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    Air deccan strategy Air deccan strategy Document Transcript

    • CENTER FOR Massachusetts INFORMATION Institute of SYSTEMS Technology RESEARCH Sloan School Cambridge of Management MassachusettsAir DeccanJeffrey L. SamplerNovember 2006CISR WP No. 365 and MIT Sloan WP No. 4657-07© 2006 Massachusetts Institute of Technology. All rights reserved. Research Article: a completed research article drawing on one or more CISR research projects that presents management frameworks, findings and recommendations. Research Summary: a summary of a research project with preliminary findings. Research Briefings: a collection of short executive summaries of key findings from research projects. Case Study: an in-depth description of a firm’s approach to an IT management issue (intended for MBA and executive education). Technical Research Report: a traditional academically rigorous research paper with detailed methodology, analysis, findings and references.
    • CISR Working Paper No. 365Title: Air DeccanAuthor: Jeffrey L. SamplerDate: November 2006Abstract: Air Deccan is the amazing story of India’s first low-cost airline. It has become thenation’s largest domestic airline in less than four years. They have done this through a clevercombination of innovation and outsourcing. More importantly, from a strategic perspective, itgives powerful evidence to how technology can be a key factor in changing the industrydynamics, even in what were once considered fairly stable or conservative industries.Keywords: BPO, outsourcing, strategic innovation, industry dynamics.22 Pages
    • Massachusetts Institute of Technology Sloan School of Management Center for Information Systems Research Air Deccan The carrier scaled its operations from a singleEXECUTIVE SUMMARY aircraft in 2003 to a fleet of 30 aircraft cateringIndia has a diverse transport sector, comprising to 55 destinations by 2006. In January 2006, Airrail, road, port and aviation sub-sectors, which Deccan became the largest low-cost carrier andcaters to the needs of more than 1.1 billion the third-largest domestic carrier with a marketpeople. Since the last decade, the transport share of 13.3%. In June 2006, it increased itssector has not been able to keep pace with the market share further to 19%, as compared toeconomy and has proven to be a bottleneck in Indian Air’s 21.1% after 53 years of existence.the country’s economic growth. In recent times, Air Deccan flew one million passengers in itsthe transport sector has experienced a dynamic first year of operation, and three millionshift with the entry of low cost airlines. These passengers in 2005. Air Deccan was on target toairlines have targeted upper-class rail pas- fly about eight million passengers in 2006,sengers, who account for substantial revenues. which would surpass Indian Air’s estimate ofThe Indian aviation industry has always been 7.2 million passengers. The company owed itshighly regulated by the government. In the early success to its ‘no-frills, low-cost’ businessnineties, the government initiated measures to model, where it offered fares which werederegulate and privatize the aviation industry, approximately 30 percent lower than thosewhich were in line with liberalization of Indian offered by full-service airlines, and were at pareconomy. In 1994, the Air Corporations Act of or even lower than upper-class rail fares.1953 was repealed, which allowed private Air Deccan’s management was well aware ofcarriers to provide scheduled services. This saw the challenge to sustain its low-cost businessthe emergence of full-service carriers such as model and proactively designed various stra-Indian Airlines, Jet Airways and Air Sahara and tegies to ensure its success over a longerlow-cost carriers such as Air Deccan, Spice Jet, horizon. The carrier’s strategies were aimed atKingfisher, IndiGo, GoAir and Paramount generating additional revenues and reducingAirways which predominantly operated domes- costs. In order to increase revenues, the airlinetic routes. reduced turn-around time and planned otherCaptain Gopinath, the founder of Air Deccan, processes such as aircraft selection, flightpioneered the low-cost carrier model in India. scheduling, ground handling and route selection,This case study was prepared by Jeffrey Sampler for the MIT Sloan Center for Information Systems Research. This case waswritten for the purposes of class discussion, rather than to illustrate either effective or ineffective handling of a managerialsituation. The author would like to acknowledge and thank the executives at Air Deccan for their participation.© 2006 MIT Sloan Center for Information Systems Research. All rights reserved to the author.
    • which in turn led to an increase in its utilization low-cost carrier. It created its Internet-based dis-rates. In addition, the airline targeted other tribution system with the help of a technologysources for additional revenues. These sources vendor, InterGlobe Technology Quotient, whichincluded credit card fees, sale of food and enabled the airline to extend its reach tobeverages on flights, and the sale of advertising customers. The carrier’s IT architecture wasspace on seats, storage bins, headrests, tray designed in such a way that it was both scalabletables, baggage tags, boarding passes, the body as well as robust. The system had adequateof the aircraft, websites and in-flight magazines. inherent backup mechanisms so as to eliminate any possibility of a break down. These ITThe carrier also implemented several innovative initiatives helped the airline to reduce itsmeasures in order to reduce costs. It followed a distribution costs by almost 20%.point-to-point route strategy, where it did nottime its flights to connect with its other flights The airline’s HR function saw the airline growor with other airlines’ flights. This helped to to almost 2600 employees within a span of twoeliminate waiting time between flights, resulting years. HR ensured that the organization had ain significant reduction in the carrier’s opera- relatively flat structure so that employees weretional and logistics costs. Air Deccan’s fleet accountable for their actions and were keen tostrategy was unique as it included both ATRs develop an entrepreneurial spirit. It emphasizedand Airbuses, which were used to cater to its the personal strengths and skills of employeestrunk as well as regional routes. Smaller ATR so that they were well suited for their roles andaircraft were economic on the regional routes the organization’s work culture. Managementand were supported by available infrastructure also employed several measures to curb attri-at these airports. In contrast, larger Airbus tion, which was a bane in the otherwiseaircraft offered lower operating costs on the booming aviation sector.trunk routes and were suitable to accommodate Air Deccan has ambitious growth plans in thehigh passenger traffic on these routes. More- future as it strives to be the largest airline in theover, the carrier incorporated a unique dynamic country. In order to meet these plans, the carrierpricing model which made a significant contri- placed an order for 101 aircraft, which will bebution toward optimizing the airline’s yield delivered by December 2012. To fund its fleetmanagement and load factor. The airline also expansion, Air Deccan made an Initial Publicfollowed a ‘lean-and-mean’ staffing model, Offering (IPO) in May 2006 and raised USD 80aimed at maintaining a low aircraft-to-employee million. The regulated aviation sector, inade-ratio, thereby further reducing costs. quate airport infrastructure, unavailability ofAir Deccan’s distribution initiatives were in- secondary airports and competition from newstrumental in saving costs as distribution costs low-cost entrants and other full service airlinesare one of the key controllable expenditures in will ensure a bumpy ride for the carrier in thean airline’s cost structure. Apart from the con- coming days. Events such as consolidations,ventional distribution channel of travel agents, price wars and evolving business models willthe carrier pioneered ticket sales through several surely change the aviation sector in the future.innovative distribution channels such as an Air Deccan management felt ready for theInternet reservation system, call center, airport challenges.ticketing desks, petrol retail outlets and anInternet services retail outlet. This enabled the CASE STUDY—AIR DECCANairline to reduce its costs and increase its While going through the newspapers on aaccessibility to the customers. Monday morning in early February 2006,The carrier’s support functions, such as Infor- Captain G.R. Gopinath, the Managing Directormation Technology (IT) and Human Resources of Air Deccan, came across the headline—‘Air(HR), played a critical role in its success as a Deccan files draft prospectus for IPO.’ HeSampler Page 2 CISR Working Paper No. 365
