Aviation Strategy Analysis

Aviation strategy analysis

Introduction[1]

On May 7 2014, Air Asia obtained an Air Operator’s Permit from theIndian aviation authorities. This was the signal that the airlinescould go ahead to operate in India, something that they had beenlonging for a long period. Air Asia was about to join the IndianAviation Industry, which has been identified as a main contributor tothe Indian economy. Having over a hundred million air travelers usingthe industry’s services, it is also one of the most profitable onesin the Asian region (Saraswati 2001). Such factors have for a whiletempted foreign investors to venture into the industry and get someshare of the billions of dollars that are generated ever year.However, entering the Indian aviation market as a foreign operatorpresents a number of challenges that any investor will have to sortout first before being assured of making any profits. There are anumber of issues that any new entrant has to sort out first, giventhat marketing environment forces in the countries, and the vastcustomer base that needs to be attracted.

AirAsia has a reputation for being an aggressive player globally. It hasbeen rated amongst one of the cheapest airlines in the global stage,with prices that attract millions of customers to use their servicesand products every year. Given its reputation for aggressiveness, thecompany aims to hit the Indian market and get a big share out of itshuge market base. According to the company’s executives, thecompany aims to revolutionize air travel in India, which is afragment of their strategy to take over the Indian Aviation Industry.Additionally, the company aims to gain a competitive edge in theaviation market in India through highly competitive operationaltargets. Nonetheless, there are a variety of challenges which thecompany faces. The Indian Aviation Industry is one of the mostoligopolistic markets in the entire region, and there are a numberother challenges that the company will face while trying to ventureinto the market. This discourse reviews the Indian Aviation Industry,conducts a strategic analysis, considers strategic choices and drawsa four-year strategic plan of action with targets, deadlines andfocus areas.

Objectives

The aim of the paper is to review Air Asia’s entry into the IndianAviation Industry. The paper aims to address four main issues andgive a report on three strategic issues. First, the paper aims toaddress how Air Asia’s entry into the Indian market and itsaggressive pricing decisions will work in the oligopolistic Indianaviation market. Secondly, the paper aims to address how the barriersto entry will affect Air Asia India’s operational targets. Thirdly,the paper aims to evaluate how Air Asia India’s entry cause to theIndian Market will disrupt the industry’s equilibrium. Finally, thepaper aims to provide strategies that Air Asia India will pursue inthe Indian market for long-term survival and growth. The report willprovide a strategic analysis that will be attained through carefulassessment of the current situation by identifying the challengesthat lie ahead and how to best leverage Air Asia’s critical successfactors. It will also profile strategic choices by highlighting keypoints, risks and expected outcomes, and additionally, provide ajustification for the same. Finally, a four-year strategic plan ofaction will be proposed with clear targets, deadlines and focusareas, including responsibilities and Key Performance Indicators(KPI).

Background

Just like any other aviation industry, the Indian airline business iscomplex. This is because there is fast burning of cash, highregulations and production of a commodity that may turn out to beuseless if not sold to the customers in due time (Delfman 2005). TheIndian Aviation Industry began in the early years of the twentiethcentury, with most flights being domestic ones. However, over theyears, the industry developed as the government, private investorsand foreign prospectors pumped cash into the industry. Today, theIndian Aviation Industry serves hundreds of millions of customersevery year, with many airlines, both local and international, sharingthe market. There have been tremendous growth rates that have beenrecorded by airlines, such as Indigo and Go Air, who have takencontrol of large shares of the market (Joshi and Desai 2012 Kasardaand Vankayalapati 2009).

Asan effort to control a larger share of the market size, most airlinessought to form mergers and acquisitions. A series of these took placein 2007, and major airlines such as Indian Airlines and Air Indiacame together to form deals that saw them operate as units. In thefollowing year, the Indian government and stakeholders in theaviation industry revised the aviation policies (Forsyth 2006). Thisgave foreign equity participation an opportunity. As a result,foreign investors were allowed to invest up to 49% in the localcarriers. Additionally, foreigners were given the go ahead to investautomatically fully in the local airlines. Nevertheless, the companynever allowed any foreign airlines operates in the Indian market. Itwas not till September 2012 that the government allowed foreigncarriers to invest up to 49% of the paid up capital in the Indianaviation market (Jha 2015 Saha and Baiwas 2013). It was at thispoint that AirAsia decided to enter the Indian market.

