An airline is a company that provides air transport services for
traveling passengers and freight. Airlines utilize aircraft to supply these
services and may form partnerships or alliances with other airlines. Generally,
airline companies are recognized with an air operating certificate or license
issued by a governmental aviation body.

Airlines vary in size, from small domestic airlines to full-service
international airlines. Airline services can be categorized as being
intercontinental, domestic, regional, or international, and may be operated as
scheduled services or charters.

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History of
Airlines Industry

DELAG, Deutsche Luftschiffahrts-Aktiengesellschaft
was the world’s first airline. It was founded on November 16, 1909, with
government assistance, and operated airships manufactured by The Zeppelin
Corporation. Its headquarters were in Frankfurt. The first fixed wing scheduled
air service was started on January 1, 1914, from St. Petersburg, Florida, to Tampa,
Florida. The four oldest non-dirigible airlines that still exist are
Netherlands’ KLM (1919), Colombia’s Avianca (1919),Australia’s Qantas (1921), and the Czech Republic’s
Czech Airlines.

 

Evolution
of the Airline Industry

 

Early 20th Century

Airplanes
were around the first few years of the 20th century, but flying was not
commonplace until 1925. In this year, the Air Mail Act facilitated the
development of the airline industry by allowing private airlines to deliver
mail. Shortly thereafter, the Air Commerce Act gave the Secretary of Commerce
power to establish airways, certify aircraft, license pilots, and issue and
enforce air traffic regulations. The first commercial airlines included Pan
American, Western Air Express and Ford Transport Service.

Mid-20th Century

In 1938,
the Civil Aeronautics Act established the Civil Aeronautics Board. The CAB
based airfares on average costs, so because airlines couldn’t compete with each
other by offering lower fares, they competed by striving to offer the best
quality service. The Federal Aviation Agency, now known as the Federal Aviation
Administration, was created in 1958 to manage safety operations.

Deregulation

In the
mid-1970s, Alfred Kahn, an economist and deregulation advocate, became chairman
of the CAB. Around the same time, a British airline began offering
exceptionally inexpensive transatlantic flights, thus forcing U.S.-based
airlines to lower their fares.

 

Late 20th Century

New
carriers rushed into the market around this time, and new routes directly
connected cities previously accessible only via a string of layovers. Fares
dropped as competition and the number of customers increased. A 1981 air
traffic controllers strike brought a temporary setback to the growth, which
continued throughout the 1980s.

21st Century

In 2001,
the industry dealt with the effects of another economic downturn, as business
travel decreased substantially while labor and fuel costs increased. The events
9/11 greatly magnified the airlines’ issues, leading to a sharp decline in
customers and significantly higher operating costs. Losses continued for years;
the industry as a whole didn’t return to profitability until 2006.

 

Evolution
of the Airline Sector in India

 

Market Size

Sinha, who was speaking at the day-long Ideas Summit 2017 of
entrepreneurs here, said the aviation industry now equaled the Indian Railways
in terms of turnover as it generated a total revenue of about Rs 1.8 lakh crore
this fiscal.

In the global economy, the
aviation industry is one of the fastest growing sectors. Some statistics of its
growth in terms of its market size is as follows:

·      
Commercial airlines carried more than 3.8
billion passengers in 2016 and accounted for 501 billion US dollars.

·      
The number of international tourist arrivals
increased from 1.19 billion arrivals in 2015 to 1.23 billion in 2016 where most
of the tourists chose to arrive by airlines.

·      
Over 54 million metric tons of cargo was carried
by air in 2016.

·      
The aviation industry provides a total of 62.7
million jobs worldwide.

In India:

 

·      
In FY17, domestic air passenger
traffic witnessed a growth of 21.5% according to the civil
aviation regulator Directorate General of Civil Aviation (DGCA) of about 205
million people.

·      
India’s civil aviation market is 3rd
largest domestic air carrier service and is expected to be the largest by 2030.

 

 

Market Trends

Aviation sector is a booming
sector in the world economy and it is on the rise. For the third consecutive
rise (2014,15,16)  which is also the only
third consecutive year in the aviation history, carriers reported a positive return
on their invested capital.

 

Some of the other trends as of
2017 are as follows:

·      
 The
global airline market comprises air transport service providers of passenger
and cargo. Industry services are used by individuals and
business,—international, domestic, and regional—and governments around the
world. The industry is fragmented in terms of suppliers and buyers.

