Case on Air Deccan
Case Study Strategic management Evaluation II AIR DECCAN: REVOLUTIONISING THE INDIAN SKIES Air Travel in India For decades, air travel in India was meant for the most elite and powerful in society. An overwhelming majority of travellers who could not afford the prohibitive air travel fares, preferred to journey on trains and buses. The revolutionizing effects of liberalization swept India with dynamic changes in the aviation sector.
From being a service that few could afford, the sector has now graduated to being a fiercely competitive industry with the presence of a number of private and public airlines and several consumer-oriented offerings. In ten years of competition in the aviation sector, private airlines have changed the rules of the game, and they now account for more than 60 % of the domestic aviation market. More and more middle class families in India now prefer air travel to the more traditional travel by train. In 2003, 10 million Indians travelled by air domestically.
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In 2004, 25 million took to the skies within India and 6 million Indians travelled abroad. The Centre for Asia Pacific Aviation estimates that the domestic Indian market will add 5 million passengers every year for the next five years, growing to 45 million passengers by 2010. Today, the relationship of domestic to international travel stands at 40:60 whereas in 1994 it stood at only 25:75. But taking into account a growing middle class with increased and increasing purchasing power, there are 200-210 million potential spenders. The Indian population grows at a rate of 8% per year.
Around 100 million travellers every day on state-owned Indian Railways, If air travel bites into even a small percentage of this huge pie, that’s still clearly a tremendous growth opportunity. The entry of budget airlines like Air Deccan, the introduction of cheap airfares by other domestic carriers, combined with rising incomes and consumption of the middle class as also their growing aspirations, have created this new paradigm: Air travel is no longer for the elite. Air Travel Market The new entrants have caused a shift in the market share for the old hands.
The three legacy airlines, Jet Airways, state-owned Indian and Air Sahara, saw their market share slipping in first quarter of this year. Jet Airways, still the leader, found its share of market volumes slipping with 34. 9%. Indian at 23. 9% and Air Deccan at 10% followed suit. Low-cost airlines are certainly giving a tough time to full service carriers whose market share has dipped, as has their revenue. Fares have been slashed drastically and both Jet Airways and Indian are wooing the consumers with special schemes and promotions.
Several new entrants such as Air Deccan, SpiceJet, GoAir, Kingfisher and Paramount have begun to dot Indian airspace, garnering a market share of more than 31% in the first quarter of 2006. The leader among this brat-pack is clearly Air Deccan – the airline has doubled its market share to 15. 2 per cent. Kingfisher and SpiceJet have captured a market share of 8. 3 per cent and 6 per cent respectively. Coimbatore-based Paramount Airways has publicly confirmed garnering 0. 3% of the market. Jeh Wadia’s GoAir is also going great guns by cornering 1. 6% of the air traffic in a short time span.
These airlines took to the skies after the first quarter of last year. All the airlines have seen an increase in the number of passengers carried in the first quarter. With all the start-ups planning significant increases in capacity this year — Kingfisher (fleet may go up to 20 planes), Deccan (38 planes), SpiceJet (12/14 planes), Go (7/9 planes) and Paramount (10 planes) — the market is set to sizzle. The market is gearing up for an adventurous ride of price wars as six more low-budget airlines waiting in the wings – Jagson Airlines, King Air, Mega Airways, Indus Air and Megapode Airline.
IndiGo has made its entry as well, with ambitious plans to induct 100 aircraft into its fleet. According to analysts, airfares will continue to nosedive, as nearly 200 new aircraft will be added to the existing 250 aircraft in the country. All this translates to further downward revision of fares and packaged offers for passengers. Lessons The case is replete with illustrations of how Captain Gopinath crafted the company from scratch. He went on a ‘boot strapping’ mode, which is the hallmark of a successful entrepreneur. The constancy of purpose, focus and humility are evident.
His ability to sense opportunities from chance encounters (such as a visit to the USA or the Southeast Asian countries) are out of the ordinary experience. These and many other qualities are a ‘must have’ list of qualities of a successful entrepreneur. Anyone aspiring to succeed in an entrepreneurial venture will do well to emulate these qualities, among others. Rise of Air Deccan “It hit me like a ton of bricks. This country has a population of a billion, but only 15 million air passengers. May be the time is right. If one billion people can fly, and we get a miniscule percent of the market, imagine how big that will be?
It’s not an impossible dream. ” – Captain Gopinath, in The Hindu, Sunday, August 15, 2004 Air Deccan, India’s first Low-cost Airline (LCA), started off with more of a whimper than a bang in September 2003 with an aborted maiden flight from Hyderabad that didn’t quite make it off the ground when a fire broke out in one of its engines. Adding to the embarrassment was the presence of the then Union Minister of State for Civil Aviation, Pratap Singh Rudy and other senior Indian politicians on the flight. The press had a field day criticizing the ‘maestro behind the mayhem ‘Captain Gopinath, the Managing Director of Air Deccan.
There were many prophesies of doom by competing airlines and industry analysts who were convinced that the bad publicity with which the airline took off would drive away customers. Captain Gopinath, however, remained unfazed and calmly went about doing what he did best succeeding at the task that he had set out to do. Making a shaky start with just two ATR turbo-prop aircraft in September 2003, Air Deccan now operates 75 flights a day to around 32 destinations in India and has increased its fleet to three Airbus 320’s and seven ATR 42’s. This flock of aircraft is constantly growing.
