India’s aviation industry is in the grips of a peculiar trend, which, if it gains traction, portends a complete makeover for the sector while attracting thousands more to take flight.
Low-cost airlines such as Indigo and Spice Jet are making profits while traditional full-service airlines Air India, Jet airways and Kingfisher Airlines are deep in the red,a trend experts believe marks the beginning of budget airlines’ domination of Indian skies.
In the June quarter ,Jet lost Rs 225 crore and Kingfisher lost Rs 243 crore.The national carrier that ran up losses of Rs 7200 crore last year is yet to report the first quarter numbers .However,SpiceJet and Indigo have reported profits for the quarter.
Sure enough, the full carriers are now betting on nofrills.Jet will transfer two-thirds of is domestic operations into Jet Konnect,the low=cost service it launched in May, Kingfisher has trimmed its fleet from 89 to 69 and plans to expand the operations of Kingfisher Red; and Air India says it will become a no-frills airline.
“There was time when Jet and Kingfisher both were against low-fare model in the country .But, now they have realized that India is a low-cost market,” says GR Gopinath, the man who introduced the concept of budget airlines into the country six years ago by launching Air Deccan.The airline went to become that country’s largest domestic carrier before being acquired by Kingfisher in June 2007.
Analysts say the market opportunity is huge, particularly because just 3%of India’s population fly now and low fares are the only way to attract more passengers.
India accounts for 2% of the global air traffic and 17% of the global aviation industry’s losses, almost all of it attributed to full service carriers. According to Centre for Asia Pacific Aviation, a Sydney-based aviation research firm.Capa experts the combined debt of the Jet, Kingfisher and Air India could reach Rs45, 000 crore by the end if this fiscal.
So what makes low-cost carriers fly high while full carriers get grounded? “It’s all in the business model. We kept fares low and steadily increasing our load factor,” says Sanjay Aggarwal, CEO of SpiceJet, which reported Rs 26 profit in the quarter to end-June.
These are low-cost airlines and as the tag suggests, they keep their costs low, very low. They don’t believe in on-board entertainment or window blinds. They have single passenger class and they sell tickets directly. And in the last quarter, they managed to notch up a profit flying with a modest 70% of their seats occupied.
The full service carriers, say industry experts, are bleeding heavily despite 65% occupancy.
While their economy-class fares are still about Rs1, 000 more than budget rivals on every sector ,the cost of flying a full-service flight is around 35% more than that of a budget aircraft, an airline executive said requesting anonymity.
Executives at the full services airlines declined to comment.
The operating costs of full carriers are much higher than budget carriers because they need to maintain special lounges, have more cabin crew on board and take care of on-board meals among other things, say experts.Also, their flights have almost 40 seats less than budget rivals that have only economy class.
At present fare levels, full service carriers need more than three-fourths of their seats occupied to stop bleedind, say experts. And hiking fares will be difficult because economy fliers are already reluctant to spend Rs 1,000 more on average just for food.
For those who want to have food on board, no-frills carriers sell snacks and beverages at reasonable prices, besides allowing people to carry homemade food.
While cost-management remains the biggest challenge by the full service carriers by far, strategic mistakes such as reckless expansion of both international and domestic operations without any real demand too contributed to the losses of Kingfisher and Jet, say analysts.
Most budget airlines played a smarter game by expanding selectively when fuel prices slumped and then shuffling their routes in line with demand, Indigo and GoAir saw anther market share increase to 14% and 5.7% ,repectively,inJuly from 13.6% and 5.4% in June, Last week,SpiceJet started 23 new connection within its existing network spanning 18 cities last week.
While people like Mr. Aggarwal of Spice Jet say only low-cost carriers will survive in India, there are others who believe the number of business class travelers will shoot up once the global business environment improves.
In fact, India’s only full business class airline Paramount Airways notched a small profit in the quarter ended June.
The Chennai-based airline’s managing director M Thiagarajan claimed that many business class travelers from Jet and Kingfisher have moved to Paramount because “we are offering the same experience at economy fares”.
“There is a natural advantage in operating aircraft of less than 40 tone weight and having less than 80 seats as we don’t have to pay different charges like Airport landing,”Mr Thiagarajan said.” We are ruthless on cost management too.”
Meanwhile, there are concerns that the expansion of budget operations by full carriers may take away the profitability of existing budget carriers, as the industry does not see any immediate rise in the number of people flying.
Analysts say Jet, kingfisher and Air India may find it difficult to raise funds for capital expenditure due to their huge debt pile. While smarter strategies and better cost-management may still help these full service carriers stay in business, industry watchers are now more or unanimous that the future of Indian aviation will have no frills.
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