1.

Bargaining Power of Suppliers- HIGH

SUPPLIERS – Fuel Suppliers, Aircraft Manufacturers, and Skilled Employees

Table 2.2 Bargaining power of Suppliers

Suppliers Industry  Boeing and Airbus forms a duopoly of suppliers of new jetliners.
Concentration This, along with low-cost airlines segment, gives a high bargaining
power of Aircraft Manufacturers
 Relatively few companies supply Aviation fuel, strengthening the
fuel supplier’s power although airlines generally defend against price
rises using hedging strategies
 There is also an acute shortage of pilots which makes the industry
dependent on them

Substitute for Inputs Impossible to find inputs required for airlines to operate- an airline must
have aircraft, a supply of aviation fuel and a sufficient workforce before it
can offer flights. Unlike other sources of transport, airlines have
alternative sources of energy
Switching Cost Bargaining power of aircraft manufacturers owing to switching cost is
high. This is because the airlines must enter into contracts when leasing
or buying aircraft from suppliers. Breaking these costs can often imply a
heavy financial cost
Importance of Quality In an industry where reliability and safety are critical, the quality of the
planes and their maintenance are highly important; this factor leads to
high supplier power
Forward Integration Supplier Power is restricted by the improbability of these suppliers
integrating forwards into the airline business
Dependence on Although manufacturers like Boeing have alternative sources of revenue,
Industry for revenue notably defense aerospace, civil aviation remains very significant part of
their business, thereby restricting their bargaining power to some extent

2. Bargaining Power of Buyers- MEDIUM

Buyers-Primarily individual consumers purchasing flights directly from the airline. Some Business to
business sales to charter companies. Discounters and similar buyers.

Table 2.3 Bargaining Power of Buyers

Price Sensitivity Price sensitivity is high due to growth of online comparison sites,
corporate travel expense policies etc. This strengthens buyer power in the
airlines market
Switching Cost Negligible switching cost which strengthens buyer power. Airlines could
use loyalty schemes such as flyer miles. However, this does not work
well in the low-cost carrier segment and hence few companies offer such
programs
Product Differentiation Owing to the cost constraints, not much differentiation possible in the
product offering
Buyer Size The power of buyers, owing to size and volumes, is low because they are
large in number and highly fragmented
Backward Integration Where the buyers are individual travellers, there is no opportunity for
of buyers and Forward them to integrate backwards or for the airline to integrate forwards;
Integration however vertical integration is more feasible between airlines and
 companies such as travel agents

3. Barriers to Entry – HIGH

Table 2.4 Barriers to Entry

Economies of Scale As an airline gets bigger, the overhead cost per passenger carried
declines as the fixed cost is spread over more passengers. Hence, big
airlines enjoy economies of scale. Smaller airlines tend to merge many
of these departments into a single business unit. Their overheads are
much lower and so their ability to derive unit cost benefits from scale is
virtually non-existent. Hence for new entrants economies of scale are
low
Brand Identity Since airline tickets are too expensive, people do not prefer spending
money on firms they do not trust. Hence they tend to choose the airlines
which have well-known names. They also rely on safety factors and
flying experience for the same. Hence brand identity acts as a
significant barrier to new entrants
Customer Switching Cost Customer switching costs are too low between the brands because all
the airlines have almost similar rates
Capital Requirement A large amount of capital is spent and without a strong customer base,
there would be little to no profits in the first few years. Also, Existing
firms can and will use their high capital to retaliate against newer firms
with whatever means necessary such as lowering prices and taking a
loss.
Govt. Policy/ Protection When firms decide to enter this industry, they have to become licensed
which can take around a year or so. After getting licensed too, they are
regulated by several organizations such as the Federal Aviation
Administration and the Department of Transportation

4. Threat of Substitution- LOW

Table 2.5 Threat of Substitutes

Availability of close There are substitutes in the airline industry. Consumers can choose
substitutes other form of transportation such as a car, bus, train, or boat to get to
their destination
Switching Costs In terms of price, switching costs can be high as some means of
transportation can be more costly than a plane ticket. The main cost is
time. Planes are by far the fastest form of transportation available.
Airlines surpass all other forms of transportation when it comes to cost,
convenience, and sometimes service
Substitutes Price Value Cost of substitutes can be considered as a factor when travel is for short
distances. At that point of time, it raises a risk for putting in money and
substitutes appear more viable but then again savings in time makes up
for the risk
5. Competitive Intensity- HIGH

Table 2.6 Competitive Intensity

Number of Competitors The competitive landscape in India has several large companies
alongside smaller competitors. The number of airlines is increasing
which increases the level of competition among airlines
Industry Growth The industry seems to be very stagnant. It seems to be in the mature
stage of the business cycle
Fixed Costs The fixed costs are extremely high in this industry which makes it hard
to leave the industry because they are probably in long term loan
agreements in order to stay in the business. The products involved are
also highly complex which also heightens the competition
Differentiation Each firm has its own brand identity hence the competition is lessened.
For e.g.: JetBlue is known for its amenities and Southwest for its low
prices
Switching Costs Switching Costs are low because each market seems to be equally
distributed as each company has its own share of market. Hence, firms
cannot really hold a large percentage of the market

OVERALL INDUSTRY ATTRACTIVENESS- NOT HIGH

In 2016-17, international traffic (Indian and foreign carriers) in India grew around 8.5% to 59 million
passengers. This growth was driven by better economic outlook and rising trade between India and
foreign countries. Further, international traffic carried by Indian carriers increased by 10% y-o-y to 21
million passengers mostly led by Air India and Jet Airways. Air India and Jet Airways contributed
around 83% of the international passenger traffic carried by Indian carriers. Improved trade ties
between India-UAE contributed to around one-thirds of the traffic in 2016-17.

Jet Airways' strategy of increasing focus on international operations, post its alliance with Etihad
Airways contributed to increased passenger traffic. Air India's entry into the Star Alliance post July
2014 provided access to new markets and destinations with other member airlines, thereby increasing
passenger traffic

Growth in domestic passenger traffic is expected to slow down to 17-19% on-year in 2017-18 as
compared with an estimated 22% in 2016-17, driven by economic growth, and improved connectivity
to tier 2 and tier 3 cities. Despite rise in fuel, employee costs etc., the airfares are barely expected to
increase at 0-2% owing to the capacity expansion, competition as compared with a decline of about
7% in 2016-17.
During 2016-17 to 2021-22, CRISIL expects domestic passenger traffic to grow at a CAGR
(compound annual growth rate) of 13-15% as stability in costs and competition intensity are likely to
arrest sharp fare hikes over the long term