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EXECUTIVE SUMMARY.................................................................................................2 EVOLUTION OF LOW COST AIRLINES GLOBALLY.................................................4 AVIATION IN INDIA......................................................................................................14 EMERGENCE OF LOW-COST AIRLINES IN INDIA..................................................16 AIRLINE OPERATORS IN INDIA (DOMESTIC).........................................................20 MEANING: LOW-COST AIRLINES..............................................................................23 BUSINESS MODEL: LOW COST AIRLINES................................................................25 MARKET SCENARIO.....................................................................................................27 RECENT DEVELOPMENTS...........................................................................................34 GROUND REALITY........................................................................................................36 CHALLENGES AND CONCERNS.................................................................................39 THE SOLUTION: LCC INTEGRATION.........................................................................41 FUTURE OF LCC.............................................................................................................45 REFERENCES..................................................................................................................49
This report is attempt to understand how does the airline industry function and take a look at the emerging trends ,especially the growing significance of low cost carriers and how this trend affect the industry dynamics and the India’s traveling pattern. Air industry remains a large and growing industry. Good air connectivity facilitates economic growth, world trade, international investment and tourism and is therefore central to globalization. Airlines also earn revenue from transporting cargo, selling frequent flier miles to other companies and ‘up-selling’ in-flight services. But by far, the largest proportion of revenue is derived from regular and business passengers. For this reason, its important that we take consumer and business confidence into account on top of regular factors that one should consider like earning growth ,debt load etc. A final key area to keep a close eye on is costs. As we all know the airline business is extremely sensitive to costs such as fuel, labour, and borrowing costs. Some of the major players in the airline attribute 30-40% of their costs to jet fuel. It is also important to look at the geographic areas that an airline targets. If the airline industry could be described in three words, they could be “intensely competitive market”. In the recent years there has been an industry-wide shakedown that will have far reaching effects on the industry’s trend towards expanding domestic and international services. Originally, the airline industry was either partly or wholly government owned. This is still true in many countries, but now in India, private players are gaining importance due to their excellent and value added services. The general pattern of ownership has gone from government owned or supported to independent, for profit public companies. As in many mature industries, consolidation is a trend, as airlines form new business combinations, ranging from loose, limited bilateral partnerships to long-term, multi faceted alliances to mergers and takeovers. Since government often restricts the
ownership and merger between the companies in different countries, we see most consolidation taking place within a country. The report highlights the various aspects of the domestic aviation industry, role of government and throws some light on the future of the low cost carriers.
EVOLUTION OF LOW COST AIRLINES GLOBALLY
A low-cost carrier or low-cost airline (also known as a no-frills or discount carrier / airline) is an airline that offers generally low fares in exchange for eliminating many traditional passenger services. The concept originated in the United States before spreading to Europe in the early 1990s and subsequently to much of the rest of the world. The term originated within the airline industry referring to airlines with a low - or lower operating cost structure than their competitors. Through popular media the term has since come to define any carrier with low ticket prices and limited services regardless of their operating costs. The American airline 'Southwest Airlines' is seen by most as the first low-cost carrier and stood example for the current low-cost model. Southwest originated in the USA after deregulation of the airline industry. It began its service in 1971 and has been profitable every year since 1973. With the advent of aviation deregulation the model spread to Europe as well, the most notable successes being Ireland's Ryan air, which began lowfares operations in 1991, and easy Jet, formed in 1995. Low cost carriers developed in Asia and Oceania from 2000 led by operators such as Malaysia's Air Asia, and Australia's Virgin Blue. The low-cost carrier model is applicable worldwide, although deregulated markets are most suited for its rapid spread. At the core of the low-cost model are the cost-reductions, which partly end up in cheaper tickets for passengers. To obtain these cost-reductions, Southwest operates according to two important principles which separate the low-cost model with other operating models. First, instead of flying according to a hub-and-spoke system, Southwest focuses on short distance point-to-point flights. Second, they only fly with one class, which a reduced service. By operating according to these two points, different cost-reductions can be made. Characteristic for Southwest are the different parts on which they save money. The figure below compares Southwest airlines with US Airways and gives an overview of the different costs of an average flight. Apparently there are large differences in respectively the salary, the operating costs of a carrier, and the remaining costs. Reductions on the 4
salary costs consist next to a lower wage, also of a more productive staff. Southwest also has relatively a higher flight frequency compared to others airlines like for example US Airways. That way, airplanes are more productive. They also have a higher productivity because they operate with only one fleet consisting of the same equipment, and have shorter turn-around times. Cost reductions related to the maintenance and managing costs of the fleet are obtained by operating with smaller aircrafts. Overall low-cost carriers also operate with newer aircraft types, which are more economical and require less maintenance. They offer only one service class with no seat reservation. On flights there are no meals offered. By choosing smaller regional airports turnaround times are shorter, and costs are saved because the landing and gate costs are lower. In conclusion, Southwest Airlines is a success because of the predictability, and the straightforwardness of the operating model. Their success became clear at the end of 2002 when airlines in the USA had the last couple of years considerable loses, whereas Southwest still gained profit. Figure 1, Average costs US Airways Vs Southwest Airlines
Source: www.jvdz.net The first low-cost carriers in Europe started in the ‘90s, when the deregulation of the airspace continued throughout the European Union. The British Ryan air and Easy Jet 5
The figure below gives an overview of the amount of cost reductions on different parts in the operating process on a flight between London and Nice. only instead of offering reduced services. Remarkable are credit cards as a separate expense. They copied their efficient operating model. no reservation option et cetera. Overview costs flight EasyJet 6 . In the beginning they also avoided competition with other carriers resulting in almost no overlap of their flight networks. Lowcost carriers expanded aggressively and profited from first-mover benefits when negotiating with different airports. In 2001 both Ryan air and Easy Jet sold over 80% of their tickets through the internet. They also started to sell tickets directly over internet.continued building on the Southwest low-cost model.136. This is because most tickets sold over the internet are paid by credit card. they offered no service at all. Figure 2. the other part was sold mainly through call-centers. In short: no service. profits from ticket sales are £6. there is no money back guarantee. Total costs of the flight are £5. During a flight one needs to pay for food and beverages.591.
jvdz. The left column displays the costs. Source: www.Flight London (Luton) – Nice. the right column displays the income from ticket sales.net 7 . amount is in pounds sterling.