    • smiled, recollecting Air Deccan’s brief and employed 1,545,300 people and transporteduncertain two-year journey. As a pioneer in the 473.5 million tons of freight and 4,833 millionlow-cost aviation arena, he had redefined the passengers.2 In the same year, railway tracksmarket. As a result, Air Deccan succeeded in spanned 108,706 km, connecting approximatelyestablishing itself as the leading low-cost 6,853 stations across the country. In 2001, theairline. However Captain Gopinath’s smile railways generated freight revenue of INR3 233faded as he spotted another headline—‘Jet billion and passenger revenue of INR 105.2Airways, Air Sahara tie the knot.’ He wondered billion (see Table 1).how this new development would affect the In 2002, 60% of rail passengers were from largeindustry, resulting in new re-alignments and cities such as Mumbai, Kolkata, Chennai andconsolidations. He was also concerned about Delhi. Long-distance passengers accounted forhow these in turn would determine the evolution 27%, and those traveling short distances or fromof Air Deccan’s business model. small cities accounted for 13% (see Figure 1).Air Deccan’s success had triggered the entry of Although rail passengers used nearly 60% ofmany other airlines such as Spicejet, Go Air, rail resources, their contribution to total railKingfisher and IndiGo, among others. These revenues was only 32%. In fact, upper-classnew entrants were fast gaining access in the passengers, who constituted less than onelow-cost market and simultaneously squeezing percent of passenger traffic, accounted for athe carrier’s margins. Captain Gopinath was significant 20% of total rail passenger reve-equally wary of the challenges posed by the nues.4 Today, these upper-class rail passengersregulatory environment and airport infrastruc- are not only the focus of low-cost airlines butture, which served as major bottlenecks in are also responsible for changing the dynamicsmeeting the demands of the fast-growing avia- of India’s air and rail sectors.tion market. He realized that it would be anuphill task for the airline to successfully meet its Indian Aviation Sector—A Reviewgoals while competing with other low-cost andfull-service carriers. Early Days In 1953, the government enacted the AirChanging Dynamics of the Indian Corporations Act to merge nine existing airTransport Sector—Air and Railways companies into two, Indian Airlines, catering to the domestic market, and Air India, servicingThe transport sector has played a vital role in the international market. The government con-the development of the Indian economy. trolled all the key operations of these entities forThough the rail and air sectors have exhibited almost 40 years.high growth in recent years, the lack of infra-structure remains a major hindrance in their However, in the 1970s, the US governmentdevelopment. The government plays a crucial pioneered the deregulation of its airlinerole in regulating and developing the country’s industry, which led to benefits such as lowertransport sector. fares, improved productivity and better asset and capital utilization. The success of the USRail Transport—An Overview government’s initiative triggered the process ofIndian Railways is the largest rail network in deregulation and privatization of the airlineAsia and the second largest in the world.1 It is industry in several other countries also.also the largest government-owned public enter- The Indian aviation industry experienced similarprise. Indian Railways has demonstrated a winds of change, which were further fueled bysteady growth in terms of freight and passengertransport. In the year 2000–01, the railways 2 Source: Indian Railways. 3 Indian Rupee.1 4 US Rail network is the largest in the world. Source: Indian Railways.Sampler Page 3 CISR Working Paper No. 365
    • the liberalization of the Indian economy. In Major Operators1986, private players were permitted to operate The Indian aviation sector primarily comprisesonly as air taxi operators.5 This led a host of four types of operators—domestic airlines,private carriers such as Jet Airways, Air Sahara, operating within India and select internationalModiluft, Damania Airways, NEPC6 Airlines destinations; international airlines; chartered airand East West Airlines to start their operations operators; and air cargo service providers,as air taxi operators. In 1994, the Air Corpor- whose services include air transportation ofations Act of 1953 was revoked, allowing cargo and mail. Scheduled domestic airlinesprivate carriers to also provide scheduled again fall in two categories, full-service carriersservices. Six private air taxi operators were and low-cost carriers. Indian Airlines, Jetgranted the status of scheduled carriers. Of Airways and Air Sahara operate as full-servicethese, Jet Airways and Air Sahara7 are the only carriers whereas Air Deccan, Spice Jet,two that continue to operate in the country Kingfisher, IndiGo, GoAir and Paramount Air-currently. ways operate predominantly on domestic routes. Indian Airlines started operations in 1953, fol-Growth Story lowed by Jet Airways in 1995 and Air Sahara inGlobal events such as economic recession, 1996. In 2003, Air Deccan commencedterrorist attacks in several countries, the Gulf operation as a low-cost domestic carrier. Itswar and the spread of epidemics such as SARS8 success attracted many similar players. Inhad a negative impact on the Indian aviation January 2006, Jet Airways signed a deal to ac-industry. However, the domestic aviation sector quire Air Sahara. If this move is successful, ithas successfully overcome these crises, re- will make this new entity the largest player incording substantial growth in recent times. the Indian aviation sector, with a combinedAccording to the Director General of Civil market share of 45.7%. However, conflicts overAviation (DGCA), the number of domestic the pricing of the deal have caused delays. Atpassengers increased at a CAGR9 of 15.9%, this juncture, the case is subjudice with bothfrom 12.8 million to 19.9 million during the parties taking the other to court. As of Juneperiod 2002–2005. For the year ending 31 2006, Air Deccan is the leader among low-costMarch 2005, domestic air traffic registered an carriers, with a market share of 19% (see Figureincrease of 26.8% as compared to 2004 (see 2).Table 2). The number of air passengers isforecast to increase to 90 million by the year Infrastructure2010.10 The lack of adequate infrastructure remains aThe growth potential of the aviation sector has major bottleneck in the growth of the aviationbeen further propelled by the government’s industry. The phenomenal growth in the numberinitiatives for greater involvement of the private of passengers and aircraft has led to thesector in aircraft manufacturing, operating and congestion of terminals and runways, resultingupgrading airports, and providing enhanced in flight delays and increased costs for theground services. airlines. As per the statistics available in January 2006, there were 450 (approximately) airports in5 India, which were managed by the Airports Air Taxi Operators own a fleet of small aircraft that Authority of India (AAI), Defense Services,make short local flights to areas not serviced by regularairlines. state governments and private parties. The AAI6 Natural Energy Processing Company. managed 126 airports. Defense Services oper-7 Note: Jet Airways has signed a deal to acquire Air ated 89 civil domestic airports, 11 internationalSahara. airports and 26 civil enclaves.11 Nearly 40 of the8 Severe Acute Respiratory Syndrome.9 Compound Annual Growth Rate.10 11 Source: ICFDC. Source: Air Deccan Prospectus.Sampler Page 4 CISR Working Paper No. 365
