INTRODUCTION

The Airline industry is one of the fastest growing sectors in the world, boosted by deregulation, open markets, technological advances and a quest for travel. Economic liberalization has wrought radical changes in India's civil aviation sector. Among the most significant of these are a rapid increase in capacity and a dramatic improvement in service quality. The Airline Industry encompasses a single aircraft conveying cargo articles and mail to different places to the numerous aircrafts carrying passengers to the different parts of the world. Services of the Airline industry can be segregated as domestic, regional, within the continent or travel between continents. A thorough analysis of the Airline industry will essentially comprise all of the above. Records show that the demand for airline travel has been increasing. 1950 through 1960 manifested a trend when the yearly growth was consistent at approximately 15%. Airline industry showed yearly growth ranging between 5% to 6% consistently in the 80s and the 90s. However, rate of growth cannot be expected to remain same throughout due to several factors. Deregulation being one of the reasons. Deregulation in the Airline industry led to flexibility in the prices of the airline tickets. Consequently, the airfares nosedived at times escalating the airway traffic. In some countries the Airline industry is regulated by the Government. In countries, where the Airline industry is privatized, many norms and regulations as laid forward by the Government has to be complied with. These norms and regulations have been framed keeping in mind the safety, political as well as economic aspects. The Airline industry trend shows that during the period 2000 through 2002, 6% profit was enjoyed by the Airline industry, as much as 10% to 13% was gained by companies in the catering sector, manufacturers of aircraft gained by 16%, airports gained by 10% etc.,. The Airline ticket costs are inclusive of the taxes, different kinds of fees and surcharges wherever applicable. At the start of a new millennium, airline industry has a role to play, in encouraging the fullest flowering of the freedom to travel and ship goods everywhere in the world.

TYPES OF AIRLINES.
The Airlines Industry in India can be broadly classified in four types, which are as follows:

International - 130+ seat planes that have the ability to take passengers just about anywhere in the world. Companies in this category typically have annual revenue of $1 billion or more.

National - Usually these airlines seat 100-150 people and have revenues between $100 million and $1 billion. Regional - Companies with revenues less than $100 million that focus on short-haul flights. Cargo - These are airlines generally transport goods. The Major factors influencing the type of airlines are Airport capacity, route structures, technology and costs to lease or buy the physical aircraft are significant in the airline industry.

Other large issues are:

Weather - Weather is variable and unpredictable. Extreme heat, cold, fog and snow can shut down airports and cancel flights, which costs an airline money.

Fuel Cost - According to the Air Transportation Association (ATA), fuel is an airline's second largest expense. Fuel makes up a significant portion of an airline's total costs, although efficiency among different carriers can vary widely. Short haul airlines typically get lower fuel efficiency because take-offs and landings consume high amounts of jet fuel.

Labour - According to the ATA, labor is the an airline's No.1 cost; airlines must pay pilots, flight attendants, baggage handlers, dispatchers, customer service and others.

ANALYST INSIGHT ABOUT THE AIRLINES SECTOR:Airlines also earn revenue from transporting cargo, selling frequent flier miles to other companies and up-selling in flight services. But the largest proportion of revenue is derived from regular and business passengers. For this reason, it is important that you take consumer and business confidence into account on top of the regular factors that one should consider like earnings growth and debt load. 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. On the other hand, leisure travelers are less likely to purchase these premium services and are typically very price sensitive. In times of economic uncertainty or sharp decline in consumer confidence, you can expect the number of leisure travelers to decline. It is also important to look at the geographic areas that an airline targets. Obviously, more market share is better for a particular market, but it is also important to stay diversified. Try to find out the destination to which the majority of an airline's flights are traveling. For example, an airline that sends a high number of flights to the Caribbean might see a dramatic drop in profits if the outlook for leisure travelers looks poor. A final key area to keep a close eye on is costs. The airline industry is extremely sensitive to costs such as fuel, labor and borrowing costs. If you notice a trend of rising fuel costs, you should factor that into your analysis of a company. Fuel prices tend to fluctuate on a monthly basis, so paying close attention to these costs is crucial.

POTTERS 5 FORCE ANALYSIS

Threat of New Entrants: - At first glance, you might think that the airline industry is pretty tough to break into, but don't be fooled. You'll need to look at whether there are substantial costs to access bank loans and credit. If borrowing is cheap, then the likelihood of more airliners entering the industry is higher. The more new airlines that enter the market, the more saturated it becomes for everyone. Brand name recognition and frequent fliers point also play a role in the airline industry. An airline with a strong brand name and incentives can often lure a customer even if its prices are higher.

