SYMBIOSIS CENTER FO MANAGEMENT STUDIES, PUNE

STRATEGIC MANAGEMENT ASSIGNMENT ON:

ANALYSIS OF INDIGO AIRLINES

BY:
LAVANYA TADEPALLI-3213
KANCHAN SINGH- 3241
VIBHU MUPANNAAKSHANSH BAGRECHA-3197
ADITI BIRLA-3187
KAVISH JAINIntroduction

India is one of the fastest growing aviation industries in the world. Because of the introduction of
liberalization policy in the Indian aviation sector, the industry has witnessed a vast difference
with the entry of the privately owned full service airlines and low cost carriers. In 2006, the
private carriers accounted for around 75% share of the domestic aviation market. Besides, there
was significant increase in the number of domestic air travel passengers. Some of the factors that
have resulted in higher demand for air transport in India include the growing purchasing power
of middle class, low airfares offered by low cost carriers and the growth of the tourism industry
in India. In addition to the liberalization policy, the deregulation policy has also played a major
role to encourage private players in the aviation industry. Below graph shows the gradual growth
in the domestic air traffic: The growth in the aviation industry looked promising and hence
attracted many low cost carriers like Spice Jet, Go Air and IndiGo after the success of Air
Deccan in 2003.On one hand, the booming opportunities incited players to expand capacity but
on the other hand, rising fuel costs and taxation rates, increased the operational costs. Thus the
low-cost players found it difficult to maintain their commitment. In their urge to survive, they
were compelled to increase prices, add free refreshments and beverages on-board, etc. Some
players sought refuge in mergers, whereas some survived by modifying their business model.
However, amidst this aviation turmoil, IndiGo continued to fly high. In its endeavor to
consistently maintain low costs, IndiGo resorted to measures like outsourcing and having a
homogeneous fleet. These efforts helped IndiGo to offer its passengers low air fares. IndiGo is
the latest entrant as a low cost carrier in the aviation industry of India. It started its operations on
August 4, 2006. Inter Globe Enterprises, a renowned travel corporation, is the owner of IndiGo.
The IndiGo team uses all of these resources to design processes and rules that are safe and
simple, that make sense, and that cut waste and hassles, which in turn ensures a uniquely smooth,
seamless, precise, gimmick-free customer experience at fares that are always affordable. It
was awarded the title of
Best Domestic Low Cost Carrier
in India for 2008. The airline currently operates 120 daily flights with a fleet of nineteen brand
new Airbus A320 aircraft and flies to 17 destinations. IndiGo plans to serve approximately 30
Indian cities by 2010, with a fleet of approximately 40 A320s.
Below are the key factors of the business model of IndiGo airlines:
A single passenger class.
Single type of airplane to reduce training and service cost.
No frills such as free food/drinks, lounges.
Emphasis on direct sale of ticket through Internet to avoid fee and commissions paid to
travel agents.
Employees working in multiple roles.
Unbundling of ancillary charges to make the headline fare lower.

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External Analysis
Airline Industry Attractiveness
1. Foreign equity allowed:
Foreign equity up to 49 per cent and NRI (Non-Resident Indian) investment up to 100per cent is
permissible in domestic airlines without any government approval
2. Attraction of foreign shores:
After five years of domestic operations, many domestic airlines too will be entitled to fly
overseas by using unutilized bilateral entitlements to Indian carriers.
3. Rising income levels and demographic profile:
Demographically, India has the highest percentage of people in age group of 20-50among its
50 million strong middle class, with high earning potential.
4. Untapped potential of India's tourism:
Tourist arrivals in India are expected to grow exponentially, especially due to the open sky
policy between India and the SAARC countries and the increase in bilateral entitlements with
European countries, and US.
5. Glamour of the airlines:
No industry other than film-making industry is as glamorous as the airlines. Airline tycoons
from the last century, like J. R. D. Tata and Howard Hughes, and Sir Richard Branson and Dr.
Vijaya Mallya today, have been idolized.