·      
The global airlines industry growth is expected
to reach an estimated $832.8 billion in 2020 with a CAGR of 3.7% over the next
seven years (2013-2020)

·      
Even though the industry is
generating profits, as oil prices rise: the global traffic growth is expected
to slow down in 2017, according to IATA.

In India:

 

·      
India’s airlines reported a combined profit of
USD122 million in FY2016, the first time in a decade. This included record
profits at IndiGo, Jet Airways, SpiceJet, GoAir and Air India Express.

·      
India overtook Japan in FY2017, to become the
third largest domestic airline industry after US and China. The US stood at
around 900 million passenger trips per year and China was at 600 million

·      
In September, India recorded a growth of 15.5
per cent while the global demand stood at 5.7 per cent. “India topped the
domestic growth chart again, while domestic US and Australia RPKs both fell in
annual terms,” the IATA said on 9th Jan,2018. Revenue Passenger
Kilometres (RPKs) is a measure of demand.

·        
Indian airlines are scheduled
to induct 60-65 narrow bodies and 10-12 regional aircraft in FY2018

·        
Domestic traffic could grow
by nearly 25% in FY2018 and approach 130 million passengers

 

 

 

 

Some trends that can be observed in the top
airline industries in India are:

·        
Air India continues to expand
its international footprint, primarily using 787 equipment.

·        
Jet Airways is likely to
revive its long haul ambitions and may possibly join SkyTeam
in 2017 or 2018

·        
IndiGo and SpiceJet have pursued relatively
modest expansion on international routes to date, preferring instead to focus
on the domestic market. However, both carriers are expected to ramp up their
international service from Summer 2017. This is also when GoAir plans to
commence international services for the first time, primarily to
unconnected destinations in Central Asia, the Gulf, China and Vietnam.

·        
IndiGo’s share of traffic has crossed 40% and
could approach 55-60% within the next two years

·        
Vistara is likely to bring
forward deliveries while AirAsia
India is also expected to target aggressive expansion.

 

Effect of
Demonetisation in the Airline Industry

The airline
industry was not visibly affected by the effect of demonetisation which was
announced by PM Modi on 9 November, 2016. On the same November, the
aviation sector, in terms of passenger growth, had registered a growth of
22.45% . However, there was a significant drop of 35% in the airline fares.

 

Effect of
GST on the Airline Industry

·        
Decrease in Fare Prices of Economy Class Ticket
but increase if the fares of Business Class.

·        
Cost of aircraft import under lease had
increased as GST @ 5% is chargeable. But, after considering the fact that
leasing reduces the cost of airline operations, Revenue Department has pegged
the IGST levy as ‘nil’ on aircraft imported on the lease.

·        
28% integrated GST on parts of airline and
aircraft while transferring inter-states

·        
Previously, both Service Tax and VAT were
charged on repair and maintenance of aircraft resulting in higher tax burden.
Under GST model, It treats pure service transaction where supply include both
goods and services thus helps in removing the cascading effect of the tax on
tax.

Market Structure

The United States airline industry today is arguably an oligopoly. An
oligopoly exists when a market is controlled by a small group of firms, often
because the barrier to entry is significant enough to discourage potential
competitors. As of 2017, there are four major domestic airlines – American
Airlines, Inc. (AAL),
Delta Air Lines, Inc. (DAL) Southwest and
United Airlines, subsidiary of United Continental Holdings, Inc. (UAL)  – which
fly about 80% of all domestic passengers.

 

 

In India:

India’s
civil aviation sector is much younger than other modes of transportation, and
its market

structure
has changed frequently over the last few decades. India’s civil aviation sector
evolved

from
a market tightly controlled by the government with two air carrier service
providers to a

relatively
competitive market with a somewhat small number of domestic and international
air

carriers.

 

Some
features of India’s civil aviation sector include a large number of consumers
(passengers and cargo), a relatively small number of airlines with significant
market share, significant cost barriers to market entry, differentiated
services, and competitive firms affecting each other’s business decisions.
These market characteristics indicate that India’s civil aviation sector has an
inherent oligopolistic market structure. Since within India’s civil aviation
sector, economies of scale and scope exist; in order for each market
participant to break even, the firm must achieve a minimum efficient scale of
operation.

