Final 707 (version 3)

Domestic Airlines :Price Leveraging

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Group Member : 

Ishan Sodi

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Priyanka Babar

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Prateek

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Rajeshwari

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R.Guruprasad

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Rohit Bebarta

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Rubina

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Sahil

Introduction To Indian Aviation Sector In 1932, JRD Tata, a visionary launched India’s first scheduled airline, Tata Airline .  In early 1948, a joint sector company, Air India International Ltd. was established by the Government of India and Air India (earlier Tata Airline) .  By 1962, eight erstwhile private airlines were merged to form Indian Airlines Corp., namely Deccan Airways, Bharat Airways, Air India, Himalayan Aviation, Kalinga Airlines, Indian National Airways, Air Services of India and Air-Services India. 

The Change 

There has been a marked change in the civil aviation scenery in India.

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

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The domestic passenger and cargo traffic recorded a growth rate of 44.6% and 8.7%, and the international passenger and cargo traffic recorded growth rates of 15.8% and 13.8% respectively during 2006-071.

The substantial growth of customer traffic in Indian aviation industry is mostly due to:  low

fares offered by Low Cost Carriers (LCC).  Scheduled domestic air services are now available from 75 airports as against just 50 earlier.  International Players making a beeline to enter this emerging market.  Numbers of Flights operating: 2500 per day.

THE PLAYERS 

Domestic air market can be divided into 2 major segments: - Premium- x y z Start up players - No frills: e r t Omega Air, Magic Air, Premier Star Air and MDLR Airlines.

Current Market Share

Indian Aviation Timeline

Contd…

DETERMINANTS OF PRICING

1.ATF ATF refers to air turbine fuel which is used by airlines in its operations. ATF contributes to the 40 % of operation cost It includes freight charges from gulf to India ,Customs Duty, Domestic Transportation and various taxes. India usually Pay higher ATF charges as compared to other countries.

2.Lease Rental 

Private operators except Air India have leased aircraft from USA and Europe.

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They pay on average $375000 to $500000 per month depending on the aircraft

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They contribute almost 33 % of operational cost.

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They generally have to pay their rents in dollar terms.

3.Airport Charges 

It is the basic fees that is charged by airports from airlines

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This include parking fees, landing fees , stop paging fees and aero bridge expenses

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New airport charges more than established one to cover up all the cost incurred

4.Other factors 

Advertising and Promotional Expenses

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Technology employed by the airlines

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Current Financial position

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Prices set by other airlines competing in the present environment.

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Pilot fees

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Government regulation.

Airfare

WAR

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INTENSIFYING THE COMPETITION

No Frills- Air Deccan The credit for triggering this price offensive goes to Air Deccan.  Inspired by the Irish carrier Ryan Air, Air Deccan offered airfares as low as Rs 500 plus taxes on the Mumbai-Delhi sector.  Air Deccan's normal fares are much lower than what passengers are used to paying for air travel on Jet Airways, Indian Airlines or Air Sahara. 

It is a 'no frills airline', meaning that the airline has cut out all the add-on costs of travel and focuses on getting people from one location to another safely. This seems to have sent the leading domestic carriers — Indian Airlines, Jet Airways and Air Sahara into a tizzy and each airline is now going all out to ensure they it doesn't lose out to the new low-cost airlines — or to each other.

Indian Airlines The airlines worked on upgrading their frequent fliers programmes (FFP) and apex.

Indian Airlines has revised its frequent flier programme to enable those with even a single boarding pass to qualify to enter the frequent flyer club.

The Indian Airlines FFP has been merged with Air-India's programme, which will allow international passengers to earn mileage points. If you fly Indian Airlines, you'll get Air-India mileage points.

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Indian Airlines came up with a new apex fare slab for purchase of tickets in eight sectors, 28 days in advance — two days less than those offered by Air Sahara and Jet Airways.

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The D-28 fares would be available for sale on one way or round trips as against round trip fares offered by Air Sahara.

