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The emergences of Low-Cost-Airlines in India

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Executive Summary The emergences of Low-Cost-Airlines in India in the past six months have led to stiff competition between the regular network airlines Jet Airways, Air Sahara and Indian Airlines, leading to slashing of fares and other aggressive tactics to drive out the new entrants. This commentary will analyse why the Low-Cost-Airlines pose a threat to the key players using the economic concepts of the theory of firms. Introduction The Low-Cost Airline concept is very fresh to the Indian market. Low Cost Carrier Air Deccan started operating in southern India since September 2003. The fares set by Air Deccan are competitively low and quite out of reach for the regular network airlines. Commentary Assuming, the market is in equilibrium and the firms to maximise profit. The domestic aviation industry of India is an oligopoly, i.e. a market in which only a few firms share a large proportion of the industry selling differentiated or undifferentiated products and where the entry of new firms is restricted. ...read more.


Both the firms face the same profit maximising situation as illustrated by the following graph. Profit is maximised by both firms where marginal cost i.e. the cost of producing one extra unit of a good, is equal to marginal revenue which is the extra revenue gained by selling that extra unit of good. (fig 1.2) (fig.1.2) Assuming, the average cost (i.e. total cost incurred per unit of output,) curve of Jet is lower than Deccan since it is an already established firm, enjoying economies of scale which exists when increasing the scale of production leads to a lower cost per unit output. It can lower its price in the short-run to start a price war. Though it will harm its profits in the short-run, the long-run effects might be the exit of Air Deccan from the industry, which means a greater market share for Jet. Moreover, there are several barriers to entry for a new firm entering the aviation industry. ...read more.


Thus, the airline might be able to survive a price war waged by Jet and the others while maintaining the same level of profit. Conclusion Air Deccan is right now facing stiff price war from the established airlines like Jet and Sahara, it might be able to survive it as it is not only luring the customers of the rival airlines but those of the railways as well. A large customer base enables the airline to further lower down its prices as it starts to gain economies of scale in the long-run resulting in the reduction of air fares in general. The other airlines have to revise their cost structures, increase efficiency and reduce number of employees. The consumers are sure to gain from the price war. 1 Supply is fixed in the short run. An aircraft as a factor of production is indivisible which implies that for a trip from A to B, an aircraft uses the same amount of fuel and manpower etc. whether there are ten or hundred occupied seats. Since, the aircraft has a fixed number of seats, its supply of seats for each trip is always fixed. Page 1 of 7 ...read more.

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