Collaboration Strategy For Air India & Indian Railways

Published by MBA Skool Team, Published on February 05, 2012

The Article written by Birma Ram is the First Prize winner of the January 2012 Article Writing Contest

Air India, from a sole Indian carrier to about 15% share in Indian aviation, has suffered from ineffective management style, over staff, frequent agitations from staff and flight delays which cumulatively have taken it down from a sole player in the industry to one of the worst performing airlines in India. Customers are dissatisfied with AI’s service even if provides more facilities then other airlines, at least on paper. On the other side Indian Railways is a monopoly which is performing just sufficient to carry out its own expenses. The present capacity of trains is insufficient to cater to growing passenger needs. This article, indeed, does not deal with problems but a strategic solution for bringing the government carrier out of it predicament, perhaps one important step in dealing with various challenges.

One organization is getting more passengers than needed but still making meagre profits and lack any plausible development in capacity & service level improvement whereas other organization i.e. AI, is  not getting enough passengers to meet its capacity but still expanding by increasing debt levels and burden on government. Though situation is grim but can be tackled with immediate strategic move by creating a win-win solution for both - Indian Railways and Air India. The strategy is a combination of tested tactics customized to suit Air India by developing niche collaboration between these organizations to gain maximum benefit for government and customers.

The discussed strategy has taken all the market forces into account while assessing the available options for Air India. The direct and indirect benefits of the strategy have also been discussed for both organizations. Formulation of system has been guided through framework and guidelines under which the strategy can be implemented, not discussed in whole but conclusions are focused upon here.

The problems with established cost and benefit strategies for Air India have been discussed along with benefits of suggested strategic move which involves locking of customers to benefit all three parties i.e. Railways, Air India and Customers.

Assessment for scope of Competitive Advantage for Air India:

Air India can consider two competitive strategies-

1. Cost strategy: This calls for lower cost per passenger and passing on this reduction in cost to customers to gain more market share, what exactly the low cost airlines has been doing or reducing the costs but keeping fares same to enjoy greater margins.

But factors that resist Air India from taking cost as pivotal point of strategy-

  1. General and administration cost: Air India has highest costs of operation due to larger staff and low administration efficiency as compare to private carriers.
  2. Less control over fuel prices: Fluctuations in fuel prices depend on external factors and is ever rising with likely similar trends in future.
  3. High competition: If AI reduces its price, private carriers will match due to higher efficiency in their structure & management.
  4. Less decision flexibility: Flexibility is low in taking situation based decisions like reducing staff or salary, decreasing flight frequency or forgoing less profitable routes, etc.

2. Benefit Strategy: This strategy helps in differentiating the service from competitors by  given higher value to customers at the same price which helps in gaining greater market share or increasing the fares so that even with constant market share one can enjoy higher margins and hence higher profits. Following are hurdles:

  1. Price Conscious Customers: Indian customers are highly sensitive to fares and have higher price elasticity for a transport service. So it becomes difficult to gather volumes even if value offered is better on the indifference curve.
  2. Business class: The customers who give importance to service level can avail business class seats which are available in almost all aircrafts. So airlines have already used this segmentation methodology.
  3. High Costs of Improving Service: Customer who demands high service standards are few; it becomes economically unviable to improve service level on aircraft above an extent as these costs become fixed and high with less benefit.

Establishing that above strategies are of little use for Air India, I propose a new strategic mix, which is a mix of customer locking and collaboration strategy with Indian Railways, to create a win-win situation for both the government organizations and more value for the customers.

Proposed Strategic Mix – Salient points:

Railways, on major routes, get reservation requests above capacity which turns down the customers and they either have to cancel/postpone travel plan or take different transport which, generally on long routes, is airlines. If the customers, who are willing to travel through airlines if not reserved in railways, are given incentive to opt for Air India then it will increase the seat occupancy for AI.

  • The incentive can be given in following ways:
    • Incentivize AC Tier-I, II & III customers to opt for airlines by giving credits (points) on traveling through AC Tier-I,II & III in railways and these travel points will be in incremental manner i.e. Tier-I will get more points than Tier-II which will give more points than traveling in Tier-III.
    • The customers will have incentive to move from lower Tier to higher ones as points offered are more on upper classes and this in turn will improve seat occupancy in AC Tier-I,II & III in incremental manner.