    • defense airports were non-operational (see Air Deccan—The Beginning of a New EraFigure 3).12 In 1995, India was in the early phase of reforms,Recognizing the need for a world-class aviation which were gradually re-structuring variousinfrastructure, the government has partnered sectors. Captain Gopinath firmly believed in thewith the private sector to expand and modernize efficacy of these reforms and was exploringinternational airports in New Delhi, Mumbai, various avenues to start a venture. According toChennai, Kolkata and 32 other regional airports. Captain Gopinath, “On meeting a colleague,The privatization plan for Delhi and Mumbai who was a retired pilot and who was not gettingairports experienced a long delay, due to a job as a pilot, I realized that there was not aopposition from political parties and non-trans- single helicopter service in the country thatparency in the awarding of contracts. However, could employ such retired personnel.” Captainthe construction of two greenfield airports at Gopinath was also aware that in the wake ofBangalore and Hyderabad has commenced and economic liberalization there would be anis due for completion by 2008.13 imminent need for helicopter service in sectors such as oil, mining, construction and power.Changing Landscape This led to the formation of Deccan Aviation inIn July 2003, the Ministry of Civil Aviation set 1995, which began operations with a singleup a committee to review the civil aviation helicopter. Captain Gopinath purchased his firstpolicy and make recommendations for the helicopter from Australia and flew it all the waypromotion and development of the civil aviation to India, hopping various islands on the way.sector. The committee addressed a diverse range From this humble beginning, the fleet of Deccanof issues such as affordable air travel, improve- Aviation gradually grew to 11 aircraft14 (ninement in airport management and infrastructure, helicopters and two fixed-wing aircraft). Deccanrestructuring of the aviation sector, and aviation Aviation became a success story largely due tosecurity and safety regulations. its continued efforts in building a national pre-Based on the committee’s report, the govern- sence and a good brand image, and offeringment initiated various measures to develop and high-quality services, such as chartered destina-promote the aviation sector. In December 2003, tions, tourist requirements, medical evacuationprivate airlines were permitted to fly to some purposes, religious pilgrimage and offshoreinternational destinations in the South Asian logistics.Association for Regional Cooperation (SAARC) Captain Gopinath was encouraged by the de-countries. Subsequently, in January 2004, the velopments in the low-cost aviation arenagovernment abolished Inland Air Travel Tax worldwide that had revolutionized the aviation(IATT) and Foreign Travel Tax (FTT) and industry. The success of airlines such asreduced excise on aviation turbine fuel (ATF). Southwest Airlines and JetBlue in the UnitedThis was followed by a substantial reduction in States and Ryanair and easyJet in Europe hadlanding charges as well as navigation charges in set a trend, inspiring airlines in other countriesFebruary 2004. In November 2004, the govern- follow suit. India’s open economic environmentment increased the foreign investment limit in and its large growing segment of air passengersthe aviation sector from 40 to 49%. Domestic and retired air force pilots presented anairlines that had completed five years of immense opportunity for the entry of an airline.domestic operations were also permitted to flyto select international destinations. In recent times, India has emerged as one of the largest consumer bases in the world. The country has a large middle-class population, which had grown to 300 million by April12 Source: ICFDC.13 14 Source: Centre for Asia Pacific Aviation. Note: As of November 30, 2005.Sampler Page 5 CISR Working Paper No. 365
    • 2005.15 Moreover, the Indian economy has ex- India, connecting millions of people. Along withhibited high growth in recent years, and the serving the ‘common man,’ the airline strives toGDP is expected to increase at the rate of 8.1% be commercially successful by reducing oper-for the year 2005–06.16 As a synergy has always ating costs, improving aircraft utilization and in-existed between the transport sector and the creasing load factor (the percentage of filledcountry’s economy, this sector has progressed seats) and yield (revenue earned per ticket).steadily along with India’s impressive economicgrowth. At present, 13 million passengers travel Air Deccan: Phenomenal Growthby train in India everyday, which highlights the In August 2003, Air Deccan began itslarge volume and potential of the transport operations with a single ATR18 aircraft, on theindustry.17 Captain Gopinath captured, devel- route between Bangalore and Hubli. During theoped and leveraged this potential and launched last two years, the carrier has exhibited phe-India’s first low-cost airlines—Air Deccan, in nomenal growth:August 2003. Air Deccan was incorporated as aunit of Deccan Aviation Private Limited. Currently, the carrier operates approx- imately 266 flights on a daily basis.The Founder, the Man The airline has scheduled flights to 55Captain Gopinath was born in the remote village destinations19 which provide connectivityof Gorur, located in Karnataka. He graduated across the country (see Figure 4).from the National Defense Academy and also Air Deccan’s fleet comprising Airbuses andserved the Indian Army for eight years. In 1979, ATRs has grown to 30 aircraft20 (see Table 5).he took voluntary retirement to pursue his As of May 2006, Air Deccan’s market shareinterests in diverse areas. He was honored with stood at 19%,21 making it the third-largestthe prestigious ROLEX award for enterprise in airline in the country.ecological silk farming. In addition, he was Currently, the carrier employs approxi-awarded Chevalier de la Legion’Honneur con- mately 2600 employees (apart from em-ferred by the French President, Galileo & Indian ployees on a contract basis).Express Editor’s Choice Award and numerous Within a year into its operations, the airlineother awards for business and society. Air funded its expansion by raising USD 40Deccan was named the “Most Innovative million from ICICI Ventures and CapitalCompany of the Year” in October 2006. International in exchange for a 26% stake. As of 30 November 2005, Air Deccan hadVision and Mission flown approximately 2.7 million passen-Captain Gopinath’s vision of contributing to the gers.22 The carrier flew one million passen-lives of India’s masses has been realized gers in its first year and 3 million passengersthrough Air Deccan, a pioneering low-cost in its second year. In its third year ofbusiness model. The airline has played a signifi- operation, it is expected to fly 8 millioncant role in making the common man’s dream to passengers.fly come true. In accordance with Captain The carrier’s revenues increased by 376% inGopinath’s vision (see Table 3), the carrier aims the year ending 31 March 2005 as comparedto provide a no-frills air travel service, which is to the previous year. In fact, the airlinesafe and economical, and provides on-timeservice to its customers. Moreover, the airline 18 The ATR 42 (48 seater) and ATR 72 (72 seater) areplans to fly to a larger number of destinations in twin-turboprop air craft. These are respectively 22.7 m and 27.2 m in length. 19 Source: Air Deccan.15 20 Source: NCAER. As of March 2006.16 21 Source: Ministry of Finance, India. Source: Director General of Civil Aviation.17 22 Source: Indian Railways. Source: Air Deccan Prospectus.Sampler Page 6 CISR Working Paper No. 365
    • earned a revenue of INR 3,618.3 million The sale of tickets was not the airline’s only (see Table 4) in the six-month period ending means of generating revenues; the sale of food 30 September 2005. The carrier’s revenue and beverages on flights was one of its alternate for 2003–4 was 16 million USD, in 04–05 it revenues. was 80 million USD and in 05–06 was 225 Air Deccan had a vision to serve even in the million USD. remotest corners of the country. As of June 2006, the airline offered its services across 55Business Model airports and 260 flights per day in India. ItAir Deccan was the first Indian airline to follow started nine flights to destinations where noa ‘no-frills, low-cost’ business model. Its suc- other airlines had a presence. In addition, therecess lay in the fact that though the model was were seven other destinations where only oneinspired by successful low-cost airlines in other other carrier was providing flight services alongcountries, it was customized to suit Indian with Air Deccan. This helped the carrier toconditions. explore new routes where it faced negligible competition. First-time fliers from such areasThe airline’s target passengers comprised also tended to develop an abiding loyalty to Airleisure, small business and corporate customers Deccan.belonging to the middle class and cost-con-scious customers of the affluent class. Thecarrier’s airfares were comparable to railways’ Strategiesupper-class fares, and at times