Strategic Thought Transformation - The IIPM Think Tank
Strategic Thought Transformation - The IIPM Think Tank
Strategic Thought Transformation - The IIPM Think Tank
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S T R A T E G I C I S S U E S<br />
trinomial trend lines, we also have to take<br />
note of the fact that on moving from right<br />
to left (decreasing order of the per capita<br />
income) along the horizontal axis of the<br />
linear, logarithmic or the trinomial trend<br />
line, we come to a per capita income value<br />
of INR 131,001.24 beyond which, if we<br />
move in the decreasing order of per capita<br />
income, the per capita trips become negative<br />
– a practically impossible situation!<br />
In all practicality, the possible values of<br />
trips per capita can be anywhere between 0<br />
(zero) and ∞ (infinity) but never less than<br />
0 (zero). Hence we can judiciously dismiss<br />
the three different trend lines represented<br />
by the linear, logarithmic and trinomial<br />
(polynomial) series on grounds of empirical<br />
invalidity and impracticality! Conclusively,<br />
we can vindicate that there are just the<br />
remaining two trend lines – power and<br />
exponential estimation trend lines – that<br />
can be taken under consideration for providing<br />
an estimation of the trips per capita.<br />
And even among these two, the exponential<br />
trend line is the most reliable one with a<br />
greater value of R 2 .<br />
Estimations and Recommendations<br />
for industry strategists<br />
(E&R)<br />
Based on what we can infer from calculations<br />
made and the most appropriate trend<br />
development process followed, a couple<br />
of estimations can be made for the aviation<br />
industry and recommendations can<br />
be given to guide new ventures entering/<br />
planning to enter the aviation industry in<br />
any geographical region. We can use this<br />
model for the estimation of demand in the<br />
aviation sector in any country when its per<br />
capita income (in terms of PPP) is known.<br />
<strong>The</strong>refore for countries like India, with its<br />
per capita income doubling by the year<br />
2010 (according to Assocham estimates), if<br />
we look at the graph then we can infer that<br />
Aviation industry in<br />
the United States<br />
made losses due to<br />
no other negative<br />
factor other than<br />
the existence of<br />
unhealthy<br />
competition<br />
even when the per capita income doubles,<br />
which means an increase of 100%, the per<br />
capita trip will increase from 0.0125 to just<br />
0.0145, which means a rise of just 16%!<br />
This basically means that though the per<br />
capita income is doubling, the trips per<br />
capita have not doubled. And the reason is<br />
very straight-forward. If explained on purely<br />
quantitative grounds, the logic behind<br />
the non-linear change can be attributed<br />
to the nature of the curve. Pragmatically<br />
explained, we can only expect it to happen<br />
if the entire raise in earning was to be spent<br />
totally in travel services – which of course<br />
stands false under any scope practicality<br />
and not true for any economy. This therefore<br />
explains sufficiently and gives us an<br />
analytical relationship between the Gross<br />
Domestic Product/Per Capita Income and<br />
the number of trips by an individual in a<br />
year’s time-span and the relationship becomes,<br />
y=0.0108e 0.1465(x) -->Eqn. I<br />
If the total GDP changes by ‘n’ times,<br />
then the value of per capita income ‘x’<br />
also changes by ‘n’ times. For example,<br />
when the national GDP doubles, the per<br />
capita income ‘x’ also becomes ‘2x’ and<br />
the number of trips per capita ‘y’ should<br />
therefore appreciate in accordance with<br />
equation I (above).<br />
Al this therefore means that the new<br />
value of ‘y’ will be obtained by multiplying<br />
the Right Hand Side of equation I (above)<br />
by e 0.1465 (n-1)x . <strong>The</strong>refore, if the GDP changes<br />
by ‘n’ times in terms of absolute value, the<br />
altered value of per capita trips,<br />
y // 0.1465 (n-1)x<br />
= y * e -->Eqn. II<br />
Abnormal growth of per capita<br />
trips and ‘Break-off Point’<br />
And interesting disclosure observed from<br />
the study is that the growth of per capita<br />
trips with increase in GDP (or per capita<br />
income in terms of PPP) demonstrates an<br />
abnormal growth trajectory beyond a<br />
certain level of per capita income. This<br />
is primarily due to the inherent nature of<br />
the exponential curve which progressively<br />
diverges from the abscissa. Besides, an appreciation<br />
in the value of per capita income<br />
also causes some definite increase in the<br />
level of economic activity and hence a natural<br />
need to travel by air creeps in.<br />
From empirical analysis, we can analytically<br />
conclude that this decisive per capita<br />
income level stands roughly around a per<br />
capita income of INR 1,00,000 and this<br />
critical value is called the ‘Break-off point’.<br />
Beyond this value, there is a staggering<br />
growth in the trajectory representing the<br />
number of trips per capita and dependent<br />
on the per capita income (PPP). Conversely<br />
the limitation on the growth of trips per<br />
capita reduces as per capita income rises.<br />
Recommendations to new<br />
ventures<br />
According to IATA, the financial year 2005<br />
witnessed airlines globally making losses<br />
16<br />
STRATEGIC INNOVATORS<br />
An <strong>IIPM</strong> Intelligence Unit Publication