Strategicanalysis

The Indian Aviation Industry is faced with a number of problems,which may pose challenges to Air Asia India as it ventures into themarket. Some of these problems include high taxes in a number ofareas, government policies that seem to be working for the company,microeconomic and macroeconomic challenges (Maniar 2012). Given thecompany’s flagship strategy, which is pricing, the county’s highairport charges pose a threat. In the entire Asian and Gulf region,the Indian airports charge some of the highest fees. As compared toits international counterparts, the Indian LLCs are quite advantagedas there are no secondary airports that offer lower charges. Thecountry’s multiple taxes and fees may be negative for the company’svision of winning the local customers by keeping the costs as low aspossible.

Thecompany has to be aware of the low prices strategy in India. Thereare currently some low-cost airlines that have been operating for awhile. In 2003, for instance, Air Decan entered the market, settingthe lowest prices in the industry at the time (O-Connell and Williams2006). The airline company did an analysis of the markets and workedto maximize on online booing and ‘no-frills’ service. However,given that the company could not keep its promise of simplicity, poorperformance, and insecurity, the company lost a lot of its customers.Air Asia India has to take into consideration the LLC model inIndian, in particular, to the details regarding the choice of routebaggage rules, labor engagement and configuration of the aircraft.This will help the company not to make operational as strategicblunders that have plunged other low-cost airliners into a loss.

Barriersto entry into the Indian Aviation Industry is another major concernfor Air Asia’s strategic analysis. In the airline industry, McAfeeand Te Velde (2006) say that passengers are most likely to pay higherfares where there is a single carrier controlling a high fraction ofthe traffic. This is the case for the Indian aviation market. Thecountry’s economics of the industry suggest that the airline isvery likely to face stiff competition in the highly concentratedIndian airports. The management has to consider that there are manyother airlines that have had to fight the barrier to entry into theIndian aviation market, and as a result, may have adopted similarpricing strategies as Air Asia. Additionally, it is very likely thatwith more airlines being given licenses to operate in the Indianmarket, it is possible that the barriers to entry will be worsenedwhen a potential war to take over a large part of the market sharewill mean that losses will be inevitable. For instance, according toresearch by Pilarski (2012), the Indian Aviation Industry had plungedinto a negative for territory for the first time since 2008. Thismainly affected the passenger market fares, which mean that manyfirms lost a total of nearly 1 million passengers in less than fouryears.

TheIndian Aviation Industry is oligopolistic. According to Strauss etal. (2009) and Xu and Hopp (2006), this is a market structure thatfalls in between the extremes of perfect competition and a monopoly.The country’s aviation industry has a few players who control amagnificent share of the market. Therefore, the pricing strategy thatis used in India fall in between a perfectly competitive market wherethere is no general pricing strategy and a monopoly, where a singleproducer dictates the prices, according to demand. In India, theimplications of this are that competition can lead to two possibleoutcomes. First, it is possible that the producers will engage in adisastrous competition, which can lead to the downfall of them all.The second situation is that they may set output and prices by takinginto account the market conditions, at the same time, considering thereaction from all the competitors. In an oligopoly, a non-competitiveoutcome has the characteristics of a cartel operation. This is wherethe producers get together to agree on the strategies to coordinateoutput and pricing. In most cases, Bischi et al. (2007) say this isan effort to mimic the monopolistic characteristics.

Strategicchoices

There are three main strategies for entry into the Indian market forAir Asia. These strategies are proposed as per the evaluation of theanalysis on the ground. Additionally, the strategies proposed takeinto consideration the market competition (oligopolistic nature ofthe Indian market), pricing strategies, financial parameters andoperating parameters. As such, the paper proposes high-profilepartnership and strategic pricing.