 

 

According to the Aviation Report
of 2018 by IBEF (India Brand Equity Foundation):

·      
India is the 9th
largest civil aviation market in the world.

 

·      
IndiGo’s market share in January 2017 stood at
39.8 percent, slightly lower than the revised 40.3 percent share it had
captured in December 2016, according to data released by the regulatory body
Directorate General of Civil Aviation

·      
Jet Airways Ltd. saw its market share improve 50
basis points to 15.5 percent

·      
 Low-cost
rival SpiceJet Ltd. held 12.8 percent of the total market share.

 

Competitors

The airline industry deals
primarily in two types of services:

1.   
Full Service Airlines (FSA)

2.   
Low-cost Carriers(LCC)

 

 

ELEMENTS
 

LCC STRATEGY
 

FSA STRATEGY

ADDITIONAL COMMENTS

Costs

Constantly striving to simplify processes and reduce costs. Have
achieved  ontinuing cost reductions.
Have a
corporate culture which supports  continual cost
reduction.
 

Collective agreements and network service
complexity tend to build in ever more complex processes.
Reforms are difficult to achieve. When
cost reductions are
sought, for many FSAs they tend to be “one off”
initiatives, rather than the adoption of continuous
improvement
management strategies.
 
Even where an FSA
strives for  continuous
cost reduction, the FSA product is inherently more
expensive to provide.
 

A key differentiation
between LCCs and
FSAs.
A few recent cost
initiatives by FSAs
should not be
confused with the LCC business model
strategy with its focus
on continuous
simplification and cost reduction.

Hubs

LCCs have major operations in large cities, where some
passengers make
connections. However the core focus is the O/D market.
 

Hubs are strategic
assets. Hubs are built and defended.

A key differentiation
between LCCs and
FSAs.
The presence of a
large number of LCC
routes at a given
major city should not
be confused with an
FSA’s strategic hub.
 

Hub Connectivity

Connection opportunities are
offered for sale when available, but are not a primary
product dimension.
 
‘Acceptable’ connections times can be quite long.

Hubs are built to
maximise the number of possible connections with shortest
possible
connection times. This results in the need for extra
resources (e.g., more gates, more
customer service agents, more aircraft due to longer
turnarounds) to
accommodate large peak demands.
 

Some FSAs have
lengthened acceptable
connection times (so called rolling hubs) but focus is still
on
maximising number of connections within the network. Perhaps
a vernacular way of
describing the
comparison is that for
a FSA, connections
are planned and
resourced, whereas
for an LCC, “connections happen.”
 

Interline Connectivity

Interlining is rare. It requires significant additional costs
and systems investments.
Some interline connections are observed, but they tend to be
manual interlining from a very small carrier to the LCC, or require the  traveller to check-in again with the connecting
carrier. Interlining typically amounts
to simple selling of block space by LCCs without any
value enhancement by the LCC.
 

Interline principles are a core concept for FSAs. Substantial
investments are made in message
systems, baggage
systems, computer
reservation systems,
facilitation initiatives such as standardisation of
product and rules (such as revenue accounting and allocation
between
carriers), etc.

A key differentiation
between LCCs and FSAs.
 
The fact that a few
LCCs show interline
services with FSAs or
regional carriers
should not be
confused with a
strategy of adopting
interlinability as one of the key business
principles of FSAs.

Code Share

Some cases exist, but are relatively rare and not a major
focus of the carrier.
Due to the strategic focus on O/D traffic, LCCs generally do
not seek expanded
network scope  except
for routes they serve themselves.

A key strategic practice which allows the FSA to
sell a network of services larger than the route network
operated.

 

Secondary Airports

Some LCCs have used this as an important business strategy
(e.g., Southwest,
Ryanair), while others have not.

FSAs often serve
secondary markets in regions from their hubs, although not to
the same extent as the most extreme LCCs.

The use of secondary
airports is no longer a key differentiation
between LCCs and
FSAs.

Alliances

Not observed

A key strategic
development in the 1990s
to meet consumer
demand for service from
large network carriers.

A key differentiation
between LCCs and
FSAs.

Network Scope

Profitable routes are served.

A key strategic
dimension. FSAs’
strategy depends on
serving those passengers for whom network scope is a prime
demand
element.
 

A key differentiation
between LCCs and
FSAs.

Network Revenue Impacts

Routes almost uniformly evaluated based on revenues for
traffic on the
route segment.

