Microeconomics

Group Assignment
Faculty: Dr. Sagnik
Bagchi
Microeconomic Dive into
India's Aviation Giants
Objective: To analyze the market Presented by: HRA-
dynamics, production-functions, cost Group- IV
structures, demand-supply interactions, Tanishka Sharma – A004
Diya Tikoo – A012
consumer equilibrium and economies of Harsha Nimmakayala – A020
scale in Indian Aviation Industry with the Udham Singh – A028
Onkar Mawal – A036
Introduction
• Indian aviation industry has achieved compellingly rapid growth rates in the last few years, and it is expected to
become third-largest aviation market globally by 2025. In 2023, industry saw a passenger traffic crossing 200 million
with a year-on-year growth rate of 12%.

• Our group has chosen aviation industry for this economic analysis because of the compelling economic complexities of
the sector as a whole and myriad economic factors interacting among each other to give a holistic effect to the
industry’s growth

• The industry operates in an extremely competitive market with key players like IndiGo, Air India, and SpiceJet,

Industry Structure and Market

continually struggling and making efforts to gain the maximum market share.

• This analysis will dive deeply into analysing the industry by market structure, pricing strategies, cost structures, and

Dynamics
revenue management practices.
The Indian aviation market is an oligopolistic market structure, dominated by only few players. The Herfindahl-Hirschman
Index (HHI) is an economic tool used to measure market’s concentration and then identifying the market type. Following
calculations proves the fact that market is an oligopoly.
Note: The data used in the calculations is derived from annual reports 2022-23 of IndiGo and SpiceJet
Let I be the market share of IndiGo, S be that of SpiceJet, V be that of Vistara, A be that of Air India and O be that of other.

I = 57, S = 13.6, A = 9, V = 8 and O = 12.4 (Values are approx.)

An HHI above 2500 indicates a highly concentrated (oligopolistic) market, confirming the oligopoly in the Indian aviation
industry.
 Indigo’s market share grew from 47.1% in 2019
to 57% in 2023, which shows the dominant
power the company holds over the market.
SpiceJet’s market share more or less stayed
constant, which showcase its sustained
competitiveness throughout the time frame.

Note: The data used in these graphs is derived

from annual reports 2022-23 of IndiGo and SpiceJet

Indigo’s revenues have grown

significantly but profitability
has been on a decline due to
rising costs. On the other hand,
SpiceJet’s revenue increased on
a low pace, but the company
struggled and is still struggling
for profits due to higher
operational costs and
competitive pressures from
Cost Analysis
Cost analysis is to determine key cost drivers, optimize
pricing strategies, and improve operational efficiency.
It helps in budgeting, forecasting, and investment
decision-making by providing empirical insights to
expenses and profitability. Additionally, it also supports
performance evaluation and strategic planning for
competitive advantage in an oligopoly.
Indigo’s low maintenance costs shows its investment
in newer, fuel-efficient aircrafts, while SpiceJet’s higher Distribution of costs over total cost for key
costs reflect its older technology and expansion
players
strategies.

Airline
Fleet
Size
Fleet Size
(2023)
Average
Utilization Capacity Analysis
(2019) (Hours/Day)

Indigo’s fleet size expansion is aggressive and

Indigo 217 304 13
higher utilization contribute to its cost efficiency
and aggressive expansion strategy, on the other
SpiceJet 121 143 11
hand SpiceJet’s modest growth reflects a more
conservative approach
Fleet size and Utilization of key
players
 Cost Category Indigo SpiceJet Cost Category Indigo SpiceJet
₹15,250.1
Fixed Costs
Fixed Costs ₹70,923.2 million million
₹10,193.6
₹535,546.6 ₹82,496.3
Depreciation & Amortization ₹60,481.8 million million
Variable Costs million million
Finance Costs ₹10,441.4 million ₹5,056.5 million
₹15,250.1 ₹606,469.8 ₹97,746.4
Total Fixed Costs ₹70,923.2 million million million (Fixed + million (Fixed +
Total Cost Variable Costs) Variable Costs)
Variable Costs
₹494,118.2 ₹74,057.6 (₹70,923.2 / (₹15,250.1 /
Operating Expenses million million ₹606,469.8) × ₹97,746.4) ×
(excluding depreciation and Fixed Cost Ratio 100 ≈ 11.7% 100 ≈ 15.6%
finance costs)
(₹535,546.6 / (₹82,496.3 /
Employee Benefits Expense ₹41,428.4 million ₹8,438.7 million ₹606,469.8) × ₹97,746.4) ×
Calculation of
Total Variable Costs
TFC₹535,546.6
and TVC
million
₹82,496.3
million
Variable Cost Ratio Calculation of88.3%
100 ≈ Ratios 100 ≈ 84.4%