Power of Suppliers: - The airline supply business is mainly dominated by Boeing and Airbus. For this reason, there isn't a lot of cutthroat competition among suppliers. Also, the likelihood of a supplier integrating vertically isn't very likely. In other words, you probably won't see suppliers starting to offer flight service on top of building airlines.

Power of Buyers: - The bargaining power of buyers in the airline industry is quite low. Obviously, there are high costs involved with switching airplanes, but also take a look at the ability to compete on service. Is the seat in one airline more comfortable than another? Probably not unless you are analyzing a luxury liner like the Concord Jet.

Availability of Substitutes: - What is the likelihood that someone will drive or take a train to his or her destination? For regional airlines, the threat might be a little higher than international carriers. When determining this you should consider time, money, personal preference and convenience in the air travel industry.

Competitive Rivalry: - Highly competitive industries generally earn low returns because the cost of competition is high. This can spell disaster when times get tough in the economy.

GROWTH IN AIRLINE INDUSTRY Air travel remains a large and growing industry. It facilitates economic growth, world trade, international investment and tourism and is therefore central to the globalization taking place in many other industries. In the past decade, air travel has grown by 7% per year. Travel for both business and leisure purposes grew strongly worldwide. Scheduled airlines carried 1.5 billion passengers last year. In the leisure market, the availability of large aircraft such as the Boeing 747 made it convenient and affordable for people to travel further to new and exotic destinations. Governments in developing countries realized the benefits of tourism to their national economies and spurred the development of resorts and infrastructure to lure tourists from the prosperous countries in Western Europe and North America. As the economies of developing countries grow, their own citizens are already becoming the new international tourists of the future. Business travel has also grown as companies become increasingly international in terms of their investments, their supply and production chains and their customers. The rapid growths of world trade in goods and services and international direct investment have also contributed to growth in business travel. Worldwide, IATA, International Air Transport Association, forecasts international air travel to grow by an average 6.6% a year to the end of the decade and over 5% a year from 2000 to 2010. These rates are similar to those of the past ten years. In Europe and North America, where the air travel market is already highly developed, slower growth of 4%-6% is expected. The most dynamic growth is centered on the Asia/Pacific region, where fast-growing trade and investment are coupled with rising domestic prosperity. Air travel for the region has been rising by up to 9% a year and is forecast to continue to grow rapidly, although the Asian financial crisis in 1997 and 1998 will put the brakes on growth for a year or two.

In terms of total passenger trips, however, the main air travel markets of the future will continue to be in and between Europe, North America and Asia. Airlines' profitability is closely tied to economic growth and trade. During the first half of the 1990s, the industry suffered not only from world recession but travel was further depressed by the Gulf War. In 1991 the number of international passengers dropped for the first time. The financial difficulties were exacerbated by airlines over-ordering aircraft in the boom years of the late 1980s, leading to significant excess capacity in the market. IATA's member airlines suffered cumulative net losses of $20.4bn in the years from 1990 to 1994. Since then, airlines have had to recognize the need for radical change to ensure their survival and prosperity. Many have tried to cut costs aggressively, to reduce capacity growth and to increase load factors. At a time of renewed economic growth, such actions have returned the industry as a whole to profitability: IATA airlines' profits were $5bn in 1996, less than 2% of total revenues. This is below the level IATA believes is necessary for airlines to reduce their debt, build reserves and sustain investment levels. In addition, many airlines remain unprofitable. To meet the requirements of their increasingly discerning customers, some airlines have to invest heavily in the quality of service that they offer, both on the ground and in the air. Ticket less travel, new interactive entertainment systems, and more comfortable seating are just some of the product enhancements being introduced to attract and retain customers. A number of factors are forcing airlines to become more efficient. In Europe, the European Union (EU) has ruled that governments should not be allowed to subsidize their loss-making airlines. Elsewhere too, governments' concerns over their own finances and a recognition of the benefits of privatization have led to a gradual transfer of ownership of airlines from the state to the private sector. In