SAHARA—A DIFFERENT JOURNEY • Began operations on with two Boeing 737-200 aircraft on 3December 1993 . • Revamped and Rebranded in 2000. • Boosted the Fleet in 2002 and Introduced New Price Schemes  Price Schemes : • First Airlines to start innovative Pricing model rather than APEX Model. • Sixer and Super Sixer Schemes in 2002 – Six refers to the six zones for 25k.These schemes offered more to the customers than their competitors. • Square Drive Scheme – ( Family Pack) 4k-2.5k  “Steal

a Seat” - Bidding process started from Base price

– Re 1/-

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Air Sahara offered to accept frequent flier miles earned on other airlines in its own rewards program. Users had to earn an equal number of miles on Air Sahara, however, before they could be exchanged for free travel or consumer goods. According to the company, 1,000 people signed up for the program in the first two weeks.

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Air Sahara brought a live acoustic band on board certain longhaul flights during February 2002. In another marketing scheme, the company teamed with Standard Chartered Bank to offer fliers the "Instabuy" program providing interest-free credit for air travel.

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Air Sahara is also planning to launch a 'dynamic fare' model. Under this model, fares will be based on the daily market demand. In short, Air Sahara, too, will sell vacant seats at lower fares

JET AIRWAYS •Started commercial airline operations on 5th May 1993 •Headed by Mr Naresh Goyal •India’s third largest airline •Operates three airlines-Jet Airways,Jet Lite and Jet Airways konnect •Jet Lite was earlier Air Sahara which was taken over by Jet Airways in 12th April 1997

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Jet Airways a premium class carrier

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Jet Lite and Jet Airways konnect are low cost carriers

Schemes Offered By Jet Airways : 

Frequent Flyer Scheme

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APEX pricing Scheme

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Cash Back Offer

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Jet Privilege Scheme : Extended its points partnerships to Accor Hotels and Langham Hotels International.

THE STRATEGIES Some of the methods that were used are as follows: 

APEX fares

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Low price tags

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Internet auctions.

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Bulk purchases.

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Last day fares.

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WHAT IS APEX? Apex IS ADVANCE PURCHASE EXCURSION FARE. It is a noncancellable return fare offered at a heavy discount on the conditions: Tickets are purchased at least 21 days in

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advance Minimum gap between departures range from one to six weeks.

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Maximum gap between departures is 12 to 24 weeks.

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There are no stopovers.

Advantages of APEX 

Planning of operations for airline companies.

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Profit of the airline companies increased.

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Helped in modernization of airports.

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Led to the introduction of new LCC’s.

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Disadvantages of APEX

Planning air travel three weeks in advance was not very convenient

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The tickets in this scheme were non refundable.

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No flexibility as tickets under this scheme could not

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be rescheduled. Very few tickets were offered by aircraft companies under this scheme. It led to the congestion of airports.

Effects of APEX 

Led to increase in the number of customers.

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Loss of airline companies minimized as with the increase of passengers the aircraft ran to their full capacity.

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It brought a veritable boom in tourism sector.

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It was able to lure the middle class people who preferred to travel by trains.

Dynamic Price 

Maximise the number of seats sold, airlines divide the seats in an aircraft into several classes and sell them at different prices.

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Pay only a fraction of what passengers who book last will pay. Fares are based on the daily market demand.

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Ticket allocations per fare block are made purely on daily demand.

BULK PURCHASE 

One can save an additional 20% - 70% by buying “Bulk/Negotiated Airfares” also known as "Consolidator Airfares", without most of the advance  purchase restrictions (70% savings apply to one-way airfare).   “Bulk purchase" sells directly to the public as well, in addition to wholesaling to travel agencies . The "Bucket Shop" often would be a "Consolidator" on one-hand, negotiating their own deals directly with Airlines, and also buy from other Consolidators in their country and or from other counties.

