The social impact of flexible pricing in the Airline Industry in India

Group NO:
Avinash, Mahesh & Sayamil
26 November 2018

Terms of Reference

The main purpose of this report is to share the impact that the pricing strategy has brought
about in the Indian society and how the mode of transport changed to air drastically in the
domestic segment with little light being thrown to international airline traffic as well.

Abstract

In this paper, we analyse the impact of price changes in the Indian airline industry.

Introduction

Indian airline industry is one if the fastest growing airline industry in the world.
Domestic passenger traffic increased at a rate of 22% in the last year. It is considered
to be third largest in the world. International passenger traffic increased at CAGR of
8.33%. The use of Revenue Management and Dynamic Pricing(RMDP) helps to
update airfares dynamically based on the booking and the demand forecasted. The
Low-cost carriers set prices depending on the competitors. The Full-Service Carriers
fares will much higher than Low cost carriers as they are operating for a different
segment and follows different strategies. It can be observed that the airfares will
increase as the departure date gets closer. The existing fleet of aircraft in India
stands at around 500 and the number of passengers carried by only domestic airlines
stands at 117.1 million.

The Indian airline industry is dominated by private airline companies in domestic and
international traffic. Now, the air fares are much cheaper and most of the people
making air travel which was once considered to be meant for rich people. Private
Airlines account for more than 75% of domestic aviation sector. The increase in the
number of airline companies operating in India have brought down the air fares
which is one of the sole reasons for people for opting to travel via air along with the
growth of tourism in India. The Indian Airline Industry is predicted to be one of the
largest in the world in the coming years. One other main service provided is the air
cargo services which transportation of mails and cargos.

Airline Industry in India

India’s current passenger traffic is around 141 million. The major carriers in order of
their market share are Indigo, Jet airways, Air India, SpiceJet, Go Air, Air Asia, Vistara,
Jet Lite. These airlines connect around 100 cities in the country and also operates
overseas journeys. Several other foreign airlines also operate in India connecting
different cities in India with major cities across the globe. Mumbai Delhi air corridor is
ranked third among the busiest air routes in the world. The busiest airport in India is
Indira Gandhi International Airport, New Delhi in terms of domestic and international
passenger traffic.
The Indian airline market is estimated to have 800 aircraft by 2020. It is then also said to
be untapped in many ways. These attract foreign and private airline industries to India.
The infrastructure is considered not up to the mark. The factors that drives the airline
industries are modern airports, low cost carriers, Foreign Direct Investment(FDI) in
domestic airlines, information technology interventions and need of regional connectivity
across different parts of India. India is also becoming a place for manufacturing
components parts of an aircraft and in the coming years will play an active part of global
aerospace supply chain due to cost advantages in manufacturing along with the technical
and engineering facilities available.

The different market shares of the major airlines in 2017 are shown in the figure 1.

Fig 1

Growth

Growth in passenger traffic has been due to increase in income and low air fares.
Airports on India are planning to increase investment on new technology to match the
surging passenger traffic. Until 2013, Airport Authority of India(AAI) was developing and
improving the airports in India. But post liberisation, a large number of new private
players has showed and improved the infrastructure and quality of many airports in India.
GMR, Siemens, Larsen & Turbo are some examples of these private sector firms. The
development of tourism in India has proved one of the factor. The foreigners come to
India via air which increased the international passenger traffic.
The air passenger traffic in India is shown in Fig 2.
 Fig 2.
The factors that influence growth are:

 Higher household incomes

 Strong economic growth
 Entry of low cost carriers (LCC)
 Increased FDI inflows in domestic airlines
 Increased tourist inflow
 Surging cargo movement
 Cutting edge information technology (IT) interventions
 Focus on regional connectivity
 Modern airports
 Sustained business growth and
 Supporting Government policies

Major Airlines

1. Indigo
This is a low-cost airline who focus on the middle class in India. The headquarters of
the company is at Gurgaon. It operates only one aircraft which is Airbus 320 family.
Operating only one aircraft is a competitive advantage for Indigo because the
employees has to be trained and work for only Airbus 320 family. Their main
strategy is low airfares and the focus on timing.