Route evaluation will
often consider some
portion of revenues on connecting segments when assessing the
viability of a route.

A key differentiation
between LCCs and
FSAs.

Singe Aircraft Type

LCCs typically operate a single aircraft type. Some
indication that LCCs may adopt large regional jets, but
even so their fleets will be relatively simple.

Because network
coverage is a core
strategic objective, FSAs attempt to serve as many
markets as possible and connect them. This leads to the
adoption of multiple aircraft types, with each suited to different route lengths
and traffic densities.

The LCC chooses
operational simplicity
of a single aircraft type (or a small number of
types) to keep costs
down, and foregoes
service on routes for
which the chosen
aircraft is not
economical.
 
FSA trades off
network coverage and service frequency for
operating simplicity
and cost.

Service

Some LCCs focus only on bare bones services.
 
Increasingly LCCs are adding some service enhancements, such
as lounges, frequent flyer programs, etc. However, these are provided on a
fee
for use basis.

By strategic choice, as well as due to legacy strategies,
FSAs typically offer a range of value
added services.

LCCs add services
where revenues will cover their costs.
FSAs provide services as part of the overall service package.
 
Note that in seat video (being added by a number of LCCs) is
a
relatively low cost
service feature,
significantly less
expensive than meal
service.

Customer Service Orientation

Starting with Southwest, most LCCs have successfully
developed a strong customer service culture. Service is
given cheerfully.

Most FSAs have
challenges in the
attitudes of their
employees toward
customer service.

A key differentiation
between LCCs and
FSAs.

 

 

 

 

According to Forbes, the top 5 airlines as of 2018 are as
follows:

1.      Air New Zealand

2.     
Qantas

3.     
Singapore
Airlines

4.     
Virgin
Australia

5.     
Virgin Atlantic

 

In India, the top 5 major players in the airline industry are:

1.     
IndiGo

2.     
Jet Airways

3.     
Air India

4.     
SpiceJet

5.     
GoAir

Characteristics of comparison of IndiGo with its major competitors Air
India and Jet Airways:

Air India and Jet Airways are full service
carriers while IndiGo is a budget carrier that is making profit and by far
the best performer in the sector.

·      
Air India’s market share has been on a declining
course. From 20.2 percent in 2013-14, the airline’s market share shrank to 17.8
percent in 2015-16. according to DGCA data.

·      
Of the 10.38 crore passengers carried by Indian
carriers in 2015-16, Air India accounted for 1.85 crore, Jet Airways 2.33 core
and budget carrier IndiGo 3.31 crore.

·      
In terms of gross debt, Air India is suffering
badly. As of 2015-16, Air India’s debt stood at a Rs 51,000 crore. The number
is 5.5 times of Jet Airways debt of Rs 7,223 crore and 16 times that of
IndiGo’s Rs 3,201 crore

·      
In terms of the number of employees working in
these 3 players, Air India ahs reduced from 26,921 in 2011-12 to 12,654 in
2015-16. , Jet Airways has 14,576 staff and IndiGo 12,362.

·      
Air India’s fleet size is almost the same as Jet
Airways and IndiGo. While the fleet of Air India and Jet Airways has a mix of
various aircraft, IndiGo has just one type – A320. This leaves IndiGo in a
better position financially, according to experts because it does not need
various kinds of engineering and maintenance support.

·      
Another matrix where Air India is witnessing a
major improvement is employees per aircraft. From a high of 436 in 2010-11
(when Jet Airways’ corresponding figure stood at 185 and IndiGo’s just 94), the
number has declined to a decent 120 in 2015-16 for Air India. This is almost at
par with IndiGo.

 

 

 

 

 

 

 

 

References:

·      
https://www.forbes.com/sites/ericrosen/2017/11/03/the-2018-list-of-the-worlds-best-airlines-is-out/#5e7d4e885ed7

·      

Top 10 Best Airlines of India 2019

·      
https://centreforaviation.com/insights/analysis/capa-india-aviation-outlook-201718-surging-traffic-but-infrastructure-constraints-become-critical-314982

·      
http://www.thehindubusinessline.com/economy/logistics/india-clocks-strong-domestic-aviation-market-growth-in-sept/article9941700.ece

·      
http://businessworld.in/article/Indian-Aviation-Sector-Will-Continue-To-Thrive-In-Price-Conscious-Market/24-08-2017-124673/

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