From 1997 the European low-cost network developed itself more to the tourist areas in the South. reducing waiting times. As of 2002 the network expanded to Eastern Europe and Scandinavia.Spatially low-cost carriers developed in Europe as is represented in figure 3. The first benefit is the extended service network which is available on many different places and is easy approachable by their costumers. Low-cost carriers first arise in England and Ireland in 1995. 8 . Full-service carriers in comparison with low-cost carrier offer three important benefits to their passengers. Figure 3. Secondly they offer high quality services related to luggage processing and their seating system. and started expanding to the rest of Western Europe. Spatial low-cost carrier network development over time After deregulation of the airport industry the full-service model was the dominant strategy of most established carriers. There is a low risk in baggage loss and different flights are better connected to each other. Finally the frequent flyer programme is improved. Another unmentioned important characteristic can be added.
Inc South west airlines is a low fare airline based in Dallas.S.Full-service carriers operate according to a hub-and-spoke system. It is important to look in detail of the origin and the background of these airlines. Southwest Airlines. Department of Transportation’s Bureau of Transportation Statistics. Southwest Airlines carried more customers than any other U. airline in August 2006. marking it the first time that Southwest Airlines has topped the monthly list for combined domestic and international passengers.S. offering a large amount of destinations to their customers. Texas.Southwest Airlines is one of the world's most profitable airlines 9 . The first and the most successful low cost airline in US is the southwest airlines and the most successful airline in Europe is Ryan air. according to the U. It is the largest airline in the United States by number of passengers carried domestically for any one year and the third largest airline in the world by number of passengers carried.
Some of the incumbent airlines of the time (Braniff. when the United States Supreme Court declined to review the case without comment. According to frequently cited legend. 1970. Its reputation for low prices and a laid-back atmosphere have made it an icon of pop culture. and Continental Airlines) initiated legal action. In early 1971. and the first flight was on June 18.The decision became final on December 7. Mr. Southwest Airlines was originally incorporated to serve three cities in Texas as Air Southwest on March 15. features that became the basis for Southwest's popularity and rapid growth in the coming years. Southwest turned its first annual profit in 1973. 10 . which ultimately upheld Air Southwest's right to fly in Texas. by Rollin King and Herb Kelleher. Kelleher over dinner by drawing on a paper napkin a triangle symbolizing the routes.That date is considered by many to be the de facto beginning of deregulation in the airline industry. Air Southwest changed its name to Southwest Airlines. 1967. and has done so every year since — a record unmatched in commercial airline industry history. King described the concept to Mr. Trans-Texas. and thus began a 3 year legal battle to keep Air Southwest on the ground. Air Southwest eventually prevailed in the Texas Supreme Court.and in January 2007. Southwest has used financial techniques to bolster its profitability and counteract many of the fiscal disadvantages of operating an airline. short hops with no-frills service and a simple fare structure. 1971. posted a profit for the 34th consecutive year.
and noted Irish businessman Tony Ryan. Its supporters praise its commitment to low fares. praised and criticised in equal measure. Ryanair was founded in 1985 by Christy Ryan (after whom the company is named). It is Europe's largest low-cost carrier and one of the world's largest and most successful airlines (whether in terms of profits. Critics. running at remarkable margins by passing its costs directly to its customers. number of passengers flown). have 11 . Southwest Airlines).on 362 routes to 22 countries. Liam Lonergan (owner of an Irish tour operator named Club Travel). Ryanair operates . Its biggest operational base. and its willingness to challenge what it calls the 'establishment' within the airline industry (similar to its American counterpart. meanwhile. Over the years. founder of Guinness Peat Aviation. radical management. is at London Stansted Airport. Ryanair has been characterised by rapid expansion. it has evolved into one of the world's most profitable airlines.Ryanair: Ryanair is an Irish airline headquartered in Dublin.at one count . a result of the deregulation of the air industry in Europe in 1997. however. Ryanair is also one of Europe's most controversial companies. number of flights.
and limited customer services. and charged that it practises deceptive advertising. Ryanair has grown massively since its establishment in 1985. hidden "taxes" and fees. into one of Europe's largest carriers.attacked its trade union policies. After taking the rapidly growing airline public in 1997 the money raised was used to expand the airline into a pan-European carrier. from a small airline flying a short hop from Waterford to London. Ryanair's success has confounded many industry analysts 12 . In an industry where the survival rate is 1 in 10 and where even the giants such as American Airlines and Delta struggle to keep in the black.
GoAir and Paramount Airways. such as KLM's Buzz. Kingfisher Airlines changed its business model from low-cost to value airlines. India's first low-cost airline. The entry of new nations into the European Union from Eastern Europe and moves towards compliance with EU legislation by those who have not yet joined. After a year of operation. the large majority of traditional airlines suffered heavy losses while low-cost carriers generally stayed profitable. However. when the aviation industry was rocked by terrorism. the inflexibility of charters (particularly as regards length of stay) makes them unpopular with many travelers. the highest by any Asian domestic carrier. Germanwings which is controlled 49% by Lufthansa and Qantas's Jetstar all of which successfully operate alongside their full-service counterparts. in 2006. Air Deccan started service on August 25. since the high cost structure of full-service carriers prevents them from competing effectively on price the most important factor among most consumers when selecting a carrier. has led to an extension of open skies arrangements. 13 . IndiGo Airlines recently placed an order for 100 Airbus A320s worth 6 billion USD during the Paris Air Show.Low-cost carriers pose a serious threat to traditional "full service" airlines. Air India's Air India-Express and United's Ted. The airline's fares for the Delhi-Bangalore route were 30% less than those offered by its rivals such as Indian Airlines. British Airways' Go. Air Sahara and Jet Airways on the same route. war and SARS. Exceptions to this have been bmi's bmibaby. From 2001 to 2003. Air Deccan now faces stiff competition from other low-cost Indian carriers such as SpiceJet. 2003. For holiday destinations. but have found it difficult to avoid cannibalizing their core business. The success of Air Deccan has spurred the entry of more than a dozen low-cost airlines in India. Many carriers opted to launch their own no-frills airlines. low cost airlines also compete with seat-only charter sales.