order to appeal to prospective shareholders, the airlines are having to become more efficient and competitive. Deregulation is also stimulating competition, such as that from small, low-cost carriers. The US led the way in 1978 and Europe is following suit. The EU's final stage of deregulation took effect in April 1997, allowing an airline from one member state to fly passengers within another member's domestic market. Beyond Europe too, 'open skies' agreements are beginning to dismantle some of the regulations governing which carriers can fly on certain routes. Nevertheless, the aviation industry is characterized by strong nationalist sentiments towards domestic 'flag carriers'. In many parts of the world, airlines will therefore continue to face limitations on where they can fly and restrictions on their ownership of foreign carriers. Despite this, the airline industry has proceeded along the path towards globalization and consolidation, characteristics associated with the normal development of many other industries. It has done this through the establishment of alliances and partnerships between airlines, linking their networks to expand access to their customers. Hundreds of airlines have entered into alliances, ranging from marketing agreements and code-shares to franchises and equity transfers. The outlook for the air travel industry is one of strong growth. Forecasts suggest that the number of passengers will double by 2010. For airlines, the future will hold many challenges. Successful airlines will be those that continue to tackle their costs and improve their products, thereby securing a strong presence in the key world aviation markets.

AIRLINE INDUSTRY MERGERS Airline industry mergers are carried out to bring about changes in response to the dynamic economic conditions of the aviation industry and determine corporate aims of competitive ratios. Not all, but some airline industry mergers may go wrong, leading to limited options to select from, hike in prices, poor quality pf services offered etc. However, such instances are rare. Instances of airline industry mergers like Air France taking over KLM, the Dutch airline, have enhanced the number of flights and offers various flight options to select from. Airline industry mergers have ample scope for future development and growth. Airline industry mergers are also done to attain growth and effect higher profitability. With regard to airline industry mergers, costs are an important factor. Airline industry mergers involve leasing of airplanes and purchasing airplanes. Airline industry merger of World Airways Inc and Global Aero Logistics Inc: One of the instances of airline industry mergers was when World Airways Inc. together with North American Airlines, under the banner of the parent company called World Air Holdings Inc., was taken over by Global Aero Logistics Inc. The ATA operates under the banner of the parent company called Global Aero Logistics Inc. This merger involved a transaction cost of USD 315million. After the merger, USD 12.50 was the price which was determined for each share of the company. As a result of this merger, various airways services were implemented. These services included chartered and schedule flights. The number of airplanes was 56 and the merger provided employment to as many as 4,500 people. Revenues collected post-merger were estimated at USD 1.6 billion.

FACTORS WHICH INFLUENCE MERGERS:There are many characteristics which effect mergers. The prominent ones are enumerate below:

Globalizing competition Financial circumstances prevailing in the market Decreasing the strength of the industry. Bringing about integration in the industry Effecting changes in the technology used De-regulation

TOP 10 AIRLINES COMPANIES OF INDIA

S.No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Site Indian Airways Kingfisher Air India Air Deccan Lufthansa India Airlines Air Sahara IndiGo Alliance Air Paramount Airways Private Limited Jet Airways

FORECAST FOR AIRLINE INDUSTRY

A YEAR AGO, ATW PREDICTED that 2007 would be the peak year of the current airline earnings cycle. It appears we may have been correct. The good news is that barring a catastrophe the industry will enjoy a second consecutive year of profitability in 2008. The bad news is that it probably won't be as good as 2007. Measured against the losses of the first half of the decade, however, one reasonably may conclude that the bad news just isn't that bad. Expectations have been reset, not just owing to 9/11 and SARS but also because of $90/barrel crude. According to IATA, the industry earned an estimated $5.6 billion in 2007 after losing $500 million in 2006. That $5.6 billion represents just a 1.1% net margin on sales of $490 billion but is still the best performance since 1999, when earnings totaled $8.5 billion, and much better than anyone expected in January 2007. For 2008, IATA Chief Economist Brian Pearce sees the net result declining to $5 billion on revenues of $514 billion, a 1% profit margin. He attributes this largely to two factors: Oil prices and a faltering US economy. "We've become much more gloomy about the US economy," he told ATW last month, citing the credit crunch driven by the collapse of the sub prime mortgage market. World economic growth is expected to slip to 3.1% this year from 3.7% in 2007, with the US lagging well behind and possibly falling into recession. Unfortunately, Pearce notes, "the problem for the airline industry is that [the US slowdown] isn't enough to pull the rug from under the oil price" given strong demand for the stuff in China. That's the other part of the story. At the beginning of 2007, expectations were that oil would settle in at around $61-$63/barrel. It didn't, instead averaging $73 and briefly hitting $100 in the fourth quarter. For 2008, IATA expects fuel to average $78/barrel.

