Business - India - Low-cost airlines

Anirban Chowdhury

Five years after it started, the low-cost aviation model in India is gasping for breath. Value carrier is the in thing.

Last month, Mumbai-based low-cost carrier GoAir, the only airline still offering fares of Rs 0-99, reminiscent of Air Deccan’s pricing in 2004, made a surprise announcement. It added business class to its flights. To a low-cost aviation evangelist, that would be akin to a kurta-clad communist devouring Big Mac.

Christened Go Comfort, the new section offers food and other services — the so-called “frills” — and costs more than economy class. The launch of Go Comfort is seen as GoAir’s flight into the category of value carriers — a hybrid between a low-cost carrier, or an LCC, and a full-service carrier. “GoAir wanted to study the market at every stage before planning growth,” says Edgardo Badiali, chief executive.

Still, this has increased the clamour that the LCC model cannot survive. The most vociferous is Vijay Mallya, who toyed with the idea of starting Kingfisher Airline, of which he is chairman, as an LCC, but quickly junked the idea and made it into a premium airline.

“If GoAir, which is the recent champion of low-cost carriers, is changing its model, it only proves what I have been saying for so long, that the budget carrier model cannot survive in India,” smirks Mallya.

Putting his signature where his mouth is, Mallya has transformed Air Deccan, India’s first LCC, which merged with Kingfisher last December, into a value carrier and renamed it Kingfisher Red. The other entry into this category has been from the other side: JetLite, which flew under the name of Air Sahara until acquired by Jet Airways. It used to be a full-service carrier when the only other carriers were Indian Airlines and Jet Airways. Having acquired it, Jet has stopped serving food on board and turned JetLite into a value carrier.

The cumulative market share of LCCs has come down from 47 per cent in January this year to 41 per cent in September. Their average passenger load factor has fallen from 65 per cent to 54 per cent. As the aviation sector grapples with a slowdown, the sales of LCCs in September this year over August fell 37 per cent; the drop was much less at 13 per cent for full-service carriers, say travel companies.

As an aside, three LCCs have lost their chief executives in the last five months: Siddhanta Sharma quit SpiceJet, Bruce Ashby IndiGo, and Maunu Von Lueders Go Air.

Experts say Indian LCCs have not been able to price their tickets right and at one point brought their fares very close to that of full-service carriers. “There came a time in June when both LCCs and full-service carriers were offering basic fares of Rs 5,000, which led to passengers making an obvious shift to full-service carriers,” says an industry expert.

Who would not? “When you do not offer lower fares, you fail to stimulate the market that an LCC is supposed to stimulate. You have to keep in mind that our target passenger is not the corporate passenger,” says Siddhanta Sharma, former chief executive of SpiceJet.

In the last three months, starting August, Indian aviation companies seem to have made a conscious decision to keep a significant gap between the two sections of carriers. “The difference in fares between full-service carriers and LCCs, which was only 15 per cent in April-June, has widened to 30-33 per cent, which is a good sign,” says Sharma.

Still, the only true LCCs left are IndiGo and SpiceJet. That begs the question: has the LCC model flown its course in a short five years? Ironically, the seeds of its demise may have been sowed by the airline that started it all: G R Gopinath’s Air Deccan.

Deccan’s chronicle
Gopinath launched the airline with a clear focus: offer rock-bottom fares, fly to every destination possible (including Kandla, Pathankot, Tuticorin, Vijaynagar, Raipur), and make the common man fly. In three years, Deccan covered 65 airports, was operating 350 flights a day with 43 aircraft, and had captured 20 per cent of the market.

Air traffic soared. Places like Raipur, Vizag and Ahmedabad topped the charts as the fastest-growing air traffic destinations in India, showing growth rates of 80-100 per cent. Deccan clones — SpiceJet, IndiGo and Go Air — cropped up.

Equally quickly, Deccan ran out of cash by the end of 2006 and early 2007. Experts say Gopinath had spread his costs over too many overheads. He was expanding too fast and needed fresh cash all the time. Increasing capacity was a viable strategy so long as passenger growth stayed high. When the price of aviation turbine fuel, or ATF, skyrocketed with the rise in global crude oil prices, keeping the fares low became difficult. As fares rose, passenger traffic became thinner. Suddenly, there was overcapacity in the industry and carriers began to bleed.

“Deccan’s expansion was in sharp contrast with the strategy followed by Spice, which has fortified in one market before moving to the next. Introducing more flights in one destination is more cost-effective than spreading all over, since the same airport infrastructure, manpower, parking slots, and so on, can be optimised to give better yields,” says an LCC executive who does not want to be named.

Interestingly, Deccan’s merger with Kingfisher and its makeover into first Simplifly Deccan and then into Kingfisher Red were accompanied by a crash in its share of the market from nearly 18 per cent in June 2007 to around 10 per cent in August 2008, and a 50 per cent drop in the number of passengers.

