Nature Of The Airline Industry Tourism Essay

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This report identifies the business environment and draws comparisons of the airline industry pertaining to countries, India and China. An attempt has been made to put forth the analyses of the broad macro-environment factors of the industry in terms of Political, Economic, Social, Technological, Environmental and Legal factors (PESTEL).

Apart from the above, the Five Forces analysis has been carried in order to assess the attractiveness of the industries and understand their potential for change.

The Airline industry with relevance to this report comprises of air transportation which includes both scheduled and chartered flights but excludes air freight transportation.

The Focus of this report is to provide an outline of the present environmental conditions in terms of the nature of the airline industry, its structure, outlining the strategies employed by the players in the airline industry to sustain in tough economic environment and make an attempt to forecast the future environmental conditions. Our prime justification to compare the industry from India and China lies in our belief that the two countries would and probably are transforming the global economy in the 21st Century. India and China have achieved growth which fared twice as much as the global economy growth. A huge and demanding consumer class is also pushing the economy northwards and it is essential for the countries to meet the aspirations of a demanding economy.

Overview of the Global Airlines Industry

For the past two years, 2008 and 2009, Airline Industry was negatively affected by the economic downturn and the oil price hike. Now that the global economy is showing signs of recovery, demand for air travel is increasing from the previous years’ depressed levels. Combating the recessionary effect has not been easy as various measures like cutting costs; slashing capacity and increasing load factor were adopted by the airline companies globally.

Global Airline industry reported revenues of USD 380.5 Billion in 2009, achieving a Compounded Annual Growth Rate (CAGR) of 2.5% for the period 2005-2009 (Datamonitor, Global Airlines Industry). The total number of passengers in the Airline Industry for the year numbered 2002.7 million and the numbers are expected to grow at a CAGR of 5% to 2551.5 million passengers by end of 2014. Strong rivalry and supplier power characterizes the global airlines industry. Even though there are large number of buyers, Product differentiation is minimal and involves negligible switching costs. It also leaves the carrier vulnerable to reduction in demand in the industry which is sensitive to the wider economy. Supplier power in the global airlines industry is strong as reliability and safety of the flights are critical. Entrances to the airlines industry are restricted due to economic barriers. The up-front costs are huge and substantial financial backing is required to cover the initial costs and expenses henceforth from there.

Airline companies today are forming alliance with other companies with the intention to achieve diversified network of operations, scale economies in terms of purchase of fuel, and even sharing of aircraft to reduce the power of the supplier. Code sharing has risen as a phenomenon catching up in the Asia Pacific region of the world where companies are forming alliances with other carriers around the world. Consolidation is a major opportunity for the players in the airline industry to increase their revenues, cost savings and enhance competitive position.

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The global airlines industry is projected to benefit the service providers as there is a new customer base in the present arising from the emerging economies which will fuel the growth of the industry and would see emergence of new players giving more competition to the existing ones. With continued and sustainable demand for air travel, Airline companies would see opportunities which would be coherent with the rising aspirations of people.

The Indian Aviation Story

In the year 2003, the whole world celebrated the centenary year of the powered flight. Indians had to wait for more than a decade to see the first aircraft airborne from the Indian soil. In the early December of the year 1910, a group of people from Belgium and England came to India with several airplanes. The idea was to showcase the marvel of a flying object and to explore business opportunities from it. Planes were showcased after assembling its parts. The groups were able to have a successful trip as their products were well received and were brought in by the royalties in India. It was December 15th 1932 when the first flight in India taken off under the name of “Tata Aviation”, which later went on to become “Air India”. Tata Aviation was started by JRD Tata after much protracted negotiations with the government of India. Eventually, during 1953, an act of nationalizing all the airlines was passed in the parliament and “Tata Aviation” went on to become Air India which then served the international traffic.