Strategicpartnership

The company has a reputation for being a successful and experiencedcompetitor in the Asian regional aviation industry. Given the recordof partnerships, which have been proven to be successful in othercountries, it is advised that the company takes the same route in theIndian market. Securing strong local partners will help the airlinewill give the airline leverage to factor all the competitive elementsin the new market while at the same time, familiarizing with marketdynamics. This strategy has been proposed after consideration of anumber of other operating costs in the country. India has highoperating costs than any other country in Southeast Asia (Levin etal. 2009 Bilotkach 2007).These include high airport charges and punitive fuel taxes. Combinedwith high inflation and interest rates, going solo into theoligopolistic market will present the company with financialchallenges that may prove hard to overcome.

Thereare a number of pros and cons that come with this strategic scenario.Given the economics theory, it will be predicted that fare costs arelikely to reduce when two airlines come together to form apartnership (Zedina 2011). This would be in line with the company’starget for being a cheap airline in the Indian market. Additionally,given that there are a number of behind-the–gateway markets, theoutcome will be dominated by consumer benefits. This will result in aconsumer gain from the partnership. As such, the company willautomatically attract many customers and build a competitive edgefrom the same. The main shortcoming for this scenario is in the scopeof anti-competitive effects. According to Bilotkach (2007), while theinternational partnerships compare just on gateway-to-gateway routes,airlines operating on the solo basis will likely develop faster onexternal flights. Flights to a destination out of India are moreprofitable than domestic flights, and as such, an alliance would meanthat Air Asia will lose out on this opportunity.

Thesecond option is dynamic pricing. Entering the Indian market withthis strategy means that the company will have the freedom to changeprice based on the ever changing circumstances. In the IndianAviation Industry, some of the circumstances are an increase indemand during the festive season, the type of regions or customersbeing served and other changing marketing conditions. The firstapproach for the same is segmented pricing, where some customers willbe charged more based on their willingness for certain in-flightservices and seats. For instance, the business class will be composedof customers whose travel schedules are prone to change in shortnotices such, the company can maintain the prices higher than therest of the customers, however, lower than those charged by therivals. The second strategy is peak user pricing. By doing this, AirAsia will be charging a higher price during rush hours on busy dayslie Monday and Frida, than any other days. The company will,therefore, be in a position to make profits to match those of otherairlines, at the same time, be perceived as a low-cost airliner bythe customers.

Oneof the advantages of incorporating dynamic pricing in low-costservice providence is that the company maintains its profits,regardless of the market conditions (Levin et al. 2009). Dynamicpricing will work in favor of the company’s objectives and missionin the Indian market, which has a number of uncertainties.Additionally, according to research conducted by Levin et al. (2009),dynamic pricing strategy was one of the fastest spreading pricingstrategies, which are set to transform consumer markets. Given theIndian oligopolistic market, dynamic pricing will work to reduce thecosts offered by the airline, as such, attract more customers. Themain disadvantage of dynamic pricing is that some of the customerswill become easily irritated by the unstable prices. Regardless ofthe fact that the company will keep its prices lower than the rest ofthe airlines at any given time and condition, there is a potentialdrawback if some of the customers discover that they are subject toprice discrimination. Additionally, the oligopolistic nature of theIndian aviation market may make some of the customers less loyal toAir Asia. According to Maglaras and Meissner (2006), when customerssubject to dynamic pricing services discover the same, they may getincentive to consider other services and products offered by thecompetitors to ensure that they are not being charged extra.

Ofthe two strategic choices, this paper proposes dynamic pricing. Thisis because it is most related to the company’s mission of being thelowest cost airline in the Indian market. Additionally, the companywill be able to address the strategy’s cons by maintaining lowerprices than any other airline. The key highlights of the strategyare:-

  1. Addressing market uncertainties

  2. Avoiding making unnecessary losses

  3. Tapping into opportunities

  4. Ability to internally control the prices

  5. Attracting low-paying customers

Risks:-

  1. Low customer loyalty

  2. Competitors may adopt the same strategy

  3. Customer response may take time

  4. Some low-income customers may be hurt

Expectedoutcomes:-

  1. Multi-productive revenue collection

  2. Counteracting oligopoly shapers

  3. Increased customer base

  4. Niche market control

Justification:

