demand in domestic aviation industry of india by akshata shirodkar(epgp-02-002)

Managerial Economics Term Paper

DEMAND IN THE DOMESTIC AIRLINE INDUSTRY OF INDIA Submitted by:

Akshata Shirodkar ePGP-02-002

This term paper explores the rational economics behind the demand and its affect on dynamic pricing in the domestic airline industry in India, where both of these vary often with time and units available. Based on the learning gained during microeconomics course, this paper analyses the current pricing strategies and norms practiced by the airline industry.

Managerial Economics Term Paper Demand in the Domestic Airline Industry of India

Akshata Shirodkar EPGP-02-002

CONTENTS

1. INDUSTRY OVERVIEW ............................................................................................................................................... 3

1.1 MARKET SHARE ................................................................................................................................... 3

1.2 INDUSTRY GROWTH ............................................................................................................................ 4

1.3 CAPACITY VS DEMAND ........................................................................................................................ 5

2. AIRLINE INDUSTRY CUSTOMERS ............................................................................................................................... 5

2.1 CUSTOMER SEGMENTS ....................................................................................................................... 5

2.1.3.1 LOW COST CARRIER BOOM ...................................................................................................... 7

2.2 SUBSTITUTES FOR CUSTOMERS .......................................................................................................... 8

3. INTERMEDIARIES IN SELLING .................................................................................................................................... 9

3.1 AIRLINE CONSOLIDATORS ................................................................................................................... 9

3.2 TRAVEL AGENTS................................................................................................................................... 9

3.3 AIR-FREIGHT FORWARDERS ................................................................................................................ 9

3.4 DIRECT RESERVATIONS (WITHOUT INTERMEDIARIES) ...................................................................... 10

4. PRICING STRATEGIES ............................................................................................................................................... 10

4.1 PRICE DISCRIMINATION:.................................................................................................................... 11

4.2 PRICE REGULATION ........................................................................................................................... 13

4.3 DIFFERENTIAL PRICING vs. UNIFORM PRICING ................................................................................. 13

4.4 Revenue Management System ......................................................................................................... 15

4.5 AIR FREIGHT PRICING ........................................................................................................................ 17

4.6 PRICING FACTORS .............................................................................................................................. 17

4.6.1. Peak hour loads ............................................................................................................................. 17

4.6.2. Off-peak hour loads ....................................................................................................................... 17

4.6.3. Restrictive conditions .................................................................................................................... 17

• Length of the Stay conditions ..................................................................................................... 18

• Advanced Purchase..................................................................................................................... 18

5. CONCLUSIONS ......................................................................................................................................................... 18

REFERENCES ................................................................................................................................................................ 19

APPENDIX .................................................................................................................................................................... 20



1. INDUSTRY OVERVIEW

At a time when most developed economies shrunk, a 4.7% growth during the first quarter of 2009-10, puts India among the top-most growing nations. In spite of the global recessionary trends, India managed 6.7% economic growth in the fiscal 2009. The growth in the aviation sector is linked with the growth of GDP, which according to latest figures released in Dec.2009 has rebounded to pre-slowdown phase of nearly 8%.

In recent years, with the entry of several new airlines, the aviation sector in India has undergone a major transformation. The arrival of the low-cost airlines like Air Deccan (merged with Kingfisher now), Go Air, SpiceJet revolutionized the sector to meet the growing demand of economical and faster inter- city travel options within India. Air travel is no longer the luxury of business executives and the economically well-off. As more airlines are entering India’s domestic aviation market, it is leading to increased competition, resulting in drastic fare cuts.

1.1 MARKET SHARE

Currently there are eight scheduled airlines in the domestic market in India, four of which are Low cost carriers (LCCs) - the full service carriers are also competing on low fares with the LCCs. There has been consolidation in the industry by way of merger of two private full service carriers and also two state owned full service carriers.

