Trends And Scenarios In The Airline Industry Tourism Essay


The Airlines is one among the inventions that had changed the way how people live and experience the world. In due course of time it has now become impossible to imagine business and leisure travel without air travel. The airline industry exists in an intensely competitive market. In recent years, there has been an industry shakedown, which is expected to the trend towards expanding domestic and international services.

The airline industry is classified into four categories: International, National, Regional and Cargo. Airlines industry facilitates economic growth, world trade, international investment and tourism and so plays a key role in globalization making it a large and growing industry.

Air travel (both business and leisure) has grown by around 7% in the last decade. Business travel has grown as companies having global presence in terms of their investments, their supply and production chains and also their customers. Availability of aircrafts at affordable prices backed by increased tourism had led to rise in leisure travel. Overall in terms of regions in developed regions like Europe and North America a slower growth is seen when compared to developing regions like Asia Pacific.

Airlines’ profitability is closely tied to economic growth and trade. So based on the GDP growth the demand for airplanes and the air travel will increase. So during 1990-1995, the industry suffered from world recession and the air travels were further lowered by Gulf War. Thus financial difficulties impact airlines/aircraft industry. Deregulation is also stimulating competition, such as that from small, low-cost carriers.

Some of the Key terms and ratios for airline industry are listed below.

Available Seat Mile = (total # of seats available for transporting passengers) X (# of miles flown during period)

Revenue Passenger Mile = (# of revenue-paying passengers) X (# of mile flown during the period)

Revenue Per Available Seat Mile = (Revenue) / (# of seats available)

Air Traffic Liability (ATL): An estimate of the amount of money already received for passenger ticket sales and cargo transportation that is yet to be provided.

Load Factor: Measures the percentage of available seating capacity that is filled with passengers. Analysts state that once the airline load factor exceeds its break-even point, then more and more revenue will trickle down to the bottom line.

Airport capacity, technology used, structuring routes and costs to buy or lease the aircraft are very vital for the industry. In addition Weather, Fuel Cost and Labour also play an important role.

The industry has to realise the need for a radical change to sustain and also ensure growth and prosperity for their survival. Currently many cost cutting measures are being adopted in the industry.

Also to meet the requirements of customers and elevate to customer delight from mere customer satisfaction the industry players concentrate on the quality of service that they offer, both on the ground and in the air. The key challenge is to ensure meeting of customer requirements and at the same time make effective cost cutting measures and continuously being efficient and competitive and profit making.

Nevertheless, the aviation industry is characterized by strong nationalist sentiments so in many places despite globalisation airlines will face limitations on where they can fly and restrictions on their ownership of foreign carriers

10 aviation myths

More runways are essential

Environmental organisations try their best to price people off planes

International agreements make the ending of aviation’s privileged tax free status (including tax-free fuel) become impossible

The external costs of the industry are met through Air Passenger Duty (APD)

Building new runways has clear economic benefits

Aviation helps the UK tourist industry

We may be able to fulfil our international obligations with regards to climate change and still have uninhibited growth in aviation and airports

We can lessen the damage done to our environment, heritage and countryside that has been caused by aviation and airport expansion and also compensate for the same

Airports can expand and we can still meet EU air quality standards

Technology has delivered significant environmental improvements in the past and will continue to do so

Emerging Markets

The Asia-Pacific region and Middle East are the emerging markets in airline industry. They are expected to experience a higher traffic growth and expand rapidly. For better analysis please see the graph below:

Regional traffic growth (% change year-on-year): 2009 to 2012F

Note: (Data by ICAO (International Civil Aviation Organisation))

Chief Characteristics of Airline Industry

Capital Intensive: It’s a capital-intensive business which requires huge amounts of money to operate effectively. This industry requires capital for expensive equipments like aircrafts, maintenance systems, control towers, simulators etc.

Labour Intensive: Airlines need personals like pilots, crew members, security guards, cleaners, engineers etc. It’s a very labour-intensive industry and nearly 1/3rd of the revenue is used for the payment of workforce.

Thin Profit Margin: The profit margin is very thin in this industry. It averages to about 1-2% only.

Seasonal: Earlier airlines used to see a heavy load during summers (because of vacations) and a relatively lesser load during winters. The seasonal factors results in rise and fall of airline revenues over the course of the year. Over the years the seasonal effect has reduced to a greater extent.

History and the Current Scenario of the Indian Aviation Sector

Genesis of Indian Airline Industry

1932: Mr. J.R.D.Tata flies a De Havilland Puss Moth from Karachi to Mumbai as part of the first Tata Sons Ltd. Flight to deliver mail carried by British Imperial Airways

1948: Govt. of India acquires 49% stake in Tata Airlines, designated it a flag carrier and renamed it as Air India International

1953: Jawaharlal Nehru, in friendly transaction, convinces the Tata group to let the Government of India acquire a majority stake in Air India International and nationalizes air transport

1953: Indian Airlines formed by merging eight former independent domestic airlines

1960: India enters the jet age with an Air India B707. USA and India are connected for the first time with an Indian Airline

1990: East West Airlines becomes the first private airline since 1953

After 1991

1991: Private airlines were allowed to provide the service under ‘air taxi scheme’ to operate chartered and non-scheduled services.