Cost Category Indigo SpiceJet

Fixed Costs ₹70,923.2 million ₹15,250.1 million
Variable Costs ₹535,546.6 million ₹82,496.3 million
Total Cost ₹606,469.8 million ₹97,746.4 million
Fixed Cost Ratio 11.70% 15.60%
Variable Cost Ratio 88.30% 84.40%
Available Seat Kilometers (ASK) 114,000 million km 12.74 million km

Cost per Available Seat Kilometer

(CASKM) ₹4.83 per km ₹5.30 per km

Comparison of cost
parameters
Analysis of cost structures
Indigo has comparatively higher total costs (₹606,469.8 million) when we compare to SpiceJet (₹97,746.4
million) but the distribution of fixed and variable costs differs. Indigo's fixed cost ratio is lower (11.7%)
compared to SpiceJet's (15.6%), indicating a larger proportion of its costs are variable as it leverages technology
more and keep upgrading its infrastructure which may allow for greater flexibility in scaling operations whereas
SpiceJet fixed cost is more due to no-upgradation of technology and keep the older infrastructure.

Average fare and Yield Analysis

Both Indigo and SpiceJet uses dynamic pricing strategy which will be discussed further in the project. Here we
have discussed average price and yield management techniques to maximize the revenue. There is specific
parameter used in aviation industry for measuring yield, called Revenue per Available Seat Kilometre (RASK).
RASK is basically the ratio between revenue and available seat. Kilometres (ASK). RASK signifies an airline's
overall revenue-generating efficiency per available seat per kilometre, reflecting its overall operational and
financial performance.

Dynamic Pricing: Indigo’s average fare rose by 7% in FY2023, while SpiceJet's fares rose by 5%.
Yield Management: Indigo’s RASK was ₹4.15 in FY2023, compared to SpiceJet’s ₹3.80, reflecting Indigo’s
superior revenue management strategies.

Remark of the Market Analysis: Indigo is dominantly evident in all the parameters discussed above while SpiceJet
faces challenges. The future market share is uncertain but can be attributed to the player’s ability to manage
costs, expand capacity, and optimize pricing strategies.
Production Analysis
In aviation industry, production means the process which involves conversion of various inputs such as labour,
capital (aircraft), and technology, into outputs, primarily measured in terms of passenger miles or cargo miles
transported.
Inputs:
Labour (L) : It means pilots, flight attendants, ground crew, and administrative staff.
Capital (K): It majorly includes aircraft and related infrastructure. (here we are considering aircrafts only)
Technology (T): Recent developments in aircraft design, digital systems, and operational management.
Outputs (Q):
In terms of passenger miles, represents one passenger being transported over one mile
Here our group has used Cobb-Douglas Production Function for the analysis
What is Cobb-Douglas Production Function?
It is a type of production function that models the relationships between output and production inputs. It is used in
Microeconomics and Macroeconomics to calculate the ratios of inputs to one another for efficient production, and to
estimate the technological change in production methods. It is very flexible. Hence, we are using it in aviation
industry.
General form:
Use of Cobb-Douglas Production Function
For Microeconomics and Aviation Industry:
Q = Output (e.g., passenger km),
A = Total factor productivity (a constant)*,
L = Labor (number of employees),
K = Capital (number of aircraft)
T = Technology (can be proxied by investments in technology or operational efficiency) ,
α,β,γ = Output elasticities of labour, capital, and technology, respectively. ** (*) our aim here is to
calculate and interpret this.
 Metric SpiceJet Indigo (***): Load Factor is a proxy for technology, we can’t measure
technology, so we consider this because because it reflects
Passengers Carried
(Q) 18.63 million 86.13 million how well an airline utilizes its seating capacity, which is
influenced by its operational practices and technology.
Employees (L) 7,468 28,529
T is taken from internet, this value can also be calculated from
Aircraft (K) 73 312
annual reports
Load Factor (T)(***) 88.20% 83.10%

Inputs and Outputs derived from reports Putting these values into the function for Indigo and SpiceJet,
we get the following values
Interpretations

Indigo has a higher Total Factor Productivity (0.442) compared to SpiceJet (0.238), indicating greater efficiency
in resource use. This clearly answers one of the arguments of Why indigo is the market leader?
Indigo's operational efficiency, possibly due to better technology or more optimized use of labour and
capital, is superior to SpiceJet's. Parameter Indigo SpiceJet
Economies of Scale Fuel Expenses
(FY2023) ₹249,754.5 million ₹33,754.8 million
Benefit from Bulk Yes, significant due to Yes, but limited due to
Industries with higher fixed costs and lower
Purchasing large scale smaller scale
variable costs are more likely to benefit from Lower due to bulk Higher due to smaller
economies of scale. As production rises, the fixed Per-Unit Fuel Cost purchasing scale
costs are spread over more units, reducing the Extensive network allows Smaller network limits
average cost per unit. If firms in the industry Route Optimization for better optimization optimization efficiency
High, with multiple daily
experience a fall in average costs as they expand
flights on high-demand Moderate, but limited
production, then they can utilize economies of Aircraft Utilization routes by network size
scale to derive the maximum benefit from Lower cost per seat Higher cost per seat
market. As we saw earlier IndiGo and SpiceJet Impact on Cost per kilometre due to scale kilometre due to
fulfil these criteria, they can derive benefit in the EOScale
Seat Kilometre comparison
advantagesof Indigo and smaller
SpiceJet
scale
Smaller compared to
Shift in Demand and Supply Curves &
Equilibrium Prices Shift in Demand & Supply Curves (3 months before Diwali/1 month before Diwali)

