Introduction

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 has become the third largest domestic aviation market in the world and is expected
to overtake UK to become the third largest air passenger* market by 2024^.

India’s passenger* traffic grew at 16.52 per cent year on year to reach 308.75 million in FY18. It grew
at a CAGR of 12.72 per cent during FY06-FY18.
Domestic passenger traffic grew YoY by 18.28 per cent to reach 243 million in FY18 and is expected
to become 293.28 million in FY20E. International passenger grew YoY by 10.43 per cent to reach
65.48 million in FY18 and traffic is expected to become 76 million in FY20E.

According to data released by the Department of Industrial Policy and Promotion (DIPP), FDI inflows
in India’s air transport sector (including air freight) reached US$ 1,817.23 million between April 2000
and December 2018.
India’s aviation industry is expected to witness Rs 35,000 crore (US$ 4.99 billion) investment in the
next four years. The Indian government is planning to invest US$ 1.83 billion for development of
airport infrastructure along with aviation navigation services by 2026.

Key investments and developments in India’s aviation industry include:

 AAI is going to invest Rs 15,000 crore (US$ 2.32 billion) in 2018-19 for expanding existing
terminals and constructing 15 new ones.
 In June 2018, India has signed an open sky agreement with Australia allowing airlines on either
side to offer unlimited seats to six Indian metro cities and various Australian cities.
 The AAI plans to develop Guwahati as an inter-regional hub and Agartala, Imphal and Dibrugarh
as intra-regional hubs.
 Indian aircraft Manufacture, Repair and Overhaul (MRO) service providers are exempted
completely from customs and countervailing duties
https://www.ibef.org/industry/indian-aviation.aspx

Five Forces Analysis

Porter’s Five Forces analysis is a useful methodology and a tool to analyse the external environment
in which any industry operates. The airline industry is affected by a host of external macro factors
that have led to declining passenger traffic, increasing operating expenses, high fuel prices, and
greater landing and maintenance costs. There is also intense competition from low cost carriers
leading to cutthroat price war.

Threat of New Entrants: low

The airline industry needs huge capital investment to enter and even when airlines have to exit
the sector, they need to write down and absorb many losses. This means that the entry and exit
barriers are high for the airline industry. In addition to this, not everybody can enter the industry, as it
needs sophisticated knowledge and expertise on part of the players. Moreover, the airline industry
leverages the efficiencies and the synergies from the economies of scale and hence, the entry barriers are
high. Therefore, applying Porter’s Five Forces framework, we find that the airlines industry has LOW
threat from new entrants.

 New Entry is cost intensive with Very high set-up costs

  Existing Players are well established
 Inadequate Airport Infrastructure
 Increasing fuel prices
 Shortfall + High cost of skilled resources - Pilots

Bargaining power of Suppliers:

The power of suppliers in the airline industry is high because the three key inputs that airlines have in
terms of fuel, aircraft, and labor are all affected by the external environment. For instance, the price of
aviation fuel is subject to the fluctuations in the global market for oil. Similarly, labour is subject to
the power of the unions who often bargain and get unreasonable and costly concessions from the
airlines. Third, the airline industry needs aircraft either on outright sale or wet lease basis which
means that the airlines have to depend on the two biggies, Airbus, and Boeing for their aircraft needs.
This is the reason the power of the suppliers in terms of the three inputs needed for them is
categorized as high according to the Porter’s Five Forces framework.

Bargaining Power of Suppliers is high for the airline industry due to :

 Duopoly in Aircraft Market- Low bargaining power with airlines

 Switch cost to other suppliers is high
 Shortage of Commercial Pilots in India
 Limited Suppliers of ATF in India Bargaining Power of Suppliers

Bargaining power of Buyers

The power of buyers in the airline industry is high. With the growing economy and large number of
low cost carriers the number of buyers has increased thereby providing further growth opportunities.
Buyer can choose the airline based on services provided, availability of flight, cost,
discounts/premium, etc. If another company provides better service compared to Indigo it is very easy
for customers to switch to that airline. Thus switching cost is also less. Buyer can book a ticket online
on laptop, through mobile, through various dealers, check for the discounts and book the cheapest
available ticket. This provides huge flexibility to the buyers. Hence, it is not necessary for a buyer to
choose Indigo again and again. Thus, buyer holds high bargaining power. The key factors contributing
to Indigo’s growth are Brand Loyalty, customer focus, quality, low cost, single class model and on-
time service. Maintaining and further enhancing these factors would help Indigo to have an edge over
other airlines.

 High no of buyers fragmented - lowers their powers.

 Switching cost minimal for buyers
 NO backward integration possible

Threat of Substitutes low

The threat of substitutes is LOW for airline industry. The substitute for low cost airline is the
Railways. This substitute is not very powerful as Customers prefer to use airline transport as it is
convenient and saves time. Therefore trains /Railways cannot serve to be a substitute. Customers use
the airline travel as a status symbol. This cannot be substituted by trains. The direct substitutes can be
other low cost airlines which can be high as the switching cost between low cost airlines is low.

 Indirect Substitutes are railways- but not powerful as airlines, score highly in travel time
  Travel by air is a status symbol

Competitive Rivalry: The competitive rivalry is quite high. The airline industry in India is
fragmented because large number of existing players likes Air India, Spice Jet, Jet airways, Air Asia,
Go Air, etc. Thus, there is huge competition among each other. The fixed cost involved in buying air
crafts, air craft financing such as lease or loan payment, leasing land for landing and take-off, aircraft
accessories, hangar rental, insurance, taxes is very high. Because of these exit barriers it is difficult
and costly to exit this industry. Thus there is a cut throat price war to increase market share. The
airline industry thus possesses high threat of the competitors.

 Very little product differentiation in Services

 Mature Industry- Only scope for growth by gaining other people’s market share
 High bargaining power of suppliers
 No sense of brand royalty amongst customers and can easily switch to other airline

Competition among major players is very high in LCC section because major target segment is middle
income group which has low brand loyalty and is very sensitive to price

 Very little product differentiation in services

 Mature industry only scope for growth by eating into other players market share.
 High bargaining power of suppliers
 No brand loyalty among consumers and they can easily switch to other airlines.

Porter’s Sixth Force- Complementors:. LOW. As for complementarities, the provision of services
like free Wi-Fi, a la carte meals, and passenger amenities offered by the full service airlines does not
really translate into more passengers as in the recent past; fliers have been induced more by lower
fares than these aspects.

References

https://www.ibef.org/industry/indian-aviation.aspx