Air Deccan: The First Low Cost Airline in India
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Case Code: BSTR134 Case Length: 20 Pages Period: 2003 - 2004 Pub Date: 2004 Teaching Note: Not Available |
Price: Rs.400 Organization: Air Deccan Industry: Airlines Countries: India Themes: Advertising and Promotion |
Abstract Case Intro 1 Case Intro 2 Excerpts
Excerpts
Entry and Expansion of Air Deccan
Gopinath was in the Indian army till 1980, when he left his job and started trying his hands at various things like multi-culture farming, sericulture and agri-consultancy. In the early 1990s, Gopinath was in Singapore, where he read about a helicopter company, founded by a girl in Vietnam. The company was set up to carry tourists in the US to Vietnam after the war had destroyed infrastructure in the country. The story reportedly inspired Gopinath to do something similar in India. In 1995, Gopinath started Deccan Aviation Private Limited (DAPL), a private helicopter charter company, providing helicopter services for company charters, tourism, medical evacuation, offshore logistics and a host of other services. DAPL soon emerged as a pioneer in helicopter tourism in India. While serving tourists, the company encountered demands for flights to many smaller tourist places. Gopinath claimed that government representatives from the states of Andhra Pradesh and Karnataka met him and asked whether DAPL could provide air links to smaller cities in these states...
The Low Cost Business Model
Air Deccan's business model was inspired by the globally successful low cost model pioneered by the US-based Southwest Airlines in the 1970s. In the fiscal year 2003-04, the LCAs commanded a global market share of 25% and their revenues had grown by 40%. LCAs were continuously offering lower flying rates by inventing innovative ways to cut operational costs. Analysts claimed that the overall costs for LCAs were 45% to 60% to that incurred by FSAs. To keep overall costs of the company low, Air Deccan took the following measures -
Food:
Unlike FSAs, Air Deccan did not provide any food on board. However, it sold snacks and water bottles on its flights for a price. Serving and consumption of alcohol were not permitted. The company felt that for short distance domestic flights, most passengers did not want food...
The Target Market and Positioning
Analysts felt that there was huge growth potential for LCAs in India due to the country's huge 200 mn middle income group population. Gopinath expected that at least one fourth of this population would use LCAs in the near term. He pointed out that India had 15 mn rail travellers every day. Of these 1,70,000 travelled in the air conditioned class and were potential customers for Air Deccan owing to the comparable prices. Gopinath further said that the US had 40,000 commercial flights every day whereas India had only 400 flights a day. But India had four times more population than the US, so it could theoretically run 1,60,000 flights daily! Gopinath said, "Assuming that we had tapped 1 per cent of this potential, we still need 1,600 flights a day. Therefore, we need a quadruple jump in the number of commercial flights." Air Deccan defined its target segment as upper middle class in the short term but planned to tap the lower middle class aggressively in a couple of years...
The Challenges
Even before Air Deccan started operating on long haul routes, leading newspapers in India reported that all air tickets in the Rs 700 category were sold out for 2004. The response for the flights was reportedly such that Air Deccan's website was jammed and the call centre flooded with calls requesting booking. Since the announcement of the Rs 700 category fares, the airline received 10,000 calls a day as against 5,000 a day earlier. In response to Air Deccan's plans to offer services on major trunk routes, the FSAs quickly announced a fare reduction on these routes (Refer Exhibit X for new flight services of Air Deccan between April and September 2004). Sahara announced its "Apex fare scheme" for metros and reduced its fares by 30% (Refer Table I for Sahara's Apex Fare Schemes). JA followed by cutting prices on major metro routes by as much as 69%. IA also launched a super apex scheme and cut its prices to match that of JA. Air Deccan's success encouraged many other companies to establish LCAs...
Exhibits
Exhibit I: Statutory Requirements of Scheduled Airline Services
Exhibit II: A Note on Jet Airways
Exhibit III: Aviation Policy on Passenger and Air Cargo Transport
Exhibit IV: Naresh Chandra Committee Report: Key Proposals
Exhibit V: Air Deccan's Aircraft
Exhibit VI: Security Regulations of Air Deccan
Exhibit VII: Fare and Cost Structure of Air Deccan Compared to Fsas and Railways
Exhibit VIII: Inside View of Air Deccan's Atr Air Craft
Exhibit IX: Air Deccan's Print Ad
Exhibit X: New Flight Services Offered by Air Deccan (Between April and September 2004)
Exhibit XI: New LCA's Planning to Enter Indian Aviation Industry
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