The Indian Airline industry has come a long way today. In the year 2009, Indian Airline industry grew by 9% to reach the value of USD 7 billion. It grew by 35.5% to reach a volume of 73.8 million passengers. By 2014, it is forecasted to have a value of USD 17.9 billion and volumes of 156.2 million passengers. The Indian Airline industry experience growth even after seeing a period of decline in 2008. While the growth rate of Indian Airlines industry was far better than that of China, The airline industry in India could achieve merely one thirds of revenue when compared to the Chinese Airline industry. Like the global airlines industry, Indian airlines industry is characterized by strong rivalry and supply power, the buyers being leisure travelers and business travelers while fuel suppliers, aircraft manufacturers and skilled employees as the key suppliers. High Price sensitivity due to product differentiation being minimal strengthens the power of the buyers. Supplier power is strong as airlines enter into contracts with the suppliers and the industry lacks alternatives or substitutes. Price sensitivity is high and availability of alternative strengthens the buyer power. The entrance into the market poses economic barriers as there needs to be solid financial back up to enter into this industry. Distributions and establishing networks and booking presence regionally are of critical importance for the success of a company.

Rivalry in the Indian Airline industry is strong and has increased since the presence of the low cost carriers. Costs are the determining factor for airlines as the Indian consumer today is more price conscious than ever.

Over the past two decades, the Indian Airline industry has experienced both stagnation and unprecedented growth. The potential for growth in the Indian Airline industry remains strong as with massive population with growing incomes only adds to the fact that the Airline Industry has a long way to go. Currently, only 2% of the Indian population prefers to fly by air. Between the year 2003 and 2006, Indian Airlines industry’s open sky policy opened the floodgates for the arrival of new start up carriers which changed the face of the industry beyond recognition. Liberalization in terms of allowing the domestic carriers to go international and allowing the international carriers greater access to the domestic market spurned the industry to achieve double digit growth. However, the increase in traffic increased the top line of the players in the industry, but due to low margins, lower yields, inadequate airport infrastructure and lack of trained pilots and engineers saw many of the companies bleeding with negative bottom lines. As rising oil prices in the year 2008 hurt airlines all over the world, Indian tax systems made the matters even worse as it added 60% of total costs. Carriers were left with no other alternative but to pass on the burden to the customers who in turn chose alternative forms of transportation leading to 10-12 percent drop in traffic.

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A more positive environment is starting to emerge as the Centre for Asia pacific Aviation (CAPA) report suggests. According to CAPA, the airline industry is India is on the path of recovery as figures from the mid year 2010 have suggested. Better operating environment, with gradual upgrade of airspace and ground access development, would only help carriers achieve faster turnaround and higher aircraft utilization. The potential lies in the Indian Airlines Industry with CAPA predicting the industry having 1000 planes from 400 in the present and 4 times increase in traffic from the current trends. The performance of the industry is forecasted to accelerate and drive the industry to create positive value for the service providers as well as the customers.

Environmental Analysis

An assessment of external macro environment can be carried out by analyzing the Political, Economic, Social & Technological factors. These factors are beyond a company or an industry’s controls and sometimes can pose as threats. Following are the PEST analysis for the Indian Airline Industry.

Political Factor

In India, Political interference has effects of all the major industries. The airline industry in general is very susceptible to the political environment of a country. A country with unstable political environment can cause doubts in the minds of the traveler to travel to that particular country. India in particular has had to go through a lot in the recent years with mounting tensions with its western neighbours. The 26/11 terrorist attack on the financial capital of India has a profound impact on the airlines industry. Another example of political factor causing problems for the Airlines Industry in India lies in the corrupt state of affairs that lies in the administration. Bribes have to be paid to obtain licenses and permits. Even recently, one of the most respectable businessmen in the world, Mr. Ratan Tata complained about the corruption problem which discouraged him to start his own Airline Company. It was alleged that the civil aviation minister had asked Mr. Tata a sum of INR 1.5 million as a bribe to give permit to start air services.

State owned airline companies suffer the most because of this problem as due to political pressure, the government companies have to give special consideration with respect to route selection, offering free seats to the ministers etc. The state owned airline companies cannot stand up to the archaic laws, regulations and trade unions which in past have held the state owned enterprises on ransom.