MARKET SHARE OF SCHEDULED DOMESTIC AIRLINES IN 2009 Source: India’s Directorate General of Civil Aviation website: http://dgca.nic.in/reports



As per the India’s civil aviation ministry, the regional air connectivity is still very low with air travel confined to very small segments of population. Therefore, there is a vast scope for expansion of civil aviation in the country in which low cost carriers will play an important role. The government has announced open skies policy for cargo services and foreign equity participation has been hiked from 40 to 49% allowing investments by NRIs, OCBs, although foreign airlines are not yet permitted to pick up equity. FIIs who seek to hold equity in domestic air transport sector cannot have foreign airlines as their share holders.

The forecast for air travel in India is robust – likely to grow 25% year-on-year for the next 3 years. This therefore means excellent demand, which has been induced primarily by low cost airlines enticing train travelers to fly at similar fares. The emerging markets of India pose a great opportunity in the civil aviation sector – exhibiting trends towards industry consolidation, liberalization and increased competition from new players and a travel demand above the world level.

1.2 INDUSTRY GROWTH

Recently, there have been signs of revival in the aviation sector with carriers finally emerging from two years of turbulence, as an improving economic scenario and relaxed corporate travel norms led to a 7.8% growth in air traffic in the calendar year 2009 over the previous year. According to statistics compiled by the Directorate General of Civil Aviation, the number of passengers carried by domestic airlines in 2009 totaled 445.13 lakh, against 412.71 lakh in 2008. This is in sharp contrast to the situation in 2008 when passenger traffic dipped, operating costs shot up due to higher oil prices and fares slipped to very low levels on sagging demand and competition.

PASSENGERS CARRIED BY SCHEDULED DOMESTIC AIRLINES INDICATE GROWTH IN DEMAND Source: India’s Directorate General of Civil Aviation website: http://dgca.nic.in/reports



1.3 CAPACITY VS DEMAND

Analysis of Capacity (ASKM) and Demand (RPKM) data for the year 2009 vis-à-vis 2008 indicates that the airlines increased the capacity with effect from July onwards. The data also suggests that demand has started increasing with effect from June 2009 indicating better utilization of the capacity.

CAPACITY vs. DEMAND

Source: India’s Directorate General of Civil Aviation website: http://dgca.nic.in/reports

2. AIRLINE INDUSTRY CUSTOMERS

2.1 CUSTOMER SEGMENTS

The airline industry is essentially a service industry with a perishable product. Capacity not filled at the time of takeoff is lost - there is no opportunity to gain revenue at a later date for such excess capacity. Airlines therefore wish to generate revenue by selling each individual seat on a given airplane for a given route during a given period of time. Each seat is potentially treated as a differentiated product appealing to different market segments.

The airlines compete by offering distinct products, presented to consumers as fares. Each fare represents a different market -- a route connecting two cities -- and departure time. The products are also differentiated by service levels received in flight, and by the willingness of a



consumer to accept certain restrictions. Customers seem to be used to the fact that they are charged different fares for the same flight and that they will receive specific benefits if they accept certain restrictions.

Customers thus are primarily sorted into two groups: BUSINESS AND LEISURE TRAVELERS. The elasticity of their demand is greatly affected by their purpose for travel. Apart from passenger traffic airline industry also provide the transportation services for CARGO & AIR FREIGHT.

2.1.1 LOGISTICS CUSTOMERS

Besides transportation services for passengers, the airlines industry also serve as cargo and air freight service providers through scheduled air routes for perishables such as vaccines, medicines and fruits that may often require cold storage facilities . The aviation industry also derives its revenues from express delivery service for example express mail, or newspapers.

2.1.2 BUSINESS TRAVELERS

First-class and unrestricted premier services tickets are more often bought by business travelers, who have little choice about when they travel as their companies pick up the tab. The business travel accounts for approximately 55 percent of the traveling public.