As of March 2004, Air Deccan has recorded annual revenues of $120 mn (Rs. 5520 mn) with a passenger load as high as 83% across sectors and some routes like Bangalore-Hyderabad and Bangalore-Goa, recording 100% loads (Exhibit 1 and 2). In December 2004 Captain Gopinath cut a deal with Airbus, the world’s largest manufacturer of civil aircraft, for the purchase of 30 A320 aircraft valued at over $1. 4 bn. The delivery of these new aircraft will commence in 2007. While the airbus will operate on trunk routes, the smaller airports will be connected with ATR’s.
The company has signed a deal with ATR for supply of 30 aircraft over the next few years, of which half will be on lease and the rest will be purchased. A distinctive strength of Air Deccan vis-a-vis any of the big three airlines in the country (Indian Airlines, Jet Airways and Sahara) is its ability to penetrate into the small towns of India. This provides the company almost an exclusive access , to 75% of the population of the country that lives in small towns and rural areas. Air Deccan has been instrumental in getting the Government to open up many of these small town airports, some of which had fallen into disuse over the years.
In contrast to the swanky airports of the big cities Such as Mumbai and Chennai, these more modest cousins need very little investment on the part of the government to recommission them and the ‘airport terminal’ is often no more than a tin shed or a thatched hut. But according to Captain Gopinath, ‘What the hell, they serve their purpose’. This obsessive focus o costs and functionality is perhaps what best epitomizes the philosophy of the main behind Air Deccan. The Low Cost Business Model: A popular mantra Air Deccan triggered the race to the bottom in the low cost sector.
Their model forced the industry to move from having simple economy, business and first class fares, to multiple slab tariffs such as apex fares, internet auctions, special discounts, bulk purchases and last day fares. Some of the tariffs offered are so low that they have brought airline fares neck-to-neck with upper class railway fares. This low cost model is two-fold: offering connectivity between smaller cities and major metros and making air travel a feasible option to a new class of passengers. The features and benefits of the model are listed in the table below: Features| Benefits|
Ticketless travel & Online ticket sales| Reduction of huge costs of printing| No international offices| and processing tickets. | Use of secondary city airports| Lower landing and parking costs in| No frequent flyer points| secondary city airports| No free food & beverages/in-flight magazines| High seat capacity due to nil storage of food| No club lounges| Minimal training (of pilots) and| Same aircraft types | maintenance (of spares for different types of aircrafts) costs. | Separate ticket for each sector/flight| | No premium class| | Short haul flights| Quicker turnaround and higher aircraft utilization |
Challenges and constraints still persist: * India is a very cost conscious society, hence market is very sensitive to air fares * Internet based solutions limited-Bandwidth restrictions and low internet penetration * Changing needs of the business traveller puts more pressure on the travel agents to offer wide variety * Travel agents still the first choice for air bookings * While aviation is centrally managed, the regional structure of India’s government and regulations, combined with the often regional management of airline companies, has created a fragmented market for corporate travel.
STRATEGY The challenges that the company has to face are now only beginning. In the initial stages of the company, many of the established players (Indian Airlines, Jet Airways and Sahara) would have trivialized the company and not expected it to reach the level it has reached now . Suddenly, the company has appeared as a big dot on the radar screen of these well-established players. The existing paradigm is that running an airline requires large funding, something that Captain Gopinath lacked. Hence, the existing players would have concluded that this venture was bound to fail.
However, there was a lot of entrepreneurial creativity manifested by Captain Gopi that helped him make his dream a reality, and today Air Deccan is a force to reckon with. Besides, many other ‘me too’ low cost airlines are already on the anvil. The Government and the realities are also things to reckon with. Participant teams may identify other challenges as well. How Captain Gopi and his team will deal with all these identified challenges will make observation interesting. Strategy as per the porter’s force model:
Kingfisher Red Oct. 17–MUMBAI, India — Kingfisher airlines has signed up with Air-Deccan to buy out the Bangalore-based low-cost airline’s extra ASKMs (available seat kilometres) on category 2, 2A and 3 routes. The Vijay Mallya promoted airline will buy about 800,000 ASKMs for the months of October and November, which will enable it to continue its expansion on the metro routes. The DGCA guidelines require airlines flying on the primary routes to fly a certain percentage of their total flights on other, less popular routes.
Growth: Indian Travel is on a roll…here’s why In India, travel and tourism activity is expected to grow by 8. 0% per annum in real terms between 2007 and 2016. As per World Travel and Tourism Council (WTTC), India will emerge as the second-fastest growing tourism economy globally between 2005 and 2014, second only to by China. Successful promotions such as the Tourism Ministry’s hit “Incredible India” multimedia campaign and the budget air travel boom are reckoned to have contributed to the tourism gold rush. Summary:
Indian Skies are experiencing a new dawn: * Rising income and consumer confidence in key markets-personal travel demand on an increase * Travel liberalization gathering pace * Leisure travel increasingly more affordable * Low Cost Carriers are reshaping air travel, leading to regional liberalization * Branded hotels with air routes have discovered India in exotic places like Goa and the North East * Airport privatisation of Mumbai and Delhi progress and confidence develops in creating tourism infrastructure