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Battle #6: India needs more than six airlines: IIM Trichy – FOR: Counter punch by Delhi School of Economics

Comments
 

Subhash Rajeev

We agreed that there has to be a change in the government norms. But in addition to this, competition would only further increase cost pressure and force the existing as well as new airlines to optimize. Yes, unholy nexuses of 15 players are possible, but then this makes it much more difficult to form the nexus. Especially when the ones that generally do form the nexus are the ones that aren't doing well. The ones that are or foresee that they can do well without forming such an alliance, why should they even bother? And artificially raise air prices by promoting artificial demand? Passengers would just take trains or buses instead, what purpose would it then serve? If you honestly believe operating expenses can't be further reduced, therein lies the biggest joke. Spirit Airlines, an ultra low cost carrier has been the most profitable airlines in the last 3 years or so. They have managed margins higher than any other low cost carrier of late by completely dispensing of frills. And while many customers complain about the poor customer service, their numbers speak for themselves. 40% more profit per plane than any other carrier in the country and the same market valuation as US Airways which has over 9 times as much traffic. How do they do this? Cheaper tickets and much lower costs per flight. So there is no question that there is still room for lower costs. If you doubt this, refer http://online.wsj.com/news/articles/SB10001424052702304749904577384383044911796 You say that growth in airlines can be managed by existing players. Sure. With losses all around, the existing airlines are just going to buy lots more planes, traffic is going to go up exponentially and the sector is going to grow at an alarming pace. Provided they don't all go bankrupt by then, just ask Vijay Mallya. 1953? Before 1992, it wasn't even an Industry. It was controlled by the government. It only allowed private players to invest after 1992 which is when the birth of the Indian aviation industry actually happened. And we thank you for recognizing that Indigo is recording profits. It flies in the face of your own argument - "How can new airlines bring in improvement in that certain arena which the old ones cannot?". Consolidation and profitability are very different however. Indigo is making profits in a turbulent market with existing players coming and going every other year. The industry will only be mature when there are a few players, each with a sizeable and stable market share, regulations stop changing and each of these players are making profits. The only way that can happen however is when all the loss making, bankruptcy filing firms are out of the industry and the only way we see that happening is through the entry of competition in order to bring in global best practices and eventually streamline the industry. Let me answer that emotional appeal with another one. These firms are all making losses anyway. Why would anyone invest in a sinking ship? The state the industry is in as of now, nobody is going to bring in the moolah to improve the conditions for these existing-failing players.The way we see it, not introducing competition is going to end up with us witnessing those same crying faces of families anyway. But at least more airlines gives them more jobs, leaves airlines scrambling to recruit the best talent and therefore gives those same crying faces a choice as to where to go and ultimately deliver more power in their hands leaving them with a brighter future.

31 Aug 2014, 01.45 PM

Ashish Verma

Mr. Sanjeev, u said, "If you honestly believe operating expenses can’t be further reduced, therein lies the biggest joke." Then why am i not laughing? well because you quoted an example of an American Airlines. This is India my friend and its been awhile since any airline has showed some good profit figures except for Indigo of course. There is always a room for lower costs, duly noted, but whats next? social service, bankruptcy? Its a business sir and we need profits.

31 Aug 2014, 03.16 PM

Subhash Rajeev

The name's Subhash*. Yes, I quoted an example of an American airlines. A country which, before the advent of deregulation in their transportation, in the early 70s faced the bankruptcy of the Penn Central railway which was then the largest bankruptcy in history. Why? Because of a hugely inefficient system which then only became profitable once privatisation and deregulation occurred. Why did this happen you ask? Because of competition coming in and forcing existing players to get into gear or go out of business which is exactly the sort of motivation that the Indian Airline industry needs. Social service and bankruptcy are exactly what will occur if you leave the market in it's current state of 6 players. Competition will force firms to come up with ways of lowering costs and therefore making their profit margins wider, therefore giving them profits.

31 Aug 2014, 04.35 PM

+Read Replies (1)

Anurag Ghosh

A VERY SIMPLE GUY........THOUGH HAVE SOME GREAT EXPECTATIONS FROM LIFE......JUST LIVING MY LIFE FOR THEM..........HOPE THEY COME TRUE ONE DAY.........