Business travelers are important to airlines because they are more likely to travel several times throughout the year and they tend to purchase the upgraded services that have higher margins for the airline. The business class travelers are often lured by full service airlines by on flight premier services, luxury seats, in-flight entertainment and gourmet meals and valet services on the ground.

2.1.3 LEISURE TRAVELERS

These customers travel for non-business purposes, for example – vacationing or visiting friends and family or for personal needs. Leisure travelers are less likely to purchase the premium services and are typically very price sensitive. They are often prepared to make sacrifices in terms of product frills – for example by traveling in the rear cabin on board the aircraft rather than a premier class or by opting for a low cost airline offering an inexpensive seat.

In the domestic aviation market of India, there is not much price variation between travel by first class railway AC coaches and travel by low cost airlines. The rapid entry of new players into the airline industry in the last 6 years has changed its competitive and growth dynamics with the low fares. As a result, there has been increased demand and new consumer segments have been created. The leisure segment is growing dominant in the local air transport industry in India today.



2.1.3.1 LOW COST CARRIER BOOM Domestic market can be divided into 2 segments: Premium – where full services airlines like Jet, Kingfisher, and Indian Airlines compete and Low cost carriers (LCC or No Frills) such as SpiceJet, Go Air, and Indigo. The LCC boom in India started with Low Price Tags, Apex Fares, Internet Auctions, Bulk Purchases and Last Day Fares. The factors that have contributed to enormous growth of LCCs are:

• Low Entry barriers • Permit for flying to Foreign Shores • Rising income levels and demographic profile of India’s population • Rise in Industrialization

GROWTH IN DOMESTIC AIRLINE INDUSTRY IN LAST 10 YEARS Source: India’s Directorate General of Civil Aviation website: http://dgca.nic.in/reports



We can understand the growth in the domestic airline industry using the Increased Demand and Increased Supply curve as shown in the graph below. The original equilibrium (with the green supply and red demand) occurs at the price of P1 and quantity (bought and sold) of Q1. The supply curve has moved to the right more than the demand curve moved to the right due to the entry of new low cost carriers. As a result, the equilibrium price decreased to P2 while the quantity (bought and sold) has increased to Q2 with more and more customers being able to afford low fares.

LCC BOOM HAS SHIFTED DEMAND AND SUPPLY CURVES IN DOMESTIC AIRLINE INDUSTRY

2.2 SUBSTITUTES FOR CUSTOMERS

Consumers have options to choose from various airlines or switch to other modes of transport such as road and rail while making their travel decisions. The advent of new generation communications technology options such as video and audio conferencing have substituted the need to travel itself. Other substitutes in existence are traveling by train or car. With the wave of technology, a large percentage of business travel has been eliminated to conserve spending.



3. INTERMEDIARIES IN SELLING

Airlines reach out to prospective customers most often through various intermediaries such as travel agents, consolidators, and online travel portal on the internet. Airlines pay commission to the intermediaries which in turn rebate some portion of the commission to the end – customer.

3.1 AIRLINE CONSOLIDATORS

An airline consolidator (sometimes called a bucket shop) is a specific kind of airline ticket reseller. Airlines rely on wholesale blocks of seats to organizations known generally as tour operators or travel organizers or ‘consolidators’. Airlines and Consolidators work through rules on routes, stopovers, seasonality for the tickets that governs contracts to manage blocks of airline seat inventory at reduced prices which the consolidators then sell through retail agencies. . Wholesale consolidators do not offer retail service directly to the end-customer. Airlines sell at lower than their published fare rates to the consolidators. The markup on wholesale tickets may be very low but the volume of sales with the airline may be high. Airlines set the discount contracts for the wholesale consolidators contingent on a specified sales volume, with year-end bonuses or additional commission rebates based on sales thresholds.

Since the goal of the airlines is to get each passenger to pay the most they are willing to pay, airlines try to discount tickets in such a way as to fill otherwise empty seats rather than divert full-fare passengers to cheaper tickets.