What low cost?
“In India, there is no low-cost carrier, only low-fare carriers. Both full-service and budget carriers have the same cost structure in terms of fuel, lease rentals, staff salaries, and so on,” says Rajiv Gupta, former chief commercial officer of JetLite.

If a pilot flies an A320, he would expect the same level of salary regardless of who owns the aircraft, Kingfisher or IndiGo. A bigger aircraft would, however, mean higher costs in terms of lease rentals. Since there aren’t separate airports for LCCs, the space rentals at airports for either kind of carrier would be the same, since they occupy the same space and use the same facilities. “Airport charges are different in foreign countries. Some of them have airports specially built for LCCs, which go easy on airport charges,” Gupta adds.

Gupta was among the 850 employees who left JetLite, as Jet got rid off almost the entire staff of Air Sahara except the crew, engineers and some related operational staff.

According to global standards, the average cost per passenger for LCCs should be $35 lower than that of full-service carriers, but this is contingent on better utilisation of aircraft through faster turnarounds (the time taken between landing and the next flight). The average turnaround of an LCC flight should be 20 minutes and that of a full-service aircraft an hour. Taking an average of six landings per day in India and an average flight duration of an hour and 20 minutes, an LCC plane should get to fly an extra flight each day. But that has not happened because of airport congestion.

Kiran Rao, executive vice-president, marketing and contracts, with European aircraft maker Airbus, whose planes are the most favoured by Indian LCCs (including Kingfisher Red, IndiGo and Go Air), says India does not lend itself to the internationally acclaimed low-cost model. “LCCs in India are not the same as those in the US or Europe.

International LCCs make a lot of savings on heads like airport charges. When Ryan Air (a successful LCC in Europe) flies from London to Toulouse, it lands at an airport called Carcassone, which is outside Toulouse. Airports like these are designed, in terms of infrastructure and charges, for LCCs and do not entail frills. The passenger disembarks from the plane, rents a car and leaves. So there are savings on airport charges,” says Rao. According to his estimates, LCCs in other countries enjoy a cost structure 10 per cent lower than that of full-service carriers.

Air Asia founder tony Fernandes, who built the profitable LCC in Malaysia by offering rock-bottom fares, says the problem in India was lack of focus on the model.

With the boom last year, there was talk that low-cost airports could be set up, for which some 300 unused airstrips had been identified. Gopinath even tied up with infrastructure company GVK Industries to develop such airports. The tie-up, however, failed.

Given the current slowdown, the concept of low-cost airports seems to have taken a backseat. “But it will be taken up again once things improve. We see it as the next level of infrastructure development,” says a civil aviation ministry official. “Due to congestion at airports, the average utilisation of aircraft in India is two hours less than in other countries. Six per cent of an airline’s savings come from better utilisation itself. For all these reasons, Indian carriers would save 10 per cent less than international carriers and that is adjusted in the fares.”

The recent decline in air traffic was supposed to have eased congestion and made for faster turnarounds, but the fall in passenger traffic has been so steep and has created such a mismatch between demand and supply that airlines have had to cut capacity frantically. According to statistics from the ministry of civil aviation, LCCs have accounted for more than 60 per cent of the total capacity reduction, which started from June.

Big brothers’ shadow
The recent alliance between Jet and Kingfisher brings further bad news for low-cost carriers. Already, there are concerns that the alliance, accounting for 60 per cent of the market, would hold sway over the key slots, leaving only crumbs for the others.

The Kingfisher-Kingfisher Red combine has a 40-45 per cent share of flights in Bangalore-connected sectors (Bangalore-Mumbai, Bangalore-Hyderabad). It has a huge advantage in key flight slots out of Bangalore. Jet-JetLite controls 40-45 per cent of the key business class slots on the Mumbai-Delhi sector, the largest revenue contributing route in the country.

It is not as if the international low-cost carriers are not affected. Europe’s biggest budget airline, RyanAir, has warned that its profits could fall by up to 50 per cent next year due to high oil prices, declining consumer spending, and the weakening pound. The Dublin-based company has said that its fuel bill had soared by 93 per cent in the first quarter and has come to represent almost half of its operating costs, up from 36 per cent last year, a scenario very similar to Indian carriers’.

Some say a flight without food will anyway totter in India, where the average flying time is an hour and a half, unlike Europe, a fertile ground for low-cost aviation, where it is an hour. Still, it may not be curtains. Says Kapil Kaul, CEO, Indian subcontinent, Centre for Asia Pacific Aviation: “The middle class still wants low fares, especially since the other modes of transport like road and rail are not as developed.”

Besides, the value carrier model has not exactly taken off in a blaze of glory. JetLite has reported a Rs 273 crore loss in July-September this year. Its PLF in the quarter was 61.2 per cent; the breakeven point is 103 per cent.

Gopinath is emphatic that there is nothing wrong with the LCC model, considering the low level of air travel penetration in the country. The right way, he says, is to expand and keep fares low. As the passenger load factor rises, the costs will get spread over the larger number of passengers carried.

The Captain, as Gopinath is known, is sticking to his guns. Somehow, he could not hold on to his airline.