to understand the current situation of LCCs in India through PEST and SWOT analysis.

5.5.1 PEST ANALYSIS OF INDIAN AIRLINE INDUSTRY:

PEST analysis is an external macro-environment analysis that studies the impact on the airline industry caused by political, social, economic and technological factors.

(+) represents an enabling factor (-) represents a disabling factor

Political:

- Un-Stabilized decision making and government policies based on their political ideology. (-)
- Benefits of open sky policy and deregulation. (+)
- Foreign direct investment (FDI) is allowed up to 49% in the airlines and 100% foreign direct investment (FDI) is allowed on green field airports. (+)
- Effect of on-going terrorism acts in the country. (-)
- Poor relations with neighbouring countries like the Pakistan, Sri Lanka and China due to ongoing disputes. (-)

Economic:

- Rise in middle class income levels. (+)
- Rise in country’s gross domestic product (GDP). (+)
- High fuel price fluctuations. (-)
- Impact of high taxes in the country. (-)

Social:

- Air travel treated as a status symbol in the society. (-)
- Growing middle class population. (+)
- Rise in domestic leisure travellers. (+)
- Change in people perception over air travel and their life styles. (+)
- Significant rise in tourist’s number in the country. (+)
- Employment opportunities in overseas. (+)

Technological:

- Development of green field airports through private partnerships. (+)
- Growth in e-ticketing and e- commerce. (+)
- Lack of modernised infrastructure and airports. (-)

5.5.2 SWOT ANALYSIS OF INDIAN AIRLINE INDUSTRY:

It is a macro-environment analysis which identifies the strength, weakness, opportunities and threats within the industry.

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TABLE 2: SWOT analysis of Indian Airline Industry.

5.5.3 PORTER’S FIVE FORCE STARTEGY ANALYSIS ON INDIAN LCCS:

It’s an external environment analysis which includes five factors that could impact LCC business in India.

1. Threat of new entrants:

Though net profits of many carriers in India were declined in recent years, yet at the same time new airlines attempts to enter the industry. The threat of new entrants is low due to significant entry barriers like high fuel costs, start-up costs and in appropriate government regulations which has forced out numerous airline to undergo bankruptcy. However, few LCCs like INDIGO, SPICE JET, GO AIR AND JETLITE were still able to sustain in the business even during these awful working conditions.

The ‘intense post-entry rivalry’ where a new carrier face from the existing carriers is primary significant entry barrier. Initially, many new carriers aim at profitable destinations by offering low fares than their competitors because of their initial low operating expenses. However, when new entrants compete with the existing carrier on a particular route, the existing carrier automatically diminishes the fare on that destination underneath the cost of new entrant by keeping up high fares on its non-competitive destinations.

The major LCCs like SPICE JET, INDIGO, JETLITE and GO Air used the similar principle to constrain out any potential new entrants entering their route.

a) Product differentiation:

LCCs can achieve differentiation only through value added services as there is no much differentiation in their basic product provided to its customers. So, every LCCs have its own value added services to draw the attention of their customers that varies for each airline. For example, INDIGO airline provides stair-free ramps, check-in kiosks and so on whereas SPICE JET has roaming agents in the airport to ease the check-in process for its customers. Similarly, GO Air provided complimentary refreshments to its passengers on board.

b) Set-up costs:

Set-up costs is another entry barrier for new entrants while starting up a new airline. Initially, the new airline requires a huge capital for its operational expenses, buying aircrafts and hiring staff. However, leasing the aircraft allows to reduce the burden of set-up costs to some extent as the costs are spread across several years than purchasing a new aircraft itself. Furthermore, leasing the aircrafts helps to get rid of major maintenance expenses as they are covered by leasing company or may be outsourced by an MRO.

All the LCCs mentioned above has overcome the difficulties of set-up costs by having a huge capital during their start-up through its founders. In this way, these four major LCCs have effectively utilized all their resources in an efficient manner to overcome the financial burden during the initial stages of their operations.

c) Government regulations and its relations:

- The open sky policy has welcomed various global carriers to enter the Indian aviation industry that led to diminish the market share of Indian carriers on international routes.
- In most cases government owns the aviation industry, but due to liberalisation, it is fully dominated by LCCs and private airlines which accounts 75% of Indian domestic market share (narasimha, 2015).
- Foreign direct investment (FDI) is allowed up to 49% which restricts the airline future growth due to unavailability of sufficient financial funds.
- All airline operations in the Indian market must comply with the Directive General of Civil Aviation (DGCA) and Bureau of Civil Aviation Security (BCAS). However, some government decisions have influenced the major LCCs market share on global destinations by increasing the privileges of airlines like EMIRATES to operate more flights/week from Dubai to major cities in India (narasimha, 2015).
- However, all these major four LCCs has maintained a good relation with government authorities that benefited these airlines in getting approvals for their new routes, landing slots and so on.

