NARSEE MONJEE INSTITUTE OF MANAGEMENT

STUDIES, BENGALURU
20th August 2018

Report on

ECONOMIC ANALYSIS OF
INTERGLOBE AVIATION
(INDIGO)
&
SPICEJET

Under the Guidance & assistance of

Dr. Akshay Dhume

SUBMITTED BY -
Disha Yagnik (A022)
Satyashree Rath (A053)
Shilpi Tandon (A056)
Vaani Sharma (A066)
 INTRODUCTION

INDIAN AVIATION INDUSTRY:

Indian aviation sector is growing at an accelerating rate and the country is getting the benefits of
its improved connectivity. Since its inception the sector has seen many changes. The civil aviation
industry in India has emerged as one of the fastest growing industries in the country during the
last three years. India is currently considered the third largest domestic civil aviation market in
the world. India is expected to become the world’s largest domestic civil aviation market in the
next 10 to 15 year. In India, low cost is critical to the airline industry which is characterised by
highly price-sensitive consumers. On one hand, increase in input costs such as fuel prices and
aircraft landing and en-route charges have added pressure to the industry’s profitability. While
on the other hand, demand for air travel continues to be robust at low fares in the domestic
market, thereby absorbing the rapid capacity expansion and stimulating higher air travel
demand. Amongst the macro-economic factors such as India’s relatively low per capita income
and low domestic air penetration levels, low cost carriers or LCCs (Low Cost Carriers) continue to
be one of the key drivers for traffic growth by offering affordable flying options to India’s rapidly
growing air travel market.

INTERGLOBE AVIATION:

Interglobe Aviation is the operator of India's largest passenger airline with a market share of
39.9% as of February 2018. The company operates its flights under the IndiGo brand. IndiGo
primarily operates in India's domestic air travel market as a low-cost carrier. It has a fleet of 160
aircraft including 32 new generation A320 NEOs and 5 ATRs. IndiGo currently operates flights
connecting 50 destinations - 42 domestic and 8 internationals. It was set up in early 2006 by Rahul
Bhatia of InterGlobe Enterprises and Rakesh Gangwal, a United States-based NRI. IndiGo began
its operations on 4th August 2006 with a service from New Delhi to Imphal via Guwahati.

To keep fares always affordable, Indio has designed a clean, comfortable and reliable airline
without costly frills that put upward pressure on fares. Below are the key factors of the business
model of Indigo airline:

 A single passenger class

 Single type of aeroplane to reduce training and service cost.
 No frills such as free food/drinks or lounges.
 Emphasis on direct sale of tickets through internet to avoid fee and commissions paid to
travel agents.
 Employees working in multiple roles.

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SPICEJET:

Spicejet is a low-cost airline based in New Delhi, India. Their marketing theme "offering low
'everyday spicy fares' and great guest services to price conscious travellers". SpiceJet airlines is
promoted by Ajay Singh, the Kansangra family and Sanjay Malhotra. 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. It has maintenance support and state of the art technology from world leaders like
KLM, Star Navigation, Russel Adams and Tech Log.

SpiceJet is focused on twin pillars of cost control and growing its ancillary revenue. It follows the
classical ―low-cost airline model of very competitive fares, a single type of aircraft and a single
class of service, point-to-point operations, quick turnarounds, no frills, and internet-based
ticketing. SpiceJet has also focused on the curved winglet design which reduces noise and
improves fuel economy by 2-3 per cent. The company has also expanded inner aircraft room by
reducing unnecessary storage areas and allotting them to passenger seats

MARKET STRUCTURE – AVIATION INDUSTRY

The aviation industry in India, especially with regard to passenger airlines, follows a strictly
oligopoly-type structure with the following characteristics:

 An industry dominated by a small number of large firms.

 Firms sell either identical or differentiated products (the only differentiation here being
in service quality and frills offered).
 The industry has significant barriers to entry (which holds true both with respect to
regulations and huge capital investment required).
 Strategy dependent on rival firm’s behaviour.

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DIFFERENTIATED OLIGOPOLY:

Each seller in an imperfectly competitive market faces a negatively sloped demand curve for his
product, permitting him some control of the price of his product. The aviation industry is a
differentiated oligopoly which produces at a profit maximizing level of output where marginal
cost equals marginal revenue. The firm finds the price it will charge customers at the profit
maximizing level of output (Qm) from the demand curve, and sets price to Pm. The firm is earning
economic profits since price exceeds average total cost at the profit maximizing level of output.

PRICING MECHANISM

Price and quantity are determined by the interaction of demand and supply in the market.
However, given the large number of buyers, firms can decide prices at which they will sell tickets.
In fact, in the airlines sector, firms go in for third degree price discrimination and segment the
market, charging a higher price to the market with a relatively inelastic demand (such as fares
between business and economy class travellers, or between emergency travel and leisure travel
by providing apex fares). The low-cost airlines follow this different pricing strategy. Customers
booking early with carriers such as Indigo will normally find much lower prices if they are
prepared to commit themselves to a flight by booking early, on the justification that consumer’s
demand for a particular flight becomes more inelastic the nearer to the time of the service. In
airline industry, the marginal cost of flying an additional customer is very low. Thus, Indigo tries
to maximize its revenue by selling the maximum number of tickets possible. It earns its revenues
not only from the sale of tickets but also from the sale of food items and any other service for
which it charges over and above the price of the ticket.