were even lower As a pioneer in the low-cost aviation sector, Airthan rail fares for select seats (see Table 6). This Deccan was determined to make a mark forhelped Air Deccan to capture a vast segment of itself. A mix of strategies contributed to itsupper-class train passengers. For example, as of success.August 2005, the airline had succeeded inattracting approximately 18–20% of upper-class High Aircraft Utilizationtrain passengers.23 This led to an increase in High aircraft utilization was the first of Airfirst-time fliers, which in turn resulted in an Deccan’s strategies as it would directly result inincrease in the market size. high revenue generation. One of the main ave-Air Deccan offered fares which were approx- nues for achieving this end was reducing theimately 30% lower than those offered by full- airline’s turn-around time. By doing this, theservice airlines. In order to provide low-cost carrier automatically increased its number offares and remain profitable, the carrier adopted flying hours, which in turn resulted in anseveral measures. It reduced its operational increased number of seats available. In addition,costs by simplifying its operations, by using Air Deccan meticulously planned other pro-technology, and by outsourcing processes that cesses such as aircraft selection, flight sched-were not core to the business. The airline did not uling, ground handling and route selection toprovide additional services (such as free meals) increase utilization rates. As a result, the airlineto its customers. It focused on providing basic was able to achieve impressive utilization ratestransportation services to its customers in an of 10.44 hours for the year ending 31 Marchefficient manner. The carrier devised strategies 2004, as compared to other airlines whoseto achieve high aircraft utilization in terms of utilization rates ranged between seven and nineflying hours. Air Deccan also adopted the hours. However, by September 2005, with theconcept of ‘dynamic pricing’ to optimize the introduction of new aircraft and the addition ofload factor and the yield. new routes and new bases (see Table 7), its utilization rates decreased to 9.19 hours.23 Source: Indian Express.Sampler Page 7 CISR Working Paper No. 365
    • Route Planning routes achieved a two-pronged result—highAir Deccan also owes its success to the manner yield and high load factor. The airline’s pre-in which it planned its operational routes. The sence on these routes, before other competitors,carrier operates from six bases, which are gave it an additional first-mover advantage. Thelocated in the metropolitan cities of Mumbai, carrier was aware that its success was dependentDelhi, Chennai, Kolkata, Bangalore and to a large extent on its load factor. Therefore, itHyderabad and are connected by trunk routes. discontinued a route after an initial four-monthFurther, these bases are connected to other period if its load factor was found to be low.regional locations through regional routes. Inaddition, there also exist various air routes Aircraft Fleetconnecting regional locations with each other. Air Deccan invested a great deal of time andAir Deccan followed the worldwide low-cost effort towards making the best use of its fleet.carrier strategy of flying on point-to-point This was another factor that contributed to theroutes. It did not time its flights to connect with airline’s success. Therefore, matching differentits other flights or with other airlines’ flights; types of aircraft with the requirements ofthereby eliminating waiting time between specific routes was yet another significantflights. This strategic move contributed signifi- strategy followed by the carrier. Initially, Aircantly towards reducing the carrier’s operational Deccan’s fleet comprised only an ATR 42and logistics costs. turboprop—a 48-seat aircraft. The airline later added ATR 72 and Airbus A320 to its fleet. TheAs an integral part of its growth strategy, the carrier included both kinds of aircraft—ATRsairline explored new route options on a contin- and Airbuses—in its fleet so as to cater to itsuous basis. These new routes comprised those trunk as well as regional routes. Smaller ATRthat were either not served by other airlines or aircraft were used because of two reasons—those that did not have adequate flights. The regional routes had lower passenger traffic, andairline carried out a feasibility study before most airports on these routes did not havefinalizing new routes. According to Mohan adequate infrastructure to accommodate largerKumar, the Director, Finance of Air Deccan, aircraft. In addition, the costs involved inbefore launching a new route between two operating smaller aircraft on regional routesdestinations, the airline first conducted an were lower as compared to larger aircraft.extensive traveler survey to identify traveler Moreover, the flight staff required for thesetraffic. If the upper class train traffic between aircraft was lower in comparison to that ofthese destinations was in the range of 500–800 larger aircraft. Also, smaller aircraft enjoyedpassengers per day, the airline recognized it as a lower sales tax on fuel, lower navigation feeslucrative option and began its operations.] and no landing fees.However, profitable route selection depended onvariable factors, which differed from one route The larger Airbus aircraft were used on trunkto the other. For example, current air traffic routes. These aircraft were ideal for accom-volumes and availability of landing slots were modating the high passenger traffic on thesethe prime factors determining the finalization of routes. Also, as compared to ATRs, these air-trunk routes. In contrast, the availability of craft offered low operating costs per passengersufficient airport infrastructure was the for longer distances.important factor that determined regional route Two features characterized all Air Deccanselection as regional routes had limited aircraft—a single class and a narrow seatinginfrastructure that could only accommodate arrangement. This led to an increase in thesmaller aircraft such as ATRs. number of seats available, thereby increasingAir Deccan’s strategy to pursue unexplored revenues.routes paid rich dividends as very often theseSampler Page 8 CISR Working Paper No. 365
    • Dynamic Pricing on the date of travel. This helped the airline toAir Deccan’s unique pricing model was another partially recover the costs of empty seats as astrategy which went a long way in optimizing result of cancellation.the airline’s yield management and load factor. Commenting on additional revenues, CaptainIn the dynamic pricing model, seats which were Gopinath states, “With an average passengerbooked well in advance had lower fares, spending INR 75 for a quick meal or beverage,whereas the seats booked closer to the travel Air Deccan could have easily generated addi-date had higher fares. This helped the airline to tional revenue worth INR 202.5 million frommaximize its revenues from ticket sales as well the 2.7 million passengers that had flown on theas maintain high seat occupancy. This balance airline till November 2005.”of load factor and yield enabled the carrier toaugment its revenues. This pricing process was Cost reductioncontinuously monitored on a real-time basis and Realizing that revenue generation alone wouldwas governed by a defined set of rules. It also not ensure its long-term success, Air Deccaninvolved checking the prices of its competitor identified its next strategy—cost reduction.airlines on an on-going basis. Implementing several cost-reduction measuresAs of 31 March 2004, Air Deccan’s load factor ensured the profitability and sustainability of thestood at 62.64%, which gradually increased to airline’s business model. The carrier did not76.36% by 31 March 2005 (see Table 8). As of indulge in incurring frivolous expenditure.30 November 2005, the carrier’s overall average Therefore, unlike its competitors, Air Deccanload factor was 80.86%. The yields also refrained from incurring expenditures on fancyincreased from INR 2,055 as of 31 March 2004 offices, lounges and frequent flier program. Theto INR 2,084 as of September 2005. airline followed a ‘lean-and-mean’ staffingRecently, the airline entered into negotiations to model and maintained a low employee-to-implement Navitaire software (used for opti- aircraft ratio in comparison to others in themizing load factor and yield management), business. Its ATRs were serviced by a one-which is popular among leading low-cost member cabin crew whereas its Airbuses werecarriers worldwide. serviced by a four-member cabin crew. By