1994: Private airlines permitted to operate as scheduled air service providers.

2003: Air Deccan lowered down the fares to 17% of previously charged rates thus introducing the concept of budget airlines in India.


The under-pricing of tickets due to the intense competition and the increasing number of budget carriers resulted in losses to the budget carriers as well as to the entire aviation sector. Consolidation was looked as the single way out which would lead to less competition and stable fares.

The main reason for the increasing costs and reduced efficiency and flexibility for the Indian aviation sector was poor Airport infrastructure and manpower shortages. In 2007, there were 13 scheduled carriers which was estimated that this number would fall to 8-10 by 2010 in this fragmented Indian domestic aviation sector and the estimation is almost true considering the current scenario of the aviation sector.

2007: Jet Airways announced that it would buy Air Sahara for US$500 million

2007: Air India and Indian Airlines merged into one entity named NACIL

2008: Kingfisher-Deccan deal was the third alliance in the Indian aviation sector.

Current Scenario of Aviation Industry

The Indian Aviation Industry, being one of the world’s fastest growing aviation industries, has a compound annual growth rate of 18%. There are 454 airports and airstrips in India, of which 16 are international airports. As of May 2006, private airlines accounted for more than 75% of the sector of the domestic aviation market.

The Indian aviation sector saw an increase in revenue by nearly US$ 21.4 million in December 2009 due to increase in traffic movements. Moreover, the Airport Authority of India may gain better margins in the near future as predicted by Ministry of Civil Aviation. These have been attributed primarily to the boost in the share of revenue from Delhi International Airport Limited and Mumbai International Airport Limited. According to a report released by the Ministry of Civil Aviation the number of passengers carried by domestic airlines rose from 67, 61, 000 to 80, 56, 000 for the period January – February 2009 and January – February 2010 respectively. The increase in passenger marked a growth of 19.2% for the aforementioned period. Some of the factors that have resulted in higher demand for air transport in India include the growing purchasing power of middle class, low airfares offered by budget airlines, the growth of tourism industry, increasing outbound travel from India and overall economic growth of India.

Besides this, Indian airports are being ranked among the top airports of the world. The Hyderabad International Airport now ranks amongst the top 5 Airports in the world as per the annual Airport Service Quality passenger survey. The other airports to figure in the top 5 are the ones at Seoul, Singapore, Hong Kong and Beijing. There are even talks going on between India and United States to make the country an aviation hub.

The Airport Authority of India is set to spend over US$ 1 billion in 2010, towards modernization of airports. The civil aviation ministry has also converted Delhi airport into an international hub for passenger airlines to help the airport utilize large amounts of additional capacity.

The investment policy of India in aviation industry currently allows FDI up to 100% under the automatic route for green field projects and for existing projects, FDI up to 100 % is allowed; upto 74% under the automatic route and beyond 74% under the government route.

Potential for Growth

Despite the slowdown and slow recovery, Indian Aviation industry sector still continues to look promising. This is primarily due to the burgeoning middle class with increasing massive purchasing power, low cost carriers providing services at very attractive low fares, the growth of Indian tourism and increasing outbound travel from India. In addition, the Government has planned to modernise non-metro airports, phasing out new international routes, putting into place new airports and renovating existing ones. Experts are estimating the growth of industry as high as 25% YoY.

Since 2006, most of the major Indian airline operators such as Air India, Indian Airlines, Jet Airways and Kingfisher Airlines have reported large losses, reason being high aviation turbine fuel (ATF) prices, rising labour costs and shortage of skilled labour, rapid fleet expansion, as wheel as intense price competition. Adding to all these problems are the new players entering the industry even before the existing players could stabilize their operations. As a result, all the airlines suffered even further when the recession hit.

Even then also the Indian aviation industry has been more prone to crisis as compared to their global counterparts and thus, India has the highest passenger growth rate among the entire airlines sector in the world including economies like Australia and France.

The total number of passengers travelling by air will be a whopping 400 million by 2020.” To meet with this accelerated demand, existing players need to increase fleets and broaden their reach including regional destinations as well. They are also going to get the competition from international low cost airlines like Air Asia (Malaysian) and JetStar Asia (Australian).

Flight into the future

As estimated by the Centre for Asia Pacific Aviation (CAPA), by 2011, the Indian aviation sector is likely to cross the mark of 60 million domestic passengers, whereas the total number of passengers i.e. both domestic and international is expected to cross the 100 million-mark over the next three years.