2. Bargaining power of suppliers:

The main suppliers in the airline industry are aircraft manufacturers and jet fuel suppliers. The bargaining power of suppliers is high due to fact that they play a monopoly in their respective markets. As Boeing and Airbus are leading aircraft manufacturers in the industry, they are always in a better position to charge the high price for their aircrafts as they always find customers for them. Moreover, costs associated in switching airplane models is always a high price for the airline. Nonetheless, LCCs carriers like INDIGO and GO AIR has acquired some control over its supplier Airbus by making a huge order of A320-neo aircrafts (GoindiGo.in, n.d.) whereas SPICE JET has got some control over BOEING by ordering 42 B737-Max aircrafts (SpiceJet, n.d.). Therefore, these LCCs managed to be in better position to negotiate with AIRBUS and BOEING in gaining better discounts for their aircraft orders compared to their rivals in the market.

In recent years, Jet fuel suppliers exhibited the greatest source of increased supplier power in the Indian airline industry. They tend to show more power on airlines due to limited number of aviation fuel suppliers in the market. One example of high power enjoyed by jet fuel suppliers lies in the fact that jet fuel constitutes 40-45% costs in India compared to 20­25% universally (Lück, 2016). Thus, on an average 45-50% of operational expenses of LCCs are resulted from high fuel costs. The below picture shows the fuel price fluctuations in India for the period 2010 - 2016.

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Figure 4: ATF Vs Crude oil price

Source: Indian Oil

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Figure 5: ATF fuel price for year 2015-2016.

SOURCE: (indexmundi.com)

3. Bargaining power of Buyers:

The power of buyers is low in the airline industry as there is no significant substitute for air travel. Additionally, the price wars between LCCs has lower down the airfare further with an intention to make it affordable to all the people and grab maximum market share. Thus, profit margins of low cost airlines have also been decreased. So even buyers exhibit power, there is less probability to lower the airfare further as no airline intends to run with losses.

4. Threat of substitutes:

The main substitute for low cost airlines in India is ‘INDIAN RAILWAYS’. However, railways in India can’t be a better substitute for air travel due to following reasons:

- Air travel in India is a status symbol in the society.
- Aside, travellers use air travel as it saves travelling time and offers comfortable travel compared to railways.

Considering any LCC in India, the direct substitute would be the other LCCs operating in the market as switching costs between LCCs are low.

5. Competitive rivalry:

The airline industry is highly unstable and competitive and hence it’s very difficult to earn high profits in this sector. Major reasons behind high competition between LCCs are explained below:

- Scope of product differentiation between LCCs products and services is very less.
- Airline industry is highly developed and matured with a small growth and ideal way to sustain and grow in this industry is by attracting customers from their competitors existing in the market.
- The customer switching costs for the low-cost carrier is high as there is no brand loyalty.
- The major competitive rivalry in Indian LCCs exists between INDIGO, SPICE JET, GO AIR and JETLITE as they together account a major market share in the Indian Airline industry.

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Figure 6: PORTER’S FIVE FORCES CYCLE

5.5.4 CURRENT SITUATION ANALYSIS:

The main objective of this analysis is to determine the key challenges faced by the Indian LCCs in the current aviation environment. As per above strategic analysis, few barriers that restrict LCCs growth in the current market has been identified and stated below:

- INDIAN aviation policies
- FDI regulations
- Lack of skilled man power
- Lack of modernised infrastructure
- High fuel costs and airport fees
- Availability of landing slots

The aviation policies in India acts as a biggest barrier for LCCs growth. The aviation policies like ‘5/20 rule’ restricts the airlines to operate globally unless they have completed five years of domestic operational services and must have a minimum fleet size of twenty aircrafts. This rule is being strongly condemned by the Indian carriers, and were having discussions with the government from time to time to abolish it. Because ‘5/20’ rule considered being a reason thwarting for the aviation growth in India. No country has ‘5/20’ rule except India, which gives an added advantage to the foreign carriers to serve the large international market. In June 2016, the government has brought a minor change to ‘5/20’ rule which transformed to ‘20/20’ rule. As per ‘20/20’ rule, the LCCs in India are no longer need to complete five years of domestic operational service to serve globally, but they must contain a minimum fleet size of 20 aircrafts and twenty percent (20%) of their fleet must be reserved to serve the domestic destinations (the indian express, n.d.). This new rule is also being strongly opposed by the major LCC carriers like Indigo, Spice Jet and Go air as the rule much favors new entrants in the market and thereby reducing the entry barriers for new carriers. Furthermore, Indian LCCs were obliged by the government authorities to fly unviable routes which constitutes Tier-2 and Tier-3 cities for enhancing the connectivity with in the nation.

The other barrier is Foreign Direct Investment (FDI) that restricts the growth of airlines in India. This policy doesn’t allow foreign carriers to have investment greater than 49% of capital in any airlines in India. Thus, the airlines in India were subjected to financial constraints to support their future expansion plans.