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Porters Five Forces strategy for Airline Industry

Threat of New Entrants
Product differentiation:
In low cost carriers, there is not much differentiation in the basic service that is being provided
to the customers. Differentiation can only be achieved by Value Added Services. IndiGo provides
check-in kiosks, stair-free ramps, and Q-Busters. Hence this argument works in favor of
IndiGo.
Switching cost:
The switching cost is not high. Customers can easily choose other low cost carriers.
The switching cost of an airline company to other business/industry is high as the exit cost is
high.
In aviation industry the major entry barriers can be:
Government regulations:
1. The government's open sky policy has encouraged many overseas players to enter the
aviation market.
2. Aviation was primarily a government owned industry. Due to liberalization Indian
aviation industry is now dominated by privately owned full-service airlines and low-cost
carriers. Private airlines account for around 75 per cent share of the domestic aviation
market.
3.

Indian Civil Aviation Policy:

Private sector is allowed to operate scheduled and non-scheduled services

4.

Operator should be a citizen of India or a company or a body corporate which is

registered in India and whose principal base of business is in India

5. Chairman and at least two thirds of its Directors are Indian citizens
6. Foreign equity participation up to 49 percent and investment by Non- Resident Indians
(N.R.I), Overseas Corporate Bodies (OCBs) up to 100% is allowed. There presentation of
the foreign investing institution/entity on the Board of Directors of the company shall not
exceed one-third of the total.

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7. Foreign airlines are not permitted to pick up equity. Foreign financial institutions and
other entities who seek to hold equity in the domestic air transport sector shall not have
foreign airlines as their shareholders.
8. As regards safety and security arrangements, the operators must ensure compliance with
relevant regulatory requirements stipulated respectively by the Director General of Civil
Aviation (DGCA) and the Bureau of Civil Aviation Security (BCAS).
9. For green field airports, foreign equity up to 100 percent is allowed through automatic
approvals. For upgrading present airports, foreign equity up to 74 percent is allowed
through automatic approvals and 100 percent through special permission (from FIPB).
Setup costs:
Nowadays, venture capital of $10 million or less is enough to launch an airline.
In order to overcome the shortfall of aircrafts during the peak seasons, airlines can utilize an
ACMI lease agreement for the extra aircraft. If the airline has many aircrafts, either owned or
leased, then they can offer their surplus aircrafts in their low season to another airline that is
facing peak season.
An airline company will bear the cost of purchasing an aircraft if it wants to start or expand its
fleet, leasing allows the cost to be spread across several years. At the lease term end, the lease
can be renewed or aircraft can be returned, to be replaced with more modern aircraft.
Fuel prices:
Domestic ATF prices have increased by over 160 per cent from the beginning of 2005 till last
year and by over 80 per cent from a year-ago levels. In India, oil companies do not import ATF
directly; instead they refine it from imported crude oil. With rising crude oil prices, imports are
becoming expensive day by day and at the same time, the government is unable to pass on the
full impact of this rise to the consumer. As a result, the state owned oil marketing companies
(almost 95 per cent of the market is with state owned firms) are forced to sell diesel, petrol,
kerosene and LPG at way below cost, a cost they are trying to somewhat make up by raising the
price of ATF, which is under their control. As a result prices of ATF in India are much higher than
some of the other Asian countries.
Resource:
The aviation industry in India suffers a shortfall of pilots. The reasons are:1.
The aspirants can receive Commercial Pilot License (CPL) only if they undertake a training
abroad

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The reason being that in India, there is a lack of dedicated flight Instructors, decade-old aircrafts
and poor quality training offered at a price much higher than what is offered by flying schools in
USA, Canada and Australia.3.
Indian institutes provide training with the help of their training partners in the foreign countries
like U.S.A, U.K etc. Private airlines hire pilots; get expatriates or retired personnel from the Air
Force or PSU airlines in senior management positions. Airlines can contract employees such as
cabin crew, ticketing and check-in staff members. In airline sector, finding appropriate laborforce is very costly. Moreover, due to the liberalization of policies by government, foreign and
private players often poach work-force of competitors which leads to talent-drain and thus losses.