Total Market Share: 40.1%

Fleet size: 155
Passenger Load factors: 83.6%
Passenger Complaints in average: .34 % (No. of Complaints/10,000 Pax)

2. Jet Airways
It is another major airline based in Mumbai. It is the second largest airline in India in
terms of market share and the passengers carried. It operates internationally also by
providing services to almost 20 countries across Europe, America and Asia.

Total Market Share: 17.9%

 Fleet size: 119
Passenger Load factors: 80.7%
Passenger Complaints in average: 1.42 % (No. of Complaints/10,000 Pax.)

3. Air India
Air India is the flag carrier airline of India owned by Air India Limited (AIL), a
Government of India enterprise. It is the third largest airline in India (after Indigo
and Jet Airways) in domestic market share, and operates a fleet of Airbus and Boeing
aircraft serving various domestic and international airports. It is headquartered at
the Indian Airlines House in New Delhi.

Total Market Share: 13.3%

Fleet size:
Passenger Load factors: 75.5%
Passenger Complaints in average: 2.38 % (No. of Complaints/10,000 Pax)

4. Spicejet
Spice Jet is an Indian low-cost airline headquartered in Gurgaon, India. It is the
country’s fourth largest airline by number of passenger carried with market share of
13.1% as of 2017. The airline operates more than 270 daily flights to 41 destinations,
including 34 Indian and 7 international cities.

Total Market Share: 13.1%

Fleet size: 54
Passenger Load factors: 94.5%
Passenger Complaints in average: 0.64 % (No. of Complaints/10,000 Pax)

5. Go Air
Go Air is an Indian Low-cost carrier based in Mumbai. It commenced operations in
November 2005. It is the aviation foray of the Wadia Group. As of 2017, it is the fifth
largest airline in India by market share. It operates domestic passenger services to
22 cities with over 140 daily flights and approximately 975 weekly flights. Its hubs
are at Chhatrapati Shivaji International Airport, Mumbai.

Total Market Share: 8.4%

Fleet size: 32
Passenger Load factors: 94.5%
Passenger Complaints in average: 0.64 % (No. of Complaints/10,000 Pax).

Dynamic Pricing

Dynamic Pricing is a pricing strategy in which businesses set flexible prices for product or
service depending on the demand for that product or service. It is also called surge pricing,
demand pricing, flexible pricing and time-based pricing. Among different pricing strategies,
however, companies tend to favour dynamic pricing, and consumers seem to accept
dynamic pricing. Dynamic pricing is a common practice in several industries such as
hospitality, travel, entertainment, retail, electricity, and public transport. Each industry takes
a slightly different approach to repricing based on its needs and the demand for the product.
Dynamic pricing will increase revenues and profits. The success of dynamic pricing relies on
the ability to segment consumers into different groups with different levels of willingness to
pay. In particular, the hospitality and airline industries have increasingly employed dynamic
pricing since their inventories are perishable, demand can be segmented, the products or
services are sold well in advance, and demand fluctuates substantially

From consumers’ perspective, consumers seem to accept the application of dynamic pricing
where they are charged different prices for the same service or product since
dynamic pricing enables consumers to make a choice over the price. Dynamic pricing has
been used as a tool to provide price promotion. In addition, studies have showed that
consumers react differently toward price discounts of the same products or services. The
concept of consumer involvement plays a significant moderating role.
The involvement can be used to segment consumers into low, moderate, and high
involvement groups which encourages different promotional strategies. Thus, the different
involvement a consumer attributes to a discount may not be independent from a
consumer’s preference on pricing strategies. Also, the involvement level may influence a
consumer’s discount receiving behaviour, such as high involvement consumers
demonstrating more positive feelings from obtaining a discount.