Only major trains’ passengers like Rajdhani, Shatabdi, etc., which have high fares and run on major stations, should be kept under this scheme. The points earned by traveling through AC Tier-I,II & III can be redeemed by passengers for fares in Air India only and the equivalent amount will be transferred by AI to Indian Railways. The point mechanism should be established in a manner that only the customer can earn & use his/her points which are earned only if he/she himself/herself travels through railways and AI. This will ensure that customers do not use points earned by others for traveling through AI. Also the money equivalent of points will give discount in fare up to a certain limit only so that unnecessary losses on flights which are reserved majorly through points are not a problem. Value of points will be such that benefit of increased seat occupancy is more than discounts offered by AI. Also it will balance total seats available in a flight and increase in demand through point mechanism.

An online platform is required from where the customers can reserve for railways, earn points and use points for reservations for AI. Also, the time period in which the points can be redeemed should be near to flight dates as fares initially are low and AI will lose revenue if customers get to reserve seats beforehand at low fares. So near the flight date when the fares raise high, the customers will be able to redeem the points. This period may be kept 7 days. To start with, this mechanism should be implemented on the long routes where the fare of AC Tier-I and AI fare is not much so that quick results are obtained to support mechanism effectiveness. The discounts on busy air routes should be kept low and high on less frequent routes where seat occupancy is low.

Benefits of Strategic collaboration to Indian railways:

  • Increased Revenue: Since about 18% revenue of railways passenger travel, which contributes about 35% to total revenue, comes from AC Tier-I, II & III. This give creditability to effectiveness of this strategy as increase in revenue from AC Tier-I,II & III will increase bottom line with no extra cost bared by Railways.
  • Scope for Increasing AC Tier-I,II & III: Since these classes contribute considerable amount to total profit with minimal increase in total capacity of trains, it becomes a good opportunity for railways to increase AC Tier-I, II & III knowing that customers being incentivised will travel by these classes.
  • Reduced Fluctuations in Seat Occupancy: Since customers get more point as they move up travel class, the occupancy of seats in all AC Tiers will increase and fluctuations in occupancy will be reduced, making forecasting easy.
  • Increased Customer Satisfaction: The customers who do not get reservation have an option to travel through AI, reducing uncertainty of travel for customers and increase options resulting in greater customer satisfaction.
  • Increase in Operational Efficiency: Staff on trains are fixed costs for railways and increasing passengers in AC Tiers will increase return on such fixed costs for railways and increase revenues through on train spending by customers.

Benefits to Air India

Benefits of Strategic collaboration to Air India can be divided in direct benefits and indirect benefits:

Direct Benefits: These benefits are instant and will be visible in short term through financial statements.

  • Increased Seat Occupancy & Profits: Increase in number of customers coming with points earned from rail travel will help AI to fill its 30% seats which were previously perishing without any revenue. Since these discount seats will give revenue which is above Marginal cost, it directly adds to the bottom line.
  • No Fare Reduction Required: AI will have an advantage over competitors as it will enjoy ensured customer flow which requires no extra discount at last moment through agents.
  • Reduced fluctuations in Traffic: Increased customer flow will ensure low fluctuations in traffic and improve operating efficiency leading to low operating costs & healthy cash flow.
  • Increased Customer Base: Since more customers will be exposed to AI service which will increase chances of repeat service opportunity for AI in future.

Indirect Benefits: In the long term, AI will have following advantages which may not be replicated by competitors:

  • Increased Loyal Customer base: As more customer switch to airline travel from railways, using AI, leading to loyal customer base.
  • Income of middle class is rising and this strategy will help in transformation of AC class customers into air passengers.
  • As more number of customers join AI base, it will increase dominance of AI in aviation leading to more control on pricing policy, hence price war can be curtailed up to certain extent.
  • Signal to New Players: Since more LCCs are planning to enter aviation which will further dense the market, this strategic move will send signal that AI is going to capture the rising Middle class transportation needs and until new players have different proposition, it is hard to find success.
  • More exposure of customers to air transport will help the whole industry as the customer evolution cycle will be faster.

References & links


This article has been authored by Birma Ram from IIM Ranchi.

Image: Simon Howden /

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