By implementing dynamic pricing strategy, the company will avoidlosing revenue and missing out on lucrative opportunities, even as itmaintains its low-cost philosophy. Moreover, this strategy has beenidentified by Talluri and Van Ryzin (2006) as a yield management movewhere a set of pricing strategies will help the company to makeprofits in various situations. Even as the company maintains itsobjective of becoming a number one choice low-cost airline, it has tocounter the market entry barriers and the turbulent Indian AviationIndustry, to avoid making losses. Additionally, the airline will beable to do away with certain travel restrictions that create lessvaluable products, such as weekend-stay overs. These are common withstatic price discrimination.

Planof action

Below is the proposal for a four year strategic plan of action forthe course of advancing Air Asia India’s priorities and mission tobe a leading low-cost airline. The plan takes into consideration themarket situation in India as of 2014 and identifies the measurablePerformance Key Indicators and growth outcomes that the company canexpect over the next four years. Additionally, the plan describes howthe proposal intends to achieve attractive results on the fronts ofcustomer base, revenue, and profits. The plan also represents acommitment to Air Asia’s core values of service delivery, lowcosts, and growth. Moreover, it outlines the Airline’s Strategiesfor long-term survival and growth.

Targets

  • Identify and serve the unserved and under-served customers in the Indian market.

  • Seek out all the niches that can be attracted to the low costs and meet their demands.

  • Offer, high level services, to compete against industry standards.

  • Utilization of technology to reduce flight booking costs and offer the customers better services than those offered by other low-cost airlines.

  • Double destinations every quarter.

  • Adopt a cargo model to carry freight and mail to increase revenue opportunities beyond just transporting passengers.

  • Create partnership and alliances with other logistics companies

Marketingstrategy:-

  • Utilization of public relations to good advantage.

  • Promote the brand through offers and related promotions.

Pricingstrategy

  • Offer customers good services at fair and predictable prices

  • Implement weekday and stay-over weekend fares

  • Set publicized discounts for various flights

  • Seasonal and peak period adjustments

  • Special customer offers

Deadlines

Task

Initiation

Accomplishment

Target market identification

2014

2018

Technology utilization

2014

System updates twice per year, till 2018.

Destination doubling

Every three months

Cargo model adoption

Strategic partnerships and alliances

2015

2018

Implementing marketing strategy

Continuous

Implementing pricing strategy

Continuous

Salesforecast

Sales forecast

% Increase

2015

2016

2017

2018

Scheduled passenger revenue

20

40

100

150

Scheduled cargo revenue

10

30

60

100

Special flights revenue

5

15

45

70

Special flights cargo revenue

4

8

15

25

Package trips

5

10

25

40

Milestones

Start date

End date

Strategic partnerships and alliances

1/1/2015

31/12/2018

Implementing marketing strategy

1/1/2014

31/12/2018

Implementing pricing strategy

1/1/2014

31/12/2018

Responsibilities and KIP

The success of the above program shall be measured by the followingKey Performance Indicators.

Indicator

Responsibilities

Market growth

  • Achieving high position in the Indian Aviation Market

  • Increase low-cost passenger handling capacity

  • Increased freight movement and cargo capacity

  • Increased domestic and international routes and passengers

Capacity creation

  • Increased number of planes

  • Development of local company-owned garage warehouses

  • Diversification of logistics department in India

Conclusion

Getting an operation license from the Indian government to operatewill be the first step in entering the market and gaining from itsever-expanding industry. The main challenges are an entry to thebarrier and government regulations. As such, the company mustinitiate a strategy development and execution program to ensure thatit overcomes the entry barriers and get a position in the market,from which it can develop its niche. Secondly, the airline’slow-cost service provider objective have to be clearly evaluated toavoid making losses, given the country’s unfriendly governmentpolicies such as fuel prices and taxing regimes. In light of this,the company has to use its reputation of being an aggressive globalplayer to outcome all the challenges.