India is gearing up for heavy investments in the aviation sector of India. According to the Investment Commission of India, Investment opportunities of around US$ 110 billion by 2020 are now being predicted. It is estimated that about US$ 80 billion will go towards purchase of new aircraft and US$ 30 billion for the development of airport infrastructure.

Over the next 10 years, the Indian aviation sector will try to cash in on the potential to grow by 25% annually, as said by Praful Patel, the Minister for Civil Aviation. Also it could attract the highest investments among all the industries in India i.e. an amount up to $45 billion.

India needs improvements in services offered, huge number of skilled personnel and to stop already experiencing shortage of pilots and thereby problems like direct and indirect employment. Hence, India can look at this time to play a transforming role in this sector, as it holds great promise for development as well needed for the Indian economy to grow at a faster rate.

Major players in domestic market


Kingfisher Airlines Ltd. Full Fare Airlines

Jet Airways Ltd.



Budget AirlinesSpiceJet

Paramount Airways

Go Air

Kingfisher Red

Current Market Shares

Challenges faced by Airline Industry

1) Rising Aviation Turbine Fuel (ATF) Prices: ATF prices form about 40% of the total operating costs of airline industry. As fuel prices climb, a trend of airline stock prices going down has been noticed. The rising fuel prices make it difficult for airlines to increase profits and they are forced to increase the air fares.

2) High input costs: Input costs are high due to:-

Various taxes by State Governments and on repayment of interest on foreign currency loans taken for purchasing aircrafts due to which some airlines are under high debts .

Due to shortage of technical personnel, manpower costs are also high.

3) Decreasing returns: After the advent of Low cost carriers, the legacy carriers were forced to decrease their prices and thus profits were impacted. With the ever-increasing competition, there is a price war that is giving low returns to all airline operators.

4) Employee Management: Training, recruiting and retaining talented employees is a major concern due to shortage of skilled personnel including pilots, unionism and cut-throat competition. After- recession effects like retrenchments, salary cuts along with no-new-hiring policy, strikes by Air India and Jet Airways staff etc. has made this task even more challenging.

5) Infrastructure Upgradation: The infrastructure upgradation progress in India is far behind the western countries. While steps are being taken to upgrade major airports in Hyderabad, Delhi and Mumbai, another issue that is yet to be fully addressed is security. Proper airline scheduling and passenger handling is another task besides physical and IT infrastructure. Attracting private sector investments and implementing the planned projects efficiently is a concern.

6) Overcapacity: There has been excess capacity of aircrafts that were ordered to increase market share before the global slowdown but were delivered after the same.

7) Regional connectivity: Though there is excess capacity in some airlines, some areas are still not well connected due to poor infrastructure. The airlines have to concentrate on building remote regional connectivity other than concentrating only on metros.

8) Environmental Regulations: The carbon emission and fuel efficiency standards have to be met by technology investments and commitment. R&D on bio-fuels, that have the capacity to reduce aviation’s carbon footprint by up to 80%, needs to be carried forward aggressively.

9) Congestion: Due to increased passenger traffic and cargo growth, there has been congestion on major routes on airports like Hyderabad, Delhi and Mumbai etc. This has to be tackled effectively by either expanding capacity or creating new airports.

All this needs real strategic planning in the industry with technological innovations and best management practices.

global scenario and trends

In the past decade, travel by air has increased by 7% per year, for both – business and leisure. Large aircrafts like the Boeing 747 have made it convenient for people to travel at affordable costs. Governments in developing nations give impetus to the development of infrastructure to lure tourists from prosperous countries and add to their national economies. Besides tourism, business travel has grown considerably owing to the rapid growth of world trade in goods and services. Some airlines are owned by the state. The ones that are independent are vulnerable to economic uncertainties. Changes in the regulations of the governments and the presence of an intensely competitive market have led to many hardships in the industry

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Commercial flights began within a decade of the invention of aircraft in the early 20th century. There was a surplus of aircraft and pilots worldwide after world wars I and II. DELAG, Deutsche Luftschiffahrts-Aktiengesellschaft, the world’s first airline, was founded on November 16, 1909 with government assistance, and operated airships manufactured by The Zeppelin Corporation. Its headquarters were in Frankfurt. By the 1950s, airline companies created the framework of international travel and commerce that exists to this day.

The Airline industry is highly unionised viz. there exist multi-unions. The industry is highly regulated in terms of routes, hours of work, etc. De-regulation in US in 1978 and in Europe in 1990s and again 2007/08 has removed control of the government over fares, routes and has marked the entry of new low cost airlines in US, Europe and now India and SE Asia.

