Cadburys

DEMAND THEORY

Business is driven by demand, a firm will not be established or will survive if adequate demand is not there. Hence, it is important to understand factors affecting demand.

Consumer Demand Theory

This theory postulates that the quantity demanded of a commodity is a function of the price of commodity, the consumer’s income, the price of substitutes and complementary commodities and the taste of the consumer.

Qdx = f ( Px, T , Py , T )

Qdx = Quantity demanded of commodity X an individual per time period.
Px = Price per unit of commodity X
I = Consumer’s Income
Py = Price of related ( i.e Substitute and complementary) Commodities
T = Taste of the consumer

Price Elasticity Of Demand

The responsiveness in the quantity demanded of a commodity to a change in its price is very important to the firm. Sometimes lowering the price of the commodity increases sales sufficiently to increase total revenues. Thus price elasticity of demand is given by percentage change in quantity demanded to percentage change in price, holding all other variables constant.

Ep = ∆Q/Q
∆P/P

Price elasticity of demand depends on
1. Availability of substitutes
2. Length of time over which the quantity response to price change is measured

Income Elasticity Of Demand ( EI )

The level of consumer’s income is also very important determinant of demand. Income elasticity measures responsiveness of demand to change in income.

EI = ∆Q/Q
∆I/I

AIR DECCAN

With economy growing at a rate of about 8% with whole business environment having infectious optimism. The spill over can also be seen in aviation sector. With only less than 14 million passenger flying the domestic sector in 2003, this figure now stands at about 28 million with domestic market growing at almost 50%.
G.R Gopinath, the man who pioneered low face aviation in India, first visualized this opportunity. With a new concept of no-frill low cost airline, it stormed market 3 years back and today enjoys a market share of 21.2%.
Today low cost carrier has about 4 major players i.e. Air Deccan, Spice Jet, Go Air and Paramount holding a market share of about 35% in 2006 and expects to cover about 50% in 2007.

Demand for air line ticket Qa = f (Pa, Y, Ps, T)

Fare of Tickets (Pa) – They are major influencing factors on demand. With steep decline in price of fare, has led to a boom in aviation sector, with a estimation of about 56 million people flying by 2010

Income (Y) – Increase in income provides an ability to purchase and with increasing income more and more people are getting airborne.

Price of Substitutes ( Ps ) – With price of fare of railway and airline coming to same level, people are turning towards airlines.

Price elasticity of demand for airline fare

Long haul domestic business - 1.120
Long haul domestic leisure - 1.520
Short/Medium haul domestic business - 1.390
Short/Medium haul domestic leisure - 0.730

Since demand for airline is highly elastic. Air Deccan with its offering of low fare (as low as Rs1 and Rs500) performed exceedingly well.

Income elasticity -
Long haul domestic business - 0.840
Long haul domestic leisure - 2.169
Short/Medium haul domestic business - 0.807
Short/Medium haul domestic leisure - 2.049

It was seen increasing in income especially at leisure segment had a very positive response on the demand of air ticket. With middle class faring well and purchasing power increasing has led to increase in number of passengers.






Substitute products

For traveling railways and roads has been most common means of transport. At present, there are an estimated 17 to 18 million passengers who daily go by rail and another 10 to 12 million who travel by bus. If just about 5% of this people substitutes with air travel about 1.5 million people would be airborne daily.
Looking at major players in aviation sector and their market share.

Thus Air Deccan has substitutes not in terms of railways and roads but also airline and specially low cost carrier (Spice jet, Go Air)
Therefore Air Deccan has kept its fare low sometimes even less than Rajdhani fares.


SECTOR AIR DECCAN INDIAN JET AIRWAYS SPICE JET RAJDHANI (2AC)
Delhi- Mumbai 2429 3707 2371 2249 2230
Banglore-Delhi 3774 3707 2802 3649 3085
Mumbai – Goa 1774 1695 2479 1449 1242

(Source – airline websites, www.makemytrip.com)

ANALYSIS

For any business decision making, it is necessary that company understands the factors affecting the demand for its products. Some of the forces that affect are under the control of firm, while others are not (factors like responsiveness of demand to change in its own price, income and price of substitutes)

Looking at the case of Air Deccan, we analyze that price elasticity for long haul domestic leisure (1.520) and short / medium haul domestic business (1.390) is very elastic. Its targeted this segment by providing lowest fare in the industry with income elasticity for long haul domestic leisure (2.169) and short / medium domestic leisure (2.049), it tried to capitalized on segment with high purchasing power and at same time is price sensitive. Knowledge of income sensitivity also helps firms to design its market strategy and market segment.
To capture market, Air Deccan had to provide service not only at cost lower than full carrier airline JetAirways, Indian Airlines but a very comparable fare in comparison to other low cost airline like Spice jet, Go Air.

Air Deccan has also bought its fare as low as Rajdhani 2AC. Thus giving a very tough competition to railways.

Within 3 years of its inception Air Deccan covers 55 destinations, one of the highest in country and commands a market share of 21.2%. this all has been possible because of Air Deccan strategy to analyze demand and factors affecting it.

References

Books
 Salvatore Dominick Managerial Economics in a Global Economy, Publisher Michael Roche, 4th edition; page – 90-114

Magazine
 Business Today, Indian Aviation’s Dark Horse, August 27,2006
 Business Today, Spoilt for choice, January1, 2006
 Business World, Flying lessons, January 16, 2006

Websites
 http://www.newkerela.com
 http://www.rediff.com/money
 http://www.financialexpress.com
 http://www.fin.gc.ca/consultresp/Airtravelhttp://www.oppapers.com/essays/Cadburys/94489

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