Landing slot allocation is another barrier that restricts the LCCs growth as acquiring a new slot on busy routes is solely depend upon their slot utilization in the preceding seasons. Moreover, inadequate airport infrastructure restricts the LCCs having more slots during peak hours as all the available slots are completely packed. Aside, the lack of secondary airports in India has forced many low-cost airlines to provide services from primary airports like full service airlines. Thus, the operational expenses of the LCCs have significantly increased due to high airport fees charged at primary airports for their operations. Moreover, high fuel expenses considered as the biggest operational expense for LCC operations which constitutes 45-50% of their total operational costs. The aviation fuel in India is subjected to various taxes which tremendously increase the price of the fuel in the market and incurred high operational expenses for LCCs. Because of high airport fees and fuel costs, the profit margins and sustainability of the LCCs in India were severely impacted.

The other challenges in the current industry are shortage of skilled manpower and modernized airport infrastructure. As we know, aviation is a continuous growing field which requires trained people and better infrastructure for having a smooth and safe operation. One hand, the LCCs were expanding rapidly but on the other hand, the growth in terms of infrastructure doesn’t meet up with LCC expansion plans. Thus, creating an unbalanced situation in the Indian aviation market.

5.6 CAN INDIAN LCCs CONTINUE THEIR GROWTH?

It’s very hard for any carrier to sustain in the market without having significant revenue and growth. Hence, airline growth is directly proportional to its sustainability. The below picture depicts the financial numbers of major Indian LCCs for the period 2009-2015.

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Figure 7: Indian LCCs financial data for the period 2009-2015

SOURCE:(DGCA, n.d.)

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Figure 8: Indian LCCs financial data represented in a bar chart for the period 2009-2015.

From the above analysis of financial data, Go Air and Indigo carrier’s financial numbers are significantly increasing each financial year even during the current worse operating environment. However, on the other hand, major rivals like the Spice Jet and JETLITE are struggling hard to overcome losses incurred by huge operational expenses and financial debt. This clearly tells us that Go Air and Indigo airlines has been successful in implementing the strategies of low cost and cost leadership in their business which resulted consecutive profits over the past few years.

Analyzing the profits of Indigo alone for the period 2009-2015, the airline profit numbers are
slightly fluctuating yet managed to generate positive revenue over the last five years. similarly, Go Air managed to generate small revenues, despite of its small operational fleet compared with its rivals. In the last six years, JETLITE and Spice Jet carriers faced tremendous losses due to their inefficient strategies, and were almost in a stage to undergo bankruptcy because of large financial debt incurred by the losses.

Market share is also an important factor which plays a key role in LCCs growth. They can be a sign of relative competitiveness in organization services and products. Increased airline sales indicate that its market share is also increasing which will parallelly increase its revenues faster than its rivals. Aside, an increase in market share allows the airline to accomplish greater progress in its operations and enhance its profitability.

The below picture provides the market share data of various Indian domestic carriers over the period 2009-2015:

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Figure 9: Domestic market share data for the period 2009-2015.

Source: (DGCA)

The INDIGO carrier represented by a blue line in the above picture has shown tremendous growth in the market share since 2009-2015. Indigo market share has risen from 13% in 2009 to 39% by 2015. Thus, the airline could generate consecutive profit revenues over these years. Similarly, GO Air market share has grown from 2% to 9% by 2015 which helped the airline to make some positive revenues compared to its rivals. However, the market share of Spice Jet has sharply declined from 12% to almost 9% by 2015 and on the other hand, JETLITE market share fell drastically from 7% to 3%. This sharp decline in their market shares resulted huge losses for Spice jet and JETLITE, whereas the increased market share has brought a sizeable amount of positive revenues to Go Air and INDIGO carriers.

5.6.1 BENCHMARKING:

An investing group conducted benchmarking on three major Indian LCCs to analyses the potential of these LCCs for their future growth in Indian airline industry. The three major Indian LCCs like Spice Jet, Indigo and Jet group are compared with Southwest airlines and leading Indian firm. The analysis report reveals that Indigo airline performance is better compared with its rivals in terms of market share, profit margins and revenue growth. The picture below shows the benchmarking data:

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FIGURE 10: Benchmarking data Source: (indianotes.com)

From the above picture, we can clearly understand that Indigo Airline is ahead on most parameters compared with its rivals Spice jet and JETLITE or Jet airways. Indigo airline growth is impressive over the last three years and their profit margins are far better than its rivals. This helped INDIGO carrier to place itself in a better position and continue its growth in the same manner in following years.

Aside, four Indian LCCs load factor data shows that their load factor numbers are increasing each year with some small fluctuations and maintained an average of 75% load factor during 2009-2015.

The below picture provides the airline’s load factor data:

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Figure 11: Indian LCCs load factor data for the year’s 2009-2015 Source: [DGCA]

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Figure 12: Indian LCCs load factor data represented in a bar chart.