So Mr Subhash if you so assume that only introduction of new airlines will force airlines to lower costs and make profits ; how is INDIGO making profits thriving on the same model with five other kids on the block? If Indigo can ; why can't the other airlines ? The answer lies in identifying and solving the deep rooted problems and some changes in Government policies.Entry of a half dozen of new airlines is not going to solve the embedded problems of aviation sector and future is certainly going to witness that.

31 Aug 2014, 06.02 PM |

venkat iyer

"Lower operating expenses!!! Was that a joke? As per as our understanding operating expenses depend on fuel (ATF) costs and the efficiency of the flights mostly. How can new airlines bring in improvement in that certain arena which the old ones cannot? Even to the best of our knowledge the new players cannot even change the taxation regime of the Government on which costs greatly depend" We can all agree that the term 'Economies of scale" isn't the product of a joke Mr Verma. Operating expenses also revolve a lot around services at the Airport. Maintenance costs, fees paid to airports, fees paid to the government, the cost of food served to passengers, the cost of running computer systems to track bookings, fees and percentages paid to travel agents and Web sites, pilot training, and other incidental costs all add to operating expenses.When we use the term 'Economies of scale' to the industry as a whole, we talk about lower cost of services because of increased efficiency and infrastructure that caters to a larger set of firms, thus reducing the cost per firm.

1 Sep 2014, 04.36 PM

+Read Replies (1)

Ashish Verma

Thanks for enlightening me Mr. Iyer. The expenses which you talked about apart from fuel and the impact of it if they are lowered (if possible) are given below: a)Maintenance cost: cannot be lowered. b) fees paid to the airport: reduction out of question here. c) fees paid to the govt.: certainly not. d) cost of food served to passengers: can give passengers low quality food on your own risk. e) cost of running computers: again, cannot be reduced. f) pilot training: i thought it was given by institutes and not the airlines (except some exceptional airlines which have integrated courses, where again major role is played by the training institutes). and for the 'Economies of scale' or lowering the cost of services, don't you think that the existing airlines which are incurring loss since 6-7 years haven't tried it?

1 Sep 2014, 06.53 PM |

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Comments
 

Subhash Rajeev

We agreed that there has to be a change in the government norms. But in addition to this, competition would only further increase cost pressure and force the existing as well as new airlines to optimize. Yes, unholy nexuses of 15 players are possible, but then this makes it much more difficult to form the nexus. Especially when the ones that generally do form the nexus are the ones that aren't doing well. The ones that are or foresee that they can do well without forming such an alliance, why should they even bother? And artificially raise air prices by promoting artificial demand? Passengers would just take trains or buses instead, what purpose would it then serve? If you honestly believe operating expenses can't be further reduced, therein lies the biggest joke. Spirit Airlines, an ultra low cost carrier has been the most profitable airlines in the last 3 years or so. They have managed margins higher than any other low cost carrier of late by completely dispensing of frills. And while many customers complain about the poor customer service, their numbers speak for themselves. 40% more profit per plane than any other carrier in the country and the same market valuation as US Airways which has over 9 times as much traffic. How do they do this? Cheaper tickets and much lower costs per flight. So there is no question that there is still room for lower costs. If you doubt this, refer http://online.wsj.com/news/articles/SB10001424052702304749904577384383044911796 You say that growth in airlines can be managed by existing players. Sure. With losses all around, the existing airlines are just going to buy lots more planes, traffic is going to go up exponentially and the sector is going to grow at an alarming pace. Provided they don't all go bankrupt by then, just ask Vijay Mallya. 1953? Before 1992, it wasn't even an Industry. It was controlled by the government. It only allowed private players to invest after 1992 which is when the birth of the Indian aviation industry actually happened. And we thank you for recognizing that Indigo is recording profits. It flies in the face of your own argument - "How can new airlines bring in improvement in that certain arena which the old ones cannot?". Consolidation and profitability are very different however. Indigo is making profits in a turbulent market with existing players coming and going every other year. The industry will only be mature when there are a few players, each with a sizeable and stable market share, regulations stop changing and each of these players are making profits. The only way that can happen however is when all the loss making, bankruptcy filing firms are out of the industry and the only way we see that happening is through the entry of competition in order to bring in global best practices and eventually streamline the industry. Let me answer that emotional appeal with another one. These firms are all making losses anyway. Why would anyone invest in a sinking ship? The state the industry is in as of now, nobody is going to bring in the moolah to improve the conditions for these existing-failing players.The way we see it, not introducing competition is going to end up with us witnessing those same crying faces of families anyway. But at least more airlines gives them more jobs, leaves airlines scrambling to recruit the best talent and therefore gives those same crying faces a choice as to where to go and ultimately deliver more power in their hands leaving them with a brighter future.

