1. Indian Airline Industry – An Introduction
Air transportation in India is under the purview of the Department of Civil Aviation, a part of the India's Ministry of Civil Aviation and Tourism. In 1995 the Indian government owned two airlines and one helicopter service, and private companies owned six airlines.
The government-owned airlines dominated India's air transportation in the mid-1990s. Air India is the international carrier; it carried more than 2.2 million passengers in FY 1992. Indian Airlines is the major domestic carrier and also runs international flights to nearby countries. It carried 9.8 million passengers in FY 1989, when it had a load factor of more than 80 percent in its fifty-nine airplanes. Analysts, however, attributed this high load factor to a shortage of capacity rather than efficiency of operation. A major expansion was planned for the 1990s, but an airplane crash in 1990 and a pilots' strike in 1991 damaged the airline, which carried only 7.8 million passengers in FY 1992. Two other accidents in 1993, plus several hijackings, put constraints on the growth of both airlines.
A third government-owned airline, Vayudoot, was also a domestic carrier in the early 1990s. It provided feeder service between smaller cities and the larger places served by Air India and Indian Airlines. By 1994 Indian Airlines had taken over Vayudoot. Another publicly owned company, Pawan Hans, runs helicopter service, mostly to offshore locations and other areas that cannot be served by fixed-wing aircraft.
In 1995 India's six private airlines accounted for more than 10 percent of domestic air traffic. Both the number of carriers and their market share are expected to rise in the mid-1990s. The four major private airlines are East West Airlines, Jagsons Airlines, Continental Aviation, and Damania Airways.
In addition to the Indian-owned airlines, many foreign airlines provide international service. In 1995 forty-two airlines operated air services to, from, and through India.
In the mid-1990s, India had 288 usable airports. Of these, 208 had permanent-surface runways and two had runways of more than 3,659 meters, fifty-nine had runways of between 2,400 and 3,659 meters, and ninety-two had runways between 1,200 and 2,439 meters. There are major international airports at Bombay, Delhi, Calcutta, Madras, and Thiruvananthapuram (Trivandrum), under the management of the International Airport Authority of India. International service also operates from Marmagao, Bangalore, and Hyderabad. A consortium of Indian and British companies signed a memorandum of understanding with the state government of Maharashtra in June 1995 to build a new international airport for Bombay, across the harbor from the main city and to be linked by a cross-harbor roadway. Major regional airports are located at Ahmadabad, Allahabad, Pune, Srinagar, Chandigarh, Kochi, and Nagpur.
Budget Airlines
It took some time for the budget airline industry to catch on in India. The concept originated in the west and was quickly picked up in the East Asian countries. Richard Branson of Virgin Airlines was the front runner in Britain, while Qantas took the major chunk of the Australian budget skies. In the post- WTC days of aerial terror, seat occupancies in established carriers crashed, leaving them to operate on losses. That was the time when the wallet-friendly carriers took off and still operated with profit margins. The non-frillers were characterized by few on-board services, elimination of catering and assistance services and little inflight glitz.
2. Air Deccan – The low cost air line carrier
India’s low cost airline carrier Air Deccan is the first to offer low airfares through a model similar to American airline Southwest. However, there’s a lot more behind Southwest’s success than just low costs; a detail that Air Deccan is quickly realizing; were quick to dismiss the concept as non-workable but the brand soldiered on and is now fairly popular.
The airline’s position of strength is in rock bottom rates; none of the larger airlines have figured out how to counter the fledgling airline’s pricing advantage. Virtually a monopoly in this category of economy flights, Air Deccan can celebrate as long as it remains unchallenged. However, the brand seems unprepared to take on competition and many aspects of the offering seem poorly managed.
Having done little to prepare customers for the brand experience, the relatively small size of the plane, the fact that passengers have to buy refreshments on flight, and the free seating arrangement may come as an unexpected (and unwanted) surprise to many.
The tag line “Simplifly” is a smart line that encapsulates “simplicity” in the context of flying, but many miss the subtlety of the line and read it as “Simplify,” which is not entirely bad in itself. However, Deccan’s advertisements focus almost exclusively on announcing new flights and rates, an opportunity that might be better used to explain aspects such as how the airline keeps its costs low. Communicating about the cost cutting techniques of, for instance, paper print outs in place of conventional flight tickets or the lack of free snacks on the flight, could be a useful to prepare the traveler for the flight experience. In the absence of an explanation of the brand’s strategy, Deccan stands to look cheap rather than inexpensive.
In practice, customer care varies from good to mediocre at Deccan. Service inconsistencies and aggressive call centre personnel lead to a feeling of “you get what you pay for,” an aspect that lacks the tactical brilliance of pricing and good cheer that Southwest radiates.
At present, limited routes and limited service restrict the brand from attracting a lot of travelers with its low cost offering. As these limitations fade, how well the brand capitalizes on its good start, how well it manages growth, and how well it survives competition remains to be seen. But for now the brand has a lot to do to convert its ambitious start into a success story.
3. Financial Status – Air Deccan
The Indian aviation sector is forecast to grow 20% a year over the next five years, as budget carriers draw in rail passengers in a country where less than a percentage of the billion-plus people travel by air each year. Air Deccan has an equity capital of only Rs 30 crore (Rs 300 million) and a debt component of Rs 15 crore (Rs 150 million). Air Deccan will seek to reach a larger audience in its maiden foray into the capital markets by floating 33-35% of its stock. The Air Deccan IPO, likely between November ‘05 and June ‘06, may see unloading of an estimated 17-19m shares in the market. The airline expects the IPO to raise an estimated $300m. The two investors, ICICI and International Capital, which hold around 26% in the company with their $40m private equity placement in January ‘05, may reduce their exposure to half during the IPO. The promoters, led by its MD GR Gopinath, may divest 20% or more of their equity. The IPO will not only provide an avenue to investors to part-unlock the value of their investment, but will also help in better retention of employees holding stock under the ESOP. Air mentioned that it will be in keeping with the airline’s buoyant growth prospects. The airline, which carried just under a million passengers last fiscal clocked revenues of Rs 350-370 crore with a marginal profit.
The topline is expected to touch Rs 1,000 crore this fiscal on the back of multifold increase in profit over last year, and a targeted passenger carriage of four million. The airline proposes to ramp up its fleet strength from 18 planes now (including five Airbus 320s) to 27-28 planes by March 31, ‘06. Deliveries of its 62 planes (32 A320s and 30 ATR-500-42/72 series) which were ordered for in December-January ‘05, will also commence shortly.
The airline keeps costs in check by offering tickets through the Internet. They will definitely be in a profit — (but) it will be a marginal profit because of the uncertainty on oil prices. The IPO is for fleet acquisition and enhancing our engineering and operational capabilities. Fuel accounts for about a third of Air Deccan’s ticket prices. Air Deccan competes with larger players like Jet Airways, state-run Indian Airlines and privately-held Air Sahara as well as another budget carrier, Kingfisher Airlines, run by United Breweries.
Air Deccan carried 11 lakh passengers last year while Jet ferried 79 lakh and IA carried 76 lakh travellers. Mr Gopinath said up to 40% of Air Deccan’s passengers were flying by air for the first time. Earlier this year, Jet Airways made a sterling debut on the stock markets after its $435m stock offering was heavily over-subscribed.
The airline is also considering an issue of American Depository Receipts (ADR). Plans for the offering, expected in June next year, come on the heels of a hugely successful issue launched by Jet Airways last year. The company has bought a group insurance policy of $200 million in the case of an air crash. As per the policy, passengers will be entitled to a minimum cover of Rs 750,000 each.
Air-Deccan could take up to 20% of the market if it is able to sustain operations for the next few years.
4. UNIQUE BUYING PROPOSITION
What's an Air Deccan flight can give to customers?
For starters, it's cheap. It is fast. And it is safe.
Customers can also book their ticket, which is priced at just a little more than half the cost of a regular airline ticket, on the Internet. There are no sweets or cotton earplugs when you take off. Then there are efficient airhostesses who wheel around carts of food: only, customers have to pay for the food.
All that passengers want from this airline is punctuality and safety, so Air Deccan takes extra care to ensure these two.
Government regulations prescribe that an insurance of Rs 7.5 lakh (Rs 750,000) should be taken out on every passenger who travels on the airline. However, Air Deccan makes a combined single insurance of $200 million on every flight and all the passengers who travel on it.
To book an e-ticket, customers have to log into their Web site www.airdeccan.net. Customers are taken, step-by-step, through a six-stage booking procedure, which even helps them to decide what flight they want to take.