So, by analyzing all above factors Indigo and Go Air carriers has acquired better potential to continue their growth in the same way in coming years, by generating more revenues through their effective business strategies. Whereas Spice Jet and JETLITE needs a strategic plan to recover from the damage caused by their financial losses which could take few years to regain their earlier positions in the market.

5.7 Are LCCs competitive advantages sustainable in the current Indian Aviation market:

The main competitive advantages of any low-cost airline include a single aircraft fleet, low cost leadership, effective management and on-time performance. Comparing the financial numbers of all four Indian LCCs, GO Air and INDIGO has been successful in implementing cost leadership into their business through differential strategies. Their differential strategies not only generated huge revenues for the airline but also brought acknowledgement that, they are the customer focused driven carriers in the market.

Besides, for any aircraft travellers arriving “On-time” is very important and hence it plays a major role in attracting time-conscious travellers for the airline. The on-time performances of major Indian LCCs along with national carrier Air India has been analyzed below as per data published in Directive general of the Civil aviation (DGCA) website for the year 2015. The graphs below represent the On-time performance of the above-mentioned carriers in terms of their flight arrivals, flight delays and cancellations for year 2015.

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Figure 13: Indian LCCs flight punctuality data for year 2015 Source: (DGCA website)

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Figure 14: Indian LCCs flights delay data for year 2015 Source: [DGCA website]

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Figure 15: Flight cancellations related data for year 2015 Source: (DGCA website)

As per above analysis, INDIGO airline has recorded high On-time performance followed by its rivals Jet airways, spice jet and Go Air for the year 2015. The INDIGO airline made ‘ON-TIME PERFORMANCE’ as company tagline and delivered high efficient performance in the industry.

Moreover, as per (flightstats.com) INDIGO airline considered as the best Indian LCC in terms of punctuality and reliability. Aside, in the category of less flight cancellations and delays INDIGO airline once again to be the best performer than its rivals with its efficient operational strategy. Surprisingly, Spice Jet one of the major LCC in India recorded very poor performance with higher flight cancellations and delays and other carriers like GO air and JETLITE shown optimum performance in their operations.

Secondly, the type of aircraft fleet is one of the major competitive advantages in LCC operations as it a saves large amount of revenue in LCC operating costs due to one type of fleet strategy. Go Air and INDIGO has perfectly executed their fleet strategy by operating a single aircraft type fleet which gained competitive advantage than its rivals in the market. Both INDIGO and GO AIR operates Airbus A320 aircrafts which were most fuel efficient and suitable for LCC operations. Whereas its rivals, JETLITE and Spice Jet followed a multi-fleet strategy which resulted them in high operating costs. Aside, the aircraft fleet age also plays a major role in gaining competitive advantage where the airline with less fleet age will have reduced maintenance costs compared to the airline with old fleet. INDIGO and Go Air gained competitive advantage in this aspect too through their young fleet compared to its rival’s fleet in the market.

Lastly, no airline can be successful in the market without having efficient management. The organizational structure and Human resources play a crucial role in any airline success. Through above analysis, GO Air and INDIGO carriers have a well-designed organizational structure which enabled them to deliver best low cost brand experience to its customers. Moreover, their efficient planning and cost control over each activity in their business played a vital role in their success. Furthermore, the human resources of GO AIR and INDIGO also played a key role in airline success, by recruiting talented people to deliver the most efficient performance without compromising in safety. But, this is completely contradictory with management of JETLITE and SPICE JET who still operates in the same environment of its rivals. However, these two carriers failed to achieve effective results like INDIGO and GO AIR and ultimately resulted poor performance by incurring huge losses.

The above analysis clearly tells that the competitive advantages of any LCCs in Indian market can only be sustainable through effective management and organizational structure, as the results derived from the differentiated strategies are easily imitated by other LCCs in the market.

CHAPTER: 6 DATA ANALYSIS & FINDINGS

6.1 LCC PASSENGERS SURVEY:

A total of 100 LCC travellers were asked questions related to low cost airline preference and their selection. Some of the survey questions includes the most preferred LCC airline in India? What factors influence them while choosing LCC and so on? The objective of all these survey questions intended to identify the passenger perception towards Low Cost Carriers.

The target population chosen for this survey comprised of people from various industry backgrounds. This healthy mix provides the true picture and accuracy in results. The respondents took part in this survey are travelers in Indian LCC’s. Moreover, survey respondents include both men and women from the age group of 18-55 years old. The quantitative data collected through a survey has been presented in the form of figures and their interpretation is presented below:

I. What is your Gender?

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Figure 16: survey Gender data

Among the total respondents, most respondents took part in the survey are male participants. The survey data reveal that 76.5% respondents belongs to a male population. Therefore, it is assumed that the travel rate of male population in Indian LCCs is higher than female population. This might be due to socio-economic reason where female population is less empowered compared to male population in the country.