Tactical measures such as fare surcharges, hedging and conservation activities certainly helped airlines to manage the price of fuel last year, but a bigger contributor was better-than-expected travel demand and capacity discipline. Rising load factors have been "one of the key driving forces behind the improvement in profitability, despite fuel prices. Airlines have managed, particularly in North America, to push load factors up to very high levels," Pearce says. The challenge will be to repeat that performance this year because traffic growth is expected to slow in tandem with the cooling economy from an expected 5.9% last year to 4%, "the slowest it has been since 2003," according to Pearce. Concurrently, aircraft deliveries will ramp up. As IATA stated last month, "new capacity arriving at a time of slowing traffic growth will make it difficult to see higher fuel costs reflected in better yields." Yet there also is room for optimism. A Nov. 30 report by Morgan Stanley argues that business travel trends remain strong despite the problems in the US. The firm's "global survey of over 300 corporate travel managers suggests 2008 will be another year of volume and pricing growth" for airlines, although it cautions, "that could change quickly if the US economy heads into recession." Sixty percent of travel managers surveyed expect travel budgets to increase at least 4% this year compared to 2007, with 25% expecting them to be up 7% or more. "For the airlines, corporate travel spend in 2008 should be solid, but growth will likely decelerate slightly from the strong pace of 2006-07," the report states, while noting that Latin America "seems to be a laggard by a large margin." Morgan Stanley's view tracks closely the findings of the annual American Express "Global Business Travel Forecast" released in late October that predicted demand for business travel services "will again outweigh supply in 2008, driving continued increases in rates across air, hotel, car rental and corporate meetings and events."

COST ANALYSIS
The challenges described above led four out of the six US Legacy carriers (US Airways, United, Delta and Northwest) into Chapter 11 bankruptcy between 2001 and 2005. Under bankruptcy protection, these carriers were able to focus on down-sizing, cutting operating costs and improving productivity as part of their restructuring efforts. And, the other two Legacy carriers, American and Continental, used the threat of bankruptcy filing to do the same. Much of their cost-cutting strategy focused on labor: Legacy airline employment was reduced by 30% in just five years, representing over 100,000 jobs lost while average wage rates were also cut by 7% [4]. At the same time, the Legacy airlines sought productivity gains not only by reducing headcount, but also by introducing new technologies (e.g., internet ticket distribution, web check-in) and by moving capacity from domestic to international routes in an effort to improve aircraft utilization with increased stage lengths. Legacy carriers also attempted to mimic several strategies of the Low Cost Carriers (LCCs), for example, by eliminating meals and pillows to reduce costs and by reducing aircraft turn-around times to improve aircraft productivity. LCCs in many respects took advantage of the weaknesses of the Legacy carriers during their financial crisis and re-structuring. Most LCCs were able to rapidly expand their networks and captured significant market share. They expanded into new markets with new aircraft, more flights and, of course, lower fares. However, during this same period the LCCs began to face increasing operating costs, driven by aging fleets and personnel with increasingly more seniority. And, the LCCs could not escape the impacts of more than a doubling in fuel costs between 2003 and 2005 even the successful fuel hedging strategy of Southwest provided only a temporary reprieve from increasing fuel costs. In fact, the concerted cost-cutting efforts of both Legacy and LCC airlines were not enough to offset the increased fuel prices, resulting in growing total unit costs for both airline groups (Figure 4) from 2001 to 2006. However, while total unit

costs continued to increase due primarily to the impact of higher fuel prices, labor unit costs showed a very different trend they have decreased dramatically for Legacy airlines, while they continue to increase among LCCs. As shown in Figure 5, there has been a clear labor cost convergence between both groups and the historical advantage that LCCs have had in this category was effectively eliminated by 2006. Indeed for the first time in 2006, LCC employees had on average a higher total compensation and benefits than their Legacy counterparts. Amazingly, the carrier with the highest labor expense per employee among Legacy and LCC airline in 2006 was Southwest [5].

Figure. Costs.

Unit

Figure. Labour Costs.

