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Lording it with low cost

It has been a bad year for India’s airlines but don’t tell that to low-cost carrier SpiceJet. The four-year-old, cut-price carrier has pulled off a double whammy coup — it has turned the corner financially by raking in a small profit. Equally importantly, it has grabbed a bigger share of the market than ever before (its market share is up by a whopping 4.4 per cent).

That’s an extraordinary feat, coming as it does during a year when the country’s airlines — especially market leaders like Air India, Jet Airways and Kingfisher — have been bleeding copiously.

You could say there’s a revolution taking place in Indian skies. The old nobility — the full-service carriers like Air India, Jet and Kingfisher — is being edged out of the skies by the upstart, thrusting low-cost newcomers like SpiceJet and IndiGo which promise to take their passengers places — even if the journey is less comfortable than it might have been in the old days.

“The market is now at the budget end of the airline business,” says Kapil Kaul, chief executive officer India of Centre for Asia-Pacific Aviation (Capa), the Sydney-based aviation consultancy company.

How should the full-service carriers respond to the barbarians at the gate who are stealing their business? The answer is easy: they are getting ready to follow suit and go low cost with a vengeance. “About 70 per cent of all flights will be low-cost ones by the end of December,” says Kaul.

Take a look at the no-holds-barred gameplan that Jet Airways has drawn up. In the coming months, Jet is converting 70 per cent of its services to low-cost flights under its Jet Konnect brand name. The airline initially introduced 54 low-cost flights across its network and has now raised that to 135. By October, it will have about 160 low-cost flights criss-crossing India — that’s quite a turnabout for an airline which built its reputation as a carrier that offered stellar service to match the best internationally.

The other airlines are looking at making similar mid-air changes. Kingfisher’s already offering low-cost services on many routes and is looking at hiking the number of flights under its Kingfisher Red banner.

Similarly, Air India is also looking at ways to pull itself out of the financial morass that it has landed itself in. It’s already operating low-cost flights (under the Air India Express label) to the Gulf and Southeast Asia.

The airline’s said to be drawing up plans to convert up to two-thirds of its fleet and get them ready for low-cost flying both on domestic routes and short-haul international ones (that’s places like the Gulf and Singapore). The airline insists that nothing is final. However, says airline spokesman and executive director Jitendra Bhargava: “There’s no denying that people are moving to low-cost carriers.”

The full-service airlines jumping on the low-cost bandwagon are also likely to result in an even uglier dogfight at 30,000 ft up in the air. India’s aviation has been bruisingly competitive for the last five years but flying conditions have turned particularly turbulent in the last one year ever since the economy dipped.

The number of passengers flying has dropped during the January 2009-July 2009 period to 247 lakh from 260 lakh during the same period last year. By comparison, when times were good back in 2007, passenger numbers rose by nearly one-third.

Keep in mind that back in 2006, aviation industry experts predicted that 60 million (600 lakh) Indians would be flying annually by 2010 — and many airlines planned with those figures in mind. At that time, Capa and the government forecast that passenger growth would be a steady 25 per cent each year. Inevitably, some airlines began to build fleets to serve the expected rise in capacity. Many of these planes have now been leased out to foreign airlines.

Instead, this year, the full-service airlines found that passenger load factors (the number of passengers on any flight in percentage terms, a crucial marker in the aviation industry) had dropped to 55 per cent on some routes. As a result Kingfisher is said to have cut services by about 23 per cent and Jet Airways by about 20 per cent. Says an aviation industry expert: “Masses of Indian travellers who had not travelled before started flying. Suddenly, the recession came and loads dropped and everybody was hurting.”

To their alarm, the full-service carriers also found that on the same sectors the low-cost airlines were getting higher load factors. “When the economy turned downward, the Indian travelling public started looking for lower fares. That coincided with many new carriers coming into being,” says the spokesman of one full-service airline.

What’s the difference from the passenger’s point of view between a full-service airline and a low-cost one? The answer is actually not very much. A full-service airline will serve meals and maybe give out a hand towel when the plane’s taking off. On a low-cost flight you simply pay for any food that you eat.

