Air Deccan

Implementing the Low - cost Model in India

Presented By- Swapnil, Harshit ,Shyam, Sunil, Shivam, Somen, Vaibhav, Vijay, Vinod

Chairman & CEO of the Air Deccan

Mr. G.R. Gopinath

Case Outline
Air Deccans first flight took-off from Bangalore to Mangalore on Aug. 25, 2003 Stunned the market by offering tickets at 10% of the regular rate, at an average price at 50% less than full service airlines Achieved a market share of 12%, two years after its debut, making it the second largest privately owned airline in India Plans to go IPO in 2006 with a goal to be the leading aircraft company in India providing a wide gamut of airborne services throughout the country

Air Deccans Beginning Strategies

Meant to be a lowest cost no frills service provider.

Focus on connecting smaller towns and areas, not covered by other airlines.

The airline was to offer lowest fares, had to be low on cost.

Air Deccans Business

Positioning as a low cost carrier
Offers no in-flight service Single class aircraft configuration Internet booking and cheap fares

Two aircraft strategy Airbus and ATR Offering non-trunk short-haul routes and attracting high-end railway traffic through comparable fares Target market: Upper middle class in short term and lower middle class aggressively in long term

Air Deccans Business

Target to expand fleet to 124 aircraft by 2013 The Indian aviation market expected to grow at 20% annually for the next ten years. Air Deccan is targeting 18% market share by 2013 Passenger load factors anticipated at 70% Revenues per customer to increase at 5% in the long run Targets to decease fuel expense as a percentage of total revenues from 30% to 26%, operating expense from 23% to 16% in 8 years

The Aviation Industry in India

High growth potential due to economic boom and highly under penetration market Air travel generally grows at 2 to 2.5 times the GDP growth Long-term GDP growth at 7% annually It is forecast that India would be the second fastest growing travel and tourism economy in the world ATF (Aviation Turbine Fuel) prices and airport charges in India are among the highest in the world In 2004-05, Indian airports handled around 6 crore passengers & its growing almost 21% per annum Due to low fares there is shift of premium class train traffic to air travel

Air Deccans Cost Cutting Plan

No meals on board which lead to decrease the storage space of the meal and will tend to increase the space of the plane where the additional seats can be made and the additional revenue is been generated Cutting cost through the proper utilization of time during landing and that time will be allocated for extra flying.

Its cut its cost by avoiding flying in the main land and will reduce the cost of main land parking and instead it use the additional parking zone which is cheaper then the main parking. Avoiding travel agent & existing central reservation system reduce the distribution of cost

Air Deccans Market Strategy

Air Deccan was aimed at the common man, encouraging him to fly

The advertisement had the base line Everyone Can Fly

Tariff were at least 50% cheaper than scheduled airlines and only little higher rail travel

Air Deccan has adopted a lean -and-mean approach to staffing and aims at maintaining a low aircraft-to-employee ratio

Factor affecting Aviation industry

Competition
This time mostly all the airlines are running in loss due to cut throat competition in various airlines. To reduce this competition all major service providers are doing consolidations with each other to use their resources at the time of need and to reduce costs.

Infrastructure
 Major problem in airlines is lack of infrastructure. Because there is no one airport with more then one runway.  ATF(aviation turbine fuel) cost is thrice in India then international market.

Factor affecting Aviation industry (cont.)

Not availability of runway at the time of need so aircraft have to live in sky more then required so it consumpt more fuel.

Effect on customers of industry shakeout

It could be a bad news for customers because by consolidations competition will reduce and there will free fall in air fair prices so passengers who have been lured in to flying by low fair can not be treated as genuine air travelers.

Major Risks
Increase in Competition
Excess capacity could lead to price wars

Oil Price
Extremely vulnerable to oil price fluctuations due to government regulations on price hedging

Regulatory risk
A collapse of the current coalition government could trigger significant changes in Indias economic liberalization and deregulation policies

Air Deccan's proposed future strategy

 To influence customers to air travel by offering low fair and 24*7*365 services.

 Tie-up with other airlines that include interline agreements to use other airlines resources at the time of need and provide services to their customers.

 To go to those routes on that other airlines are not going at this time it is using 17 new routes so it gives him 20-30% of revenue.

THE SOUTHWEST MODEL

  
Southwest airline started operations in Texas in the early 1970s. And declared a profit every year for the next thirty-four years. Southwest now operates 2,800 daily flights to 60 airports in 59 cities across the U.S. It is the low cost airline against which its countless imitators are judged.