in order to promote travel and tourism. It is argued that.AVIATION IN INDIA For many years in India air travel was perceived to be an elitist activity. to get a seat either into the country or out of it. In recent years. 1953. capacity and points of call. pilots and issuing all rules and procedures governing Indian airports and airspace. Open skies A recurring demand often voiced by interested parties is that. The directorate general of civil aviation controlled every aspect of flying licenses. The government owned airlines had their monopoly for almost four decades and on march 1. by the virtue of the Air Corporations Act. the government threw open the gates for private entrants satisfying the 14 . therefore that India should adopt an Open Skies approach to any foreign carrier wanting to fly into India. As a result potential tourists are not offered a choice of airlines or seats when traveling to India. the only people who could afford it were the rich and powerful. this monopoly was perpetuated for the next forty years. due to the prohibitive cost of air travel. This problem is exacerbated during holiday season when it is difficult. however this image of civil aviation has undergone a change and aviation is now viewed in a different light. Until less than a decade ago. In the early fifties. if not impossible. all airlines operating in the country were merged into either Indian Airlines or Air India and. This view arose from the “maharajah” syndrome where.as an essential link not only for international travel and trade but also for providing connectivity to different parts of the country.1994. It is argued that the current policy restricts the access of foreign airlines. which literally means allowing them unlimited service. all aspects of aviation were firmly controlled by the government. Finally the Airports Authority of India was entrusted with the responsibility of managing all national and international airports and administering every aspect of air transport operation through the air traffic control. India should adopt an open skies policy.
most consumers will opt for low price over other amenities. A low cost carrier (also known as a no-frills or discount carrier) is an airline that offers low fares but eliminates all unnecessary services. 15 . East West. Winds of change The new trend of low-cost aviation has been picking up immensely in the recent past. and Damania. This new emerging trend has put the existing traditional airline agencies. when given a choice. all over the globe to rethink their strategies and restructure their airfares. since full service carriers cannot compete on the price and. Sensing a huge lucrative opportunity in this sector a large number of players jumped into the fray. Sahara. The prominent among them were Jet Airways. both government owned and private.requirements of the scheduled services. NEPC. Low cost carriers (LCCs) pose a serious threat to traditional ‘full service’ airlines. Modiluft.
the network carriers. In effect. This strategy worked because the business traveler grew accustomed to paying high fares and often did not have an attractive alternative to the high fare. The above reasons and the price transparency that the internet has created for all types of passengers have led to the emergence of a new breed of low-cost carriers. by the supply that network carriers were willing to deploy in the market.principally. and also because the airlines enjoyed a greater ability to control the number of seats available to discretionary travelers. in the post-regulation world travelers – particularly business traveler – did have the greater option than before. but. as business and other time–sensitive travelers accounted for only 20% of the airline traffic. Network carriers were able to avoid cost-side pressures by focusing on revenue side strategies – largely centered on the high . You are – or we were – the linchpin in that strategy. they were often at the mercy of major carriers when it came to price. demand for passenger service was driven. revenue management. In short.EMERGENCE OF LOW-COST AIRLINES IN INDIA For the first 15 years of deregulation the demand for scheduled passenger air transportation was driven by the constraints and confines of its providers . but for 80% of network airline. These developments have seriously compromised the ability of legacy carriers to charge higher prices to travelers on the routes where they overlap with the low-cost carriers.yield business traveler. even with the impact of the occasional low-fare carrier. The focus led to innovations like sophisticated global distribution system. At the end 16 . and frequent flyer programs that helped the airlines segment demand. even controlled.
Increasing numbers of business travelers use low fare airlines as a matter of corporate travel policy whichever country they have been launched in. there are 12 million people who travel air yearly. lasting competition to their network rivals. This generation of low cost carriers has newer fleets. as against 40.E. thus here is a nice big fat juicy market of around 200 million people which is equal to that of entire Europe. as the corporate travel managers became more cost-conscious. The demand for more affordable air travel is quite robust. The fare transparency delivered by the internet and the expansion of low cost carriers has increased the price-sensitivity even of business passenger. 17 . even though the population is one fourth that of India.of 2000 the demand for the business class and other high-end products fell dramatically. Target market The entry of these low cost carriers has several far reaching implications on the aviation sector in India. Now if the LCA’s are able to tap even one-fourth of that large middle class and would persuade them to travel by air. Not every airline will be able to satisfy every customer but the entrance of low cost airlines has pushed customer segmentation. It has to a very large extent influenced the mass transportation and domestic tourism . In Malaysia. This has led to stiffer competition for the non–business passenger and price conscious business passenger. Customers continue to fall into segments with regard to demand for products on offer. The number of daily flight averages around 400 a day. There is a sharper focus for the shorter routes and the target is the price conscious and quality conscious customer. the Indian aviation industry is puny.000 flights a day in the US. there could be a rise by 5% to 6% in their capacity. Ryan Air amongst the low cost pioneer in Europe flies 25 million people in a year and still has less than 5% market share. Now low cost airlines have proliferated and offer real.g. in a country of a billion people. a better ontime performance and completion factors than the first wave of post-deregulation startups. In the US around 12 million people who fly everyday.