Airlines restrict consolidator from advertising, such as forbidding mention of the name of the airline. It is common for tickets to be most heavily discounted in a place far from where the ticket either begins or ends, so as not to depress the primary market.

3.2 TRAVEL AGENTS

Travel agents are extremely important and airlines cultivate their loyalty to obtain market share by partnering with the rapidly developing online travel agency business to sell over the internet and also engaging with offline travel agents who sell to the retail end-customers.

3.3 AIR-FREIGHT FORWARDERS

There are marked differences between an airline’s passenger and freight business. In air freight, marketing intermediaries are known as ‘forwarders’ who are similar to the travel agents for the passenger business. Forwarders gather large number of small packages from individual shippers and present them to the airline as one large consignment. Airlines charge a lower rate per kilo



from forwarders, who is thus able to pass on the some of the saving to the shippers who generate small consignments.

3.4 DIRECT RESERVATIONS (WITHOUT INTERMEDIARIES)

The internet has greatly facilitated the process of selling. Through computers, new airfares can be published quickly and efficiently to the airlines' sales channels. End-customers can make reservations directly with the airline through the airline’s website or Automated Interactive Voice Response (IVR) ticketing. Airlines levy a slightly higher price to end customer purchasing directly without intermediaries. The airline companies have introduced e-ticketing and ticket purchase through call centers besides other modes such as - airport counters , firm’s website, counters at local office, counters at other corporate’s office space ( for example – Reliance web world, selected club HP outlets of Hindustan Petroleum Corporation)

4. PRICING STRATEGIES

To understand pricing in the airline service industry, we should perceive the product unit to be sold as an airline seat on an aircraft. Each seat is potentially a differentiated product appealing to different market segments and it is priced differently. Pricing for each seat should be at, or above, the average cost for that seat.

Alternatively, if the average cost per flight is determined on a given route or network, then the focus must be on the average total revenue generated per aircraft. Airline decides price considering the costs allocated across the unit of measurement – be it unit seat or each scheduled aircraft, and the break-even load factor for the flights.

The Airline Industry have developed extensive tools to wring out as much revenue from a flight as possible through ‘discriminatory pricing’ – the practice of charging different prices to different consumers for similar products. Even though customers buy similar seats on an aircraft they essentially are buying different products, because of the associated restrictions on ticket. For the airline firm, while it is imperative to be profitable, the focus is to maximize the cost of the flight revenue. Airlines focus on Yield management, also known as revenue management to understand, anticipate and influence customer behavior in order to maximize revenue from a fixed, perishable resource – the unit seat that needs to be sold.

The objective is to sell the right resources to the right customer at the right time for the right price by applying suitable the pricing strategies as discussed next:

http://www.associatedcontent.com/



4.1 PRICE DISCRIMINATION:

Airlines use several different types of price discrimination:

• Bulk discounts to wholesalers, consolidators, and tour operators

• Incentive discounts for higher sales volumes to travel agents and corporate buyers

• Seasonal discounts, incentive discounts, and variance in price by location

• Timing of the purchase

Airlines mostly practice the third degree of price discrimination that involves dividing customers into segments based on some distinguishing characteristic, thereby allowing the charging of different rates to different groups.

THIRD DEGREE PRICE DISCRIMINATION

The airlines traditionally divide their customer base primarily into customer groups - business and leisure travelers. Each customer group has a separate demand curve (shown by D1 and D2 in the above graph). The optimal prices and quantities (seats) are such that the marginal revenue from each group is the same and equal to marginal cost. The business traveler segment (D1) with demand curve D1 is charged the higher price, while the leisure segment group with the more elastic demand curve D2 is charged the lower price. Marginal cost depends on the total seats such that MRT= MR1 + MR2.

