After a gap of several years, two new airlines are entering the Indian market. Their decision really intrigues me because the airline industry in India is clearly what one would call an unattractive industry, that is, an industry in which profit potential is poor. In fact, every time I discuss a case study on the Indian airline industry with my class, my students end the class by asking why anyone would want to enter this industry.
The reasons for the travails of the airline business are well known.
Greedy suppliers are the first reason. Oil companies treat aviation turbine fuel as a cash cow and pass on all cost increases plus more to the airlines. Airports, driven by huge investments in new infrastructure are constantly trying to raise airline and passenger user charges. Buyers in India allow airlines no respite — they are acutely value conscious, and demand is price sensitive. Thanks to the Internet and travel portals they have full information on fares with no search cost, resulting in price-based decision-making. And being a high fixed-cost business with the added challenges of perishability, price-sensitive demand and very low customer-perceived differentiation, this is a cut throat business on the pricing front. This is hardly the recipe for attractive returns.
This is not the story of India alone. A recent International Air Transport Association (IATA) report found that only a handful of the world’s airlines make real profits on a sustainable basis. And, if anything, India makes things worse, with high fuel prices, poor infrastructure and further debilitating policies like route dispersal guidelines that make airlines fly on unprofitable routes.
Read news in full 10/10/13 Rishikesha T Krishnan/Business Line
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