we would still need 1. has 40. about 12 million people fly every year. it is also attracting to its fold many of the rail travelers who save hugely on time and don’t mind paying premium for the time thus saved.Comparing the Indian scenario with that of China we see that china leads India by huge margins in terms of the number of air passengers. There are a variety of reasons for the shift. passengers will book a private holiday with an LCC to acquire experience.4 140 5 400 2. which has one fourth of India’s population. Malaysia also boasts of a similar figure. Quite often. The US.000 flights a day. they may decide to book LCC for their next trip. If a low cost airline can offer fares at the half the price 18 . Other important reasons include the lower prices and improved schedules (several flights per day). but on a population of 24 million. If satisfied. In addition. Potential of air travel in India A total of 390 to 400 commercial flights operate in a day in India. 60.1 15 1 300 2.600 flights a day and that would mean a jump in the number of commercial flights by four times. Also in India.5 17% India 1. among other reasons. If the airline in India were to tap just 1% of its potential. due to the location of the airports.5 25% Initially. business travelers are clearly starting to use the LCCs more often as time goes by. Based on research conducted by TQ3. low cost carriers (LCCs) were geared more towards holiday trips than toward business holidays.000 flights would be needed. Thus if US were to have India’s population nearly 1. This can be seen from the table shown below: Factors Population (billion) Air population (million) Number of LCCs Middle class population(million) Longest routes(hrs) Growth forecasts (per annum ) Source: Center to Asia pacific aviation (CAPA) China 1.
of regular airlines. 19 . at least one-fourth of India’s middle class population of 200 million will travel.
AIRLINE OPERATORS IN INDIA (DOMESTIC) Existing full service carriers: Existing LCCs: 20 .
announced plans to launch in 2005 but is yet to get a no objection certificate (NoC) Eastwest Airlines : value carrier . had announced plans to launch in may 2005 but is yet to import its first aircraft. A detail of the carriers lined up to reach out to Indian skies is given here below: Indus airways: value carrier. had plans to launch in the year 2005 Interglobe: low-cost . has a NoC to start the operations but is yet to announce any plans of launch Crystal air: regional .New entrants: Every other month a new cost airline or value carrier is taking to the skies. Airone : regional airline.the Coimbatore based airline has plans to launch regional services with Embraer 170/175 series Visa air: low cost . had announced plans to launch regional services in 2005 Magicair :no frills airline.has NoC but in the process of raising funds Source: business world 22 .
Unreserved seating (encouraging passengers to board early and quickly) 5. Emphasis on direct sales of tickets. less congested secondary airports and flying early in the morning or late in the evening to avoid air traffic delays and take advantage of lower landing fees 6. 3. A single passenger class 2.or lower operating cost structure than their competitors. reducing training and servicing costs).MEANING: LOW-COST AIRLINES A low-cost carrier or low-cost airline (also known as a no-frills or discount carrier / airline) is an airline that offers generally low fares in exchange for eliminating many traditional passenger services. especially over the Internet (avoiding fees and commissions paid to travel agents and Computer Reservations Systems) 23 . emphasizing point-to-point transit instead of transfers at hubs (again enhancing aircraft utilization and eliminating disruption due to delayed passengers or luggage missing connecting flights) 8. Flying to cheaper. Simplified routes. The term originated within the airline industry referring to airlines with a low . Short flights and fast turnaround times (allowing maximum utilization of aircraft) 7. Through popular media the term has since come to define any carrier with low ticket prices and limited services regardless of their operating costs Typical low-cost carrier business model practices include: 1. which rewards early reservations) 4. A single type of airplane (commonly the Airbus A320 or Boeing 737). A simple fare scheme (typically fares increase as the plane fills up. The concept originated in the United States before spreading to Europe in the early 1990s and subsequently to much of the rest of the world.
9. "Unbundling" of ancillary charges (showing airport fees. for instance flight attendants also cleaning the aircraft or working as gate agents (limiting personnel costs) 11. Aggressive fuel hedging programs. and replaced by optional paid-for in-flight food and drink (which represent an additional profit source for the airline). taxes as separate charges rather than as part of the advertised fare) to make the "headline fare" appear lower. 24 . 13. 12. Employees working in multiple roles. "Free" in-flight catering and other "complimentary" services are eliminated. Encouraged use and issuance of the electronic ticket 10.
BUSINESS MODEL: LOW COST AIRLINES The “low cost carriers” business design can be defined by three elements: SIMPLE PRODUCT (NO FRILLS) LCC LOW OPERATING COST POSTIONING 25 .
short cleaning time Lean sales.short ground waits due to simple boarding processes. price conscious Short haul point-to-point traffic with high frequencies Aggressive marketing Secondary airports Competition with all transportation carriers Operating costs Low wages.Key elements of an LCC Simple product No meals .drinks and snacks for free Narrow seating (greater capacity) No seat reservation (free seating) No frequent flier programs Positioning Non business class passengers . low airport fees Low cost of maintenance . such as Airbus 320s or Boeing 737s. There is no business class just economy class. to lower maintenance costs. no hub services. high percentage of online sales They generally operate with only one kind of aircraft in their fleet. 26 . leisure traffic. this increases the number of seats per flight. no air freight . cockpit training and standby crews due to homogeneous fleet High resource productivity .
27 . February 2007 It can be seen from the above diagram that the market leader is Jet Airways with 25.2% Air Deccan 20.0% Paramount Airw ays 1. The combination of ongoing global economic events.3% market shares respectively.5% Air sahara 8.2 and No.3 position are held by the Air Deccan and Indian with 20.5% market share.0% Indian 16.MARKET SCENARIO Today’s airline industry is undergoing more transformation than ever before. The No.5% Spicejet 8.7% and 16. The market share of the players is as follows: market share IndiGo 4.3% GoAir 5.3% Jet airw ays 25. cost and yield.7% Kingfisher Airlines 10. “wired” passengers and growth of low cost carriers makes this market more competitive on price.5% Source: DNA.
