Strategic Thought Transformation - The IIPM Think Tank

E N T R Y S T R A T E G I E S
worth $6 billion with North America leading
the pack of losers with $9 billion in
losses. The other minor loser was Africa
with just $150 million in losses. Among
the profit-makers were Asia raking-in $2.6
billion, Europe with $1.4 billion and Middle
East with $100 million. Just looking at the
figures provided, we would question why
airlines in North America (US & Canada)
which have such high per capita incomes
(and therefore according to our analysis,
since their trips per capita being consequently
high) would run into losses The trick here
is not to isolate our empirical analysis and
gather understanding from it but to view
it harmonically with the four most important
current external environmental factors
– competition (low-cost and normal fare
carriers), fluctuations in global aviation
fuel price, population (rise/fall) and immigration/emigration
volumes and finally,
government regulations. The trick here lies
in viewing our analysis while allowing the
environmental factors to serve as foil.
Therefore when read in the sanest manner,
we can well understand that capital
expenditure in the aviation industry in US
or Canada does not make entrepreneurial
sense for the reason that though per capita
income (PPP) in these regions are very high
and demand for air travel equally encouraging,
the number of competing players,
i.e. especially competition from low-cost
carriers (which often operate on operating
losses for many years) serves as the major
roadblock for a positive outlook. We have
to understand that the aviation industry in
US made losses due to no other negative
factor other than unhealthy competition,
whereby the industry suffered as a whole
and many low-cost fliers continued luring
customers even while they filed for Chapter
11 and continued running on huge operating
losses in the face of rising jet-fuel
prices. Hence indubitably there exists no
business sense to enter such a geographical
area of operation!
Ideally investment should be made in
a region (or country) where the number of
trips per capita is low (ideally below 0.5) so
that we ideally get the first mover advantage
and build a market share and brand in
that region. Secondly, for an international
airline setup, the country should be such
that the passenger/human influx and outflux
should not be desiccated. If any region
can be traced that serves as an ideal trading
hub, it could be the best choice among all.
Besides, legal restrictions should also be
kept in mind while deciding the location
for the set-up. As a matter of fact, once
the trips per capita crosses the ‘abnormal
growth’ level, the level of competition also
intensifies with umpteen and a variety of
carriers in the arena. Therefore, ideally
one should invest directly in the aviation
industry much before the industry in that
region (or country) reaches the ‘abnormal
growth stage’
Recommendations to the
Indian aviation industry
In the face of the huge growth potential
For an
international
airline setup, the
country should be
such that the
passenger influx
and outflux should
not be desiccated
that stares at the aviation industry in the
face, quite a few steps could actually be taken
to ensure that the success dream run is
not shattered by the fatal ‘unhealthy’ pricewars
(by ‘unhealthy’, we mean operating at
prices lower than the actual operating costs)
which inevitably causes more damage to
the sector than to the competitors.
The various recommendations for ensuring
a secure future to the Indian aviation
industry are:
1. India ought to adopt an ‘Open Skies’
policy: Strictly speaking, the concept of
‘Open Skies’ means unobstructed admittance
of any carrier into the sovereign
territory of a country without any (legal)
agreement in black and white identifying
capacity, ports of call or schedule of services.
In other words it would permit the
airline belonging to any country or ownership
to land at any port on any number of
occasions and with unlimited seat capacity.
There would be no restriction whatsoever,
on the variety of aircraft, no requirement
for certification, no mandatory frequency of
service and no call whatsoever for specifying
the airports at which they would land.
Time and again, an argument arises that
the current policy limits the access of foreign
airlines thereby giving a pseudo-protection
to the Indian aviation players. This
would therefore work dually as a medium
of earning foreign exchange for the country
coupled with acting as a stimulator to the
foreign carriers of India to work better.
While the 180 bilateral aviation agreements
have done their bit to improve the herd of
international air carriers, even today, both
domestically and internationally, there are
immense pressures on seats, particularly
during peak hours Whilst this does improve
their profitability in the short run, it has a
long-term adverse effect in that it deprives
the country of much needed air bridges to
bring in tourists and carry trade. Thus there
is a substantial outgo of foreign exchange
and loss of business to our own nationals
on account of the non-utilization of designated
rights which are also not very healthy
for the GDP health of the country.
2. A strong focus should also be given
to strengthening and promoting short haul
tourism for the overall well-being of the
sector and business development.
3. Encouraging the pro active involvement
of overseas investors and technical
managers in the sector would definitely
improve the state of affairs.
4. Privatization of the airports should
happen freely despite the opposition from
various bodies.
5. Encouraging commercial activities
within airports such as hotels, restaurants,
duty free, etc. that serve as a means to earn
monetary benefits.
Steven Philip Warner is a Professor
of Business Economics at
The Indian Institute of Planning
and Management, New Delhi
An IIPM Intelligence Unit Publication STRATEGIC INNOVATORS 17