FACTORS WHICH HELPED TO BRING DOWN THE PRICE IN 2002 1. Open Sky Policy: The signatories are allowed to fly over the skies of India. EFFECT: --Tourist arrivals in India are expected to grow exponentially, -- The increase in number of international tourists will percolate down to increase in domestic passengers.

2. Deregulation: Requirements to become a scheduled operator air carrier in India have being reformed, the reduced restrictions on foreign direct investment is 49% for flights and 100% for airports. EFFECT: Entry into the air travel industry is not only cheaper, but also affordable to new operators  

3.Modernization of Airports 

The Indian Cabinet has approved a proposal mandating the state-run airport operator to modernize 35 airports in second-tier cities within the next two years.

Effect: Improved infrastructure would lead to rise in no. of travelers and also so would encourage more operators.

4. Abolishment of Taxes

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Foreign Travel Tax (FTT) Rs500 and 15% inland air travel tax (IATT) charged on Basic airfare has been abolished by the government to reduce fares.

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5. Reduction on Excise Duty The excise duty on ATF was reduced from 16 to 8 per cent The average domestic price of ATF is 99 per cent higher than prices in foreign countries and affects domestic airlines drastically as ATF accounts for 30 to 40 per cent of operating costs

Effect : 

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

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The government has reduced the average age of aircraft being imported into India for commercial airline operations by five years.

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

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operators coming in and improve services

6. Landing Charges abolished 

Landing charges for aircraft with less than 80 seats were abolished

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Landing charges for larger aircraft have been reduced by 15% with effect from February 11,2004.

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Effect: Reduction in cost.

Economic Prosperity Of India

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Effect: The rise in income levels along with introduction of no-frills flights will lead to

Rise in no of travellers,  ·More investments in aviation,  ·More competition and  ·Rise in industrialization leading to more need of air transport.. 

PRICING & THE ECONOMIC CONCEPTS First degree Price Discrimination: Professor Baumol shows that effective competition does not necessarily impose uniform prices. More provocatively,competitive pressures can force all firms to adopt discriminatory prices if consumers cannot easily resell a product.

rice

Price,Cost per unit First Degree Discrimination

P1

P2 P3

P0

Q3

Q1 O

• The method taken here is to dynamically modulate prices over time by adjusting the number of seats available in each pre-defined fare class. Advantage is taken of a natural segmentation in the consumers: business travelers for whom the flight dates and timings are primary and fares are secondary; casual travelers for whom prices are important prices are important and the dates/timings are flexible; B MC=AC and hybrids for whom both factors are at an equal level of importance.

Q2

QD

Quantity Per Period

PRICING . . . 

A restricted model was estimated, where price discrimination is assumed not to vary with market concentration.

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The regression equation comes out to be:

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P = 8922.81 – 1629.9 DAYS - 831.1273 DEPTIME – 26.9095 DUR

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The coefficient of determination or R2 comes out to be is 0.9283

PRICING … 

The adjusted R2 is 0.8746. This means that variation in the duration of journey and departure time and advance purchase explains 87.46% of the variation in air fare

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While performing the t test, the value of the calculated t statistic for departure time Duration of flight and advance purchase is more than the critical t value of 3.182. This shows that the three parameters are statistically significant and shares significant relationship with the airfare. Means they have a great impact on the variation in prices

PRICING 

The study proved that not only price discrimination can work well in monopolistic competition but also in imperfect completion Also price discrimination works well only when price elasticity of demand are different in different situations. Here we have studied for Airlines with with more firms in the market, price discrimination can increase or decrease.

Conclusion Some FAQ’s: Were the schemes effective?? Does the price cutting undermine firm's viability in the long run?? Ø There are may factors which determine the price of an air ticket.  The innovative schemes initiated by the airlines way back in 2002 were definitely effective in increasing the customer base.  The price cutting schemes are in tandem with government policies and are viable as long as the external factors for pricing are under control.

Thank

You