REVENUE ANALYSIS
The international airline industry provides service to virtually every corner of the globe, and has been an integral part of the creation of a global economy. The airline industry itself is a major economic force, both in terms of its own operations and its impacts on related industries such as aircraft manufacturing and tourism, to name but two. Few other industries generate the amount and intensity of attention given to airlines, not only among its participants but from government policy makers, the media, and almost anyone who has an anecdote about a particular air travel experience. During much of its development, the global airline industry dealt with major technological innovations such as the introduction of jet airplanes for commercial use in the 1950s, followed by the development of wide-body jumbo jets in the 1970s. At the same time, airlines were heavily regulated throughout the world, creating an environment in which technological advances and government policy took precedence over profitability and competition. It has only been in the period since the economic deregulation of airlines in the United States in 1978 that questions of cost efficiency, operating profitability and competitive behavior have become the dominant issues facing airline management. With the US leading the way, airline deregulation or at least liberalization has now spread to much of the industrialized world, affecting both domestic air travel within each country and, perhaps more importantly, the continuing evolution of a highly competitive international airline industry. Today, the global airline industry consists of over 2000 airlines operating more than 23,000 aircraft, providing service to over 3700 airports. In 2006, the worlds airlines flew almost 28 million scheduled flight departures and carried over 2 billion passengers [1]. The growth of world air travel has averaged approximately 5% per year over the past 30 years, with substantial yearly

variations due both to changing economic conditions and differences in economic growth in different regions of the world. Historically, the annual growth in air travel has been about twice the annual growth in GDP. Even with relatively conservative expectations of economic growth over the next 10-15 years, a continued 4-5% annual growth in global air travel will lead to a doubling of total air travel during this period. In the US airline industry, approximately 100 certificated passenger airlines operate over 11 million flight departures per year, and carry over onethird of the worlds total air traffic US airlines enplaned 745 million passengers in 2006. US airlines reported over $160 billion in total revenues, with approximately 545,000 employees and over 8,000 aircraft operating 31,000 flights per day [2]. The economic impacts of the airline industry range from its direct effects on airline employment, company profitability and net worth to the less direct but very important effects on the aircraft manufacturing industry, airports, and tourism industries, not to mention the economic impact on virtually every other industry that the ability to travel by air generates. Commercial aviation contributes 8 percent of the US Gross Domestic Product, according to recent estimates [3]. The economic importance of the airline industry and, in turn, its repercussions for aircraft manufacturers, makes the volatility of airline profits and their dependence on good economic conditions a serious concern for both industries. This concern has grown dramatically since airline deregulation, as stable profits and/or government assistance were the rule rather than the exception for most international airlines prior to the 1980s. As shown in Figure 1, the total net profits of world airlines have shown tremendous volatility over the past 15 years. After the world airline industry posted 4 consecutive years of losses totaling over $22 billion from 1990 to 1993, as a result of the Gulf War and subsequent economic recession, it returned to record profitability in the late 1990s, with total net profits in excess of $25 billion being reported by world airlines from 1995 to 1999. Even more dramatic was the industrys plunge into

record operating losses and a financial crisis between 2000 and 2005, with cumulative net losses of $40 billion.

RECENT INDUSTRY EVOLUTION 2000-2005

On a global scale and especially in the United States, the airline industry has been in a financial crisis for much of this new century. The problems that began with the economic downturn at the beginning of 2001 reached almost catastrophic proportions after the terror attacks of September 11, 2001. In the United States alone, the industry posted cumulative net losses of over $40 billion from 2001 to 2005, and only in 2006 was it able to return to the black with a total net profit of just over $3 billion [2]. The industry crisis was most certainly exacerbated by the events of 9/11, which resulted in immediate layoffs and cutbacks of almost 20% in total system capacity, in anticipation of the inevitable decline in passenger traffic due to concerns about the safety of air travel. However, the airlines were in serious trouble well before 9/11, as the start of an economic downturn already had negatively affected the volume of business travel and average fares. At the same time, airline labor costs and fuel prices were increasing yearly. To make matters worse, airlines were faced with deteriorating labor/management relations, aviation infrastructure constraints that led to increasing congestion and flight delays, and dissatisfied customers due to perceptions of poor service in general. Thus, we cannot attribute the recent poor performance of the airline industry solely to the impacts of 9/11. In fact, the events of 9/11 actually provided a temporary reprieve from some of the industry's fundamental problems: Reductions in flight schedules alleviated some of the pressure on the aviation infrastructure, resulting in fewer flight delays; faced with massive layoffs and tremendous uncertainty about the financial futures of the airlines, labor unions moved towards a more conciliatory position, and passengers became more willing to lower their service expectations in exchange for improved security. In the period after 9/11, passenger traffic made a slow recovery, and returned to