Yield management allows an airline to vary the fare charged for a ticket based on the elasticity of demand for that ticket in relation to the marginal cost of providing that ticket. The more inelastic the demand for a ticket, the greater the premium charged for the ticket above the marginal cost. The more elastic the demand (that is, the more sensitive the market is to the price), the closer the price is to the marginal cost. The airlines use lower fares to fill empty



seats, continuing to generate revenue for the firm once the less elastic demand has been fully met.

Thus high fares are charged to the business travelers, while the leisure segment customers enjoy low fares. The airlines enforce the scheme by making the tickets non-transferable thus preventing a tourist from buying a ticket at a discounted price and selling it to a business traveler (arbitrage).

4.1.2 TRAVEL CLASSES

TRAVEL CLASSES ON AN AIRCRAFT

Carriers often accomplish price discrimination by dividing each cabin of the aircraft into a number of travel classes for pricing purposes. Airlines typically have three travel classes as shown in the above picture, although many airlines are eliminating first class replacing it with business class as the highest level of service:

• FIRST CLASS - generally the most expensive and most comfortable accommodations available.

• BUSINESS CLASS OR EXECUTIVE CLASS - high quality, traditionally purchased by business travelers

• PREMIUM ECONOMY - slightly better Economy Class seating (greater distance between rows of seats; the seats themselves may or may not be wider than regular economy class)



• ECONOMY CLASS (ALSO KNOWN AS COACH CLASS OR TRAVEL CLASS) - basic accommodation, commonly purchased by leisure travelers

Within each travel class there are often different fare classes, relating to ticket or reservation restrictions and used to enhance opportunities for price discrimination. This is done by assigning capacity to various booking classes, which sell for different prices and which may be linked to fare restrictions. The restrictions help ensure that customers buy in the booking class range that has been established for their segments.

The technological advances in computers and communications have enabled the airlines to more closely match their fare prices to the actual demands of the traveling consumer. Everyone on a flight pays a different fare, hence we can say that the airlines are approaching or at least trying to accomplish the first degree of price discrimination, however, it is very difficult to determine the reservation price of each customer to achieve first degree discrimination.

4.2 PRICE REGULATION

Regulation in the industry causes prices to be not determined by the free demand and supply market forces rather regulated and bound by government or agreements. No airline industry has core customers that are forever loyal promising not to be swept by price competitive rival.

In the airline industry informal cartels are said to have been formed through the use of computerized airline reservation systems (CRS) while more formal relationships are formed through CODE SHARING. The Code Sharing is an arrangement between airlines to allow the placing of their code on another airline's flight, thereby allowing their passengers the ability to book through apparently only one airline.

The Indian airline industry must adopt code sharing in the future as they expand and venture into newer markets so as to minimize the costs of operating services. By selling seats on a flight operated by another carrier, code sharing enables an airline to make direct cost savings by rationalizing services or establishing market presence on a route without actually operating on it. Thus, both airlines may be able to save on fuel, labour and other variable costs, as well as making more effective use of aircraft and other overheads.

4.3 DIFFERENTIAL PRICING VS. UNIFORM PRICING

The benefits of differential and higher price being charged to business travelers can be understood in the light of economic theory of long run demand-supply.



Consider the example of an airline that sells all its seats at uniform price with no benefits to business travelers. As such, the fare charged to business travelers paying higher would be reduced, while the fare paid by passengers currently paying less would have to rise to uniform level reflecting the end of the existing cross subsidy of the low payments by those currently paying higher prices.

In such a situation it is most unlikely that in the long run, the leisure travelers would pay the extra in order to continue traveling with the same airline concerned. Most leisure travelers have high price elasticity, reflecting the fact that they are paying fares out of their own pockets. Because of this a sudden steep increase in ticket prices, some customers would opt not to travel at all. A much greater number will continue to travel but will choose a competitor airline or substitute that offers attractive lower fare. Thus, overall, an airline changing over from such a fare structure to one of uniform pricing might easily find a drop in the number of passengers it carried.