II. What is your age group?

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Figure 17: The survey Age group data

Majority of respondents took part in the survey belongs to a young age group. The survey result shows that 90.4% respondents lie in the age group between 19-30 years old while 8.7% respondents belong to 31 -45 years old. Therefore, it can be assumed that low-cost airlines are the first choice for many young age travelers in India. Whereas, other age groups shown less preference to travel in LCCs as per survey data.

III. Which Indian low cost airline does majority passengers prefer to travel?

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Figure 18: Most preferred LCC

The above result clearly depicts that the ‘INDIGO Airline’ is considered as a first choice for majority of the respondents followed by Spice Jet, Air Asia and others. Around 48% of respondents preferred INDIGO Airline, 28% preferred Spice Jet, and 11.5% choose Air Asia respectively. JetLite was preferred by 8% while Go Air was preferred by 2.7% of respondents.

IV. What made you to choose above airline as most preferred airline?

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Figure 19: Determining factors of preferred LCC

This question is continuity of the previous one, which focuses to identify the factors that led respondents to choose their preferred LCC. So, from the previous question ‘INDIGO Airline’ is the most preferred carrier chosen by many respondents. This is because of INDIGO’s extreme low fares, punctuality and better customer service. The other carriers lacked to provide these services like Indigo and ultimately positioned ‘INDIGO Airline’ at a better place in the market compared with other LCC’s.

V. What factors influencing the most while choosing a LCC Airline?

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Figure 20: Influential factors for LCCs

In this question, respondent’s perspective way was explored to determine the most influential factors while choosing a low-cost airline. The influential factors include low fare promotions, safety, punctuality, ease of booking, seat comfort, customer service, and so on. All the respondents were asked to choose from the above specified factors. Surprisingly, many respondents preferred “Safety” as their top priority while selecting an LCC. It is followed by flight punctuality, ease of booking, low fares and convenient destinations where much difference is not observed between them. From respondent’s perspective, “safety” dominated all other factors while choosing an LCC.

VI. Does the Airfare’s preference makes an impact on choosing the LCC?

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Figure 21: Airfare impact on choosing LCCs

In LCC’s business, price of an air ticket plays a key role in attracting customers. This statement is relevant to Indian airline industry as many Indian air travelers considered as price-conscious. From the above picture, majority of respondents (48%) are willing to change their preferred LCC to another airline, if low fares were offered to them. The other 46% of respondents will change to another carrier, depending upon the airline image in the market. Interestingly, only 6% of respondents agreed to stay with their preferred airline irrespective of air fares. This clearly tells us that market tilt in favor to the LCC carriers offering cheaper fares as Indian LCC’s lacks loyal customer base.

VII. What is the Overall customer satisfaction in Low cost airline travel?

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Figure 22: LCC travellers customer satisfaction level data

The objective of this question is to determine the satisfactory level of low cost airline travellers. Fifty percent (50%) of respondents rated “Good” and 22% of respondents rated “satisfactory” for all the services provided by Indian LCC’s. Only 2% of respondents rated LCC services as “excellent”. So, these results reveal that services offered by LCC’s in India should be improved for gaining higher customer satisfaction.

VIII. Which areas should Indian LCC’s improve?

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Figure 23: Represents the areas in which Indian LCCs must improve

As per respondents, the top five areas Indian LCCs should improve are seat comfort, low fare promotions, in-flight services, safety and customer service. Most of the respondents selected “seat comfort” as their top choice in which Indian LCCs must improve. The seat comfort accounts 50% of respondents and moreover other areas also received relatively equal importance. So, bringing the changes in the areas specified by respondents will help the LCCs to achieve better market share and customer satisfaction.

6.2 Passenger perception analysis:

From the above survey analysis, it is understood that passengers in India have developed their own requirements and expectations over their travel in LCCs. The passengers who choose to travel in low cost airlines has given higher priority to safety and punctuality along with low fares. Indigo Airline by itself lies as a best example to support the above statement. Further, the interesting aspect emerged from this survey result was that LCC travellers are expecting traditional airline services with low-cost airlines. As stated in literature review, Indian traditional airline travellers pay fare close to the Low-cost airline fares. Thus, many travellers are expecting that services would be same like FSA when they travel with LCCs. This misinterpretation might have mainly caused due to the lack of knowledge to understand the difference between FSA and LCC services. The other reason that has raised high expectation on LCC services is due to many LCC customers are first time travellers.

The airfare plays a key role in choosing LCCs as per survey results. Majority of travellers has given higher priority to lower airfare than the airline’s brand image. Thus, market tilts favor to the low-cost airlines offering cheaper fare. This clearly tells us that LCCs travellers in India don’t show much importance to brand loyalty as they tend to change towards the carrier offering low fares. Furthermore, they expect high quality services and low fare promotions from LCCs by spending less money.

In conclusion, Indian LCCs must improve their quality of product and services offered to its customers. Services include cheap fares, safety, seat comfort, better customer service and punctuality. LCCs improvement in above services helps them to retain and extend their market share in the Indian market. Besides, it also helps the LCCs to improve their sustainability.