Custoemrs can search for a suitable flight right on the Net, find out whether seats are available and get ticket prices (including taxes) online. Then, they have the option of contacting a mobile phone number and blocking a ticket, or filling up a form online and buying the ticket, using your credit card. There is a transaction fee of Rs 25 on every ticket.
Air Deccan does not provide the luxury of a coach to transport customers to their aircraft. Customers have to walk across the tarmac towards it.
Once any customer reach the aircraft, he/she will be treated as well as a passenger on any other more expensive airline. The passengers who are flying with Air Deccan right now are doing so for a variety of reasons.
To reach the destination quickly, and they don’t care about being served good food or drink.
To encourage a local enterprise.
First time fliers who are just to enjoy the travel by flight.
This airlines is not really low-budget, it is just regional. Their major USP (unique selling proposition) is extremely low airfares.
5. COMPETITION
Air Deccan can claim credit for bringing the budget airline concept to the Indian skies. Started last year, the Bangalore-based company is a subsidiary of Deccan Aviation, which operates chartered air services, mainly with helicopters. Air Deccan unleashed cut-throat competition in the aviation scene with fares mostly equalling similar train fares. In response, leading domestic airlines like Indian Airlines, Jet Air and Sahara Airlines slashed rates and unveiled Advanced Purchase schemes (Apex) to take on the new challenger. Competition, as always, brought the best to the customer. “Our mission is to keep our fares low and keep lowering them with time,” says Air Deccan’s Gopinath. Air Deccan is initially planning to tap the budget air traveler to and from metros to non-metros. But competition was not far behind. Barely a year after Air Deccan took to the skies comes news of Vijay Mallya’s Kingfisher Airline. In June this year, Mallya announced his plans to take to the skies with his own Indian no-friller. The flamboyant chairman of the multi-crore UB group is not known to do things half-way. And Mallya will be flying on the wings of the well-established Kingfisher brand. Bangalore’s King of Good Times, a trained pilot himself, went the whole hog with plans for a 16-strong Airbus A-320 fleet to run its operations. (Four have been ordered from Airbus, with options to buy eight more, and operating another four on lease basis.) "It is always good to welcome a new customer to the Airbus family, and we derive great satisfaction in being its partner in delivering comfort and value to passengers," says Airbus President and CEO Noël Forgeard. Kingfisher is investing Rs 150 crore to kick off operations. Expect a dazzling show. Mallya’s birds will be taking to the skies in early 2005. Here’s a sneak preview: Kingfisher Airlines, Mallya says, will not be a run-of-the mill Indian budget airline. Expect a value-added designer no-friller. Kingfisher Airlines will be emphasizing on spunky, well-done interiors and trained airhostesses. Each A-320 will carry 180 passengers. Borrowing from the Kingfisher beer tagline of “The King of Good Times”, Mallya is pushing the theme of “Fly The Good Times” for his unborn baby. Kingfisher is planning to capture the Indian budget airline market with the twin engines of ‘special flying experience’ and ‘value for money’. Contests like `Kingfisher flying face of the month' are on cards.
The Kingfisher air hostesses will be selected through a nationwide contest. Expect designer staff uniforms. The Kingfisher "Funliners" will have in-flight silent auctions for lifestyle products and sales of packaged food and beverages. Mallya is sure to leverage on the Kingfisher brand of exuberant, youthful and fast-paced image. The man behind the Kingfisher swimsuit calendar can be expected to put up a stiff challenge to Air Deccan and other low-cost aspirants. To begin with, Kingfisher Airline has roped in model Katrina Kaif to endorse the airline. We hope you get it. Don’t expect an Udipi hotel from Mallya. Await the smart fast food joint.
Vijay Mallya already has a company called UB Air, which is a non-scheduled airline. He will be probably moving the civil aviation authorities to convert this licence to one for a scheduled airline. Kingfisher Airline charges are expected to be higher than Air Deccan’s, but substantially less than those of the big players. Even as the budget carrier battle hots up, the airline biggies are not sitting idle. Country’s flag carrier Air-India recently announced its move to set up a subsidiary called Air India Express, which will be an international low-cost airline. Air India Express will be taking to skies in March 2005. There will be a fleet of 14 Boeing 737-800s, which will be taken on dry lease in three phases. These aircraft will have 181 Economy Class seats in single class configuration. The new airline will operate 63 flights per week when six aircraft are inducted on dry lease at the time of the launch. With the induction of four more aircraft, effective winter 2005, Air India Express will operate 38 additional flights, and add another 26 flights in the third phase effective April 2006, when four more aircraft will join the fleet. Thus, within a year of operations, Air-India Express will operate a total of 127 flights with 14 aircraft to destinations in the Gulf and South-east Asia. Meanwhile, Australian carrier Qantas Airways is planning to include Indian cities among many others for its low-cost airline to be launched in November this year. The as-yet-unnamed airline will be operated from Singapore, says Qantas Airways manager (India & South Asia) Khursheed Lam. The inclusion of Indian cities for Qantas low-cost low-cost airline is subject to bilateral seat sharing agreement and code-sharing, according to Ms Lam. Bilateral discussions over seats and code-sharing between the two countries are likely to be held next week. "We have a flexible approach as far as flights, destinations in India and code sharing are concerned,” Qantas Airways, head of sales & distribution, Rob Gurney said. The planned Qantas budget airline is a move to participate in the booming intra-Asia travel mart. The no-frill airline is set to commence with four A320 aircraft in November out of the eight A320 aircraft, for which lease agreements have been signed. The airline has plans to build a fleet of more than 20 aircrafts over the next three years. The ambitious plans notwithstanding, the history of private sector aviation in India is not very heartening. Ratan Tata is still sore that the Air India nationalisation left the Tata group high and dry. Tata’s late attempts to bid in the botched Air India privatization process came a cropper. Air India divestment plan itself was abandoned. Earlier, Indian private airline operators like NEPC Airlines and East West Airlines disappeared without a trace. Every few weeks, leading private carrier Jet Airways is faced without questions about its funding and promoters. It was Arun Shourie himself who said when he was divestment minister that he doesn’t know if Jet Air is an Indian or a foreign firm! Meanwhile, another low-cost Indian carrier is reportedly facing problems in starting up. The Bangalore-based AirOne Feeder Airline, was supposed to start its flights with two Embraers from Brazil. The delay in Embraer delivery has forced AirOne Feeder to postpone its launch twice already. AirOne is now expected to take off only in early 2005. The company is looking at leasing two new Embraers with 50-seat capacity. The Embraer brand is not generally used in India. AirOne is believed to be targeting non-metro routes to corner its share of the market.
As the catfight hots up, expect fur to fly. Air Deccan says its aim to keep reducing fares further and further. More carriers, both Indian and foreign are expected to come up. Airline industry experts believe that there is space for at least five domestic low-cost airlines in India. Meanwhile, expect the big daddies of domestic aviation to match up with cost-cutting and aggressive Apex schemes. The battle for budget skies has just begun.
Given that the exceptional growth in the past two years have been driven by falling airfares, it’s the low-cost airlines that will likely draw a larger percentage of the new non-business travellers. And fares can still go lower. Says Subhash Goyal, president, Indian Tour Operators Association: "Fares can fall 25 per cent from current levels." This could happen as early as later this year, when more low-cost airlines launch their services. If fares fall by 25 per cent and Jet follows suit, as it will probably have to in cost-conscious India, the airline will have to ferry 30 per cent more passengers in 2005-06 just to match its 2004-05 revenues. Only after that will growth kick in.
Unless oil prices go up further, full-service airlines can forget about higher fares in the foreseeable future. Their growth will primarily come from flying more passengers. Last year, Jet’s average aircraft occupancy was around 65 per cent. Traffic in India is projected to increase at 5-6 per cent a year for the next 10 years. By comparison, the industry is expected to increase seats by 20 per cent this year. In other words, it will take some years for occupancy to catch up. Foreign routes, which were recently opened to Jet and Sahara on a selective basis, will be a new revenue stream, but these are also cut-throat markets.
Luxury rail segment faces air challenge
With air fares hitting rock-bottom, it is the railways that has been most hit. Therefore, it is imperative for the railways to take on competition head-on. The decision of more airlines like the Deccan Airways to jump into the cut fare market for long distance travel is undoubtedly coming as a bolt out of the blue for the railways which is getting more immersed into social moorings than concentrating on profit making ways. The plethora of incentives from the airlines is, however, making the railways now sit-up for fear of losing the upmarket luxury segment which provides higher profitability than the second class sector.