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Spicejet marked its entry in service with Rs. 99 fares for the first 99 days, with 9000 seats available
at this rate. This deal was followed by a Rs. 999 promotional schemes on select routes. This deal
was followed by a Rs. 999 promotional schemes on select routes.

Airline Industry practices the following strategies while pricing its services and meeting with
competition.

i. Implements peak-load pricing.

ii. Implements third-degree price discrimination. That is, fare restrictions screen customers
and segment them by their sensitivity to price and potentially by their demand
uncertainty.
iii. Implements an inventory control system for coping with uncertain demand.

ELASTICITY OF DEMAND:

The airline industry is an extremely unstable industry because it is highly dependent upon current
market conditions. Events such as inflation, terrorist attacks, and the price of oil have greatly
influenced the demand for airline tickets throughout the years. Competition consistently affects
the price of airline tickets because it gives the customer other options. Substitutes that are
existence is traveling by train, car, or avoiding travel whenever possible. Customers have resorted
to all named substitutes during turbulent times in our economy. The elasticity of demand is
greatly affected by the customer's purpose for travel. Airline customers typically fly for business
or pleasure. With the wave of technology, a large percentage of business travel has been
eliminated to conserve spending.

Price elasticity of demand measures the responsiveness of consumers to a change in the price
of a particular good.

Price elasticity of demand = % change in Quantity Demand (Air India Tickets)

% change in Price (Air India Tickets)

The number of substitutes an airline has (for a particular sector) can be one of the main
determinants of how elastic or inelastic demand will be for the airline tickets. If an airline has a
number of substitutes, for a particular sector, consumers are likely to be more responsive to the
changes in the price of tickets, whereas an airline that has few or no substitutes, consumers are
likely to be less responsive to the changes in prices of the tickets.

Airline industry observers have generally assumed that the demand for airline travel is price
elastic. Indeed, one of the primary benefits of the airline industry being deregulated is the fall in
fare level and the increased passenger traffic.

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REGRESSION ANALYSIS OF INTERGLOBE AND SPICEJET
The pertinent oil prices in the country is a major factor affecting sales of the Airlines industry.
The regression analysis, using oil price as the independent variable(X) and Sales as the dependent
variable(Y) gives a relationship between the two.

INDIGO:

INDIGO
B-HAT 10,61,703.05
A-HAT 48,44,30,21,537.55
REGRESSION LINE Y=48443021537.55+1061703.05X
R^2 0.04

This means that 4% of the total variation in the Indigo's sales is

accounted for by the variation in the Aviation Turbine Fuel (ATF).

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SPICEJET:

SPICEJET
B-HAT 8,22,084.86
A-HAT 2,07,78,52,579.30
REGRESSION LINE Y=2077852579.30+82208.49X
R^2 0.33

This means that 33% of the total variation in the Spicejet's sales is
accounted for by the variation in the Aviation Turbine Fuel (ATF)

DEMAND FORECASTING
The linear trend projection method is used to forecast future sales of the airlines and as the
airlines face extreme seasonal variations, we also take that into account.

INDIGO
The forecasted quarter-wise sales for indigo for 2018 and 2019 are as follows:

Year Forecasted Sales (in Cr.)

2018.1 6250.9151
2018.2 6524.4136
2018.3 6809.8785
2018.4 7107.8335
2019.1 7418.8250
2019.2 7743.4234
2019.3 8082.2241
2019.4 8435.8484

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However, there are some seasonal variations, i.e. certain months in a year have higher sales
turnover. Therefore, to adjust the trend forecast for the seasonal variation, we incorporate the
seasonal effect into the forecast as follows:

QUARTER X ACTUAL (Y) FORECAST ACTUAL/FORECAST ADJUSTED FORECASTED

2015.1 1 4,188.8800 3,739.1168 1.1203 4,034.2398
2016.1 5 4,545.1900 4,437.7268 1.0242 4,787.9900
2017.1 9 5,752.9100 5,266.8637 1.0923 5,682.5695
AVERAGE 1.0789
2015.2 2 3,519.5200 3,902.7157 0.9018 3,590.6174
2016.2 6 4,149.3000 4,631.8922 0.8958 4,261.4819
2017.2 10 5,290.9780 5,497.3066 0.9625 5,057.6896
AVERAGE 0.9200
2015.3 3 4,273.4000 4,073.4726 1.0491 4,274.7389
2016.3 7 4,943.1100 4,834.5529 1.0225 5,073.4235
2017.3 11 6,177.8800 5,737.8322 1.0767 6,021.3329
AVERAGE 1.0494
2015.4 4 4,060.6900 4,251.7006 0.9551 4,087.5513
2016.4 8 4,848.2200 5,046.0808 0.9608 4,851.2621
2017.4 12 5,799.1100 5,988.8815 0.9683 5,757.6632
AVERAGE 0.9614

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SPICEJET:
The forecasted quarter-wise sales for SpiceJet for 2018 and 2019 are as follows:

Year Forecasted Sales (in Cr.)