Airlines change prices often depending on the day of the week, time of day, and number of
days before the flight. For airlines, dynamic pricing factors in different components such as:
how many seats a flight has, departure time, and average cancellations on similar flights.
Airfares are determined by both intertemporal price discrimination and dynamic adjustment
to stochastic demand given limited capacity. Airlines tend to charge high prices to
passengers who search for tickets close to the date of travel. The conventional view is that
these are business travellers, and airlines capture their high willingness to pay through
intertemporal price discrimination. Airlines also adjust prices on a day-to-day basis as
capacity is limited and the future demand for any given flight is uncertain. While fares
generally increase as the departure date approaches, prices can actually fall from one day to
the next, after a sequence of low demand realizations.

Intertemporal price discrimination and dynamic adjustment to stochastic demand are

complements in the airline industry. This follows because inelastic consumers tend to arrive
last. In order to be in a position to price discriminate and set high prices to these late-
arriving consumers, the firm will want to allow fares to adjust to realizations in demand.
In order to estimate how demand elasticity changes over time, which is needed to calculate
the welfare effects of intertemporal price discrimination, it is necessary to take stochastic
demand into account. The reason is that by ignoring stochastic demand, the opportunity
cost of selling a seat is the same regardless of the date of purchase. But with stochastic
demand, the opportunity cost changes over time. These matters because inferences
regarding demand elasticity come from the firm's first-order condition in choice of price,
which relates prices and marginal costs to demand elasticities. If marginal costs are
incorrect, then the estimated change in demand elasticity is also incorrect.

Advantages:
 Reduction of loss because of vacancy of seats
 Robust market for low cost carriers
 Passenger benefit from advance bookings by lesser fares
 Cutting edge technology to leverage business travellers and address the idle
capacity
 Revenue Maximization for not so profitable air routes
 Much higher returns through stimulating demand by announcing prize
 Eliminates possible loss by changing price
  Helps to anticipate demands to adjust to the supply
 Eliminates the travel agents from exploiting the consumers
 Better services to the consumers in case of cancellation
 The pricing mechanism helps to ascertain the different consumer types and
decide the magnitude of the price discrimination
 Airline firms offer special deals and customization for the individual customer
 Dynamic pricing has brought about the changes in pricing in airlines due
towering of the economy through internet, corporate networks and wireless
networks.
 Buyers can compare the prices of different airlines to leverage on bargaining
position with lesser search costs
 Technology allows firms to collect data about the preferences, tastes to
customize the prices
 Transaction costs are eliminated as there is no need for the people to be
physically present in the time and space and also third-party costs of
distribution is not there
 Airline sector is characterized by increased uncertainty and demand volatility.
Dynamic pricing is preferable over single fixed price
 Natural segmentation of business travellers, casual travels and hybrid travels
helps to adjust fares
 Complex software’s enables major airlines to fill unsold seats at marginal
revenues by generating direct sales via their websites and mobile application.
 Yield management system leads to maximize the profits by forecasting
demand, closely monitoring the bookings and dynamically adjusting the seats
available.

Disadvantages:
 Airline industry is grappling with the task of determining the right prices to
charge a customer for a product or service
 It is difficult to know own operating costs and availability of supply
 It is herculean task for airline firm to sense the demand
 Implementation of sophisticated price and customization schemes is costly in
airline firms
 Successful deployment of Dynamic Pricing schemes involves excessive set up
costs
 Airline firms with distribution through “mobile first” strategies are visible to
the large audience as internet access is easy, immediate and omnipresent.

Factors impacting the Indian airline industry

Political Factors

In India, one can never over-look the political factors which influence each and every industry
existing in the country. Like it or not, the political interference has to be present everywhere.
Given below are a few of the political factors with respect to the airline industry:
The airline industry is very susceptible to changes in the political environment as it has a great
bearing on the travel habits of its customers. An unstable political environment causes
uncertainty in the minds of the air travellers, regarding travelling to a particular country.