Even otherwise, the new challenges have made modernisation of the railways imperative. Railway minister Lalu Prasad, who had strongly advocated against privatisation saying he would not even hesitate to resign in case it is forced on his ministry, seems to be tempering his pronouncements by admitting that the Rakesh Mohan committee and other reports for making railways competitive are relevant. The various recommendations, among other things, have called for commer-cialisation of vacant rail land and offering offseason discounts in the air-conditioned class.
Railways have about 423,000 hectares (ha) of land out of which 20,000 ha of land is vacant, mostly in longitudinal strips along the track. Even though much of the land is required by Railway for its own use, the earlier proposal for commercialising the air space in these lands has not gained momentum. Currently, in a small way, the land which is not needed for immediate use is utilised temporarily for plantation, commercial licensing, for purposes directly connected with Railway working, etc.
Railway officials, however, claim that the various programmes including technology upgradation to make the sector commercially viable is receiving utmost attention. As a follow up to the Independence Day pronouncement of former prime minister Atal Bihari Vajpayee last year regarding setting up of a Technology Mission on Railway Safety, they say action has been initiated and four mission programmes in the field of traction and rolling stock, track and bridges, signal and communications and fog vision instrumentation have been jointly identified by RDSO and IIT-Kanpur. Ministry of railways has approved 14 projects under the four mission programmes and it will be a joint effort between ministry of railways, ministry of human resource development and industry.
Though the railways is trying to keep pace with technology infusion and other modernisation measures to remain competitive, these would have to be greatly enhanced at a shorter period of time. For instance, the speedy internet airline ticketing system would have to be strongly matched with a people friendly online booking system in the railways.
It is in the fitness of things that the frontiers of the much acclaimed customer friendly computerised passenger reservation system (PRS) have been expanded further with the introduction of internet booking. Now, reserved tickets are also being delivered at the doorstep of the customer. On the unreserved side, where difficulties continued to persist, a major break-through was achieved last year with the introduction of computerised Unreserved ticketing system (UTS), which seems to be finding acceptance among the general public. Officials state that the system is proposed to be extended further.
In the new era of transport alternatives, the railways would need to overhaul its system, both for freight and the passenger services, to stay afloat as a commercially feasible and profitable organisation.
6. Operating Strategy
Are the operators going to slash the fares for the executive class as well so that he can shift into the Everybody has a worry or query as far as India's civil aviation sector is concerned. But the fact remains that history has been created in the country with the cost of air travel coming to as low as Rs.700. While Air Deccan has set the ball rolling in the skies with its most affordable airline, Delhi-Mumbai for Rs.700, it is set to face stiff competition even at this down-to-earth rate, not to mention surviving the logistics that are at odds. The moot point, however, remains - is the concept viable in India? Those who have a stake in it believe it can be achieved by cutting out frills.
Startups in the runway
Perhaps even J R D Tata, the man who brought aviation into this country, might not have visualised such a future when train and air travel will be at par by default. But it has become a reality, at least for the time being. Air passengers in India may soon reap the benefits of cheaper fares with several players planning to start low-cost airlines. Already, as many as 12 startups have applied for licences. This is when the civil aviation minister Praful Patel has stated in Parliament that there is no proposal at present to open up the domestic aviation sector to foreign airlines. Otherwise, the queue would be even bigger.
Liquor baron Vijay Mallya of the UB group, known for his beer brand, Kingfisher, already owns a fleet of helicopters and private jets, is also set to launch Kingfisher Air, his version of cheap airline. The Wadia group, owned by Bombay Dyeing chief Nusli Wadia, is also planning to foray into the low-cost airlines business. The Wadias have already applied for the necessary permission from the civil aviation ministry and are hoping to commence service early next year.
Even our national carrier does not want to be left behind in this rat race: Alliance Air, the Indian Airlines subsidiary which operates Boeing 737s, will become the national carrier's low cost airline. Not only this, in order to take the battle a bit further, India's international flag carrier, Air-India is planning to launch a new discount airline - Air-India Express - by April 2005. The move is aimed at boosting the share of Air-India in the Gulf and Southeast Asian markets. These markets have been the most profitable for the airline but it has been facing stiff competition on these routes. The new discount airline will have about 25 per cent lower fares than the ones offered by other international airlines.
As low as it can get
So just how cheap is it going to get? Air Deccan, the company which pioneered no-frills flying, says a Delhi-Mumbai ticket could be bought for as low as Rs.500 - only Rs.20 more than a second-class rail journey. The business philosophy of Capt G R Gopinath, managing director, Air Deccan, is loud and clear - the next time you will have one guy paying Rs.500, another guy paying Rs.4500 and the guy next to you Rs.3000, all in the same flight! Such fares would be possible because the airline will auction away its seats - about 180 seats on the Delhi-Mumbai flight - on a first-come-first-served basis.
If a passenger decides to buy a ticket three months before the journey, the ticket comes for only Rs.500. The same ticket will cost Rs.4500 if you buy it a day before your journey.
At present, only 1.5 per cent of Indians can fly given the high airfare but all that could change with the entry of low-cost operators into the market. Air travel became much more affordable when the airline companies announced Apex fares. People could travel at half the cost by simply buying a ticket 30 days in advance. Now if the low-cost airlines succeed, it could well change the rules of flying in India.
Let's accept that the demand factor promises a smooth ride for the low-cost airlines. The most affordable means of travelling in the country, railway, is in such a miserable state that nobody wants to travel by rail, only if one can help it. Concerns are many - from safety to poor quality of service, overcrowded coaches to booking problems.
Packaging is the mantra
Here it would be pertinent to understand as to who would fly these low-cost airlines in India. Keeping in mind the business model of these airlines, where bookings have to be made at least 30 days in advance, there seem to be three segments of customers - the price conscious business traveller, the leisure traveller and those who planned vacation much in advance. Now, if we talk of business travellers, a large proportion of them travel at company expense and might not have a reason to migrate from full-service airlines. The fact that most of the business meetings are not planned that much in advance is also a deterrent. And in order to tap the other two segments of air travellers, the LCAs need to tie up with the travel agents to offer the tour packages. This is a model practice worldwide, like Air Asia's tour packages from Bangkok to Penang, or a honeymoon package from Kuala Lumpur to Phuket. But the very business model of the Indian LCAs is dismissive of travel agents in order to cut the cost. As a result, many enthusiastic travellers will never come to understand that low cost air travel is simple, easy to book and a great savings option.
The grey areas
Air Deccan is already facing rough weather on the route. The airline has not yet managed to get a counter at the Delhi airport to sell tickets. Most low-cost airlines want to start their flights from metros like Delhi and Mumbai. But airport officials say they have a problem in hand as infrastructure at these airports seems over- stretched. Delhi and Mumbai airports handle 20,000 domestic passengers a day and more passengers will only lead to more congestion. There are no extra parking bays in both the airports and the new airlines may have to park their planes in nearby airports. This means their fuel costs will go up.
This is just the tip of the iceberg. In a country where the domestic aviation sector has been repeatedly complaining how difficult it is to sustain, survival logistics seem to be heavily placed. In reply to a question early this year, Parliament was told that while losses of Indian Airlines had been Rs.145 crore in 2002-03, India's largest private airline Jet lost Rs.242 crore in the same year.
Experts believe the government must ensure measures to check the high cost of infrastructure. While the landing charges at Indian airports are too high compared to international norms, state governments impose hefty taxes on aviation turbine fuel.
At what cost?
But the question still stands - cost cutting at what cost? And how much will it save? Obviously, no frills on board means lesser crew staff, which can cut the cost up to 10 per cent. Secondly, by selling the tickets through the Internet, which can also save the commission of travel agent, there can be, a saving of another 10 per cent. Then selling food and drinks on board can increase revenue. Besides, this airlines is also planning to advertise on seats and boarding passes.
7. WILL AIR DECCAN SURVIVE?
It's an audacious incentive scheme -- especially in the glamourous world of the airline business. The next time customers may find an airhostess on board the no-frills airline Air Deccan cajoling customers into buying samosas, a sandwich, or even bottled water, don't be taken aback.
For the airline offers its cabin crew a 10 per cent commission on all beverages and food that they sell passengers on the flight. Captain G R Gopinath, co-promoter and managing director of Air Deccan, explains the logic.
As the airline does not offer complimentary meals, he expects the average passenger to fork out about Rs 75 to pick up a quick meal. On a margin of 30 per cent for the 1 million passengers who have flown Air Deccan over the last 12 months, that means Rs 7.5 crore (Rs 75 million) in extra revenue.
