THE

SHRI RAM CASE COMPETITION PRELIM 1

Shri Ram Case

THE SHRI RAM CASE COMPETITION PRELIM 1

Instructions:
o This document consists of one case study with 5 questions. Teams are expected to
clearly state any assumptions made and mention the source of information when
using data from external sources. There is NO word limit to the recommendations.

o Teams shall be judged on the basis of creativity, analytical skills and feasibility.

o Teams must submit their solution by 11:59 PM on 15th January 2016 by mailing it to
the following email ID: shriramcase.bc16@gmail.com

o Kindly note that each team must generate a Team Code consisting of 6 letters, a
character, and two numbers in the same order. The solution should be in the
Portable Document Format (PDF). The solution document and subject of the mail
should be named as ShriRamCase_TeamCode. (For example:
ShriRamCase_caseit!16)

o The body of the mail should contain the name and contact details of the participants.

o The shortlisted teams would be sent an e-mail, so keep checking your e-mail at
regular intervals.

o The list of the shortlisted teams will also be uploaded on the Shri Ram Case Study
Facebook Event page.

o The decision of the organizers shall be binding on all the participants.

If it can be thought, it can be done.

THE SHRI RAM CASE COMPETITION PRELIM 1

The Beginning of BlueAir Pvt. Ltd

The quickest way to become a millionaire in the airline business is to start out as a
billionaire - Richard Branson.

Company Overview

BlueAir Pvt. Ltd. is a newly incorporated private company in India with 2 directors on its
board. Having obtained the required licenses, the company now intends to establish itself as
an airline carrier in India. Given the current trends in the civil aviation market and the
innovations taking place within the industry, BlueAir has some crucial decisions to make
before commencing its operations.

Industry Overview

The Indian aviation industry has the potential to become the third largest aviation market by
the year 2020 and the largest in the world, by 2030. There is huge untapped potential for
growth due to the fact that access to aviation is still a dream for majority of the Indian
population and that many tier 2 and 3 cities still remain unconnected. Further, as per
reports of the Airport Authority of India, Indias aviation market has been picking up speed,
registering a growth in the domestic traffic by 13.9% year-on-year. Total international traffic
to and from India grew at 9.0% in FY 2015, however Indian carriers grew slightly faster at
10.2%. Foreign carriers, which handle around 65% of international traffic to and from India,
increased their passenger numbers by around 8.6%.

The domestic market leaders include Indigo, Jet Airways, Air India, Spice Jet and GoAir. With
IndiGo leading the way, Jet Airways is not far behind. Third in the race is Air India, a Full
Service Airline.

Types of Airlines

The Indian Airline Industry today is clustered with 2 radically different kinds of airlines,
namely the Low Cost Carrier (such as Indigo, SpiceJet and GoAir) and Full Service Carrier
(such as Air India, Jet Airways and Vistara). LCCs and Full Service Carriers differ in terms of
their operational costs, pricing strategy, services offered and route planning. While LCCs, by
offering fewer comforts, charge a low fare from the customer, Full Service Airlines do not
compromise on services or prices. Although the low fare and low operating costs make a
good combination for LCCs, to generate sufficient profits, they generally have ancillary
revenue sources such as charges for in-flight food, extra leg space, priority check in, seat
selection and so on. These services are generally already included in the ticket price of a Full
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Service Carrier. Another significant difference between the two is the difference in classes of
seats offered in the flights. While LCCs (such as Indigo) generally do not have a Business
Class or a First Class section, Full Service Airlines make clear distinctions between
Economy Class and Business Class services. Finally, the customers that they cater to are
often very different owing to reasons mentioned above.

Challenges in the Industry

Despite the immense potential that the aviation sector promises, airline companies are not
free from hindrances that severely limit their growth.

Various reports suggest that majority of the cost of Indian carriers is jet fuel driven. An
increase or decrease in the prices of Aviation Turbine Fuel affects the cost structure of
companies to a major extent thus affecting their pricing strategy and ultimately profitability.
To avoid exposure to such fluctuations in fuel prices, most airline companies opt for Fuel
Hedging. A fuel hedge contract allows the fuel consuming company to establish a fixed cost
at which the company shall buy the fuel at a future date. Fuel Hedging has its own pros and
cons. If a company enters into a fuel hedge and the price of fuel declines, the company will
effectively be forced to pay an above market rate for fuel. However, if the price of fuel
increases, the company will receive a return that offsets their actual cost.