using the smaller ATR aircraft for shorter flights and for regional destinations, Air Deccan signifi-Additional Revenues cantly reduced its infrastructure usage feesGenerating additional revenues was a strategy because the landing fees for smaller aircraftthat Air Deccan adopted with great success. were almost 50% lower than the fees for largerSince the airline was a low-cost carrier, it faced aircraft. The airline also reduced its employeecontinuous challenges to maintain profitability. strength by automating some of its processes,Therefore, it was aware that the sale of tickets thereby reducing costs.alone would not be adequate to raise therequired revenue. Thus, the airline targeted The existence of a single fare system in Airother sources to achieve this end. These sources Deccan, unlike those of full-service carriers,included credit card fees, the sale of food and was yet another means of implementing costbeverages on flights, and the sale of advertising reduction. The airline opted for a single farespace on seats, storage bins, headrests, tray system instead of a multi fare one to avoid thetables, baggage tags, boarding passes, the body additional costs involved in accounting andof the aircraft, websites and in-flight magazines. auditing processes.Unlike full-service carriers that generally pro- The carrier achieved a turn-around time of 40vided full refunds on ticket cancellations, Air minutes (for an Airbus) and 20 minutes (for anDeccan imposed penalties on the same. These ATR), as compared with other airlines that hadpenalties varied from 10% to 100% depending average turn-around times of 55 minutes. ThisSampler Page 9 CISR Working Paper No. 365
    • resulted in increased aircraft utilization rates, Deccan with additional advertising slots onthereby generating higher revenues. In addition, television, newspapers and radio.the carrier benefited by paying lower parking The airline customized marketing campaigns forrentals for its aircraft. its diverse customer segments. For its leisureTo further reduce costs, the airline outsourced travelers, the carrier offered a ‘Value Flier’non-core operations to third parties. Operations, package, which provided multiple ticketssuch as airport ground handling, supply of on- useable over a fixed period by any four mem-board food and beverages, and supply of in- bers of a family. In the near future, Air Deccanflight magazines, were managed by third-party also plans to offer leisure packages in partner-vendors. Recently, the carrier signed an agree- ship with hotels.ment with Cafe Coffee Day and appointed it asits single-point vendor for supplying food and Sales and Distributionbeverages. Air Deccan’s sales and distribution strategy wasAir Deccan also reduced costs by using another initiative that revolutionized theunconventional distribution channels (described industry. By introducing several innovations inbelow) and the airline primarily sold tickets its distribution channels, the airline succeeded inupon receiving advance payments or payments reducing its distribution costs substantially.within 24 hours of ticket booking, reducing the According to Air Deccan’s Chief Revenuecarrier’s requirement to finance its working Officer John Kuruvilla, “Distribution cost iscapital. This gave Air Deccan a distinct advan- seen as one of the key controllable expenditurestage compared to other airlines that had longer in an air carrier’s cost structure; thus, anpayment cycles because the bulk of their effective and efficient distribution mechanismreservations were routed through travel agents. goes a long way in making an airline successful.”24Marketing and Promotion Most full-service airlines use GDS reservationAir Deccan achieved significant breakthroughs systems, where their seating inventory is hostedin the low-cost carrier arena through its on GDS databases, such as Galileo, Amadeus,intelligent marketing and promotion strategies. Sabre, Abacus and Worldspan. GDS chargesThe airline utilized its marketing and these airlines a fixed price, which is approx-promotional programs effectively to highlight imately three to four percent of ticket sales. Inthe competitive advantage it enjoyed as a result order to reduce its distribution cost by avoidingof its low fares. The carrier also increasingly GDS-related costs, Air Deccan developed anfocused on public relations, advertising, direct Internet-based Centralized Reservation Systemmarketing and the Internet to promote its offers (CRS), with the help of InterGlobe Technologyand increase public awareness about its services. Quotient. This system centralized customers’In order to convey its message to its target reservations through channels such as thesegment, i.e., the cost-conscious customer, Air Internet, call centers or travel agents.Deccan selected cartoonist R K Laxman’s Using the CRS, the airline successfully imple-famous mascot ‘The Common Man’ (see Table mented ticket sales through the Internet. Direct9) as its brand ambassador. The carrier adver- Internet bookings accounted for approximatelytised primarily through media such as print, 28.17% of total ticket sales, for the six-monthradio and billboards. Though the airline also period ending 30 September 2005. Customersused television as a media to reach the masses, it only needed printouts of their tickets to generatedid not use it as extensively. The carrier has also their boarding cards. This saved the cost ofentered into various sales and barter exchanges printing tickets, which amounted to INR 4 forfor advertising space, which has provided Air 24 Source: Real CIO World.Sampler Page 10 CISR Working Paper No. 365
    • each ticket. In addition, airline paper tickets Through these outlets, customers booked Airwere bar coded. The bar code reader was used to Deccan tickets for an added handling fee. Theseread these codes, which helped in reducing the sales were also connected through CRS.time required to generate boarding passes. Recently, Air Deccan has introduced a new facility for its customers—they can use theirThe airline set up a 24x7, multilingual call mobile phones to book tickets through SMS.center for customers who did not have access to Customers can also use SMS to reschedule theirthe Internet or credit cards. As this call center flights. The carrier is now planning to offer itshad CRS connectivity, it provided these customers ticket booking using General Packetcustomers with the facility of booking their Radio Service (GPRS) over mobile phones.tickets over the telephone. The call center salesaccounted for 9.94% of Air Deccan’s total ticket Thus, Air Deccan effectively used severalrevenue for the six month-period ending 30 distribution channels to substantially reduceSeptember 2005. distribution costs and significantly increase customer accessibility.However, the airline sold most of its ticketsthrough travel agents, the aviation industry’sconventional distribution channel. This helped Support Functionsthe carrier to mitigate the risk of alienating Air Deccan’s two support functions, Informa-travel agents by introducing several alternative tion Technology (IT) and Human Resourceschannels. These travel agents accounted for (HR), have played a crucial role in the airline’s49.16% of the carrier’s total ticket sales for the growth path and have also been major contri-six-month period ending 30 September 2005. butory factors in its success.Other airlines operated through their travelagents who booked tickets through GDS and Information Technology (IT)25collected payments from customers, which were The manner in which Air Deccan utilizedthen passed on to the airline. However, Air technology to its advantage was instrumental toDeccan modified the existing model to one in its success. The carrier not only used technologywhich travel agents used the CRS to book as a medium to reduce costs, but also used it totickets. Agents collected payments from custo- enhance operational efficiency and increasemers and purchased tickets either against pre- revenues.paid deposits or credit/debit cards. Unlike otherairlines, this model enabled Air Deccan to As noted, Air Deccan opted out of the third-receive payments in advance, thereby reducing party GDS reservation systems used by otherits cash cycle. By using this model, the carrier airlines. In doing so, the carrier required rapidextended its reach to include non-traditional implementation of its own customer reservationagents such as merchants, retail outlets and systems (CRS). Since Air Deccan did not havecyber cafes for ticket booking. adequate skills and competencies to develop such a system on its own, it made the strategicIn addition to the major sales and distribution decision to outsource it to a third party. Accord-initiatives listed above, the airline also pursued ing to Air Deccan’s Chief Information Officersome more strategies to bolster its distribution Arvind Saksena, outsourcing offered Airchannel. It sold tickets through airport ticketing Deccan a distinct advantage. As the third partydesks, which were connected to CRS. Sales had domain expertise, the airline would be ablefrom these ticketing desks accounted for to affect speedy implementation of the new11.15% for the six-month period ending 30 system, thereby leading to quicker revenueSeptember 2005. In order to reach out to a larger generation.26customer base, Air Deccan partnered withapproximately 160 HPCL petrol retail outlets 25and 240 Reliance Web World retail outlets. Source: Air Deccan Prospectus. 26 Source: Real CIO World.Sampler Page 11 CISR Working Paper No. 365