That, of course, is not the only way Air Deccan is innovating revenue. It hawks advertisement space on the seats, the cabin interiors, and even on the body of the airplane.
And it will soon offer inflight entertainment -- from movies to news and music -- at a cost, naturally. Gopinath reels off some figures -- the airline is already making about Rs 20 lakh (Rs 2 million) on each Airbus aircraft a month through ad revenue, and he hopes to squeeze in another Rs 5 crore (Rs 50 million) by hawking inflight entertainment.
These permutations aside, what is Gopinath's secret mantra for running a low-cost airline? "My cost per kilometre per seat is only 4.3 cents," he says simply, "my competitors fly at 8-16 cents. My revenue yield is 5.1 cents. And now, by expanding the network and adding more flights, I will reduce costs even further".
That is precisely what Gopinath and his team are busy with: Air Deccan is on a major overdrive and wants to transform itself from a small regional feeder route carrier to a pan-Indian player.
Taking off rather shakily (its inaugural flight had caught fire) with only two ATR turbo-prop aircraft in September 2003, the fledging airline has targeted a fleet of over 35 aircraft by March 2006 (which will include 13 Airbus 320s).
At the moment it flies 64 flights a day, with 7 ATRs and three Airbuses, but has set itself an ambitious five-fold increase in the number of flights to about 300 by March 2006.
That's not all. By March 2005, the airline hopes to grab a 10 per cent market share (up from 3 per cent in March 2003) with a passenger load of 1.4 million. It will add 10 new cities on the map within the next four months. The target is to have over 30 Airbuses and a similar number of ATR turbo-props in the next three years.
The cornerstone of the aggressive expansion is rock-bottom tariffs to impel users of railways to upgrade to air travel. The first salvo was shot last year when Air Deccan offered tariffs that were at least 50 per cent cheaper than scheduled airlines.
But the bigger bombshell was thrown this year when Air Deccan offered air travel at an amazing Rs 700 (on only a few seats) -- virtually half the price of a railway ticket in many destinations. By next year the airline hopes to push down tariffs by at least another 10-20 per cent.
And Gopinath is not complaining. Already, as much as 90 per cent of the 10,000 seats till March 2005 on the Bangalore-Mumbai sector are booked. On the Delhi-Mumbai sector, 65 per cent of the capacity for the same period is full. But the pygmy airline is still thirsting for dollops of cash if it is to fly into the big league.
Industry watchers say the going had been easy so far as Air Deccan mostly leased turbo-prop ATRs. But the game will change dramatically with the introduction of Airbuses and forays into metro routes where Indian Airlines and Jet Airways reign supreme.
Inevitably, this had led to speculation about Air Deccan's survival. Already, the company has slipped from its turnover target of $120 million by March 2005 because of delay in aircraft acquisition, scaling it down to $90 million.
Nor will the going be easy. Says Kapil Kaul, senior vice president of the Centre for Asia Pacific Aviation, an aviation consultancy firm, "Air Deccan will have to face intense competition from new airlines like Wadia, Kingfisher Air and Royal Air next year, all of which are looking at low-cost models. Also, the existing carriers will not keep quiet."
The three big carriers, for instance, have been quick in responding to the Air Deccan challenge on metro routes by dropping tariffs on select flights where, unlike an apex fare, you need not book earlier.
Indian Airlines has responded by bringing down tariffs on its flights that coincide with those of Air Deccan. For instance, IA is offering Fly Select fares on three flights from Delhi to Mumbai -- at 9 am, 10 am and 6 pm -- for Rs 4,200. (Air Deccan flies at 8.55 am and 4.30 pm.) Says an IA executive: "Passengers may pay Rs 500-1,000 more, but they get major advantages -- they don't have to book in advance or lose their money if they cancel, and will get food and beverage on the flight. The premium they pay is very little".
Even Jet (through their Check Fares) and Air Sahara (through Steal a Seat) are using the same model. IA is also planning to have at least three of its Airbus 319s, which will be delivered next year to run with only economy seats and cheaper tariffs.
Competitors point out that the average tariffs for Air Deccan aren't as low as they are made out to be, and even Air Deccan admits to an average ticket yield of Rs 3,750 on its Bangalore -Delhi leg.
The hyped Rs 700 seat is booked within hours, and for many passengers seems more an advertising gimmick than reality. In most cases, the apex fares offered by the three airlines are more or less similar to what you can book on Air Deccan.
Says a senior executive of a competing airline: "If you book three months in advance, you get a cheap price, but between the seven-30 day advance booking period there are many cases where tariffs of full carriers are cheaper".
Also, these carriers are cutting costs too. Says Rono Dutta, CEO of Air Sahara: "There are smarter ways of cutting costs than by stripping down the product. In fact, today our costs are not any higher than those of Air Deccan."
Sahara has restructured its routes by creating a hub in Hyderabad. Dutta says this will improve utilisation of his fleet by over 10 per cent and save passengers travel time of over 50 per cent for those taking onward flights, as they don't have to wait long to take the next flight.
Plus, with the carrier spending $20 million, it will save cost by having a single hub, spare parts depot and maintenance centre for its whole operation.
So where have Gopinath and his men cut costs? Gopinath suggests that his Airbus aircraft have 180 seats -- 22 per cent more than what his competitors squeeze in -- and that he flies his aircraft for over 12 hours compared to the competition's eight-nine hours.
Besides, his sales and distribution costs constitute only 8 per cent of the total cost compared to the full-service airlines that spend as much as 28 per cent.
That's because he has managed to shift bookings away from travel agents to the Net, ensuring his money upfront (you pay by credit card or cash), does not use international reservation systems (like Amadeus), which charge money for each transaction, and saves on agency commission.
There are also savings in avoiding the printing of tickets, and keeping staff on a tight leash. Besides, he only flies point to point with no onwards or connecting flights, saving on both fuel and time.
But many analysts and competitors say the cost-cutting model might not work here at all. For instance, IA says it also flies its aircraft for 11 hours, so that's not a big deal.
Adds Sahara's Dutta: "Low-cost made sense in Europe and US where labour costs constituted over 45 per cent of total cost; in India it is not more than 15 per cent. Instead, 50 per cent of the cost is fixed."
Analysts suggest that Air Deccan's ATRs did not have to pay landing fees, and forked out nominal navigation charges (government allows special rates for aircraft with less than 50 seats).
"But with Airbus, this saving (which is as high as 18 per cent of total cost) will cease to exist. Then the battle will be different." Worse, unlike in Europe, there are no no-frills airports (such as Gatwick in UK) that charge a fraction of the cost for landing and parking compared to the main airport.
Competitors also point out that the key ingredient for success of a low-cost airline is its dependance on e-ticketing. But in the case of Air Deccan, as much as 40 per cent ticket sales are through agents.
Says an airline executive: "He offers them the same 5 per cent commission we do, and is now also offering them credit lines. If they were not important, why should he do so?"
For instance, Air Deccan has recently tied up with ICICI Bank under which agents are issued a special Air Deccan credit card to buy tickets from the Net with a 40-day credit free limit. (Gopinath says he still gets his money upfront from the bank.)
The managing director of Air Deccan knows it isn't going to be a cakewalk for him. But he points out that he should be able to make a profit in the first year of operation itself.
No doubt he is also banking heavily on how successfully he can raise the funds for his next expansion phase. That could well be his acid test. And he knows the battle will only get fiercer.
Money matters
Air Deccan has an equity capital of only Rs 30 crore (Rs 300 million) and a debt component of Rs 15 crore (Rs 150 million). That might be passable when you run a small operation with turbo props, but running a pan Indian airline with Airbuses is a different kettle of fish.
Company finance director Mohan Kumar agrees that the funding requirement will change dramatically -- he is scouting for $300 million to buy six Airbus aircraft next year -- by roping in fresh investors to expand the equity capital base.
Already, Air Deccan is in the final stage of negotiations with three equity investors (ICICI Venture and Capital One among them) to raise $50-60 in fresh equity.
Says Kumar: "We might do a deal with all three, or with one of them. An option is to issue zero-interest convertible debentures to these investors where the conversion would be tied up with the company's performance." The company is ready to offer up to 26 per cent to the new investors.
That still leaves a yawning gap of $240 million. Air Deccan says this will be raised through debt, talks for which are on with Export Credit Agency of Europe that funds up to 85 per cent of the cost of the plane as long as companies buy European products.
But that could overburden the company with debt and high interest costs. Kumar says the debt to equity ratio will go up from 0.5 to 2 -- beyond this would put a strain on the company's bottomline.