7,000

6,000

5,000
Price (in INR)

4,000

3,000

2,000

1,000

0
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000

QD(3mb), QS(3mb) and QD(1mb), QS(1mb)

The above graph shows the shift in demand curves from case(1): 3 months before Diwali and case(2): 1
month before Diwali. As Diwali approaches, people from metropolitan or other cities wants to go from
their home, the demand increases, the firms try to increase the supply but increases in a limited way
because of limited fleet size. Demand curve shifts to right more than the supply curve shift towards
downwards direction, overall, we can see an increase in equilibrium price from INR 4800 to INR 5200. This
Pricing Strategies in Aviation with the
context Of IndiGo
Dynamic Pricing:
Indigo Airlines leverages dynamic pricing to set/adjust fares of tickets in real time based on the time of booking,
demand and competition. Prices rise as we approach the travel date, airlines do that to capture the consumer’s
maximum willingness to pay.
IndiGo maintains a cost structure with a high occupancy rate which actually allows them to offer competitive prices
while maximizing their profits.

Demand Forecasting:
Usage of historical data and research to analyze market and predict demand to adjust prices.

Price Differentiation:
First Degree (Personalized Pricing): Offering targeted discounts or special fare to specific customers based on
their loyalty and booking history.

Second Degree (Product Versioning): Offering different classes (Lite, Standard, Flex) with varying benefits (e.g.,
baggage allowance, window seat selection etc.)

Third Degree (Group Pricing): Pricing based on varied customer segments such as corporate travellers, students,
or senior citizens, each receiving different fares.

How is IndiGo different and a market leader?

IndiGo uses a concept of flash sales by offering very steep discounts on unsold seats just days before departure. This
tactic quickly fill seats which would otherwise remain empty, tempting last minute price sensitive travelers. This
tactic maximize revenue aggressively.
Suppose There is a flight from Delhi to Varanasi, passenger capacity is 200. Look at this example from IndiGo’s
lens to sustain its position in market and at the same time to maximize revenue and widen the profit margins.

Look at the table how Indigo leverages mix of all the strategies mentioned in the previous slides to maximize its
revenue and attract consumers.

Days Before % Seats Discounts/ Effective Revenue

Seats Left Base Price (₹) Seats Sold
Departure Available Offers Price (₹) Generated (₹)

10% Early
30 Days 100% 200 ₹4,500 ₹4,000 40 ₹1,60,000
Bird Discount

15 Days 80% 160 ₹5,000 None ₹5,000 30 ₹1,50,000

Business
₹148,000 (₹145,000
Class ₹5,800 (₹7,500
7 Days 60% 130 ₹5,800 25 from regular, ₹3,000
Upgrade for upgrade)
from upgrade)
Offer: ₹7,500

₹4,960 for 40 (30

Flash Sale: ₹236,800 (₹148,800
Flash Sale, through Flash
3 Days 35% 105 ₹6,200 20% off on from Flash Sale,
₹6,200 for Sale, 10 at
last 30 seats ₹88,000 from regular)
others regular price)

1 Day 10% 65 ₹7,000 None ₹7,000 30 ₹2,10,000

Last Minute (3
5% 35 ₹8,500 None ₹8,500 35 ₹2,97,500
hours before)

Here IndiGo used differentiated price classes (Economy, Standard, Business), dynamic pricings
and flash sales along with price differentiation to achieve full-occupancy of while achieving
maximum revenue i.e. ₹1,164,200
Conclusion
Through a comprehensive microeconomic analysis, we have seen the market position of the key
players in aviation industry. We can conclude that IndiGo is a market leader and is aggressively
expanding with the strategy of monopolizing the aviation industry. In every aspect of
microeconomics, like production, cost, economies of scale etc. IndiGo is found to be leading and
benefitting most from these factors. The project can also conclude that even during festive seasons
like Diwali IndiGo, increases the price because the demand also increases. Through its clever
pricing strategies, it utilizes the full fleet capacity using tactics like flash sales and price
differentiation. IndiGo undeniably holds the position of a market leader, with its distinct practices
contributing significantly to its market dominance and setting it apart from other competitors.

Microeconomics may be small in scope, but

it has a marginal impact on everything!
Thank You for your Time
Group-IV