The first reaction of business travelers to uniform pricing might be positive due to the reduction of cross subsidy burden, however, in the long run, due to large number of drops in the number of leisure travelers, the frequent business traveler will have to provide for the cover of the higher proportion of the airline’s increased overhead, variable costs which will in turn lead to higher rather than lower fares.

Overall uniform pricing will result in frequently travelling business segment customer paying still higher prices for a worse product than they received. Thus an airline’s decision to adopt differential pricing though results in higher unavoidable costs of implementing complex pricing systems, it also brings significant benefits both to the airlines and its customers in terms of profit and performance. It allows airlines to maintain their network and frequency, use larger aircraft to achieve economies of scale (by lower seat-kilometer costs) leading to the variable and overhead costs to be spread more widely and allowing fares to be lowered across all customer segments.

Airlines have to be concerned with their break-even load factors, that is, the number of passengers paying a sufficient fare to enable the airline to break even on the flight. If an airline is selling seats above its average variable cost, but is not selling a sufficient number of seats, then the airline continues to lose. In the rational economic view, airlines price their tickets differently for each customer so as to meet their break-even load based on projections of demand. This is done by projecting the expected minimum fill rate on the aircraft, and then assigning prices to meet the break-even costs for that flight.



4.4 REVENUE MANAGEMENT SYSTEM

All airlines use revenue management systems also called ‘Yield Management System’ to dynamically vary their fares according to supply and demand, and to manage yield with the objective of achieving profitability. Airlines use a formula of combining their yield and inventory costs to determine ticket prices.

YIELD MANAGEMENT TOOLS allow the airlines to balance a large number of premium and discount fares, regularly re-evaluating demand for different segments of the ticket prices, adjusting the amount of each type of ticket available to maximize revenue while filling every seat on the aircraft (selling the total inventory).

The airlines need to keep a specific number of seats in reserve to cater to the probable demand for high-fare seats. The price of each seat varies inversely with the number of seats reserved, that is, the more seats that are reserved for a particular category, the lower the price of each seat. This will continue till the price of seat in the premium class equals that of those in the concession class. Depending on this, a floor price (lower price) for the next seat to be sold is set.

The advent of sophisticated computer systems for managing the sale of seats and cargo space helps airlines industry to optimize financial returns based on decisions on what number of seats to sell, at what prices and when. The capacity on board each aircraft is divided into large number of booking classes.

Decisions are made about the number of seats to be allocated to each class and the time at which these seats would be made available for sale based on demand.

For example, for a flight leaving to a business destination on a Monday morning, few if any seats will be allocated to those classes allowing for early sale at low prices. Almost all of them will be in classes allowing for sale permit at high fares only, while most of the bookings only being made a relatively short time before flight departure.

In contrast, a flight leaving to such a destination early on a Sunday morning will be given a completely different profile. Here, almost all the seats will be allocated to booking classes allowing for sale at low prices or for their use by people redeeming frequent flyer program miles as the airline attempts to obtain at least some revenue from seats which might otherwise remain empty.

Since airlines often fly multi-leg flights, and since no-show rates vary by segment, competition for the seat has to take in the spatial dynamics of the product. Someone trying to fly A-B is



competing with people trying to fly A-C through city B on the same aircraft. This is one reason airlines use yield management technology to determine how many seats to allot for A-B passengers, B-C passengers, and A-B-C passengers, at their varying fares and with varying demands and no-show rates.

SAMPLE FARE PRICING EXHIBITING DIFFERENCE IN BOOKING CLASSES Source: Jet Airways Flight Fares Information

In recent years there has been an advent of sophisticated software and information dissemination systems for example e.g. - Semi-Automated Business Research Environment (SABRE) and for real time information management.