So on an equity capital base of $67 million (after the new investors have been roped in) it will be able to raise debt to a maximum of another $130 million.
That still leaves a gap. Kumar's answer is to get into a contract with Airbus to buy the aircraft (as the Export Credit Agency does not give loans for leasing out), then transfer the contract to a bank or a leasing company which will then buy the aircraft and lease it back to Air Deccan.
Talks are already on with international banks, he says, that will ensure Air Deccan's debt burden is under control. He says the company might be able to buy two aircraft (the price of an Airbus 320 is around $56 million) and take the rest on lease.
Analysts say the airline's future is uncertain until the financial deals are closed. Especially as the financial restructuring does not include the leasing of more ATRs.
They also say the debt burden could put tremendous pressure on the company's bottomline, something Kumar refutes as he says that these are long term loans spread throughout the life of the air craft.
8. FUTURE OF THE INDUSTRY
India Inc is going places, literally. With the civil aviation and tourism portfolios at the Centre under the charge of able ministers like Praful Patel and Renuka Chowdhary - combined with a leadership inclined to open up the economy, one suddenly witnesses great dynamism in these sectors. The country is witnessing an unprecedented revolution in the aviation industry that is opening the skies to private carriers, driving down ticket prices and giving foreign airlines and equipment suppliers unmatched access to one of the world's fastest-growing markets. But how long will this boom sustain? Express Travel & Tourism takes a look at both sides of the coin - the good and the bad of the sudden aviation boom.
Picture Perfect: Aviation Boom
The explosion in Indian air travel is driven by a booming economy, a rapidly growing middle class and increased deregulation. Not a week passes without one airline or another coming out with announcements on introducing new routes or expanding services on existing routes. The liberalised policy has also been permitting airline companies in India to expand operations both within and outside the country.
Air Traffic Booming
Despite the nation's population of more than a billion people, it has just 165 commercial planes. The United States, which has about 300 million people, has about 6,000 commercial airliners. But India is changing rapidly, emerging as one of the fastest-growing markets. Air traffic in India has been growing rapidly, adding around 275,000 passenger seats in 2004, and it is expected to add more than 325,000 in 2005. Even aircraft manufacturers are working out their strategies for India and to that effect, Boeing itself has revised its projections upward. Barely six months ago, it projected its business in India would reach US$ 20 billion within 20 years. Now, the company is saying it will grow to US$ 35 billion in that time.
Route Expansion
After a gap of nearly 15 years, one witnesses tremendous activity at state-owned Air-India and Indian Airlines. Inept and poor political leadership, lack of resources and the absence of new policy initiatives have bedeviled these airlines. All these seem to have been pushed back in the last couple of years. Both companies have been busy planning major fleet expansions. Boldly going for lease options, these state-owned airlines are preparing themselves to win a good stake of the present boom in air travel. Air-India posed impressive plans for its no-frill subsidiary, Air-India Express that offers attractive introductory fares to countries in the Gulf from Delhi, Mumbai and Kerala.
Recently, Britain and India agreed to more than double air flights on existing routes between the two nations and open up lucrative new services to Indian cities. A similar deal was signed between India and the US. Jet Airways, India's largest domestic carrier, announced that passenger traffic would increase by 15-18 per cent this year.
The boom in the Indian aviation industry has boosted the fortunes of international aircraft leasing companies, whose business in India has tripled over the last two years. Almost every airline, public or private, is taking the lease route to raise capacity in the shortest possible time. Benefits of operating leases include lower cash outlays to preserve working capital, the flexibility to increase or reduce capacity quickly and the ability to induct new aircraft models with no need for pre-delivery payments.
Lufthansa, is the perfect example for being the most successful in capturing emerging opportunities. Bangalore and Hyderabad in the South have been receiving a lot more attention well before the new airports in these cities have taken shape. Lufthansa and Saudi Arabian Airlines have introduced new flights from Hyderabad. Asian, European and Middle Eastern airlines are already ramping up flights to India. Britain's Virgin Atlantic Group even hopes to buy a stake in an Indian carrier, although civil aviation authorities have yet to permit such investments.
New Carriers…New Options
With more competitors flocking to the India market, prices of tickets for domestic and international travel are plummeting. As Air Deccan has upped the ante with a Re 1 flying offer, Kingfisher Airlines, that has started services on the Mumbai-Bangalore route recently, is talking of becoming the number one domestic airline by 2010. With the announcement of the UB Group's foray in the Indian aviation industry, Kingfisher Airlines has already become a force to reckon with. After Kingfisher Airlines, the rank of budget airlines will have other new entrants like Magic Air and SpiceJet that have already commenced service in May and took the industry by surprise with its Red Hot Rs 99 offer, Go Air and Air One in the coming months. Last but not the least is the re-launch of East West Airline, after almost a decade. The Airline hopes to take wings again by the end of this year and is in the process of renewing its license soon. It is in talks with Boeing and Airbus for buying aircraft, and with two foreign investors to raise US$ 50 million to US$ 60 million in the next two years. Further, according to the Centre for Asia Pacific Aviation, the new low-cost airlines will help add at least five million new passengers every year taking the total number of air travellers to 50 million by 2010.
Open Skies - The After-Effects
One of the arguments for the open skies policy is that it will lead to huge benefits for tourism. A November 30, 2003 government-appointed committee report titled 'A Roadmap For The Civil Aviation Sector' unequivocally states: 'The international air transport segment is inexorably moving towards liberalisation, particularly at the regional and sub-regional levels. Even within bilaterals, which continue to be a dominant form of regulating international air transport, many of the recent agreements and amendments are reported to contain some features of liberalisation. Many countries have unilaterally opted for liberal air transport policies, often based on a broader perspective of national interest, including economic development and trade benefits.'
If Asia's fourth-largest economy is poised to grow significantly over the next five years then even the most conservative analysts predict massive growth in India's air travel market. India, and the wider Asian air travel market represent an opportunity that most airlines are grasping with both hands. Competition will be intense, with new domestic airlines pitching in.
The Challenges Ahead
The aviation ministry, which till very recently was henpecked by the industry for its obdurate stance on deregulation, is now receiving shouts of support for not going too fast too soon. Aviation experts forecast that India's annual passenger load will hit 50 million by 2010. International travel to and from India is soaring at a 20 per cent annual clip. According to the International Air Transport Association (IATA), international airline passenger numbers are set to grow by six per cent year-on-year till 2008. The key driver for the growth would be the economic expansion in India and China. Cargo volume is also likely to be up by six per cent annually over the 2004-08 period. The growth, however, will strain airports and other infrastructure. Though some changes in the management of airport infrastructure have been initiated, India still has a long way to go.
Airport Apathy
Liberalisation and restructuring of airport infrastructure is going to be a far more complex and difficult task than the restructuring of air services. Nearly every aspect of services, from runway maintenance to air-traffic control and baggage handing, needs huge upgrades to cope with bigger demand. The government has earmarked US$ 3 billion to upgrade main gateway airports at Mumbai and New Delhi, and as much as US$ 300 million to build airports at Bangalore and Hyderabad.
V Thulasidas, chairman and managing director, Air-India, takes first guard, "An increase in the international airline seat capacity to and from India is no doubt good for the promotion of tourism. However, this is only one of the facilities required and unless it is supported by other infrastructure facilities like adequate number of hotel rooms, good airports, tourist friendly procedures, good roads and rail connectivity, overall cleanliness etc. An increase in the number of airline seats alone cannot lead to more tourist travel." Therefore, the immediate need of the hour is not so much to start new airlines so much as to develop the airports infrastructure.
He further points out that many of the competing airlines are more interested in exploiting the Indian travel market and not necessarily promoting international tourist travels into India. "What we need is a carefully orchestrated and balanced plan for opening up the international travel sector with adequate emphasis on the growth plans of Air-India. Allowing more foreign airline capacity into India or alternatively permitting domestic airlines to fly international routes need not be the only solution for increasing the international air travel capacity," he adds.
Tourism Reality Check
Qatar Airways CEO, Akbar Al Baker insists that the open skies policies are key to developing the aviation industry in the country and so too, tourism, since airlines are the chief delivery system of the tourism policy of any country. "There are approximately 30 million Indians staying abroad while only 35 million seats have been allocated through the sale of traffic rights of which 17.5 million are utilised leaving a huge gap in supply of seats even for NRIs and expatriates wanting to visit India. These traffic rights include countries that do not operate into India while additional seats are not being granted on high-density routes," he says.