    • The most critical step in this process was the indicated PNR27 numbers. The departure controlselection of an ideal vendor for developing Air system interfaced with the reservation engine toDeccan’s Internet-based reservation system. track passengers who boarded an aircraft.28This was because the online booking channel The entire IT solution developed by InterGlobewas expected to become one of the carrier’s was up and running in a short span of 40 days—major revenue earners, owing to increasing no mean feat by any standards. The CRS de-Internet penetration in India. Therefore, when ployed by Air Deccan enabled the airline to:selecting a vendor, the company’s prime con-cerns were stability and reliability as only a Save approximately 20% in distributionvendor that met these requirements would be costsable to provide efficient support. Moreover, the Monitor yield management throughvendor had to possess sufficient internal available seat occupancy datacapacity to absorb large orders and sustain the Connect different geographiesdevelopment process, even when payments were Improve cash flow via pre-paymentsdelayed. It was also imperative that the vendordeliver as per the deadlines. InterGlobe Tech- Reduce collection and administrative costsnology Quotient met all of the airline’s criteria, Optimize booking levelsand was chosen by Air Deccan to develop an Sell tickets 24x7efficient distribution/reservation solution. In addition to InterGlobe, Air Deccan also part-InterGlobe developed the CRS, a system that nered with Sheorey Digital Systems to developwas based on a combination of both .Net and an Airline Resource Management SystemJ2EE technologies. This new solution handled a (ARMS), which tracked logistics, maintenance,variety of activities ranging from reservations, training and crew rotation.schedules, fares, payment gateway integration, Air Deccan’s IT infrastructure also ensured thatdeparture control system and document produc- its website, which could be accessed by alltion. According to Arvind, “Our focus was to customers, maintained CRS connectivity at allbuild IT architecture and infrastructure which times. As a security measure for e-commerce,were both scalable and robust. We wished to the website was certified by Verisign. In addi-have a foolproof system in place that would tion, the infrastructure comprised two onlineeliminate all possibilities of any breakdown. payment gateways and data links to provideThis was because an IT breakdown had critical security and continuity for online customers.consequences—operations could come to agrinding halt.” To meet such an eventuality, the The airline’s IT infrastructure also provided webIT infrastructure required multiple alternatives, connectivity for various points of sales. Thus,wherein the infrastructure would provide for the carrier was not dependent on SITA’s29system failures to be automatically remedied (third-party vendor) communication links,and addressed. which offered limited connectivity and were also far more expensive. Therefore, Air DeccanThe IT solution comprised three significant had far greater market reach as compared toparts—the reservation engine, the inventory other airlines. This was because these airlinesengine and the departure control system. The were dependent on SITA, which did not have areservation engine facilitated transactions with presence in smaller cities.online customers, corporate customers, callcenters, travel agents, and city and airport 27offices, on a real-time basis. The inventory Passenger Name Record. 28engine managed inventory flight schedules, Source: Real CIO World. 29 SITA is a provider of IT business solutions andfares, sales and flight departures. Through the communications services to the air transport industry. Itdeparture control system, passengers were serves approximately 1,800 customers in over 220issued boarding passes with ticket printouts that countries and territories.Sampler Page 12 CISR Working Paper No. 365
    • Though partnering with its technology vendors mile’32 applications and Air Deccan’s data ser-helped Air Deccan implement its IT systems, vers were provided double or triple protectionthese vendors required continuous monitoring. by HCL. The entire facility had a 24x7 dualAccording to Arvind, “It was extremely impor- power backup. Finally, various security meas-tant to monitor vendors by having service level ures, such as video surveillance and securityagreements (SLAs) in place. This was because clearance, were established to monitor the datareplacing vendors would require the entire center sites.process to be begun all over again, involvingsignificant time and expenses.” Moreover, the Human Resources (HR)carrier had a dedicated team at the vendor’s site, Air Deccan recorded an impressive employeewhich enabled the carrier to have flexibility to growth rate that touched the 2000-mark within aaccommodate changes in the system. comparatively brief 30-month period. ThisAir Deccan also multi-tasked its bandwidth, achievement was a clear indication of thethereby reducing bandwidth wastage. The air- efficient support that the airline received fromline used open-source software for firewalls and its HR division. The carrier was incorporated ine-mail servers, which ensured the customization August 2003. Its employee strength wasof applications in diverse environments. The approximately 2600 in June 2006. According tocarrier used voice over Internet protocol (VOIP) management estimates, the head count is ex-and other technologies to reduce its telephone pected to grow to 5000–6000 by 2010. Thoughcosts. Air Deccan favored a ‘lean-and-mean’ approach to recruiting and staffing employees in variousThe airline undertook several measures to en- departments, its head count has increasedsure that its IT systems operated efficiently. Its proportionally to match its exponential growth.CRS was based on servers, which were hosted As of January 2006, security personnel ac-at InterGlobe’s data center located in Gurgaon counted for 21.7% of the carrier’s employees(an IT hub near Delhi), India. This provided followed by its cabin crew and engineers, whoeffective alternatives for power breakdowns, accounted for 20.4% and 19%, respectively (seecontrolling fires and optimizing network con- Figure 6).nectivity and security. To maximize networkavailability and provide continuous connecti- The Indian aviation industry, like other indus-vity, these servers were connected through the tries, is facing the constant challenge of dealingInternet with telecom service providers such as with employee attrition. As of January 2006, AirBSNL and Bharti,30 and wireless loop from Deccan had an annual attrition rate of 15–20%.HCL31 (third-party vendors). A 24x7 support Recently, the DGCA passed a new rule, whichteam was also established at InterGlobe, Air required pilots to give a six-month notice beforeDeccan and HCL to eliminate any downtime. To leaving an airline. This has resulted in a signi-further strengthen security, these servers were ficant decrease in pilot attrition.isolated from other networks and were contin- Air Deccan’s HR division focuses on recruitinguously updated with new operating systems, young professionals with little work experiencedatabases and anti-virus patches. The airline straight from their university campuses. Theyalso had backup procedures such as routine screen all prospective employees’ resumesdatabases, transaction logs, and website and thoroughly, conducting in-depth interviews toserver log backups. All important links, ‘last- ensure that candidates’ academic qualifications and personal strengths and skills are a good fit with their job profiles. This initiative paid off as30 32 Bharat Sanchar Nigam Ltd (BSNL) and Bharti are the ‘Last mile’ is the final step of delivering communi-leading telecommunication service providers in India. cations connectivity to a resident or customer, which is an31 HCL is a leading technology solution provider in India. expensive and an extensive exercise.Sampler Page 13 CISR Working Paper No. 365