The biggest loser has been Jet Airways. challenger carriers (Air Deccan.7% last year. The comparison of market share between incumbent and new entrant with respect to last year is given below: Incumbent vs new entrant Jan 2006 Jan 2007 Up/down (in %) 28 .2 percentage points in November. Likewise. Paramount 1.70%. look set to dominate the sky for some time to come.2% marketshare from 34. Another FSC struggling to keep its market from eroding is Air Sahara. Another incumbent facing the brunt of the new entrants is the state-owned Indian.6% last January. Jet Airways and Air Sahara) has been dwindling. even as the overall share of FSCs has shriveled to 62% from 79% last January.5% and IndiGo 4. Kingfisher Airlines 2.7 percentage points to 16. all other FSCs have lost market share. whose share has been eroded by 8. on the other hand. the share of incumbent carriers (Indian Airlines. low-cost airlines. Kingfisher Airlines. The state-owned carrier. Air Deccan has extended the lead to 4. are trying hard to preserve their market.2% from 11.4 percentage points in January with a market share of 20. All the new players have added marketshare over the last one year — Air Deccan 7. which has increased its market share to 10.4%. GoAir 5%. From being ahead of it by just 0. which had for long dominated the sky.While the new entrants have usurped market share from incumbents.8%. which has lost 9. which were not around three years back. even as full service carriers (FSCs). which has been overtaken by budget carrier Air Deccan in the race for the second position.5% in January this year from 7. is only slipping further. has swelled to 38% from 21%.6%.3%. Understandably. The share of low-cost carriers (LCCs). SpiceJet. whose market share is down to 8.30%. SpiceJet 2%. Paramount and IndiGo) have hammered down the share of incumbents to 50% from 72% to take their own share up from 28% to 50%. Except for Kingfisher Airlines (a new player). GoAir.
February 2007 Jan 2007 62 38 Up/down (in %) ↓ 17 ↑ 17 29 .Incumbent New entrant Source: DNA. February 2007 72 28 50 50 ↓ 22 ↑ 22 The comparison of the market share between the full service carriers and low cost carriers with respect last year (Jan 2006) is given below: Full service vs low-cost carriers Jan 2006 Full service carriers 79 Low-cost carriers 21 Source: DNA.
the LCCs need to raise fares by around Rs 500 per seat. The external environment is not helping. many of the large LCCs have survived by keeping out of each other’s way. what with little uniformity in fuel taxes within states and no stability in global oil prices. Load factors for the LCCs should ideally be in the mid or high 80s and for the legacy carriers around low or mid 70s (see ‘Viable Fares and Load Factors’). In the UK. very few routes or even airports of Ryanair and easyJet coincide. So. the list is long. Ministry sources point out that internationally. both in the US. Aviation has been no different. BPO. as there isn’t much competition on those routes. rarely cross paths. making it among the top 10 busiest routes in the world. Take a look at Delhi-Mumbai. so there is too much capacity.. as most of the money is being lost on metro routes. who are more heavily focused on metro connectivity and frequencies. Far too much of the total capacity is deployed on just metro routes and the airlines should break out of this. airlines have to achieve higher load factors than before. But making matters a lot worse is the obsession with one or two routes. its ATR operations are close to break even but losses on Airbus routes are high enough to wipe out the gains made on many of its mature ATR routes. Traffic is growing but capacity is growing faster. Airlines such as Jet and Kingfisher.. which are often monopolized regional routes (26 per cent of its capacity is on metro routes). That means severe competition and very low fares. The traffic increases are heavily concentrated at the lower end of fare categories.That Indian industry suffers from the ‘herd mentality’ is quite evident by the trends in telecommunications. In case of Deccan. information technology. are likely to see larger losses for the time being. Everyone worth his salt has jumped into it at the same time. 30 . which has close to 44 flights operating one way. to break even. JetBlue and SouthWest. The legacy carriers need to raise average fares by around Rs 400-700 per seat to reach any kind of breakeven or turn in a small profit. Many airlines are making a profit on their regional far-flung routes by charging a small premium.
Source: Business world. Jan 2007 31 .
maintenance. the reforms are more comprehensive — touching airports. So. But there’s plenty of difference in the two rounds of liberalization. So what is happening in India is hardly unique. fares are more affordable and with growing levels of income in the economy. there was a flood of new operators when the Indian government allowed entry. more reachable.It’s happened before: The last memory of the wave of failures following the first wave of liberalization in India in the early 1990s is all too fresh in everyone’s minds. capacity grew but traffic growth was not as high. Airlines then did not have the deep pockets. the ability to raise money from the markets. all the players entered in the full service space — there were no LCCs or. But there’s more. Secondly. rather. Just a few years later. At that time too. over 60-65 carriers have shut shop in the past 4-5 years. In the 1990s. many of the newbies shut shop. at least two airlines survived — Jet Airways and Air Sahara. at that time fares remained quite high and yields were much higher. closed on the ground’. A lot of new capacity was created. In Europe. Even in that rather adverse environment. Moreover. Then. this time around the environment is much freer. Take the US. there is no reason why many of today’s new carriers won’t make it. People then used to say that the aviation policy is ‘open in the air. Today. especially after the advent of low-cost carriers. most good things were reserved for Indian and Air India. till Naresh Goyal began to spin his magic. Airlines going bankrupt are more the rule than the exception. the investors queuing up happy to lend or the professional management that airlines today have. the former going on to become the country’s largest domestic airline So. low fare airlines. Airlines were not even free to advertise their schedules. where more than 350 filings for bankruptcy have been recorded since the sector was opened up in the late 1970s. The airline business the world over is not known for its ability to churn out huge profits. But the public’s ability to afford those fares remained quite low. This will help make the aviation business more viable. All 32 . This time around. repair and overhaul (MROs). and general issues. it took on competitor Jet Airways by directly targeting the latter’s frequent fliers through its advertising campaign. when Kingfisher launched. This time.