CHAPTER:7 CONCLUSION & RECOMMENDATIONS

7.0 CONCLUSION:

The Low-Cost Carriers (LCCs) have visibly changed the industry dynamics worldwide, ranging from highly developed (e.g. USA) to developing (e.g. India) nations. Their entry into the Indian market has been fulfilling the dream of many Indians, as majority of them being cost conscious.

This report analysed the competitive advantages of LCCs vis-a-vis Full Service Carriers, while detailing the characteristics of LCCs that are aiding them to focus on consistent growth and profitability through cost leadership. Furthermore, this report presented the operational and business strategies followed by Indian LCCs. Though the strategies differ from one player to the other, they all operate on one common principle, i.e. ‘low operating costs.’ Only when this requirement is fulfilled, the LCCs can offer economical fares to its customers. However, due to high operational and fixed costs that haunt the Indian aviation industry, cost reduction is only possible to a certain limit. Once this limit is reached, intense competition leads to further lowering of airfare, thereby resulting in losses.

A strategic analysis has been carried to identify key challenges faced by Indian LCCs through SWOT and Porter’s five force model. The principal aim of this analysis was to determine the sustainability of Indian LCCs' cost advantages. The analysis result reveals that INDIGO and Go Air performed better than their rivals through effective cost leadership, management, fleet strategy, and on-time performance on a consistent basis. Moreover, comparing the operational and financial performance of these two LCCs with others clearly tells that their competitive advantages are sustainable in the market. However, pressure from the government in the form of certain aviation policies and regulations has affected the Indian LCC industry in terms of growth and profitability.

The primary data collected through a survey tells that many LCC travellers preferred to travel with INDIGO airline due to its high on-time performance and low fares. Moreover, the data reveals that, brand loyalty doesn’t position high place on travellers preferences list as they tend to switch constantly between airlines offering cheaper fares. This scenario must be changed and each LCC must form its own loyal customer base to sustain in the market. The Indian LCC travellers are expecting better comfort and convenient services without paying extra. Achieving balance between low-fares and value-added services is no cakewalk. LCCs that tackle these challenges skilfully and can keep pace with ever-changing industry might only continue to stay afloat and even sail further.

In a nutshell, the Indian low cost airlines are playing a crucial role in elevating the norms to a faster and reliable travel that will eventually result in higher productivity and output.

7.1 RECOMMENDATIONS:

1. Further liberalization of existing Aviation policies:

Currently, aviation industry in India is still highly regulated with several aviation policies such as FDI limits, 5/20 rule which restricts airlines faster growth, etc. So, liberalizing these policies will favor the LCCs in terms of better sustainability and profits. Moreover, the government must make efforts to bring a single tax policy on all aviation related products like fuel and so on. This could lower the operational costs of LCCs to a good extent and helps them perform better in the market.

2. Dedicated low cost terminals and airports:

The usage of secondary airports is a key operational strategy for successful global LCCs and lack of them will severely affect their day-to-day operations. This also incurs high operational expense for LCCs due to high airport fees. So, dedicated low-cost airports need to be developed or explore the possibilities of under-utilized airports and transform them to secondary airports for LCCs. Moreover, providing dedicated LCC terminals at primary airports will boost the low-cost carrier business, and change the customer’s perspective towards LCCs.

3. Privatization and modernizing existing airports:

The modernization of existing airports is very important to meet the future growth of airline industry in India. The government must raise the FDI limit from 49% to a higher number for modernizing airports similar to green field airports. This will allow modernization to take place in a faster way by attracting competent investors all over the world. Similar plans of the regulatory authority (AAI) to invest 150 billion Indian rupees in upgrading various airports across India over the next five years starting from 2016 is very encouraging. (AAI website)

Secondly, the results of privatizing airports can clearly be through the successful performance of Mumbai and New Delhi airports. The operations at these airports are efficient, streamlined, and effective. The Indian government must continue to allow privatization of other airports across India to enhance airport operations.

4. Forming alliances:

The LCCs in India need to form more alliances and code share agreements with other carriers to withstand competition. These strategic alliances can bring massive cost savings for LCC carriers in terms of terminal sharing. Furthermore, it helps them to fill more seats in their airplane through exchange of passengers. Strategic alliances (especially, to tier II and III locations) with leading full service carriers like Emirates, Qatar, and Lufthansa can help the LCCs in India to improve their brand image in the market. It even provides the platform to access large customer base and helps to explore untapped short-haul international routes. This alliance ultimately improves LCC sustainability in the Indian market and generates more revenues.