And how do you convert a plane for low-cost flying? That, too, is simple — you rip out the business class seats and replace them with economy class ones packed tightly together. The end result is that a full-service plane which originally carried about 140 passengers will be able to carry closer to 180. The weight of the extra passengers is compensated by the absence of the food trolleys on full-service airlines which add considerably to the load.

To differentiate their services, airlines like Jet and Kingfisher are offering extras like the fact that passengers still earn air miles on low-cost flights.

What exactly has triggered the rush to the low-cost model isn’t hard to figure out. Across the globe, some of the top low-cost carriers like Ryan Air in Europe and Air Asia closer home are thriving while the big brand full-service carriers like British Airways are facing unprecedentedlytough times.

In India, too, low-cost carriers like SpiceJet and IndiGo have been picking up market share at the expense of their bigger rivals (see chart). IndiGo now has a 14 per cent market share and, unthinkably, it’s catching up on Air India which has seen its market share drop to 16 per cent.

But there’s one problem that’s having a chilling effect on all airline executives. Will the low-cost revolution turn even more brutal once there’s an excess of low-cost seats from a string of airlines including SpiceJet, IndiGo, Jet Airways and Jet Lite, Kingfisher, Air India and Go Air?

For a start, there will be a huge addition of capacity. Each converted full-service aeroplane will now have 40 seats more to fill every time it takes off. “The problem we are having is that the industry is very irrational when it comes to pricing and capacity deployment,” says SpiceJet’s CEO Sanjay Aggarwal.

In fact, Aggarwal’s sounding distinctly worried about the future even though passenger numbers have been rising in the past three months — industry experts predict 10 per cent growth rates for next year. Aggarwal notes that since June, ticket prices have fallen by almost 25 per cent — and that’s what is bringing passengers back into the skies. “If you drop fares to rock-bottom levels, you’ll get more passengers. But if we don’t cover our costs, we’ll just compound our problems,” he says.

Also crucially, can airlines that were famed for their service like Jet Airways and Kingfisher make the transition to being a low-cost airline where all offerings must be as cheap as possible? And can a public sector carrier like Air India slice away and keep down costs like a ruthless low-cost carrier? Declares Kaul: “You need to restructure the entire cost base. The three big boys don’t have the structure to operate low-cost services.”

The other question that airline industry executives are wondering about is whether the low-cost phenomenon is only a temporary one. Will passengers return to full-service airlines when the economy takes off again?

Capa’s Kaul reckons that full-service airlines will get a bit of a boost if the economy starts looking up. “We would see some full-service operations being expanded. But 60 per cent will still be low cost in about two years time,” says Kaul.

Amitabh Khosla, country head, India, of the International Air Transport Association (IATA) points to foreign markets where, in the past, passengers have returned to full-service airlines on long-haul routes after a downturn. However, he adds: “On short-haul markets such as within Europe there has been a trend shift from the front to the back for business passengers. The deep and prolonged nature of this recession may exacerbate such shifts.”

The low-cost airlines are confident about the future. “Many companies have shifted to us during the downturn and we feel they’ll stay with us,” says a spokes-man for one low-cost airline.

If passengers decide they are willing to put up with two or three hours of discomfort to reach their destination for a cheaper price, India’s skies will never be the same again.

Budget airlines are different

In Europe and Southeast Asia, low cost airlines operate from smaller airports (like Stansted and Luton in the UK) which charge lower landing fees. They serve no food or charge for it and for frills.

The planes flown by low-cost carriers worldwide carry more passengers. A plane which originally carried about 140 passengers carries closer to 180. The weight of the extra passengers is compensated for by the absence of food trolleys.

India’s low cost airlines have an edge over those in Europe and Southeast Asia. They fly from the same airports as full-service airlines. Air Asia’s main base, for example, is now Kuala Lumpur’s LCC Terminal which is 20 km from Kuala Lumpur International Airport. Some passengers also complain that parking at the terminal costs more than the air ticket.

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