These COMPUTERIZED RESERVATION SYSTEMS (CRS) distribute latest fares for multiple airlines to travel agents and online databases of travel portals across the world. The data is formatted for computer processing and the latest fares can be loaded automatically, allowing these new fares to be sold in the market place in the shortest possible time. Airlines carefully monitor new public fares filed by their competitors for detecting the action of other airlines increasing or decreasing their fares for specific connections. This information is used to set new pricing strategies. For instance, if a competitor introduces special promotional pricing between two cities, the other players may want to quickly react by filing their own special fares for that market.



4.5 AIR FREIGHT PRICING

Pricing policy reflects the costs associated with the freight handling. For example – some commodities may need extra security, fragile items may need special handling, and perishables may need refrigeration. Shippers of low density freight are charged on volumetric basis so as to avoid excessive amounts of low density cargo that fills the capacity of the aircraft without payload potential. The attempt is to apportion the flight operation costs between passenger and freight output of a flight.

4.6 PRICING FACTORS

The pricing has to be strategized by airlines depending on the interaction of various micro and macro economic factors. Low profits or losses may occur where pricing is not in tandem with costs. It is therefore vital to understand the controllable and uncontrollable costs and how to manage them. Prices have to be modified if there is rise in uncontrollable costs like aircraft fuel, navigation charges. Controllable costs such as labour costs, wages constitute as high as 30% of carriers total cost and if not effectively managed can damage productivity.

Multi-airlines approach to tariffs management is only effective in situations where capacity and demand are in some sort of equilibrium. The offers of discounts and competitors prices, have to be specially monitored and controlled, otherwise passengers with low price elasticity will take advantage of discount fares causing high degree of revenue dilution. The important factors for arriving at price decisions are as below:

4.6.1. PEAK HOUR LOADS

On peak time flights very few low fare seats are offered, forcing people who need to travel on these flights to pay higher prices

4.6.2. OFF-PEAK HOUR LOADS

A large number of seats are offered at low prices, reflecting the low marginal costs of filling seats which would otherwise be flown empty

4.6.3. RESTRICTIVE CONDITIONS

These are conditions set on discount fares to make them unattractive to business traveler thus forcing him to buy full fare ticket instead. These conditions are hence designed to protect airlines’ high yielding traffic. These rules are used to enforce on the cheaper fares to ensure that customers that customers have to pay full fare tickets in order to obtain flexibility. The major type of such restrictive discount fare conditions are as follows:



• LENGTH OF THE STAY CONDITIONS – require passengers to spend time at their destination. On short haul routes , weekend can be specified which means passengers cannot make return journeys earlier if they wish to do so without paying the extra full fare, thus restricting the freedom-of-action.

• ADVANCED PURCHASE - The airlines use time of purchase to create this segmentation, with later booking customers paying the higher fares and customers booking in advance paying lesser. This means that passengers must book and pay for their ticket a defined minimum period in advance. Customers must also accept that there will be substantial penalty if they wish to alter or cancel the booking once made. The advanced purchase conditions are beneficial for the airline as they improve cash flows, ease task of capacity management in that they force low yielding demand to come forward at an early stage. Most business trips cannot be planned far in advance and business executives often cannot accept the limits on their flexibility that a cancellation or re-booking penalty will cause - thus it makes make it difficult for the business traveler to avail low fare.

5. CONCLUSIONS

Pricing is a high profile area and any mistake in it can lead to huge losses. Hence, it is important to apply right principles while deciding price. The airlines pricing model is driven by the demand and supply economics in deregulated markets while in the regulated market or on specifically regulated routes, a uniform pricing is being imposed.

In the future, as the airlines industry expand, grow and consolidate and grow even more competitive, regulated pricing may get abolished completely. The price in the economy cabin too may conform to differential principle based on the demand. It is necessary to understand that pricing decisions cannot be made in isolation – rather they have to made by analyzing the micro and macro-economic factors, marketing mix and closely relating the pricing with the airline’s business strategy.