LCC - Not An Easy Task
The verdict on the birth and subsequent maturity of low cost carriers (LCC) still has its jury out on a limb. While it is quite clear that for air travel in this country to become as commonplace a culture as is the case in the US, LCCs have to thrive and consolidate, their roadmap appears fraught with a despairing ignorance from the government in so much as creating a parallel cost regime that recognises the minimal framework these airlines operate within.
Trade Dilemma
Last but definitely not the least is the hot debate between airline and agents on the commission structures. Globally, the current scenario hotting up where airlines and agents are at loggerhead over the zero commission regime, in many a developing market and India is on the hit list at the moment. While the agents' boycott of Air-India did little to move the airline, a bit of history was created when non-IATA association (ETAA) was invited by TAAI and TAFI on a single platform to institute a united stand against the airlines. Further according to industry sources, the joint committee that was subsequently formed could well usher the formation of a consolidated association of IATA and non-IATA agents. Moving on a current note, the issue has been resolved to a certain extent with the committee that has been formed, resolved to push commission stand for Gulf carriers to July and a freeze on the commission paid for the next four years.
Taking the above-mentioned factors into consideration, the aviation industry is definitely in a confused situation where one good deed…gives rise to not another but many unknown hurdles. Surely exciting times for India all around with great business opportunities. But will it miss the bus is the question?
9. RECOMMENDATIONS
Reduce labour costs
All low cost carriers need to win significant concessions from their workers. Low labour outlays would consist of a mix of reduced wages, more flexible work rules and trimmed benefits including pension.
Simplify flight operations
Low-cost carriers use just a few types of aircraft, a strategy that cuts training and maintenance expenses.
Another way to simplify operations is modifying the hub-and-spoke model, which uses designated headquarter airports for transfers and increase service along heavily travelled routes.
Offer more transparent pricing
The low cost carriers have long had an exotic, almost incomprehensible pricing system. However, these days, with the Internet allowing travellers to shop for the cheapest tickets easily, and low-cost airlines offering uncomplicated set prices, these carriers have to follow suit or risk losing more and more passengers.
Get smart on fuel
With oil near $50 a barrel, airlines must be smarter about how they incorporate its price into their costs. Discount carriers lock in prices on future fuel when the price drops.
Stop chasing market share
Airlines need to be savvier about capacity. At the start of 2004, many planned to add more flights amid signs of an improved economy. When it became clear that demand wasn't as strong as originally forecast, most carriers still wouldn't retrench from their plans for fear of losing out if the market snapped back. Rather than scrambling to add seats in fear of missing out on the party, airlines would do well to take a more cautious approach and focus on efficiency and margins.
From bailouts to government partnership
Although the Indian airline industry was largely deregulated in 1990, plenty of lingering rules and regulations have made it nearly impossible for carriers to be efficient. Many believe that restrictions on foreign ownership and labour laws have kept the industry from innovating. So instead of lobbying for protective measures like bailouts, airlines need to work with government to tackle longer-term projects like building more runways, running airports more efficiently, and reining in labour costs.
A new model for premium pricing
Most of the industry's improvement efforts have focused on whittling down costs. However, boosting revenues also needs to be a priority. After all, people are willing to pay more if they believe they're getting more value, especially to the business traveller including airport lounges and more comfortable seating.
Make positioning
Cutting down cost can never be the strategy to attract customers in the longer run. Any carrier should take care of his positioning in customers mind for longer growth and survival in this cut throat competition.
Air transportation in India is under the purview of the Department of Civil Aviation, a part of the India's Ministry of Civil Aviation and Tourism. In 1995 the Indian government owned two airlines and one helicopter service, and private companies owned six airlines.
The government-owned airlines dominated India's air transportation in the mid-1990s. Air India is the international carrier; it carried more than 2.2 million passengers in FY 1992. Indian Airlines is the major domestic carrier and also runs international flights to nearby countries. It carried 9.8 million passengers in FY 1989, when it had a load factor of more than 80 percent in its fifty-nine airplanes. Analysts, however, attributed this high load factor to a shortage of capacity rather than efficiency of operation. A major expansion was planned for the 1990s, but an airplane crash in 1990 and a pilots' strike in 1991 damaged the airline, which carried only 7.8 million passengers in FY 1992. Two other accidents in 1993, plus several hijackings, put constraints on the growth of both airlines.
A third government-owned airline, Vayudoot, was also a domestic carrier in the early 1990s. It provided feeder service between smaller cities and the larger places served by Air India and Indian Airlines. By 1994 Indian Airlines had taken over Vayudoot. Another publicly owned company, Pawan Hans, runs helicopter service, mostly to offshore locations and other areas that cannot be served by fixed-wing aircraft.
In 1995 India's six private airlines accounted for more than 10 percent of domestic air traffic. Both the number of carriers and their market share are expected to rise in the mid-1990s. The four major private airlines are East West Airlines, Jagsons Airlines, Continental Aviation, and Damania Airways.
In addition to the Indian-owned airlines, many foreign airlines provide international service. In 1995 forty-two airlines operated air services to, from, and through India.
In the mid-1990s, India had 288 usable airports. Of these, 208 had permanent-surface runways and two had runways of more than 3,659 meters, fifty-nine had runways of between 2,400 and 3,659 meters, and ninety-two had runways between 1,200 and 2,439 meters. There are major international airports at Bombay, Delhi, Calcutta, Madras, and Thiruvananthapuram (Trivandrum), under the management of the International Airport Authority of India. International service also operates from Marmagao, Bangalore, and Hyderabad. A consortium of Indian and British companies signed a memorandum of understanding with the state government of Maharashtra in June 1995 to build a new international airport for Bombay, across the harbor from the main city and to be linked by a cross-harbor roadway. Major regional airports are located at Ahmadabad, Allahabad, Pune, Srinagar, Chandigarh, Kochi, and Nagpur.
Budget Airlines
It took some time for the budget airline industry to catch on in India. The concept originated in the west and was quickly picked up in the East Asian countries. Richard Branson of Virgin Airlines was the front runner in Britain, while Qantas took the major chunk of the Australian budget skies. In the post- WTC days of aerial terror, seat occupancies in established carriers crashed, leaving them to operate on losses. That was the time when the wallet-friendly carriers took off and still operated with profit margins. The non-frillers were characterized by few on-board services, elimination of catering and assistance services and little inflight glitz.
2. Air Deccan – The low cost air line carrier
India’s low cost airline carrier Air Deccan is the first to offer low airfares through a model similar to American airline Southwest. However, there’s a lot more behind Southwest’s success than just low costs; a detail that Air Deccan is quickly realizing; were quick to dismiss the concept as non-workable but the brand soldiered on and is now fairly popular.
The airline’s position of strength is in rock bottom rates; none of the larger airlines have figured out how to counter the fledgling airline’s pricing advantage. Virtually a monopoly in this category of economy flights, Air Deccan can celebrate as long as it remains unchallenged. However, the brand seems unprepared to take on competition and many aspects of the offering seem poorly managed.
Having done little to prepare customers for the brand experience, the relatively small size of the plane, the fact that passengers have to buy refreshments on flight, and the free seating arrangement may come as an unexpected (and unwanted) surprise to many.
The tag line “Simplifly” is a smart line that encapsulates “simplicity” in the context of flying, but many miss the subtlety of the line and read it as “Simplify,” which is not entirely bad in itself. However, Deccan’s advertisements focus almost exclusively on announcing new flights and rates, an opportunity that might be better used to explain aspects such as how the airline keeps its costs low. Communicating about the cost cutting techniques of, for instance, paper print outs in place of conventional flight tickets or the lack of free snacks on the flight, could be a useful to prepare the traveler for the flight experience. In the absence of an explanation of the brand’s strategy, Deccan stands to look cheap rather than inexpensive.
In practice, customer care varies from good to mediocre at Deccan. Service inconsistencies and aggressive call centre personnel lead to a feeling of “you get what you pay for,” an aspect that lacks the tactical brilliance of pricing and good cheer that Southwest radiates.
At present, limited routes and limited service restrict the brand from attracting a lot of travelers with its low cost offering. As these limitations fade, how well the brand capitalizes on its good start, how well it manages growth, and how well it survives competition remains to be seen. But for now the brand has a lot to do to convert its ambitious start into a success story.