In Europe, major players like Iberia, TAP, Alitalia, KLM, Air France, Lufthansa were all once state-owned. The aviation industry is governed and set apart by strong nationalist sentiments towards a country’s domestic ‘flag carriers’. In many parts of the world, airlines will, therefore, continue to face confines on where they are allowed to fly and restrictions on their ownership of foreign carriers.

The global airline industry being high competitive has resulted in huge cumulative losses. Many airlines have either gone bankrupt or have collapsed. For example, Sabena, Swissair, Alitalia, Delta, United.

future trends

Worldwide economic activity, reflected in the global gross domestic product (GDP), is the most powerful driver for airplanes demand. The global GDP is projected to grow at an average of 3.2 percent per year for the next 20 years. Reflecting the economic growth, worldwide passenger traffic will average 5.3 percent growth and cargo traffic will average 5.9 percent growth over the forecast period.

The above graph represents the growth in the future. However, this growth can be achieved only if the surging price of fuel is controlled as it directly affect flight schedules, ticket prices and services offered. So order to survive airlines need to become more lean and mean by addressing issues like rising costs, constraints on revenue growth and increasingly dissatisfied customers.

Now we need to understand that three features are vital. That is services that give customers more control over their journeys, an infrastructure that can be easily changed to cope with variations in demand and greater collaboration among travel providers. The 5 technological innovations that can help the industry deliver the above mentioned features are

Self-service solutions: It’s a cost cutting measure but now gives the passengers the choice and control they want

Integrated baggage handling: Using IT systems and process and technologies like RFID together and thereby speed up at the same time efficiently handle the security checks for the customer’s baggage.

Shared Services: There are three levels of shared services. One is share commodity application which reduces infrastructure costs. Next is common service hosting, which allows applications to be used by the partners and other clients. Then finally traditional application hosting, which enables multiple clients to use commodity applications as per their usage rate.

Modular, flexible airport operating systems: Airports need to improve their operating systems and have a modular, flexible architecture so has to improve the efficiency and contribute to growth.

New Security Technologies: Identity management solutions like finger print matching etc. and other such improved techniques have to be employed as the threat of terrorism is growing.

Thus with all such measures we can expect a good growth in the airline industry.


The rise in low cost carriers and increasing disposable income of consumers with the growing population of youth working generation, especially in metros, all give rise to tremendous opportunities to the aviation industry-

1) Enhancing non-aeronautical revenue streams and Airport retailing: Revenues from vehicle parking, advertisements, shop rentals are being targeted with increased modernisation of airports and attracting international luxury brands for a 24/7 shopping experience for the customers. E.g.- New airport terminals such as the T3 in New Delhi.

2) Airport development through PPP: The restructuring of airport infrastructure for metro and non-metro airports, developing Greenfield airports by attracting large private investments is a part of government’s Eleventh Plan, where it expects an investment of around US$ 6.5 billion. This would fulfil the gaps to build world-class user-friendly airports with modern technology and provide airport capacity ahead of demand.

3) Bio-Fuels: Instead of focusing only on crafting fuel-efficient engines, manufacturers of aircraft (like being done by Boeing and Airbus),can focus on developing sustainable bio-fuels that can protect them from wavering profits due to rising fuel prices.

4) Maintenance, repair and overhaul (MRO) business: This offers high investment and business potential. An Ernst & Young report says that the MRO business in the aviation sector can absorb investments of up to US$ 120 billion 2020. Air India has signed an agreement with GE Aviation, a unit of General Electric Co. (GE), to set up a $90 million facility to maintain aircraft engines in Mumbai.

5) Private Jet market: With increasing number of billionaires in the country and the glamour quotient attached to airlines, the private jet market in India is a great business opportunity. The government is also considering permitting private airstrips in the country.

6) Heli-tourism and Commonwealth games: A major portion of visitors during the Common wealth games including spectators, athletes and coaches will travel via airlines. Tourism to various parts of India can be boosted at the same time by heli-tourism or attractive offers by airlines connecting major tourist spots.

7) Exploring alternate revenue streams:

Air Cargo operations

Ground Handling opportunities lie in offering comprehensive ground-handling solutions,3rd party handling and service contracts with private airports.E.g- AI-CIAL at Cochin

Training will be needed for pilots, airhostess, engineers, cabin crew, technicians, ground staff which is a huge business opportunity considering the demand for aviation jobs.

Internet business can be leveraged for e-ticket bookings thus saving agent commission costs and airline websites can pose as one stop shops for all travel related information thus boosting revenues.

Emergency medical services (EMS) business Eurocopter, a division of EADS which is world leader in the field of aerospace defence and related services, is looking forward to entering the emergency medical services (EMS) business in India. Leading hospital majors like the Manipal group and the Apollo group are being considered for the purpose. The company operates around 480 helicopters in India that cover both the civil and military sectors. The company also plans to increase its business area by entering the heli-tourism sector.



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