    • it substantially reduced attrition. Thus, the air- various other measures have contributed signi-line had a committed and enthusiastic youthful ficantly towards each Air Deccan employeework force, which accepted challenges cheer- identifying with the airline’s mission and vision.fully and delivered. Another HR initiative wasto reward meritorious employees through pro- Expansion Plansmotions to supervisory and base management Air Deccan has aggressive growth plans to fur-positions or as trainers. ther strengthen its position in the Indian low-The airline has a relatively flat organizational cost airline market. To further penetrate existingstructure, which encourages employees to be markets and explore new ones, the carrieraccountable and develop a sense of ownership intends to increase the frequency of its flights onand pride in their work. Air Deccan also values existing routes, introduce services for cities thatand fosters an entrepreneurial spirit among its are already being served by other airlines, andemployees. It also promotes transparency across explore and finalize new flight destinations.the organization, with positive results. The air- To meet its extensive growth plans, Air Deccanline is particular that its employees value their plans to expand its aircraft fleet. According tocustomers and vendors and are fair to them at all Captain Gopinath, “The new acquisition willtimes. Air Deccan’s efforts in being sensitive to expedite our growth plans and take us closer toits employee needs resulted in a win-win situa- fulfilling our vision of taking low-cost airtion for both its employees and the airline itself, connectivity across the length and breadth of thewith both experiencing exponential growth. country.” The airline has placed an order forFor skilled employees such as pilots and cabin 101 aircraft to meet the anticipated demand,crew, Air Deccan offers salaries as per industry which comprises 69 Airbus A320, 30 ATR 72standards. As Air Deccan’s Chief Human Re- and two ATR 42 aircraft. These are scheduled tosources Manager Maclean S. Raphael puts it, be delivered by December 2012. As per its“Offering competitive salaries for these skilled proposed schedule, the carrier expects to takeemployees is imperative as we cannot operate delivery of one aircraft every month.without them.” The airline focuses on iden- To fund its expansion plans, Air Deccan filed itstifying diverse sets of skills and attitudes in its draft prospectus for an Initial Public Offer (IPO)potential hires. According to Maclean, it is im- with the Securities Exchange Board of Indiaportant that the cabin crew is equipped with (SEBI) in January 2006. Through its IPO, theselling skills as they are the ones who are in- airline plans to raise USD 250–300 million.volved in in-flight retail sales. Similarly, it is Some of the objectives of its IPO include settingimportant that the cabin crew hails from modest up a training center and a hangar facility,backgrounds and has no inhibitions in engaging developing airport infrastructure, developingin aircraft-cleaning activities. The crew also new markets and repaying debts. The trainingneeds superior interpersonal skills to enable center is proposed to be located at Bangalorethem to interact pleasantly with customers from and will be used to train pilots, cabin crew andvarious backgrounds. security personnel. Currently, aircraft mainten-The management employs several measures to ance is carried out at leased hangars. The estab-motivate its employees. There are performance lishment of a new hangar is aimed at reducingincentives for employees, which motivate them maintenance expenses and enhancing theto perform well. For the convenience of em- availability of hangar space. In order to developployees, a helpdesk has been set up that takes new markets, the airline plans to invest INR 75care of activities such as payment of utility bills, million to develop 50 ticketing offices. In addi-buying movie tickets, etc. There are monthly tion, the carrier plans to allocate INR 377.2birthday parties for employees, which inculcates million to its advertising budget.a sense of belonging among them. These andSampler Page 14 CISR Working Paper No. 365
    • Challenges Ahead Apart from coping with the inconveniences caused by the unavailability of secondary air-Though Air Deccan has emerged as the third ports, the Indian aviation industry is also dealinglargest airline in India in a remarkably short with problems posed by inadequate infra-time and will soon be the second largest airline, structure such as airport facilities, take off andit faces many challenges ahead. Only by meet- landing slots, parking bays, air traffic controling and surmounting these challenges will the facilities, etc.airline establish itself as a true leader of India’slow-cost aviation sector. Another challenge that Air Deccan faces is com- petition from its peers. Its success has triggeredDespite the various reforms that have been the entry of other low-cost carriers such as Spicerecently introduced, India’s aviation sector faces Jet, Kingfisher, GoAir, Paramount Airways andseveral limitations because of the highly regu- IndiGo, which may imitate its low costlated environment in which it operates. Fixed strategies. Though Air Deccan enjoys the first-costs, such as fuel and airport-related costs, con- mover advantage in this arena, it will be diffi-stitute a major part of an airline’s operating ex- cult for the airline to sustain its competitivepenses, all of which are under government advantage unless it devises new strategies tocontrol. It is only recently that the government successfully defend its market share. There ispermitted Air India to hedge its fuel prices. also an increase in competition from other full-Though this is not currently applicable to other service carriers such as Jet Airways, Indiancarriers, there is a possibility that the govern- Airlines and Air Sahara. These airlines havement may soon also permit other airlines to also reduced their fares to match the competitivehedge their fuel prices. Air Deccan, being a pricing of Air Deccan, which will furtherdomestic carrier, also faces the additional dis- increase pressure on the carrier.advantage of paying higher fuel prices as com-pared to international carriers. This is because Since Air Deccan’s success is closely linked tointernational airlines are exempt from excise the Internet reservation system, the currentduty and sales tax. limited Internet penetration in the country is acting as a major bottleneck in its growth plans.Further, domestic airlines in India have to com- The Internet is crucial for Air Deccan as itply with the route dispersal guidelines set by the contributes significantly in reducing its distri-government. These carriers have to operate a bution costs.minimum number of flights to unprofitable ruraland smaller urban destinations, which leads to areduced load factor and yield. Future – What Next?Another challenge faced by the country’s low- In the coming years, both full-service and low-cost carriers is that they do not have the choice cost carriers will have to face many unansweredas yet of operating from secondary airports, questions and explore many novel horizons.unlike the low-cost airlines in other countries. However, amidst all these uncertainties, there isUsing secondary airports is beneficial as these one certainty—the Indian aviation sector hascharge lower parking and landing fees. The immense untapped potential. As the middleabsence of secondary airports in India has class population constitutes the majority of itsforced the country’s low-cost carriers to use market, the prospects for low-cost airlines seemprimary airports, incurring avoidable expen- bright. “By 2010, the low-cost carrier’s marketditures this sector can ill afford. To combat this share will be 50%,” predicts Kapil Kaul, CEO,disadvantage, the Naresh Chandra Committee Center for Asia Pacific Aviation (CAPA). Thesehas recommended a lower landing and parking low-cost carriers have changed the dynamics offees for low-cost airlines in primary airports. the aviation sector. Full-service airlines have also reduced their fares significantly. Full- service carriers may initiate price wars bySampler Page 15 CISR Working Paper No. 365