Deccan’s IPO barely scraped through and Jet has been trading below par ever since it listed big investors seem quite happy to jump in. Some industry analysts are convinced that Deccan’s valuation will exceed Jet’s or Kingfisher’s in the way Ryan air and EasyJet’s did British Airways. It has a pretty impressive list of investors it claims are in the queue. 33 . companies are finding alternative funds through private placements.over the world. So. “Barring IndiGo — which is in its honeymoon period of losses — most airlines are looking at ways to raise money to tide over this phase. Airlines and investors are hanging in there because the end is so juicy. Everyone thinks he will be there in the end. if IPOs and foreign currency convertible bonds are looking less attractive. Air Deccan has raised money through private placements (it is expecting its second tranche of investment of $36 million). SpiceJet recently managed to get the Tatas to pick up a 7 per cent stake. Investors’ story: Though the markets are not too gung-ho on the airlines sector. There is a very bright light at the end of this tunnel. both legacy and low-cost carriers have lost humungous amounts of money and have closed down with unerring regularity. big investors seem quite happy to jump in. GoAir is soon hoping to do so too.
The government had decided to merge the two companies to take on competition more effectively. are only going to be spurred to consolidate to take on the merged public sector entity. but the private players. Jet intends to induct 20 more aircrafts by 2009. As new planes join fleet. it could result in redeployment of aircraft since Air India and Indian are flying on the some common routes like Singapore and Dubai. some existing ones will be phased out and those on lease will be returned. The new public sector entity will enter list of top 30 airlines globally (in terms of the fleet size) and will break into the top 10 in Asia. The new national carrier will have more than 125 new generation aircraft by 2010.RECENT DEVELOPMENTS Air India and Indian merger: The government has cleared the proposal that was first mooted 20 years to merge the Air India and Indian to take on the onslaught from private airlines and large international carriers. which will be the closest rivals to the merged new entity of Indian and AI. low cost carriers will have a firm grip on their passengers and will account for nearly 70% of the market in the next three years. including Boeing and Airbus in its fleet. The merger will create a new entity which will have a fleet of about 120 aircrafts to start with. Besides. Along with the size. The government is aiming to create a mega merger with the precision and reliability of Lufthansa and the in-flight service of Singapore airlines. According to some analysts. The merged company will be the only airline in the world with at least 7 types of aircraft. The merger is expected to cost the government about Rs. who already have a bigger pie of the sky. 34 . 200 crore. while kingfisher has ordered 109 planes. Jet Airways which has the fleet of about 44 aircraft at present and Vijay Mallaya’s Kingfisher has about 23 aircrafts. the new entity is expected to create considerable amount synergy for the state-owned airlines since the two can feed traffic to each other. This Air India-Indian merger is expected to spur consolidation in the aviation market.
In addition to this. 15000 crore and it is having the countries largest fleet of aircraft. the Vijay Mallaya’s Kingfisher and Spicejet would also be on prowl. As compared to the other players in the market. the merged airline is operating to more destinations than any other airline in the Indian market. Jet Airways. to consolidate. The traffic in India is growing at nearly 40 % a year when compared to the global pace which is 15-20%. some of whom are already allowed to fly overseas. which earlier tried to acquire Air Sahara. the merged airline has the advantage of economies of scale.The merger is expected to encourage the private players. is expected to start hunting once again the arbitration proceedings are over. 35 . Thus one can expect the private equity funds to help the private players finance their expansion. The combined turnover of the two airlines is over Rs. Similarly.
100 crore. with guess estimates ranging between Rs 800 crore to a more bizarre Rs 1. respectable).200 crore. financial jugglery each airline has been doing to keep its balance sheet looking. mind you. somewhat. airlines are losing on an average roughly $15 (gap between revenue and costs.000. November 2006 showed a dip in terms of load factors. Normally. Airlines are buying planes like they were peanuts and adding capacity at a frenetic pace. At 32 million passengers expected to fly in 2006-07.200 crore. For every passenger flying today in India. By December that went up to 120. Since April 2005. the industry has added 120 aircraft. some airlines are losing less than others and some routes are losing less than others).GROUND REALITY The Indian aviation industry’s appetite for making losses is huge. December numbers are better. Nobody in the industry expects the combined losses to be lower than Rs 2. that works out to $480 million or Rs 2. Contrary to yearly trends.000 seats were available per day. But that may be a trifle alarmist (in fact.000 crore in 2006-07 (that. is the number with the sale and lease back profits excluded. Many airline chiefs firmly believe that Sahara alone is contributing close to half the industry’s total losses this year. a total of 100. In September 2006. What has really happened is that huge capacity was added in November and that has shown up in the drop in load factors. A back-of-the-envelope calculation of each carrier’s losses combined is around Rs 2. November is a peak month when most carriers begin to expect to fly the good times. 36 . despite the fog).
IndiGo. tried to urge his rivals to bring some sanity into their pricing. But industry players estimate that IndiGo’s first year’s losses alone will be no less than $50 million. brave enough to launch during this grim period. there is no way of confirming this. Industry leader Jet Airways has clocked a loss of over Rs 100 crore in the first half. they had all expected and accounted for some losses in the initial phases. Since the company is private. claims that its initial equity infusion of $50 million will see them through the initial 18 months or so (the time startup airlines typically take to break even) — but few are willing to believe it. 37 . Kingfisher Airlines chairman Vijay Mallya has. Jan 2007 Whatever we may or may not expect. industry players certainly did not expect this kind of bloodbath. But his pleas have so far fallen on deaf ears.Source: Business world. on more than one occasion. but the preliminary estimates are far exceeding the worst doomsday predictions. Sure. in sharp contrast to the promises made at the time of its IPO. emphasizing that he is not in this business to lose money. Deccan stunned most analysts and its investors when it announced its Rs 340-crore loss for 15 months (1 April 2005 till 30 June 2006).
2 billion. What is making it even less palatable is that it is happening at a time when most other sectors in the Indian economy are booming and aviation itself is growing at its fastest ever. Without the $6-billion restructuring costs incurred by US carriers.5 billion — since 2000. Traffic is growing by leaps and bounds. And they expect 2007 will see the first profit — close to $2. it is also a time when the global aviation industry seems to be getting its act together. The International Air Transport Association (IATA) expects far lower losses — $500 million this year than its own estimates of $1.7 billion made in September. yet aviation is defying the trend.To add to the Indian industry’s woes. Europe is likely to have the biggest profit of $1. 38 . the Indian economy is on a roll.5 billion followed by Asia at $1. Every airline expects industry fundamentals to improve. But there are no signs of that happening as yet. 2006 would have been profitable.