Strategies of southwest airlines

.Very low fares-with the affect of filling the aircraft with people who might not otherwise have flown at all. .Cattle car boarding with no assigned seating or classes of seats. .No In-flight services apart from soft drinks and bag of peanuts. .The airline drew attention to it self by being weird and by practical jokes.

No frills Flying in Europe

Several European no frills airlines started with the southwest model Low fares No on board meals No allocated seats Often using regional airports Lower staffing cost Low airport cost

No frills flying in Europe (cont.)

From this estimate almost half the customer for the low-cost carriers are priceconscious business travelers. The low cost flight market from the UK to Europe grew from zero to five percent in just two years.

HOW CAN AIR SERVICE PROVIDER CUT COST Reduction in distribution cost of tickets. Remove in flight catering and staffing. Tie-up with other competitive airways. More use of regional airports.

COMPERETIVE COST STRUCTURE BETWEEN FULL COST & LOW COST AIRLINES
airline Expenditure full service unit airline fuel 20% dep. 1% interest 4% marketing 8% food & passenger amenities 3% airport charge 6% administration 8% salaries & wages27% maintenance 3% insourance 14% capital cost total 100% low cost airline 26% 1% 3% 7% 0% 15% 2% 12% 19% 2% 13% 100%

Q&A

Question No-1
Can Air Deccan manage to make profits by continuing to offer such low prices, given the lack of suitable infrastructure ,and other cost escalations in the Indian market (as compared to other countries LCC have been successful) ? Is the business model of low cost carrier airlines feasible for the Indian skies, or should some other innovation be done to sustain the business?

Answer
Yes, Deccan can manage to make profit by continuing to offer such low price. If Deccan follow some strategies.
1- Fuel saving on runway time. 2- Maximum advertisement on the upper side on plane. 3- Develop new Routes. 4- Advertisement in the plane between passengers . By this, he can generate extra revenue and also can earn profit on low cost price continoue..

Question No-2
All the low cost carriers seem to be targeting customers who are price sensitive. Can the airline identify different segments of consumers with in this price sensitive segment ? If so, what should be the basis for segmentation ? Besides, Is it possible to look beyond the price sensitive customer segments to focus instead on consumers who demand additional services, but are willing to pay more ? Either way, airlines need to differentiate their service offerings. How can this be done by Air Deccan ?

Question No-3
Do you feel that Deccan has manage to build brand preference among air travelers in the Indian market ? What can Air Deccan do to enhance brand preference ,particularly in terms of its communication strategies ?

Answer
Yes I think air Deccan has managed to build brand preference among air travelers in the Indian market. air Deccan which starts its operation in august 2003 has seen a rapid growth, having flown over 5.8 million passengers since inception. Its was India's first low cost carrier provider service. It has achieved market share of 12% for Oct 2003. and now air Deccan has garner a market of 21.2% in June, arise of 1.8% since may 2005, making it second largest privately owned airline in country. These figures of air Deccan explain that it has managed properly to build brand preference.

Cont.
Enhancing the brand preference by rapidly expansion of fleet. Communication strategies of air Deccan with its unconventional business model brought the luxury of flying to the common man in India dynamic pricing coupled with regional connectivity. Understand target market and promotion strategies at low cost airlines in India and draw a comparison with that of fall of service People carrier with lowest cost offering the largest connectivity and lowest fare. It should work on two pronged strategies, get into uncharted routes and tie up with rival jet.

Question No-4
At present ,there is intense competition in the LCC industry in India. There are almost no doubts of an impending shakeout or consolidation. When do you think this would happen, and how would air Deccan fare in such a scenario ? What type of competitive marketing strategies should air Deccan adopt to emerge on top in such a situation ?

Answer
 In India's current environment there could be catastrophic shakeout. More people will indeed travel by air but it would be a huge risk to bet on future of air travel operation. In countrys top low cost carriers have moot at the idea of forming an association to ensure that they don't lose out in scramble for air seat but they are also looking at the way to cut costs which can only happen if they share resources.  Shakeout and consolidation could be bad news for customers. the free fall in air tariffs is probably over. Air Deccan should adopt these factor to emerge on top in such type of situation

Cont.
 very low fare with effect of filling aircraft with people.  cattle-car boarding with no assigned seating or class of seat.  distribution cost (15% of cost of conventional air ticket comes from distribution)  flight catering and staffing (removing these services saves money free meals and drinks prices in their ticket prices).  fleet uniformly (reduces the maintenance and spares cost)  regional airport (access to the understand regional population in the regional airports catchment area).

Question No-5
suggest other innovative measures by air Deccan can keep its costs which down, in order to continue offering low prices to consumers?

Thanks
If its on the map, we will get you there---Air Deccan