3. Financial Status – Air Deccan
The Indian aviation sector is forecast to grow 20% a year over the next five years, as budget carriers draw in rail passengers in a country where less than a percentage of the billion-plus people travel by air each year. Air Deccan has an equity capital of only Rs 30 crore (Rs 300 million) and a debt component of Rs 15 crore (Rs 150 million). Air Deccan will seek to reach a larger audience in its maiden foray into the capital markets by floating 33-35% of its stock. The Air Deccan IPO, likely between November ‘05 and June ‘06, may see unloading of an estimated 17-19m shares in the market. The airline expects the IPO to raise an estimated $300m. The two investors, ICICI and International Capital, which hold around 26% in the company with their $40m private equity placement in January ‘05, may reduce their exposure to half during the IPO. The promoters, led by its MD GR Gopinath, may divest 20% or more of their equity. The IPO will not only provide an avenue to investors to part-unlock the value of their investment, but will also help in better retention of employees holding stock under the ESOP. Air mentioned that it will be in keeping with the airline’s buoyant growth prospects. The airline, which carried just under a million passengers last fiscal clocked revenues of Rs 350-370 crore with a marginal profit.
The topline is expected to touch Rs 1,000 crore this fiscal on the back of multifold increase in profit over last year, and a targeted passenger carriage of four million. The airline proposes to ramp up its fleet strength from 18 planes now (including five Airbus 320s) to 27-28 planes by March 31, ‘06. Deliveries of its 62 planes (32 A320s and 30 ATR-500-42/72 series) which were ordered for in December-January ‘05, will also commence shortly.
The airline keeps costs in check by offering tickets through the Internet. They will definitely be in a profit — (but) it will be a marginal profit because of the uncertainty on oil prices. The IPO is for fleet acquisition and enhancing our engineering and operational capabilities. Fuel accounts for about a third of Air Deccan’s ticket prices. Air Deccan competes with larger players like Jet Airways, state-run Indian Airlines and privately-held Air Sahara as well as another budget carrier, Kingfisher Airlines, run by United Breweries.
Air Deccan carried 11 lakh passengers last year while Jet ferried 79 lakh and IA carried 76 lakh travellers. Mr Gopinath said up to 40% of Air Deccan’s passengers were flying by air for the first time. Earlier this year, Jet Airways made a sterling debut on the stock markets after its $435m stock offering was heavily over-subscribed.
The airline is also considering an issue of American Depository Receipts (ADR). Plans for the offering, expected in June next year, come on the heels of a hugely successful issue launched by Jet Airways last year. The company has bought a group insurance policy of $200 million in the case of an air crash. As per the policy, passengers will be entitled to a minimum cover of Rs 750,000 each.
Air-Deccan could take up to 20% of the market if it is able to sustain operations for the next few years.
4. UNIQUE BUYING PROPOSITION
What's an Air Deccan flight can give to customers?
For starters, it's cheap. It is fast. And it is safe.
Customers can also book their ticket, which is priced at just a little more than half the cost of a regular airline ticket, on the Internet. There are no sweets or cotton earplugs when you take off. Then there are efficient airhostesses who wheel around carts of food: only, customers have to pay for the food.
All that passengers want from this airline is punctuality and safety, so Air Deccan takes extra care to ensure these two.
Government regulations prescribe that an insurance of Rs 7.5 lakh (Rs 750,000) should be taken out on every passenger who travels on the airline. However, Air Deccan makes a combined single insurance of $200 million on every flight and all the passengers who travel on it.
To book an e-ticket, customers have to log into their Web site www.airdeccan.net. Customers are taken, step-by-step, through a six-stage booking procedure, which even helps them to decide what flight they want to take.
Custoemrs can search for a suitable flight right on the Net, find out whether seats are available and get ticket prices (including taxes) online. Then, they have the option of contacting a mobile phone number and blocking a ticket, or filling up a form online and buying the ticket, using your credit card. There is a transaction fee of Rs 25 on every ticket.
Air Deccan does not provide the luxury of a coach to transport customers to their aircraft. Customers have to walk across the tarmac towards it.
Once any customer reach the aircraft, he/she will be treated as well as a passenger on any other more expensive airline. The passengers who are flying with Air Deccan right now are doing so for a variety of reasons.
To reach the destination quickly, and they don’t care about being served good food or drink.
To encourage a local enterprise.
First time fliers who are just to enjoy the travel by flight.
This airlines is not really low-budget, it is just regional. Their major USP (unique selling proposition) is extremely low airfares.
5. COMPETITION
Air Deccan can claim credit for bringing the budget airline concept to the Indian skies. Started last year, the Bangalore-based company is a subsidiary of Deccan Aviation, which operates chartered air services, mainly with helicopters. Air Deccan unleashed cut-throat competition in the aviation scene with fares mostly equalling similar train fares. In response, leading domestic airlines like Indian Airlines, Jet Air and Sahara Airlines slashed rates and unveiled Advanced Purchase schemes (Apex) to take on the new challenger. Competition, as always, brought the best to the customer. “Our mission is to keep our fares low and keep lowering them with time,” says Air Deccan’s Gopinath. Air Deccan is initially planning to tap the budget air traveler to and from metros to non-metros. But competition was not far behind. Barely a year after Air Deccan took to the skies comes news of Vijay Mallya’s Kingfisher Airline. In June this year, Mallya announced his plans to take to the skies with his own Indian no-friller. The flamboyant chairman of the multi-crore UB group is not known to do things half-way. And Mallya will be flying on the wings of the well-established Kingfisher brand. Bangalore’s King of Good Times, a trained pilot himself, went the whole hog with plans for a 16-strong Airbus A-320 fleet to run its operations. (Four have been ordered from Airbus, with options to buy eight more, and operating another four on lease basis.) "It is always good to welcome a new customer to the Airbus family, and we derive great satisfaction in being its partner in delivering comfort and value to passengers," says Airbus President and CEO Noël Forgeard. Kingfisher is investing Rs 150 crore to kick off operations. Expect a dazzling show. Mallya’s birds will be taking to the skies in early 2005. Here’s a sneak preview: Kingfisher Airlines, Mallya says, will not be a run-of-the mill Indian budget airline. Expect a value-added designer no-friller. Kingfisher Airlines will be emphasizing on spunky, well-done interiors and trained airhostesses. Each A-320 will carry 180 passengers. Borrowing from the Kingfisher beer tagline of “The King of Good Times”, Mallya is pushing the theme of “Fly The Good Times” for his unborn baby. Kingfisher is planning to capture the Indian budget airline market with the twin engines of ‘special flying experience’ and ‘value for money’. Contests like `Kingfisher flying face of the month' are on cards.
The Kingfisher air hostesses will be selected through a nationwide contest. Expect designer staff uniforms. The Kingfisher "Funliners" will have in-flight silent auctions for lifestyle products and sales of packaged food and beverages. Mallya is sure to leverage on the Kingfisher brand of exuberant, youthful and fast-paced image. The man behind the Kingfisher swimsuit calendar can be expected to put up a stiff challenge to Air Deccan and other low-cost aspirants. To begin with, Kingfisher Airline has roped in model Katrina Kaif to endorse the airline. We hope you get it. Don’t expect an Udipi hotel from Mallya. Await the smart fast food joint.
Vijay Mallya already has a company called UB Air, which is a non-scheduled airline. He will be probably moving the civil aviation authorities to convert this licence to one for a scheduled airline. Kingfisher Airline charges are expected to be higher than Air Deccan’s, but substantially less than those of the big players. Even as the budget carrier battle hots up, the airline biggies are not sitting idle. Country’s flag carrier Air-India recently announced its move to set up a subsidiary called Air India Express, which will be an international low-cost airline. Air India Express will be taking to skies in March 2005. There will be a fleet of 14 Boeing 737-800s, which will be taken on dry lease in three phases. These aircraft will have 181 Economy Class seats in single class configuration. The new airline will operate 63 flights per week when six aircraft are inducted on dry lease at the time of the launch. With the induction of four more aircraft, effective winter 2005, Air India Express will operate 38 additional flights, and add another 26 flights in the third phase effective April 2006, when four more aircraft will join the fleet. Thus, within a year of operations, Air-India Express will operate a total of 127 flights with 14 aircraft to destinations in the Gulf and South-east Asia. Meanwhile, Australian carrier Qantas Airways is planning to include Indian cities among many others for its low-cost airline to be launched in November this year. The as-yet-unnamed airline will be operated from Singapore, says Qantas Airways manager (India & South Asia) Khursheed Lam. The inclusion of Indian cities for Qantas low-cost low-cost airline is subject to bilateral seat sharing agreement and code-sharing, according to Ms Lam. Bilateral discussions over seats and code-sharing between the two countries are likely to be held next week. "We have a flexible approach as far as flights, destinations in India and code sharing are concerned,” Qantas Airways, head of sales & distribution, Rob Gurney said. The planned Qantas budget airline is a move to participate in the booming intra-Asia travel mart. The no-frill airline is set to commence with four A320 aircraft in November out of the eight A320 aircraft, for which lease agreements have been signed. The airline has plans to build a fleet of more than 20 aircrafts over the next three years. The ambitious plans notwithstanding, the history of private sector aviation in India is not very heartening. Ratan Tata is still sore that the Air India nationalisation left the Tata group high and dry. Tata’s late attempts to bid in the botched Air India privatization process came a cropper. Air India divestment plan itself was abandoned. Earlier, Indian private airline operators like NEPC Airlines and East West Airlines disappeared without a trace. Every few weeks, leading private carrier Jet Airways is faced without questions about its funding and promoters. It was Arun Shourie himself who said when he was divestment minister that he doesn’t know if Jet Air is an Indian or a foreign firm! Meanwhile, another low-cost Indian carrier is reportedly facing problems in starting up. The Bangalore-based AirOne Feeder Airline, was supposed to start its flights with two Embraers from Brazil. The delay in Embraer delivery has forced AirOne Feeder to postpone its launch twice already. AirOne is now expected to take off only in early 2005. The company is looking at leasing two new Embraers with 50-seat capacity. The Embraer brand is not generally used in India. AirOne is believed to be targeting non-metro routes to corner its share of the market.