Then. network scale and flexibility of the individual airlines of the sub continent –small size means lower purchasing power and higher costs across the board – network scale restricts aircraft utilization to uneconomic levels. nothing prevents them from doing the larger chunk of the journey by air and the rest by road. Distribution costs are high. the number (of passengers) is far lower. there are regulations like all airlines have to fly to some unprofitable routes (the North-east. the main ticketing medium for budget carriers. journeys are short. And while many Indians traveling by train are not headed for the big cities but to smaller towns in between. is poor. operating conditions present severe challenges. Fuel costs now are the single largest cost element for the airline industry. and the journeys are hardly comfortable. as Internet penetration.and due to market forces fares have not kept pace. In Europe. among other things) at Indian airports. All these add up to throw their budgets out of gear. Also.CHALLENGES AND CONCERNS Today. Hence one can begin to imagine the size of the market in India. if prices permit. Airport charges are 62 per cent higher than international levels and fuel prices are also higher. many carriers are buying or leasing new-generation aircraft at high prices. 39 . Yet. there are no reliable train connections between large cities in India. for example). and traveling by train is a nice experience. If we compare these conditions with that of Europe it is quite different. the low-cost airline model has worked very well. However unlike in Europe. Aircraft utilization and turnaround times are lower due to poor infrastructure (few runways and hangars. Unit cost compression to a competitive level is constrained by the limited size.
which put them under severe infrastructure pressure in terms of both passenger and aircraft handling. The scarcity of the pilots will be felt as more and more LCCs enter the domestic aviation market. 40 . Airport congestion and bottlenecks: Peak hour congestion is the main concern. followed by 4000 hours and five years of experience as a first officer to be a captain. especially at one runway airports. for example. If the expected number of commercial aircraft grows by about 200 by the year 2010. Training schools which are losing instructors produce few commercial pilots. an estimated 2400 additional pilots will be required. which currently are numbered about 1500 in India. Until current training facilities are expanded and revamped. the peak times for the scheduled aircraft movements. Pilots need 1500 hours of flying experience for the first officer to be eligible for an airline transport pilot’s license. With all the airlines competing for the best slots. are between 0500-1000 and 1700-2200 hrs. The following table shows the concentration of international and domestic traffic at the key metropolitan city airports. In Mumbai airport. both domestic and international. the airlines expect substantial use of expatriate pilots.Concerns in future: Pilots: All planes need pilots. there does not seem to be any way of sorting this out.
pax/day 21.854 6.451 7.627 10.984 1.849 4.Domestic traffic: Airports Mumbai Delhi Visakhapatanam Bangalore Chennai Kolkata Hyderabad Ahmedabad Goa Guwahati Source: DGCA Avg.776 16.471 THE SOLUTION: LCC INTEGRATION 41 .944 1. flights/day 273 203 300 115 101 88 61 30 24 37 Avg.442 1.407 6.
one operation per city. Common scheduling will overlap and increase connectivity and the larger network scale will permit increased aircraft productivity. airline companies can extend their individual reach by cooperating with other airline companies. By participating in an alliance. SkyTeam and oneworld. The degree of cooperation differs between alliances.There is however a solution: the operational integration of the low cost carriers into an effective Indian regional airline group. A common frequent flyers program will reinforce strong current brand loyalty. Also. the number of destinations will increase. The combined effect will be an improved network and sustainable profitability. one reservation system common to all. The operational integration of the airlines will create an airline network that will have the scale and flexibility of significantly increasing traffic and revenue through improved traffic flow across the network and the scale to permit the reduction of unit costs to a sustainable competitive level. Many alliances started as only a code sharing network. An airline alliance is an agreement between two or more airlines to cooperate for the foreseeable future on a substantial level. The benefits can consist of an extended and optimised network: This is often realised through code sharing agreements. An overview of the different alliances in international context is given in figure 4. With the help of alliances. The three largest alliances are the Star Alliance. it is possible to buy jointly and share the costs of different services and infrastructure. The cost benefits are apparent: one head office. Figure 4. as well as frequent flyer programs. flight schedules can be combined. About airline alliances: An important development in the aviation sector is the arrival of the worldwide airline alliances. Further cost savings and efficiencies will flow as the integrated structure matures. Airline alliances Alliance About Members 42 . one marketing organization for all.
Since: 1999 Passengers: 343. Finn Air. Air France-KLM. Thai. Asiana Airlines. United. American Airlines. BMI. What is envisaged is an Indian hybrid.110 Countries: 134 Destinations: 599 Since: 1992 Passengers: 382. This has been discussed further in details. AeroMexico. Continental Airlines. The network: The Indian air travel market is complex and multi segmented. This can also be adopted by the domestic operators while operating within India. LOT Polish Airlines. Air New Zealand.g. Ranchi. Korean Air.6 million Daily flights: 15. US Airways. Singapore Airlines. Aer Lingus.jvdz. Northwest Airlines. Cathay Pacific.series of major points along the linear network into which ‘clusters’ of connecting flights will feed to and take from the main line network traffic destined to smaller markets at the transfer times through the day e. Gwalior.6 million Daily flights: 15. Austrian. Delta. Direct service between regional markets will 43 . Scandinavian Airlines. Iberia. TAP Portugal. and Tiruvananthapuram.000 Countries: 138 Destinations: 790 Source: www. Czech Airlines. Alitalia. Tripura.6 million Daily flights: 8.207 Countries: 133 Destinations: 684 Since: 1998 Passengers: 242. This international alliance model has been successfully adopted by all major international carriers. British Airways. Qantas. Spanair. Varig. LAN.net Air Canada. Amristsar.