REFERENCES

1. GDP growth could touch 8% in current fiscal: FM, Economic Times, 24 Jan, 2010 http://economictimes.indiatimes.com/news/economy/indicators/GDP-growth-could-touch-8-in-current-fiscal-FM/articleshow/5371988.cms

2. Domestic air traffic grows 7.8% in 2009, Economic Times, 14 Jan, 2010 http://economictimes.indiatimes.com/News/News-By-Industry/Transportation/Airlines-/-Aviation/Domestic-air-traffic-grows-78-in-2009/articleshow/5442021.cms

3. Directorate General of Civil Aviation Website : http://dgca.nic.in/ 4. Microeconomics 7th Ed., Robert S. Pindyck, Daniel L. Rubinfeld, Prem L. Mehta 5. Airline Marketing and Management 5th Ed., Stephen Shaw 6. The Airline Business, 2nd Ed., Rigas Doganis 7. Kingfisher Airlines annual report, 2008-2009 8. Jet airlines website http://www.jetairways.com/ 9. SpiceJet, 23rd annual report 2006-2007 10. Exploring predatory pricing in the airline industry- Article by Stephan P. Brady & William A.

Cunningham at http://www.entrepreneur.com/tradejournals/article/88760575.html 11. News from Airline Industry

http://www.thehindubusinessline.com/cgi-bin/bl.pl?subclass=004

http://economictimes.indiatimes.com/news/economy/indicators/GDP-growth-could-touch-8-in-current-fiscal-FM/articleshow/5371988.cms

http://economictimes.indiatimes.com/news/economy/indicators/GDP-growth-could-touch-8-in-current-fiscal-FM/articleshow/5371988.cms

http://economictimes.indiatimes.com/News/News-By-Industry/Transportation/Airlines-/-Aviation/Domestic-air-traffic-grows-78-in-2009/articleshow/5442021.cms

http://economictimes.indiatimes.com/News/News-By-Industry/Transportation/Airlines-/-Aviation/Domestic-air-traffic-grows-78-in-2009/articleshow/5442021.cms

http://dgca.nic.in/

http://www.jetairways.com/

http://www.entrepreneur.com/tradejournals/article/88760575.html

http://www.thehindubusinessline.com/cgi-bin/bl.pl?subclass=004



APPENDIX

KEY AIRLINE INDUSTRY RATIOS (ECONOMIC INDICATORS) OF KINGFISHER AIRLINES(2009)

• AVAILABLE SEAT MILE: is a measure of an airline's traffic. It refers to how many seat miles were actually available for purchase on an airline. If all of the seats on the plane are not sold, then the ASM indicates the overall capacity the airline is operating at. It is calculated as the (total number of seats available for transporting passengers) X (number of miles flown during period)

• REVENUE PASSENGER MILE: is a measure of an airline's revenue based on its traffic. It indicates how many seats were actually sold on an airline’s flight. It is calculated as: (number of revenue-paying passengers) X (number of miles flown during the period)

• AIR TRAFFIC LIABILITY (ATL): An estimate of the amount of money already received for passenger ticket sales and cargo transportation that is yet to be provided

• LOAD FACTOR: it measures the percentage of available seating capacity that is filled with passengers. Analysts state that once the airline load factor exceeds its break-even point, then more and more revenue will trickle down to the bottom line. During holidays and summer vacations load factor can be significantly higher due to higher demand. Airline payload, in other words revenue-earning traffic, essentially consists of passengers, freight and mail. For AEA airlines, revenue from these three sources amounted in 2005 to 86.7%, 12.7% and 0.6% respectively of total operating revenue.

• REVENUE PER AVAILABLE SEAT MILE (RASM): in calculated by dividing the available seat mile with the revenue passenger mile. RASM is the most important industry benchmark, as load factors continue to increase, focus on yield, or revenue per revenue passenger mile, will be the critical metric to watch to signal a carrier’s success.

demand in domestic aviation industry of india by akshata shirodkar(epgp-02-002)

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