Currently, In terms of Investment FDI of 100% is allowed in the Airline Sector under the automatic route for Greenfield projects.

Economic Factors

Airline Industry is greatly impacted by the business cycles. It is considered a luxury to fly during the recession which then leads to cuts in spending eventually leading to reduction in the air fares. During prosperity, People spend more and that leads to increase in air fares. Recent global recession has had a deep impact on all the major industries in the world. Aviation Industry too had its own share of set backs. Corporate travelers were cutting back on travel which would save costs and leisure travelers had deferred their travel plans. Even a company like Citibank in India had to cut down its costs to increase its profits for which even the top managers were allowed only to travel by train.

The loss of income due to economic factors forced the airline companies to execute the corporate restructuring program which resulted in several employees being laid off. Turnaround time, maintenance costs, jet fuels costs, staff costs, benefits costs etc. are some of the expenses which the airline companies have to take into consideration while pricing their air tickets. Anything below these costs the company losses which makes the company unsustainable in the industry/

Social Factors

India, being a diverse country has people coming from different parts of the country with different culture, language, food and preferences. Airline industry need to understand this along with the fact that there are people with varied income group and their needs should be served accordingly. India is a land of extremes with people coming from different walks of life. For example, a person subscribing to Jain religion needs to be served a special Jain food and it could be kept in mind that the person sitting next to him can be a vegetarian. One of the finer examples can be drawn from South West Airlines which is a low frills airlines which has created a niche for itself in that segment. It has also successfully augmented its marketing mix strategy which has done wonders for it.

Technological Factors

Internet has opened avenues for the airlines industry in a way which could never have been comprehended. For Example, Jet Lite has introduced a service on its website where it auctions few unreserved seat on the flight one week prior to the departure date.

Almost all airline companies offer their services through the internet. Right from booking the ticket to choosing the seat where one would prefer to sit on the flight. Apart from this, choosing the food from the menu can also be selected through the internet.

Another good example of the impact of technology would be that of the Airport Authority of India, which with the help of technology was able to lease out its obsolete and unused hangers to international airlines thereby making huge profits out of the same.

Technology development helps reduce costs, saves time and enhances service performance which is critical in a competitive industry like the Airlines industry.

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Porter’s Five Forces

Michael Porter introduced a framework that models a sector or an industry as being influenced by five forces.

This analysis has five-core element. These are

1. Bargaining Power of Suppliers

2. New Entrants

3. Threat of Substitutes

4. Competitive Rivalry

5. Bargaining Power of Customers

Bargaining Power of Suppliers

Suppliers for the Indian Airlines industry like other locations around the world as far as flight manufacturers are concerned are very limited. Globally, Airbus and Boeing are the only suppliers of aircraft which suit the industry requirements. There is limited bargaining opportunity for the Airline Industry in India hence is a threat for the industry.

New Entrants

It was difficult for a new player to enter the Airline Industry in India. There were lots of barriers to entry. Capital Investment to enter this industry is very high but banks have increased the possibilities to avail short term or long term loans with less interest rate thereby increasing the threat of new entrants in the present markets.

Threat of Substitutes

International routes do not have any threats as there is hardly any other form of feasible transportation available. However, Domestic travel can be competitive as high airfares encourage customers to look for alternatives ways to get to their destinations. Rail & Road are probably the only feasible option available as they are only economical for shorter distances. A customer would prefer to travel long distance via road or rail only if the time factor allows the customer to take the alternative options.

Competition Rivalry

Rivalry within the industry is pretty intense at the moment as all the airlines are vying for attract customer by offering lower fares, membership privileges, free meals on board and other additional benefits to grab the customer from the competitors.

Bargaining Power of Customer

Indian travelers are highly price sensitive. With availability of many airlines to choose, cheaper price difference might just switch the customer to choose from one airline to another. Customers have some chance of bargaining in the domestic market as competition is intense in it whereas International routes gives less operations to bargain.

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