Another major problem that Indian carriers face is the problem of excess capacity. The
average carrier seat load factor of 70-75% indicates that demand is lagging behind supply by
20-25%. To tackle this problem, most companies relentlessly follow the path of deep
discounting which further leads to a price war, ultimately resulting in loss of revenue in a
sector that entails high cost.

Considering the fact that entry into the aviation industry requires heavy investments,
choosing between sources of aviation finance also becomes a challenge for most
companies. Although cash is the cheapest way to finance aircraft, it is only an option for
profitable airlines or state-owned ones with rich owners. Other common sources include
commercial bank loans, external commercial borrowings, ETCs*, export credit loans** and
the capital market.

Airline companies face the problem of deciding the optimal path between 2 different
locations. When a direct flight between 2 destinations is not possible, and there exists
several locations between the starting and the final point, airline companies have various
options in which they can travel from the starting to the final point via the intermediate
locations. However, the companies generally want to determine the shortest path that
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exists between the locations and operate a flight accordingly. The shortest path helps the
company minimize its cost owing to low usage of fuel. In order to find the shortest path that
exists between 2 locations, airline companies use various algorithms such as the Breadth
First Search, Back-Tracking or Dijkastras Algorithm. The most common algorithm that is
used by the airline companies is the Dijkastras Algorithm.

Finally, Airline companies have to determine the optimal route strategy. This involves a
decision regarding whether the company should fly its aircrafts from tier 1 to tier 1 cities, or
from tier 1 to tier 2 cities or from tier 2 to tier 3 or any other combination of the above.

Glossary

*ETCs or equipment trust certificates are bonds that airlines issue to pay for aircraft by
setting up a special purpose company or SPV (its only purpose or business is to own the
aircraft) that issues bonds to investors. The SPV then uses the cash from these bonds to buy
aircraft. The SPV further leases the aircraft to the airline and passes the lease rent to the
investors in the form of bond interest.

**Export credit loans are loans that are guaranteed by an Export Credit Agency (ECA). For
example, if Kazakhstan Airlines wants to purchase a Boeing, it will not get the required bank
loan as it is not a profitable company. Thus Export-Import Bank of USA, which is an ECA, will
guarantee the loan so that Kazakhstan Airlines gets the required funding.

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Exhibits
Exhibit A

Exhibit B

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Exhibit C

Exhibit D

Cost structure of the two types of airlines (In % terms)

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Exhibit E

Business Model of a LCC

Questions

You are one of the Directors of BlueAir Pvt Ltd. As the Director you are required to address
the problems mentioned by providing feasible recommendations on the following issues:

1. Decide, with adequate reasons, whether BlueAir should establish itself as a LCC or a Full
Service Airline. Show with the help of a STP Analysis and Market Sizing that your decision
ensures sustainability for BlueAir in the long run. (Hint: Show market value of company at
least till 2020).
Also, formulate the initial pricing strategy (skimming, penetrating or competitive) for the
airline. Determine the ancillary revenue sources for the airline (if it is a LCC) that helps it
maximize its profit and the services that shall be provided (if it is a Full service Airline) to
justify the price. Ensure that the strategy is consistent with the choice between LCC and Full
Service Airline.

2. Make a comparative analysis of the various sources of aviation financing mentioned in the
case and determine the optimal ratio of the sources for BlueAir. Estimate the total capital
requirement and show its breakup under various sub-headings.
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3. Study the Indian Aviation Fuel market and other relevant parameters and on the basis of
the study, determine the optimal fuel hedging to non-hedging ratio. Keep in mind your
choice regarding LCC and Full Service Airline.

4. Choose, with reasons, the optimal route strategy for the company. Keeping in mind the
above decision, determine the optimum promotional strategy and mix (advertising, sales
promotion, personal selling, direct marketing, public relations and publicity) for BlueAir that
will help ensure that there is a demand and supply match for its airline and that the problem
of overcapacity is solved.

5.

Suppose a particular flight of BlueAir Ltd is to fly from A to F and the numbers represent the
distance between any 2 locations in 100 kms. Determine what would be the ideal path (in
terms of distance) for the company to use. (Hint: Preferably use an algorithm mentioned in
the case).

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