pre-9/11 levels by mid-2004. With total US domestic airline capacity substantially lower than before 9/11, average load factors soared to historical record levels. Yet, despite operating flights that were quite full, the large network airlines were still losing money. The ability of the network airlines to generate adequate revenues to cover their operating costs was severely impacted by major shifts in passenger choice behavior, particularly on the part of business travelers. The overall volume of business air travel demand decreased in early 2001 due to the overall economic downturn. Business air travel was further affected by the increased hassle factor and greater uncertainty in passenger processing times caused by increased security requirements. The combination of reduced business travel budgets and substantial cutbacks in airline passenger service quality led more business travelers to look for alternatives to paying premium air fares teleconferencing and other travel substitutes, alternative travel modes, and especially, low-fare airlines for business travel. As a result, total US airline industry passenger revenues dropped by over 20% between 2000 and 2002, and were still 10% below 2000 levels in 2004

The Balance Sheet following shows the assets and the liabilities and of Jet Airways from March 04 and March 08.
Mar ' 08 Sources of funds Owner's fund Equity share capital Share application money Preference share capital Reserves & surplus Loan funds Secured loans Unsecured loans Total Uses of funds Fixed assets Gross block Less : revaluation reserve Less : accumulated depreciation Net block Capital work-in-progress Investments Net current assets Current assets, loans & advances Less : current liabilities & provisions Total net current assets Miscellaneous expenses not written Total Notes: Book value of unquoted investments Market value of quoted investments Contingent liabilities Number of equity sharesoutstanding (Lacs) 1,465.00 10.35 14,247.89 893.34 69.01 6,624.43 893.34 190.06 9,736.40 863.34 1,603.68 3,097.06 863.34 233.42 121.10 720.89 4,145.67 4,361.78 -216.11 13,866.79 3,402.32 2,469.71 932.61 8,161.11 4,091.31 1,865.21 2,226.10 7,039.46 2,156.27 1,417.65 738.62 4,715.73 1,398.72 1,131.53 267.19 3,239.83 16,591.09 2,699.90 2,506.92 11,384.27 1,223.28 1,475.35 5,713.83 132.44 2,416.34 3,165.05 3,994.52 68.93 4,312.07 162.02 2,249.58 1,900.47 2,725.66 187.23 5,162.79 259.27 2,593.46 2,310.06 71.32 1,595.73 5,130.88 387.57 2,050.21 2,693.10 46.12 233.42 1,612.75 10,402.29 13,866.79 742.46 5,313.84 8,161.11 206.02 4,689.58 7,039.46 60.00 2,904.84 4,715.73 60.34 3,149.65 3,239.83 86.33 1,765.42 86.33 2,018.48 86.33 2,057.53 86.33 1,664.56 72.09 69.83 -112.08 Mar ' 07 Mar ' 06 Mar ' 05 Mar ' 04

MARKET STRUCTURE
The airline industry is characterized by an oligopoly market structure, a form of imperfect competition in which a limited number of firms dominate the industry.

(1) Oligopoly firms have market power in setting or altering prices for their products by establishing various output levels. Since oligopoly firms produce similar outputs and compete with their industry rivals, any action an oligopoly firm takes is noticed by its competitors. Consequently, rivals may react with pricecutting or other attempts to enhance market share. Thus, the firms in an oligopoly are interdependent, and each recognizes that its market power is vulnerable to erosion by competitors or new market entrants.

The standard measure of oligopoly market power is the industry concentration ratio. This ratio relates the market share of the largest firms in the industry to the size of the entire market (Schiller 2003). In 2001, the six major airlines had almost 70% market share of U.S. passengers, and the largest low-fare airline, Southwest, commanded an additional 12%, leaving only 20% of domestic passengers among the remaining smaller carriers, as shown in Figure 2 (Air Transport Association 2002). The market structure for airlines is an oligopoly. This means that there are only a handful of companies that compete in this industry. Oligopolies are more competitive than monopolies, industries for which there is only one seller of the product, but are less competitive than industries that experience near perfect competition. Before discussing how oligopolies work, a few words about monopolies and perfect competition...