5. Increased fleet and network expansion:

LCCs in India must increase their fleet size to meet market growth and demand. The increase in fleet size allows LCCs to add new destinations to their route map and attract new customers to the airline. Aside, LCCs must analyze their load factors on existing routes to identify profitable and non-profitable routes. This analysis will allow LCC to eliminate non-profitable routes and shifts their focus toward opening new routes or increases the flight frequencies on profitable destinations. Thus, LCCs can minimize their operational losses to some extent. Furthermore, LCCs in India must work with an objective to increase their fleet size by 3 to 4 aircrafts per year over the coming years to support their future expansion plans. This would ultimately improve LCC performance in terms of high profit margins and market share.

6. Increase sales and ancillary revenues:

In India, the airline’s official website doesn’t play a significant role in ticket sales as majority of bookings were done through travel agents and other websites like yaatra.com, makemytrip.com and so on. The lack of awareness over official airline websites and high illiteracy rate resulted high travel agent costs for Indian LCCs. To overcome this problem, LCCs in India must replicate the combined strategy of Malaysian airline ‘AirAsia Expedia’. This strategy could reduce the burden of high travel agent costs to some extent on Indian LCCs, and furthermore provides access to a large customer base which would improve LCC market share and profit margins.

Secondly, ancillary revenues play a key role in any LCCs success as they contribute huge operating revenues. So, LCCs in India must improve their ancillary revenues by unbundling new products and services that draw customer attention. Services include extra baggage fee, premium check-in, extra leg room, seat selection, in-flight sales and so on. Moreover, LCCs in India must invade the possibilities of ‘user-pays’ basis in their business to offer more services to paying customers. This ultimately generates higher margins for the airline.

7. Effective marketing:

Marketing is a technique that allows the company to promote its brand and generate more business. So, care must be taken by the LCCs on the money they invest in advertisings. The LCCs in India must be focused to adopt an integrated marketing strategy in their business using cost effective channels. The cost-effective channels include social media, bill-board advertisements, print-ads, and so on. Aside, LCCs must also look the possibilities of word-of- mouth marketing technique to promote their brand which ultimately brings new customers and improve sales.

8. Making LCCs sales 100% online:

Indian LCCs must continue to rely on the internet as their primary point of sale. The airline must encourage its travelers to make bookings through their websites. Moreover, Indian LCCs must work with an objective to have 100% sales through internet over the next five years. This could help the LCCs to get rid from travel agents and call center costs completely.

9. Seasonal tourist packages:

Vacations and festival seasons are the time where an airline increases their profitability by attracting leisure travelers across the country. Indian LCCs should try on conspiring towards the requirements of travelers by bringing out seasonal packages or by offering most popular destinations of the season. This would in turn help the airline to make more business by improving their market share and creating competition.

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APPENDICES

1.0 HISTORY OF INDIAN AIRLINE INDUSTRY IN BRIEF

1.0. 1 Evolution of Government Airlines:

The Airline industry took its birth after independence by establishing two stated owned carriers. They are Air India and Indian Airlines for international and domestic travel respectively. Air India service was considered as gracious boutique service. But, this mark did not sustain long due to adaption of Indian public sector enterprises insensitivities. It also had huge workforce than its customer’s payment. Indian Airlines had broad domestic network connecting all the corners. But they were known for delayed flights, high fares and improper safety record. The airlines started going bankrupt due to the interference of politicians for fleet purchase decisions and employment decisions. Some of the consequences was purchase of A-310 and A-320 by AIR INDIA almost resulted going airline bankrupt. Thus, these airlines growth was constant but slow retaining till 1992.

1.0. 2 Establishment of Private Airlines:

The call for Aviation sector was raised after New Economic policy in 1991, but the improper regulations in Indian Economy are keys to this sector which started from mid-80's. The "Air Taxi" services were allowed by government to be operated initially and led to scheduled services by 1994. As the years passed, many airlines such as SAHARA, Jet Airways, MODILUFT, EASTWEST and many more have started their services. These airline founders made money from travel trade and financial services since they are not well established people in India. The newly formed airlines have drawn specific expertise from foreign airlines or former aviation and national carrier employees. Among, new entrants DAMANIA positioned itself as a luxury airline with special on-board entertainment like fashion show. Also, EASTWEST had most aggressive growth with fleet expansion strategy. Out of all Jet Airways was reputed to be punctual airline and preferred as good airline service. Others airlines such as SAHARA was known for its connectivity and MODILUFT made technical tie up with Lufthansa to project itself as a reliable and safe airline. The new carriers managed to attain 24% of market share due to provision of additional capacity which has not been served by Indian Airlines.

1.0. 3 Market Shakeout:

By 1997, some airlines like DAMANIA, EASTWEST and MODILUFT were forced to suspend their services. Factors such as poor financial mismanagement, lack of infrastructure, operating regulations, improper route network that could exploit scope of economies and many other issues led to suppression of demand spelt trouble for the airline industry. But, Jet Airways and SAHARA airlines could sustain by the end of first phase of Indian domestic airline industry. Jet Airways survived due to its great financial planning and the Airline industry expatriate’s involvement in their management. Jet Airways were offering broad connectivity due to interline arrangements with leading airlines and its parent company served as General Sales Agent in India for many foreign carriers.