Overall India’s recent political environment has been largely unstable due to international
events & continued tension with Pakistan. The Gujarat riots & the government’s inability to
control the situation have also led to an increase in the instability of the political arena.

The most significant political event however has been September 11. The events occurring on
September had special significance for the airline industry since airplanes were involved. The
immediate results were a huge drop in air traffic due to safety & security concerns of the
people.

International airlines are greatly affected by trade relations that their country has with others.
Unless governments of the two countries trade with each other, there could be restrictions of
flying into particular area leading to a loss of potential air traffic (e.g. Pakistan & India)

Another aspect is that in countries with high corruption levels like India, bribes have to be
paid for every permit & license required. Therefore, constant liasoning with the minister &
other government official is necessary. The state-owned airlines suffer the maximum from
this problem. These airlines have to make several special considerations with respect to
selection of routes, free seats to ministers, etc which a privately-owned airline need not do.
The state-owned airlines also suffer from archaic laws applying only to them such as the
retirement age of the pursers & hostesses, the labour regulations which make the
management less flexible in taking decision due to the presence of a strong union, & the
heavy control &interference of the government. This affects the quality of the service
delivery & therefore these airlines have to think of innovative service marketing ideas to
circumvent their problems & compete with the private operators.

Economic Factors
Business cycles have a wide-reaching impact on the airline industry. During recession,
airline is considered a luxury & therefore spending on air travel is cut which leads to reduce
prices. During prosperity phase people indulge themselves in travel & prices increase.

After the September 11 incidents, the world economy plunged into global recession due to
the depressed sentiment of consumers. In India, even a company like Citibank was forced to
cut costs to increase profits for which even the top-level managers were given first class
railway tickets instead of plane tickets.

The loss of income for airlines led to higher operational costs not only due to low demand but
also due to higher insurance costs, which increased after the WTC bombing. This prompted
the industry to lay off employees, which further fuelled the recession as spending decreased
due to the rise in unemployment.

Even the SARS outbreak in the Far East was a major cause for slump in the airline industry.
Even the Indian carriers like Air India was deeply affected as many flights were cancelled due
to internal (employee relations) as well as external problems.

Social Factors

The changing travel habits of people have very wide implications for the airline
industry. In a country like India, there are people from varied income groups. The airlines have
to recognize these individuals and should serve them accordingly. Air India needs to focus on
their clientele which are mostly low-income clients & their habits in order to keep them
satisfied. The destination, kind of food etc all has to be chosen carefully in accordance with
the tastes of their major clientele.

Especially, since India is a land of extremes there are people from various religions and castes
and every individual travelling by the airline would expect customization to the greatest
possible extent. For e.g. A vegetarian would be satisfied with the service only if he is served
veg food and it should be kept in mind that the customers next to him are vegetarian.

Another good example would be the case of South West Airlines which occupies a solid
position in the minds of the US air travellers as a reliable and convenient, fun, low fare, and
no-frills airline. The major element of its success was the augmented marketing mix which it
used very effectively. What South West did was it made the environment inside the plane very
consumer friendly. The crew neither has any uniform nor does it serve any lavish foods, which
indirectly reduces the costs and makes the consumers feel comfortable.

Technological Factors

The increasing use of the Internet has provided many opportunities to airlines. For e.g. Air
Sahara has introduced a service, through the internet wherein the unoccupied seats are
auctioned one week prior to the departure.

Air India also provides many internet-based services to its customer such as online ticket
booking, updated flight information & handling of customer complaints. USTDA (US trade &
development association) is funding a feasibility study and workshops for the Airports
Authority of India as part of a long-term effort to promote Indian aviation infrastructure. The
Authority is developing modern communication, navigation, surveillance, and air traffic
management systems for India's aviation sector that will help the country meet the expected
growth and demand for air passenger and cargo service over the next decade.
A proposal for restructuring the existing airports at Delhi, Mumbai, Chennai and Kolkata
through long-term lease to make them world class is under consideration. This will help in
attracting investments in improving the infrastructure and services at these airports. Setting
up of new international airports at Bangalore, Hyderabad and Goa with private sector
participation is also envisaged.

