Airlines shed costs to keep flying

In air pockets: Survival of domestic carriers will depend on demand revival

Seven years after the first budget airline took off from the Indian soil, low cost air travel has come to stay in the country. The no-frill airlines occupy about 55 per cent of the market share and are set to gain more owing to a combination of factors.


It was on August 23, 2003 that the country’s first budget carrier — Air Deccan — took off from Bangalore to fly to Hubli. Almost seven years later, the last of the full service carrier left to turn low cost carrier or LCC — Air India — announced this month its plans to launch a budget airline. The other two legacy carriers— Jet Airways and Kingfisher Airlines — already have their own budget subsidiaries.

As the state-run airline’s international low cost arm — Air India Express — will run the domestic LCC, both Jet and Kingfisher are already expanding the operations of their LCCs. More aircrafts of these three FSCs (full service carriers) will be converted into no-frills carriers in the days and months to come, taking space in the budget pie. Thus, Jet Konnect and Kingfisher Red will have an additional number of budget aircrafts. All the legacy carriers will, however, maintain their original full service character.

What has made the FSCs go increasingly budget ? What are the implications on the $14 billion Indian aviation industry ? How will the existing standalone major LCCs such as SpiceJet and IndiGo react to this ?

It is a combination of factors that led to  evolving of the present situation.
The popularity of the LCC should be seen in the background of the cost-conscious Indian. Adding to this is the current economic downturn which has forced corporates away from executive class travel . “Traffic in the business class segment has almost dried up”, says an airline executive.

The cost of running an airline continues to be high, such as prices of jet fuel. There is excess capacity in the market. The continued losses of the three FSCs played a major part in their decision-making, attempting to make good at least some yield which was otherwise not there. As Ernst and Young Partner Kapil Arora told Deccan Herald:  “These developments have come at a time when there is excess capacity and low yields which are leading to the airlines incurring losses. In the backdrop of this, the development (of FSCs expanding their LCC space) is a good idea. That’s where the volumes are. Past experience has shown that competitive pricing spurs traffic which will help the industry”.

Says Chief Commercial Officer of a budget airline Samyukth Sridharan: “The move of FSCs suggests that our model is a good business model which is working well in the market. I don’t see any big threat to the demand and supply for our airline. We now have to see how the newer players manage the capacity switch at much lower cost levels. They have to dramatically prune their cost structure to sustain in the market”.

Take a look at the FSCs— AI suffered losses of about Rs 5,000 crore and Kingfisher Rs 1,608 crore in 2008-09 while domestic carriers together lost Rs 10,000 crore in last financial year. In the latest quarter ending June 31, 2009, Kingfisher (including Kingfisher Red) lost Rs 243 crore and Jet Rs 225 crore (as against profit of Rs 143 crore during the same period of the previous fiscal).  Jet Airways has cut capacity by 20 per cent and deferred eight aircraft deliveries. Kingfisher has deferred delivery of 32 aircraft and reduced capacity by 26 per cent. AI recently decided not to take delivery of its six new Boeings.

Now, look at the LCCs— SpiceJet made Rs 26 crore profit in the first quarter of 2009-10 as against a net loss Rs 129 crore in the same quarter of 2008.  JetLite, the low-cost arm of Jet Airways also posted a marginal profit of Rs 2.2 crore in the first quarter.

Passenger load up

While the passenger load factor of the budget airlines has been increasing, there is no clear picture of their edge in market share which, however, has fluctuated. While the total passengers carried by all domestic airlines in June 2009 was 36.94 lakh,it fell to 35.97 lakh in July.

As for the market share, AI carried 6.45 lakh passengers in June and 5.82 lakh passengers in July, accounting for a market share of 17.5 per cent and 16.2 per cent respectively, Jet 6.12 lakh and 6.81 lakh passengers , market share of 16.6 per cent and 18.9 per cent  respectively, and Kingfisher 9.01 lakh and 8.29 lakh, with a market share of 24.4 per cent and 23 per cent. Among budget airlines, IndiGo carried 5.04 lakh and 5.02 lakh passengers, 13.6 and 14 per cent,  and SpiceJet 4.74 lakh and 4.49 lakh passengers , 12.8 and 12.5 per cent. Amidst this backdrop has come the expansion of the low cost carrier space. Civil Aviation Minister Praful Patel told Parliament in July 2009 that AI’s no-frills subsidiary would compete for a space in the LCC market.

Extension of services

“In order to compete effectively with other domestic low fare carriers, and to get a share of that segment, AI is considering a proposal to extend low fare services to some of the domestic routes also,” Patel said. AI CMD Arvind Jadhav disclosed later that the government-owned airline will launch its domestic budget carrier from September by operating 27 flights a day by pressing into service 10 aircraft.

 “We will take the number of flights to 75 during the winter schedule and hope to benefit by Rs 180-200 crore, ” he added. Air India Express, which currently flies on short haul international routes covering the Gulf and South-East Asian countries, will operate the domestic LCC also in the same brand. AI at present flies 57 of its 147 aircraft on domestic routes. As for the private carriers, while Jet Airways has said it will increase the number of flights  on its JetKonnect network to 160 by October out of its total 290 flights on domestic routes, Kingfisher has already shifted 70 per cent its 365 domestic flights a day to the no-frills brand.

Amidst the talk of the merger of its LCCs JetLite (formerly Air Sahara) in JetKonnect, Naresh Goyal-led Jet Airways, will allow JetKonnect to  operate by October on all routes it has planned to take over from its full- service parent airline. There is also talk of JetKonnect, launched on May 7 2009, going international. SpiceJet has added 20 more flights in existing routes as it bought three new aircraft this year. There is no change in its original delivery schedule. SpiceJet’s Sridharan says his airline, which began operations in May 2005,  will take delivery of four next year.

Commenting on the market developments, IndiGo President Aditya Ghosh told this newspaper: “ We are in a fast moving business. There is competition all around. I mean we stay fully focused on what we are doing— fares, on time performance and hassle-free travel which have what made us the fastest growing airline”. IndiGo, which has dramatically improved its market share, received three aircraft this year.

 “We will get three more in 2009 and six next year. There is no change in our delivery schedule, ” Ghosh said.

Aviation consultant Centre for Asia Pacific Aviation in its recent report says that by the third quarter of this fiscal, when all full service airlines would bring a significant part of their operations under the low-cost model, yields can be expected to fall further while industry over-capacity is still an issue. “Everyone will ‘be an LCC’ by the third quarter and everyone stands to lose,” it said. “The problem for the incumbents (FSCs) is they are entering the LCC sphere with still-higher cost structures relative to their peers, while their mainline operations remain subject to intense competition,” CAPA said.