Theoligopolistic nature of the Indian Aviation Industry is another majorchallenge. The market dynamics are significantly influenced by a fewplayers, who have gained control of a large share of the market. Assuch, the company’s strategic plan has to take into considerationforming alliances and partnerships with other companies. The main aimof this is to be in a position to form a ‘cartel’ as described bythe oligopolistic market researchers. However, in order to avoidmixing up objectives, priority should be given to the pricingstrategy. As such, the paper proposes that the airline uses dynamicpricing strategies as it enters the market. Dynamic pricing will helpthe airline to make profits and maximize opportunities, even as itkeeps its prices considerably lower than those of other competitors.

Thesuggested four-year plan of action is a categorical execution programthat will help the company achieve objectives and realize profitableoutcomes. The plan represents the company’s commitment to its corevalues of service delivery, low cost, and growth. By executing theplan, the company will be assured of long-term survival and growth.The targets that have been identified have taken into considerationthe findings of the Indian Aviation Industry analysis and the futureof the airline in the market.

Bibliography

Bilotkach, V, (2007) “Priceeffects of airline consolidation: evidence from a sample oftransatlantic markets”, EmpiricalEconomics,&nbsp33(3),427-448.

Bischi, G. I, Naimzada, A, K, andSbragia, L, (2007) “Oligopoly games with local monopolisticapproximation”,&nbspJournalof Economic Behavior &amp Organization,62(3),371-388.

Delfmann, W, (Ed.),(2005)&nbspStrategicmanagement in the aviation industry,Ashgate.

Forsyth, P, (2006) “Martin KunzMemorial lecture, Tourism benefits and aviation policy”, Journal of Air TransportManagement,&nbsp12(1),3-13.

Jha, P, (2015) Impactof determinants of FDI on Indian Economy,Ashgate Publishing.

Joshi, N, A, and Desai, J, (2012)“A Study of Mergers &amp Acquisitions in Aviation Industry inIndia and Their Impact on the Operating Performance and ShareholderWealth”,&nbspCorporateFinance: Governance, Corporate Control &amp OrganizationeJournal,&nbsp4(63).

Levin, Y, McGill, J, and Nediak, M, (2009) “Dynamic pricing in thepresence of strategic consumers and oligopolistic competition”,Management Science 55 (1): pp 32-46.

Maglaras, C, and Meissner, J,(2006) “Dynamic pricing strategies for multiproduct revenuemanagement problems”, Manufacturing &ampService Operations Management,&nbsp8(2),136-148.

Maniar, M, “The InfrastructureSector in India 2012”.

McAfee, R, P, and Te Velde, V,(2006) “Dynamic pricing in the airline industry|, forthcomingin Handbook on Economics and Information Systems, Ed: TJ Hendershott,Elsevier.

O’Connell, J, F, and Williams, G,(2006) “Transformation of India`s Domestic Airlines: A case studyof Indian Airlines, Jet Airways, Air Sahara and Air Deccan”,&nbspJournalof Air Transport Management,&nbsp12(6),358-374.

Pilarski, A, M, (2012)&nbspWhycan`t we make money in aviation?Ashgate Publishing, Ltd.

Saha, A, K, and Biswas, S, (2013)“Current Economic Slowdown in India: An Empirical Analysis”&nbspNewPricing Models, 190.

Saraswati, S, K, (2001) “Operatingenvironment for a civil aviation industry in India”, Journalof Air Transport Management,&nbsp7(2),127-135.

Strauss, J, Frost, R., and Ansary,A, I, (2009)&nbspE-marketing.Pearson Prentice Hall.

Talluri, K, T, and Van Ryzin, G, J,(2006)&nbspthetheory and practice of revenue management&nbsp(Vol.68), Springer Science &amp Business Media.

Xu, X, and Hopp, W, J, (2006) “Amonopolistic and oligopolistic stochastic flow revenue managementmodel”, OperationsResearch,&nbsp54(6),1098-1109.

Zedina, Y, A, (2011) “LiAbalkin`s view on state-private partnership as an object oftheoretical research”, Ofthe Plekhanov Russian University of Economics.