2018.1 2239.9121
2018.2 2402.0039
2018.3 2575.8254
2018.4 2762.2255
2019.1 2962.1146
2019.2 3176.4686
2019.3 3406.3344
2019.4 3652.8346

However, there are some seasonal variations, i.e. certain months in a year have higher sales
turnover. Therefore, to adjust the trend forecast for the seasonal variation, we incorporate the
seasonal effect into the forecast as follows:

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 QUARTER X ACTUAL FORECAST ACTUAL/FORECAST ADJUSTED FORECASTED
2015.1 1 782.5700 968.5418 0.8080 933.6177
2016.1 5 1,448.6700 1,280.8234 1.1310 1,234.6389
2017.1 9 1,613.8300 1,693.7922 0.9528 1,632.7167
AVERAGE 0.9639
2015.2 2 1,103.2400 1,038.6306 1.0622 1,101.2331
2016.2 6 1,506.3600 1,373.5105 1.0967 1,456.2976
2017.2 10 1,856.1300 1,816.3638 1.0219 1,925.8435
AVERAGE 1.0603
2015.3 3 1,029.1200 1,113.7913 0.9240 1,033.1054
2016.3 7 1,378.4700 1,472.9048 0.9359 1,366.2038
2017.3 11 1,797.4500 1,947.8053 0.9228 1,806.7014
AVERAGE 0.9276
2015.4 4 1,439.3800 1,194.3910 1.2051 1,277.3881
2016.4 8 1,602.6600 1,579.4919 1.0147 1,689.2493
2017.4 12 2,065.1200 2,088.7587 0.9887 2,233.9046
AVERAGE 1.0695

ANALYSIS
According to the regression analysis we conclude that there was a huge impact on the sales
Spicejet (33%) and a significantly lesser impact on sales of Indigo (4%). This depicts that as
compared to Spicejet, indigo has been able to maintain its average sales throughout the years,
despite the fluctuations in oil prices.

The demand forecast for indigo sales shows a growth rate of 4.38% and the average quarterly
seasonal is 1.078928525 and for Spicejet the growth rate for sales is 7.24% and average seasonal
effect factor being 1.060274101.

This depicts that sales for Spicejet are expected to grow at a greater rate as compared to indigo
and seasonal effect in the airlines industry has a huge impact on sales but there the effect of
seasonality factor is comparable between indigo and Spicejet.

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 CONCLUSION

India has no dearth of challenges. Land acquisition for airports is a complicated process. India’s
potential in air cargo, maintenance, repair and overhaul (MRO), helicopters, seaplanes and
general aviation remains untapped. Availability of skilled manpower is inadequate.

Other reforms such as the formation of an independent civil aviation authority, corporatisation
of Air Navigation Services and public listing of Airports Authority of India are still pending. The
recent bids for privatisation of Air India and helicopter company Pawan Hans drew a blank. So
did the bid for selection of private operators for Jaipur and Ahmedabad airports, despite all these
assets having high intrinsic value. The bid conditions are expected to be made more liberal and
investor-friendly.

The price of jet fuel in July increased by 45 per cent over the past 12 months. The government is
considering bringing aviation turbine fuel under GST, which may provide welcome relief. Aviation
turbine fuel (ATF) contributes about 30-35% of airlines’ cost of operations. The ATF prices
averaged around Rs 56,450 per kilolitre in Q3FY18, 12% higher than the year-ago period. The
price surge has affected operating margins in the sector.

Indian aviation is currently in a sweet spot. It has the potential to become the third-largest
market by the end of 2018 thanks to a growing economy, strong middle class, rising tourist traffic
and a supportive policy environment. This provides a great opportunity for Indo-Gulf
collaboration in areas such as airlines, cargo, MRO, general aviation, aerospace manufacturing
and skill-building.

We believe despite cost pressure, aviation sector is poised for growth based on lowering cost of
air travel, growing middle-income population and capacity constraints in other public transport
services such as Railways. In addition, government’s “UDAN” (Regional Connectivity Scheme)
scheme aiming at connecting small cities to metro cities at affordable prices will support overall
growth. The scheme is expected to add 1.3mn new passenger seats across new networks. Also,
fleet modernization by the airlines will protect their profits despite ATF price pressures.

REFERENCES
 https://www.goindigo.in/information/investor-relations.html
 https://www.moneycontrol.com/india/stockpricequote/transport-
logistics/interglobeaviation/IA04
 http://www.spicejet.com/investorsfinancialinformation.aspx
 https://www.moneycontrol.com/india/stockpricequote/transport-
logistics/spicejet/SJ01

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