delivering improved reliability. Go air. and improved service on the current and new intra-regional longer low-density routes.continue and will be improved. 2. Dedicated cargo aircraft operation is envisaged in addition to the cargo capability of the passenger operation. This system will require seamless connections at the cluster stations to minimize passenger connection times and shorten aircraft turnaround/ transit times. Benefits to stake holders: 1. Operations: The integrated Airlines network will be operated by the existing airlines: Deccan airlines. Profitability will permit expansion of the route structure thus allowing the integrated airlines to better support the tourism industry and regional trade and economic development. With an increased aircraft utisisation will permit route expansion and/or limited fleet reduction. The benefits: The integrated airlines network will be profitable. It will further support the objective of the civil aviation. Spicejet. increased flight schedules and the ability to earn and use frequent flyer points over a broader network. region wide. 44 . 3. Access to the entire Indian market will permit the development of an efficient and profitable cargo service. The consumer will benefit from the lower fares. rationalization will bring further cost reductions through standardization. and IndiGo airlines operating on a common schedule. The taxpayer will benefit in a way because it has to no longer have to subside the airlines (government owned) losses. It will be required for the profitable development of new markets within India. expanded flight schedules and lower fares. In the medium term fleet. The successful integration of airlines will be a potent regional symbol.
market responsive flight schedules and service quality – a world class airline network. From being a service that few could afford. FUTURE OF LCC Revolutionized by liberalization. private sector ownership and professional management will be operated as a business – to generate optimum returns for its stakeholders over a long term investment horizon through reliable. efficient. price competitive. The economic and service benefits of the proposed network integration have been extensively analyzed over many years and can be clearly demonstrated. The integration of the airlines with proper capitalization.4. 45 . the aviation sector in India has been marked by fastpaced change in the past few years. the sector has now graduated to being a fiercely competitive industry with the presence of a number of private and public airlines and several consumer-oriented offerings.
Vadodra. Agatti. special discounts. Little wonder then that the consumer prefers air travel to the railways. the industry’s watchdog in the Asia Pacific region. AAI has identified 15 more non-metro airports. the Airports Authority of India (AAI) and other Government PSUs will hold 26 per cent equity. internet auctions. In the joint venture (JV). The airports have a direct bearing on the foreign direct investment and the developed countries must augment their gateway airports. Khajuraho. It was spurred further by the entry of Air Deccan. Bhopal. India's first budget airline. Nagpur. Rajkot. to multiple slab tariffs such as apex fares. namely.The market was galvanized a couple of years ago by the introduction of lower price tags which ensured that people could travel at the fraction of the original price of air travel. Trichy. Foreign direct investment (FDI) in this transaction has been capped at 49 per cent. bulk purchases and last day fares. Some of the tariffs offered are so low that they have brought airline fares neck-to-neck with upper class railway fares. Bhubaneswar. Indore. business and first class fares. In addition to these 10 non-metro airports. Centre for Asia Pacific Aviation (CAPA). which offered hard-to-believe tariffs. Patna. The balance 74 per cent will be held by the strategic partner. Investors’ interest will remain alive as they have an eye on the long term. Coimbatore. This was the trigger point for the sector to move from having simple economy. The international airport in Delhi and Mumbai are being modernised and upgraded through private sector participation. The increase in passenger traffic calls for upgraded infrastructure facilities. Varanasi and Vizag. Port Blair. Aurangabad. for development. estimates that at least 2-3 large LCCs commanding a market share of around 70 per cent by 2010 46 .
The legacy carriers will get almost half their revenues from international operations (Jet. who will have a 30 per cent market share between them. There is tremendous untapped potential in Indian domestic industry. industry players and investors expect the valuation of any of the survivors to be no less than that. He also says that the passengers flying will go up to 60 million by then. The question is: whose aeroplanes they will be and that is the ‘billion dollar’ question.The market appetite may be low as there is little chance of short-term gains but investors are well aware most Indian aviation companies are heavily undervalued. half its revenues will be from international operations). if you compare globally. is already heading that way. Analysts.000 aircraft market by 2010. claiming that by March 2009. for one. Most agree that India will be a 1. It is really a matter of who blinks first. The table below illustrates this fact: 47 .will survive along with 2-3 full-service carriers.
On parameters like fuel prices and airport charges. the (low-cost) market share will be 50 per cent up from today. India will be at par with international levels. India will be one of the lowest-cost aviation markets by 2010. That may be a little 48 . It is time the government woke up. A single step by the government — making fuel a declared good — will make the industry profitable overnight. Coupled with labor cost advantage and high quality IT infrastructure (at low prices). Unbelievable valuations for Indian aviation companies.Source: Business world Centre for Asia Pacific Aviation (CAPA) predictions: • • • • By 2010.
The focus will be less on killing the competitor and more on making the business efficient. bring a silver lining to these dark clouds. REFERENCES 49 . people want to see some improvement in customer service. That mad scramble to add planes is over. But the good news for consumer is that the party on fares is unlikely to get over. The budget airlines' staff at airports appears semi-literate. Many endorse the view that the budget carriers seem unable to exploit India's IT expertise to their advantage. The onus to wake up and actually smell the coffee lies with the industry players themselves. Although many are happy with the low-cost carriers. especially because of the low prices they offer. All relevant employees and points of contact must have the same and most current status information and the on-site personnel should be authorized to take decisions like putting passengers on other airlines in case of delay. But there is only so much an industry association can get done. The birth of the Federation of Indian airlines (FIA) may be a first step in that direction. and it is indeed trying hard to resolve them. But in case of Jet Airways one should make a note that its new capacity is for its international routes. Airlines will have to find ways to cut costs and look for non-operating revenues to shore up bottom lines. That will. For instance. the flight departure time for the same flight on the voice helpline. at least in 2007. hopefully. capacity additions are now slowing down.simplistic but certainly there are many issues that the government needs to address. There will be a limit to the extent of losses companies can absorb. company’s ability to ramp up and ramp down will determine its success. In this kind of uncertain market. SMS and website can vary by several hours. Whichever way you look at it.
DAILES AND MAGAZINES • • • • Business world DNA The Times Of India The Economic Times WEBSITES • • • • • www.jvdz.en.BOOKS.org www.com www.ryanair.net www.wikipedia.nic.airindia.in 50 .com http://indian-airlines.
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