A monopoly exists when one seller is the only seller of the product or service. Some industries are prone to become monopolies naturally, and because the industry operates more efficient with one provider, they are allowed to become a monopoly but are regulated to keep the company from exploiting the buyers. For instance, electric companies are generally natural monopolies. Since it would not be worth it for a competing electric company to lay their own electrical lines all the way to your house when you might not even switch to them, only one company controls the electricity that sells to your house. It's more efficient that

way, and the government allows this type of monopoly while regulating the price this company sells electricity to you. Some other industries, such as steel and oil, once become powerfully monopolistic over a hundred years ago. These monopolies were formed in ruthless ways, which destroyed other companies and then exploited buyers with high prices. Eventually, the government broke apart these monopolies and passed anti-trust laws to prevent future monopolies. On the opposite end of the spectrum is perfect competition. Perfect competition is pretty much just a theoretical concept and never actually exists, but some industries can come very close to perfect competition. Some items sold on eBay approach perfect competition. Suppose people on eBay are selling a book for which there are many, many sellers selling identical editions of the same bestselling book. Adding in shipping and handling, you will find that people are all buying the book for almost the same price. An eBay seller could not sell the book for more than that price, and people will bid up the price to the going price. Each individual seller sells the book at a price set by the market and has virtually no power to set prices.

In the middle are oligopolies. In an oligopoly, each company has some pricing power, but they can't set prices to whatever they want. Each company affects the market (unlike perfect competition) but is also affected by other companies in the market (unlike monopolies). Oligopolies are industries where set-up costs are extremely high, so people can't just enter the market even if there's money to be made in the industry. Imagine trying to start a new airline to compete with United or American. It would be extremely difficult. (On the other hand, one could start an eBay business rather easily. Even a family restaurant is relatively easy compared to a new airline.) The same would be true of starting a car company. In oligopolies, people will sometimes refer to the "Big 3" or "Big 4" or "Big" however many major players there are in the market. That's not to say that there aren't small players in the airline or automotive industries that fill a special niche in the market, but the small companies don't affect the major players.

One characteristic of oligopolies is that they engage in price wars. When one airline company decides to cut fares or one car company decides to cut new car prices, the other industries will usually cut theirs as well. Price wars happen because some company is trying to grab a larger percentage of the market, and the other companies lower their prices to not lose market share. With oligopolies, people feel some loyalty for various reasons (such as frequent flyer program or availability of certain flights), so people might stick with their preferred company when a competitor offers a lower price, so just because one company is selling at a higher price doesn't mean they won't sell at all. (On the other hand, a company in perfect competition will sell no units if its price is higher than other companies in the market.) However, if the price difference between oligopolistic companies is great enough, virtually everyone will ditch the higher price company and buy from the cheaper company.

The Curve following is the form of Oligopoly market which prevails in the Aviation Sector.

The Table Following shows the division in the market shares of passengers in 2003 in the Indian Aviation Sector.

CONCLUSIONS
The ageing fleet of Indian Airlines and Air India has dampened returns and valuation but they dont have the money to buy new airplanes. Neither does the government, for that matter. Ergo all fleet renewal plans had to be put on hold till a white knight came along and snapped up the two airlines at the dis-investment altar. After going through the various factors influencing and trends prevailing in the industry and the various challenges faced by the Airlines especially the Maharaja, it is essential that PRIVATISATION and a huge injection of funds can only be the key to India's International Flag carrier Air-India's (A-I's) survival. This, unfortunately is again stalled by the Government, who, should be actually taking the lead in promoting the industry. Now once again, after months of indecision, policymakers seem to be coming around to the idea of new acquisitions because Air Indias suitors dropped out one by one and there is not much interest forthcoming for Indian Airlines either, and now with aircraft manufacturer being more flexibile in terms of deliver and pricing this will be the best time to lease more aircraft and civil aviation ministry needs to extend their consent to the airlines. Since providing an atmosphere of healthy competition will ultimately benefit the consumers and society.

ASSIGNMENT 1

AIRLINES INDUSTRY
Deanne Lopez Harish Maurya Elston Menezes Anushree Menon Aatri Mishra 24. 20. 21. 22. 23.