A good example of the impact of technology would be that of AAI, wherein with the help of
technology it has converted its obsolete and unused hangars into profit centres. AAI is now
leasing these hangars to international airlines and is earning huge profits out of it. AAI has also
tried to utilize space that was previously wasted installing a lamination machine to laminate
the luggage of travellers. This activity earns AAI a lot of revenue.

These technological changes in the environment have an impact on Air India as well. Better
airport infrastructure, means better handling of airplanes, which can help reduce
maintenance cost. It also facilitates more flights to such destinations.

Perspective of consumers

The analysis of the buyer behaviour is really interesting in this sector. Every individual has
different needs and expectations in this market, so segmentation and positioning will be also
fundamental. Furthermore, it’s normally an industry where, the user follows all the steps of
the buyer behaviour in the selection and purchase of the service. Special importance has the
Information Search by the customer (which is normally more complete than in other
purchases) and beliefs and attitudes, which are the most important challenges of this analysis
because normally have an important weight in the final decision of the customer. In a market
as competitive as this one, a personal bad experience or just a non-favourable belief or
attitude can determine the user's choice forever. That's why the Brand Image is also
fundamental for this kind of Companies.

Customers income is one of the major factors influencing demand for air travel. As soon as
economic activity and trade increase, demand for business air travel grows. With greater
economic activity, income of the population rises. Consequently, people start to have higher
expenses for less important goods and services such as holidays. Similarly, with increasing
prosperity, people are less price-sensitive and more predisposed to product quality. This
lead airlines to sell tickets in higher prices in an effort to offer the best service. Conversely
during a recession customer are more sensitive and are more interested in price than the
comfort and brand image. These facts force airlines to stimulate demand for air transport
with various promotions with discounted tickets. Often bad financial situation of customers
results in shifting of passengers from traditional airlines to low-cost airlines.

Consumer who books ticket just before their date of journey, pay relatively much more than
the consumer who booked ticket week(s) prior to their date of journey. Though, it doesn’t
affect high-income consumer in a similar manner it affects low and middle-income
consumer. In order to evade high airline prices, low and middle-income consumer tends to
book tickets earlier.
Perspective of Airlines

The aviation industry as we know it in the current form went through a long development.
The process of internationalization, globalization, and many other factors greatly increased
the amount of travelling people. Trade agreements, expansion of cargo transportation
caused greater mobility of business travellers. The behaviour of leisure passengers also
changed. All these factors have had a notable impact on creating of the airline pricing
strategies.
Traditional carriers can offer two different vertical quality products (economy cabin vs.
business cabin, refundable ticket vs. non-refundable ticket, VIP lounge access vs. no VIP
lounge access), while low-cost carriers offer only one type of product (economy cabin, non-
refundable ticket and no VIP lounge access). Customers for this product could be divided
into two types of travellers, business travellers and leisure travellers. Both of these
categories have different preferences and look at the quality product. It is important to
remember that these differences have significant impact on the direction of price policy and
the management of product availability.

Do we have enough employees to provide a good service? Do they have the necessary
personal and professional skills? , Do they understand the brand-values? , Are they
enough motivated or too tired?
Those are questions that airlines companies have to ask themselves, and which
answers are going to have important consequences in the type of service provided.

Therefore, management faces a tremendous challenge in selecting and training all of these
people to do their jobs well, and, perhaps even more important, in motivating them to care
about doing their jobs well, and to make an extra effort to serve their customers. After all,
these employees must believe in what they are doing and enjoy their work before they can,
in turn, provide good service to customers.

Because services are often experienced at the provider's facilities, other customers who are
being served there can also influence one’s satisfaction with a service. For e.g. crying children
in a nearby seat on an airplane or ill-mannered customer are all examples of unpleasant
service conditions caused by a firm's other patrons.