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. There is a fair degree of competition amongst them to get the biggest market share due to which they face a kinked demand curve.

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This will be explained by the following graph. (fig 1.1) At the market equilibrium price P, a quantity Q is demanded. (Its important to consider that the airline is not necessarily

 flying fully occupied. So the increase and decrease in the demand of air tickets due to the changes in price might only result in an increased or decreased occupancy rate). As price increases from P to P1 the demand decreases to x but the firm continues producing

at Q (as there is the problem of indivisibility). So there is a surplus of goods, which implies that it has lost ...

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