    • further reducing their prices to compete with diaries, such as travel agents, and will focus onlow-cost carriers. However, it would be direct selling (Internet reservations) and otherinteresting to see whether the larger carriers will alternative channels such as retail stores, etc.be able to sustain this over a long period. Also, The progressive growth of the aviation sectorwith the arrival of several other low-cost en- will lead to enhanced salaries, thereby raisingtrants, the present players certainly have a airline budgets.daunting task ahead. Captain Gopinath realized that Air Deccan hadWith the steady increase in the number of low- pioneered the low-cost air carrier businesscost players in the aviation industry, an im- model in India, and that many innovationsminent paradigm shift is in the cards. The ac- contributed to its success. At the same time,quisition of Sahara Airlines by Jet Airways is because of its success, Captain Gopinath real-indicative of such a development. Air Deccan ized that he had many new competitors andadmits that it too is not averse to such acqui- many more potentially waiting to enter withsitions in the future. even more innovations. He wondered about how to continue to innovate to keep Air DeccanIn order to lower costs, airlines’ distribution ahead of the competition.models will evolve further to remove interme-Sampler Page 16 CISR Working Paper No. 365
    • Appendix Table 1: Indian Railways 2000–01Track (km) 1,08,706Route (km) 63,028Electrified Route Kilometres 14,856Locomotives 7,566Wagons 222,147Coaches 42,570No. of Stations 6,853No. of Passenger Trains 8,520Revenues INR 233 billions of freight revenue INR 105.2 billions of passenger revenue Source: Indian Railways Table 2: Domestic Sector Passengers Annual Growth33 Domestic Sector Passengers Year Ended March 31 (millions) Year-on-Year Growth (%) 1996 10.4 – 1997 11.2 7.7 1998 11.6 -1.3 1999 12.0 4.3 2000 12.7 5.8 2001 13.7 7.9 2002 12.8 -6.6 2003 13.9 8.6 2004 15.7 12.9 2005 19.9 26.8 Source: DGCA, CMIE Monthly Economic Indicator, November 2005 Table 3: Air Deccan – Vision and Mission Vision To be the preferred airline of air traveler in India. Mission To demystify air travel in India by providing reliable, low-cost air travel to the common man by constantly driving down the airfares as an ongoing mission. Source: Air Deccan33 Note: Information does not include air taxi operators.Sampler Page 17 CISR Working Paper No. 365
    • Table 4: Revenues – Deccan Aviation Private Limited Six Months ended Year ended March 31 September 30 2005 2005 2004 2003 INR Sources of Income INR (millions) INR (millions) INR (millions) (millions) Sale of airline tickets and 3,085.69 2,669.46 314.18 - related income Helicopter charter and other 202.97 386.08 315.21 234.15 services Other income 329.61 147.29 44.18 0.77 Total income 3,618.27 3,202.83 673.57 234.92 Net Profit/Loss as per (725.01) (195.32) 5.6 6.24 audited accounts Source: Air Deccan Prospectus Table 5: Air Deccan Fleet – March 2006 Aircraft Fleet Size Airbus A320 11 ATR 42 14 ATR 72 5 Source: Wikipedia Table 6: Comparison of Fares Air Deccan Jet Airways Rail I AC Rail II AC Journey Time (hrs) Route (One-way) Fares (INR) Fares (INR) Fares (INR) Fares (INR) Rail Air Chennai-Bangalore 721-1500 1370-2970 990-1402 614-747 7-8 1 Delhi-Mumbai 1999-5499 3120-5610 3303-4135 1775-2210 17-24 2-3 Source: Indian Railways, Air Deccan, Jet Airways Table 7: Aircraft Utilization Six Months ended Year ended March 31 September 30 2004 2005 2005 Aircraft (hours) (hours) (hours) ATR 42 10.44 9.87 8.71 ATR 72 - - 13.19 Airbus A320 - 9.25 10.60 Average for all aircrafts 10.44 9.74 9.19 Source: Air Deccan Prospectus Table 8: Load Factors and Yields Six Months ended Year ended March 31 September 30 Aircraft 2004 2005 2005 Passenger Load Factor (%) 62.64 76.36 71.47 Revenues per Passenger (INR) 2,055 2,704 2,884 Source: Air Deccan ProspectusSampler Page 18 CISR Working Paper No. 365
    • Table 9: The Common Man – Air Deccan’s Mascot Description Picture ‘The Common Man’ was created by author and cartoonist R K Laxman. For nearly 50 years, the Common Man has represented the average Indian, through a daily cartoon strip in the daily ‘The Times of India’. In 1988, the Common Man featured in a postage stamp by Indian Postal Service on the 150th anniversary of the Times of India. The picture shows, Air Deccan’s mascot ‘The Common Man’ and Captain Gopinath, the founder of Air Deccan. Source: Wikipedia Figure 1: Rail Passenger Traffic 2002 Long Distance 27% Suburban Other Cities 60% 13% Source: Indian Railways Figure 2: Market Share—Airlines—January, 2006 SpiceJet Others Kingfisher 6.0% 2.4% Indian 8.0% 21.0% Air Deccan 19.0% Air Sahara Jet Airways 9.0% 34.7% Source: Director General of Civil AviationSampler Page 19 CISR Working Paper No. 365
    • Figure 3: Airports – India Source: Airports Authority of IndiaSampler Page 20 CISR Working Paper No. 365
    • Figure 4: Air Deccan – Destinations Source: Air Deccan Figure 5: Savings Breakup – Distribution Costs 3% % age share 10% 20% 3% 4% GDS Billing and Travel Agents Others Total SettlementSampler Page 21 CISR Working Paper No. 365
    • Figure 6: Employee Break-up – January 2006 Expatriate Engineers Expatriate 3% Others Pilots Engineers 7% 1% 19% Pilots 14% Operations 5% Cabin Crew 20% Security Call Centre 22% 9% Source: Indian RailwaysSampler Page 22 CISR Working Paper No. 365
    • About the Center for Information Systems ResearchCISR MISSION CISR RESEARCH PATRONSCISR was founded in 1974 and has a strong track record BT Groupof practice based research on the management of The Boston Consulting Group, Inc.information technology. As we enter the twenty-first Diamond Management & Technology Consultantscentury, CISR’s mission is to perform practical empirical Gartnerresearch on how firms generate business value from IT. Hewlett-Packard CompanyCISR disseminates this research via electronic research IBM Corporationbriefings, working papers, research workshops and Microsoft Corporationexecutive education. Our research portfolio includes: Tata Consultancy Services—America Effective IT Oversight The Future of the IT Organization CISR SPONSORS An IT Manifesto for Business Agility Aetna Inc. Business Models and IT Investment & Capabilities Allstate Insurance Co. American Express Corp. IT-Enabling Business Innovation AstraZeneca Pharmaceuticals, LP Effective Governance Outsourcing Banco ABN Amro Real S.A. IT Engagement Models and Business Performance Biogen Idec Effective IT Governance Campbell Soup Company Enterprise Architecture as Strategy CareFirst BlueCross BlueShield IT Portfolio Investment Benchmarks & Care USA Links to Firm Performance Celanese IT-Related Risk Chevron Corporation IT-Enabled Business Change Det Norske Veritas (Norway) Direct EnergySince July 2000, CISR has been directed by Peter Weill, eFunds Corporationformerly of the Melbourne Business School. Drs. Jeanne EMC CorporationRoss, George Westerman and Nils Fonstad are full time Family Dollar Stores, Inc.CISR researchers. CISR is co-located with MIT Sloan’s The Guardian Life Insurance Company of AmericaCenter for e-Business and Center for Coordination Information Services InternationalScience to facilitate collaboration between faculty and ING Groep N.V.researchers. Intel CorporationCISR is funded in part by Research Patrons and Sponsors International Finance Corp.and we gratefully acknowledge the support and Merrill Lynch & Co., Inc.contributions of its current Research Patrons and MetLifeSponsors. Mohegan Sun News CorporationCONTACT INFORMATION Nissan North America, Inc.Center for Information Systems Research Nomura Research Institute, Ltd.MIT Sloan School of Management Northrop Grumman Corp.3 Cambridge Center, NE20-336 Owens CorningCambridge, MA 02142 PepsiAmericas, Inc.Telephone: 617/253-2348Facsimile: 617/253-4424 Pfizer, Inc.http://web.mit.edu/cisr/www PFPC, Inc. Quest DiagnosticsPeter Weill, Director pweill@mit.edu Raytheon CompanyDavid Fitzgerald, Asst. to the Director dfitz@mit.edu Standard & Poor’sJeanne Ross, Principal Res. Scientist jross@mit.edu State Street CorporationGeorge Westerman, Res. Scientist georgew@mit.edu TD BanknorthNils Fonstad, Research Scientist nilsfonstad@mit.edu Telenor ASA (Norway)Jack Rockart, Sr. Lecturer Emeritus jrockart@mit.edu Time Warner Cable Trinity HealthChuck Gibson, Sr. Lecturer cgibson@mit.edu TRW Automotive, Inc.Chris Foglia, Center Manager cfoglia@mit.edu Unibanco S/AAdministrative Assistant cisr-aa@mit.edu United Nations — DESA US Federal Aviation Administration The Walt Disney Company