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Bargaining Power of Suppliers

Any airlines in general face a duopoly of two major suppliers of aircrafts i.e. Airbus and
Boeing. There are other suppliers like Dauphin, Dronier , Bell, ATR-42 but do not meet the
requirements to serve the low cost commercial aircraft carriers, particularly IndiGo airlines. Fleet
Forecast for the India-Region 2006-2011 shows that there will be approx. 85% growth in the
order rate of air carriers.
[Exhibit 2]
Thus, suppliers are few and thus in better position to bargain as they always finds customers for
their aircrafts.
IndiGo fleet comprise of Airbus-A320 and the switching cost is high due to the limited number
of suppliers.
Due to shortage of commercial aircraft pilots in India the supply of pilots is concentrated, hence
increasing their power.
There are only four suppliers for ATF (Aviation Turbine Fuel); IOC, Hindustan Petroleum
Corporation, Bharat Petroleum and ONGC and since their number is limited, they possess more
power.
The proof of evidence for high power enjoyed by ATF suppliers lies in the fact that the ATF
prices constitute 35-40% of the costs in India compared to 20-25% globally.
The brand value of suppliers is high due to their less number and results in higher bargaining
power for them.
The airlines also face a threat of forward integration since the suppliers are in close contact and
are familiar with the knowhow of the aviation industry.
The suppliers are few and thus in better position to bargain as they always finds customers for
their aircrafts.

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Bargaining Power of Buyers

Buyers in airlines industry are large in number and highly fragmented thus lowering their
power .With the growing Indian economy and increasing low cost carriers, the buyers have
increased and so have the growth opportunities.
The switching cost is minimal since there are multiple alternatives available. It is not difficult to
move from one airline to another or to switch to a substitute.
Furthermore the players in the particular strategic group do have minimalistic differentiating
points.
Backward integration from the buyers end is very difficult and next to impossible.

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Competitive Rivalry
The aviation industry is a highly competitive industry because of which it is difficult to earn high
returns in this sector. Below are the major reasons for the high competition in the low-cost carrier
airlines:

Very little scope for differentiation between competitors products and services
Aviation is a mature industry with very little growth. The only way to grow is by stealing away
customers from competitors
Suppliers of aircrafts are the same, i.e., Boeing and Airbus. Hence suppliers bargaining power is
high.
Switching cost of customers is high for low cost carriers, i.e., there is no brand loyalty. Closest
competitor of IndiGo is SpiceJet followed by GoAir.

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Below is brief description about each of them:

SpiceJet
Is a low-cost airline based in New Delhi, India. Spice Jets mission is to become Indias preferred
low cost airline, delivering the lowest air fares with the highest consumer value, to price
sensitive consumers. Its vision is to ensure that flying is no longer confined to business travelers,
but is affordable for everyone and thus the tagline
Flying for everyone
Spice Jet airways began its operations in May 2005. SpiceJet has chosen a single aircraft type
fleet which allows for greater efficiency in maintenance, and supports the low-cost structure. It
has a fleet of 6 Boeing 737-800 in single class configuration with 189 seats. SpiceJet's new
generation fleet of aircraft is backed by cutting edge technology and infrastructure to ensure the
highest standards in operating efficiency. Spice Jet currently flies to 11 destinations.
GoAir Airlines
Owned by Wadia Group, is a low-cost budget airline based in Mumbai, India. It has been
showcased as The People's Airline.
GoAir is looking at commoditizing air travel' by offering airline seats at marginally higher train
prices to all cities in India. The Airlines theme line is Experience the Difference and its objective
is to offer its passengers a quality consistent, quality assured and time efficient product through
affordable fares. GoAir's business model has been created on the 'punctuality, affordability and
convenience' model. Go Air operates four A320 aircraft with a single class, 180-seat configuration,
and plans to expand its fleet to 33 aircraft in three years.
Thus, we can summarize from above data that all the three players are trying to follow cost
leadership strategy by bringing down the ticket rates to the minimum possible value. However, it
is clear that, to sustain in this cutthroat competition, each player will have to come up with
different strategies to improve the non price factors

of

Availability
Substitutes
The
substitute for
low cost

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airline company is the railways. But this substitute is not very powerful due to the following
reasons:
1. Customers use airline transport as it is convenient and saves travelling time. So trains
cannot work as a substitute to save time.
2. Secondly, many customers use airlines as a status symbol. So again, trains cannot
substitute for prestige. So if we consider IndiGo airlines, the direct substitutes are the
other low cost carriers like SpiceJet and GoAir. So in this case, threat of substitutes is
high as the switching cost between low cost carriers is low.

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