31 Aug 2014, 01.45 PM

Ashish Verma

Mr. Sanjeev, u said, "If you honestly believe operating expenses can’t be further reduced, therein lies the biggest joke." Then why am i not laughing? well because you quoted an example of an American Airlines. This is India my friend and its been awhile since any airline has showed some good profit figures except for Indigo of course. There is always a room for lower costs, duly noted, but whats next? social service, bankruptcy? Its a business sir and we need profits.

31 Aug 2014, 03.16 PM

Subhash Rajeev

The name's Subhash*. Yes, I quoted an example of an American airlines. A country which, before the advent of deregulation in their transportation, in the early 70s faced the bankruptcy of the Penn Central railway which was then the largest bankruptcy in history. Why? Because of a hugely inefficient system which then only became profitable once privatisation and deregulation occurred. Why did this happen you ask? Because of competition coming in and forcing existing players to get into gear or go out of business which is exactly the sort of motivation that the Indian Airline industry needs. Social service and bankruptcy are exactly what will occur if you leave the market in it's current state of 6 players. Competition will force firms to come up with ways of lowering costs and therefore making their profit margins wider, therefore giving them profits.

31 Aug 2014, 04.35 PM

+Read Replies (1)

Anurag Ghosh

A VERY SIMPLE GUY........THOUGH HAVE SOME GREAT EXPECTATIONS FROM LIFE......JUST LIVING MY LIFE FOR THEM..........HOPE THEY COME TRUE ONE DAY.........

So Mr Subhash if you so assume that only introduction of new airlines will force airlines to lower costs and make profits ; how is INDIGO making profits thriving on the same model with five other kids on the block? If Indigo can ; why can't the other airlines ? The answer lies in identifying and solving the deep rooted problems and some changes in Government policies.Entry of a half dozen of new airlines is not going to solve the embedded problems of aviation sector and future is certainly going to witness that.

31 Aug 2014, 06.02 PM |

venkat iyer

"Lower operating expenses!!! Was that a joke? As per as our understanding operating expenses depend on fuel (ATF) costs and the efficiency of the flights mostly. How can new airlines bring in improvement in that certain arena which the old ones cannot? Even to the best of our knowledge the new players cannot even change the taxation regime of the Government on which costs greatly depend" We can all agree that the term 'Economies of scale" isn't the product of a joke Mr Verma. Operating expenses also revolve a lot around services at the Airport. Maintenance costs, fees paid to airports, fees paid to the government, the cost of food served to passengers, the cost of running computer systems to track bookings, fees and percentages paid to travel agents and Web sites, pilot training, and other incidental costs all add to operating expenses.When we use the term 'Economies of scale' to the industry as a whole, we talk about lower cost of services because of increased efficiency and infrastructure that caters to a larger set of firms, thus reducing the cost per firm.

1 Sep 2014, 04.36 PM

+Read Replies (1)

Ashish Verma

Thanks for enlightening me Mr. Iyer. The expenses which you talked about apart from fuel and the impact of it if they are lowered (if possible) are given below: a)Maintenance cost: cannot be lowered. b) fees paid to the airport: reduction out of question here. c) fees paid to the govt.: certainly not. d) cost of food served to passengers: can give passengers low quality food on your own risk. e) cost of running computers: again, cannot be reduced. f) pilot training: i thought it was given by institutes and not the airlines (except some exceptional airlines which have integrated courses, where again major role is played by the training institutes). and for the 'Economies of scale' or lowering the cost of services, don't you think that the existing airlines which are incurring loss since 6-7 years haven't tried it?

1 Sep 2014, 06.53 PM |