The rapid rise and fall of Indian airline industry has led many changes in regulatory policy which even limited aircrafts in some airlines to five. However, foreign investment by non-airline entities is allowed up to 49% and NRI’s to 100%. This policy was formulated as a government’s reaction for the proposed joint venture between Tata’s and Singapore Airlines in domestic airlines that could protect the interests of Indian Airlines. On the other side, private airlines like Jet Airways and SAHARA owners were against to this venture in Indian airline sector. Thus, the joint venture between Tata’s and Singapore Airlines has got cancelled and new entrants in the industry were stopped for some time.

1.0. 4 Growth of New Indian Airline Industry:

The steady growth of Indian economy has increased the size of economy with annual growth rate more than 6% which in turn increased the demand for business and leisure travel. The new entrants in Airlines industry had sensed this opportunity which led to the development of new phase in Indian airline industry during 2003. Even though several operational costs were fixed for any airline business model, the new entrants choose low fares as a competitive advantage to attract middle class in India. This led to the start of “LOW COST AIRLINES (LCC’s)” in Indian market.

Air Deccan was the first LCC started by ‘Captain GOPINATH’ which had offered fares at reasonable prices. He started Deccan Aviation in 1997 with charter helicopters service and small aircrafts supplier in the country. Moreover, Air Deccan has cut down the frills from its operations to provide services similar to JetBlue and Ryan Air. Its connectivity extended slowly and started using Airbus-320 for accommodating more passengers and reduces their operational costs. The airline operations were outsourced with limited staff. Air Deccan airlines had 40 aircrafts in its fleet by the year 2007 and 120 by 2012 with good achievement in connectivity. Air Deccan created intermediate sources such as oil companies, postal department and tickets were sold through travel agents as well as online. Thus, the demand for the airline was growing fast and its rapid expansion resulted in aircraft delays and reduced operational reliability in customer perspective. On the other hand, the Indian Airlines, SAHARA and Jet Airways started to offer discounted fares in their flights with limited seats booked before.

The other new low cost airlines are SPICE JET and INDIGO started with the help of NRI (non- residential Indians) investors. Spice jet is launched in 2005 and it used new generation Boeing- 737. The airlines mainly concentrated on its ancillary revenues along with its cost control. It also had worldwide partnerships which helped in safety enhancement and for more reliability. It made significant investments IT (informational technology) sector for effective operations. Hence all these factors made this airline as the efficient and most reliable among all other airlines. Spice jet fleet had 5 aircrafts at initial stages and with its rapid growth it had almost 41 aircrafts by 2016 and fleet of 42 new aircrafts which will join the current fleet from 2017. INDIGO which was established a year after SPICE JET had begun its operations in Indian sector. Initially, it also followed same low cost business strategies of SPICE JET but by using A-320 aircrafts. Indigo also has good connectivity which operated with 17 aircrafts out of its initial 100 ordered aircrafts by 2008.These aircrafts flew to 17 different destinations. Currently, it has a fleet of 108 A320- 200 a/c and A320-neo aircrafts joining the fleet from 2016.

Aside, they are three other airlines along with spice jet and Indigo, they are Kingfisher, Paramount and Go Air which are started by powerful industrial sector leaders in India. Out of these airlines, Kingfisher airlines were started by Famous business tycoon, Vijay Malaya in 2005 which adopted his beer company name "Kingfisher”. It evolved as full service airline very fast inheriting Malaya’s style and went head-on with Jet Airways. The airline used ATR’s and A-320 aircrafts and had more than 50 aircrafts in its fleet by the end of 2008.

Paramount is other airlines that was started in 2005 by Loyal Textiles group from south India which provided Business class service at economy class prices. This airline has shown strong prominence by connecting all major business locations in south India which made its market share rise to 26% at one stage. It had 40 aircrafts in its fleet by the end of 2009 and even expanded connectivity to north and western parts of India. Go Air is the low-cost airlines started by WADIA’S group in 2005.It adapted a dynamic fleet strategy which leased aircrafts in winter months and return it during unwanted or when there is no much demand for air travel. Initially, it had seven A320 aircrafts and later reduced to 5 by 2007 in its fleet. These airlines did not share good market value and it is in process of development. However, by the end of year 2012 PARAMOUNT and KINGFISHER airlines were undergone bankruptcy and suspended their operations completely in Indian market. The new carriers that have entered in recent years are AirAsia India and VISTARA which commenced their operations in year 2015. (Rishikesha T. Krishnan,2008)

2. SURVEY

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Details

Pages
79
Year
2016
ISBN (Book)
9783668515802
File size
1.9 MB
Language
English
Catalog Number
v370845
Grade
MERIT
Tags
aviation management low cost carrier go air indigo airlines jetlite spice jet

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Title: Indian Low-Cost Airlines and Their Future Sustainability