As the catfight hots up, expect fur to fly. Air Deccan says its aim to keep reducing fares further and further. More carriers, both Indian and foreign are expected to come up. Airline industry experts believe that there is space for at least five domestic low-cost airlines in India. Meanwhile, expect the big daddies of domestic aviation to match up with cost-cutting and aggressive Apex schemes. The battle for budget skies has just begun.
Given that the exceptional growth in the past two years have been driven by falling airfares, it’s the low-cost airlines that will likely draw a larger percentage of the new non-business travellers. And fares can still go lower. Says Subhash Goyal, president, Indian Tour Operators Association: "Fares can fall 25 per cent from current levels." This could happen as early as later this year, when more low-cost airlines launch their services. If fares fall by 25 per cent and Jet follows suit, as it will probably have to in cost-conscious India, the airline will have to ferry 30 per cent more passengers in 2005-06 just to match its 2004-05 revenues. Only after that will growth kick in.
Unless oil prices go up further, full-service airlines can forget about higher fares in the foreseeable future. Their growth will primarily come from flying more passengers. Last year, Jet’s average aircraft occupancy was around 65 per cent. Traffic in India is projected to increase at 5-6 per cent a year for the next 10 years. By comparison, the industry is expected to increase seats by 20 per cent this year. In other words, it will take some years for occupancy to catch up. Foreign routes, which were recently opened to Jet and Sahara on a selective basis, will be a new revenue stream, but these are also cut-throat markets.
Luxury rail segment faces air challenge
With air fares hitting rock-bottom, it is the railways that has been most hit. Therefore, it is imperative for the railways to take on competition head-on. The decision of more airlines like the Deccan Airways to jump into the cut fare market for long distance travel is undoubtedly coming as a bolt out of the blue for the railways which is getting more immersed into social moorings than concentrating on profit making ways. The plethora of incentives from the airlines is, however, making the railways now sit-up for fear of losing the upmarket luxury segment which provides higher profitability than the second class sector.
Even otherwise, the new challenges have made modernisation of the railways imperative. Railway minister Lalu Prasad, who had strongly advocated against privatisation saying he would not even hesitate to resign in case it is forced on his ministry, seems to be tempering his pronouncements by admitting that the Rakesh Mohan committee and other reports for making railways competitive are relevant. The various recommendations, among other things, have called for commer-cialisation of vacant rail land and offering offseason discounts in the air-conditioned class.
Railways have about 423,000 hectares (ha) of land out of which 20,000 ha of land is vacant, mostly in longitudinal strips along the track. Even though much of the land is required by Railway for its own use, the earlier proposal for commercialising the air space in these lands has not gained momentum. Currently, in a small way, the land which is not needed for immediate use is utilised temporarily for plantation, commercial licensing, for purposes directly connected with Railway working, etc.
Railway officials, however, claim that the various programmes including technology upgradation to make the sector commercially viable is receiving utmost attention. As a follow up to the Independence Day pronouncement of former prime minister Atal Bihari Vajpayee last year regarding setting up of a Technology Mission on Railway Safety, they say action has been initiated and four mission programmes in the field of traction and rolling stock, track and bridges, signal and communications and fog vision instrumentation have been jointly identified by RDSO and IIT-Kanpur. Ministry of railways has approved 14 projects under the four mission programmes and it will be a joint effort between ministry of railways, ministry of human resource development and industry.
Though the railways is trying to keep pace with technology infusion and other modernisation measures to remain competitive, these would have to be greatly enhanced at a shorter period of time. For instance, the speedy internet airline ticketing system would have to be strongly matched with a people friendly online booking system in the railways.
It is in the fitness of things that the frontiers of the much acclaimed customer friendly computerised passenger reservation system (PRS) have been expanded further with the introduction of internet booking. Now, reserved tickets are also being delivered at the doorstep of the customer. On the unreserved side, where difficulties continued to persist, a major break-through was achieved last year with the introduction of computerised Unreserved ticketing system (UTS), which seems to be finding acceptance among the general public. Officials state that the system is proposed to be extended further.
In the new era of transport alternatives, the railways would need to overhaul its system, both for freight and the passenger services, to stay afloat as a commercially feasible and profitable organisation.
6. Operating Strategy
Are the operators going to slash the fares for the executive class as well so that he can shift into the Everybody has a worry or query as far as India's civil aviation sector is concerned. But the fact remains that history has been created in the country with the cost of air travel coming to as low as Rs.700. While Air Deccan has set the ball rolling in the skies with its most affordable airline, Delhi-Mumbai for Rs.700, it is set to face stiff competition even at this down-to-earth rate, not to mention surviving the logistics that are at odds. The moot point, however, remains - is the concept viable in India? Those who have a stake in it believe it can be achieved by cutting out frills.
Startups in the runway
Perhaps even J R D Tata, the man who brought aviation into this country, might not have visualised such a future when train and air travel will be at par by default. But it has become a reality, at least for the time being. Air passengers in India may soon reap the benefits of cheaper fares with several players planning to start low-cost airlines. Already, as many as 12 startups have applied for licences. This is when the civil aviation minister Praful Patel has stated in Parliament that there is no proposal at present to open up the domestic aviation sector to foreign airlines. Otherwise, the queue would be even bigger.
Liquor baron Vijay Mallya of the UB group, known for his beer brand, Kingfisher, already owns a fleet of helicopters and private jets, is also set to launch Kingfisher Air, his version of cheap airline. The Wadia group, owned by Bombay Dyeing chief Nusli Wadia, is also planning to foray into the low-cost airlines business. The Wadias have already applied for the necessary permission from the civil aviation ministry and are hoping to commence service early next year.
Even our national carrier does not want to be left behind in this rat race: Alliance Air, the Indian Airlines subsidiary which operates Boeing 737s, will become the national carrier's low cost airline. Not only this, in order to take the battle a bit further, India's international flag carrier, Air-India is planning to launch a new discount airline - Air-India Express - by April 2005. The move is aimed at boosting the share of Air-India in the Gulf and Southeast Asian markets. These markets have been the most profitable for the airline but it has been facing stiff competition on these routes. The new discount airline will have about 25 per cent lower fares than the ones offered by other international airlines.
As low as it can get
So just how cheap is it going to get? Air Deccan, the company which pioneered no-frills flying, says a Delhi-Mumbai ticket could be bought for as low as Rs.500 - only Rs.20 more than a second-class rail journey. The business philosophy of Capt G R Gopinath, managing director, Air Deccan, is loud and clear - the next time you will have one guy paying Rs.500, another guy paying Rs.4500 and the guy next to you Rs.3000, all in the same flight! Such fares would be possible because the airline will auction away its seats - about 180 seats on the Delhi-Mumbai flight - on a first-come-first-served basis.
If a passenger decides to buy a ticket three months before the journey, the ticket comes for only Rs.500. The same ticket will cost Rs.4500 if you buy it a day before your journey.
At present, only 1.5 per cent of Indians can fly given the high airfare but all that could change with the entry of low-cost operators into the market. Air travel became much more affordable when the airline companies announced Apex fares. People could travel at half the cost by simply buying a ticket 30 days in advance. Now if the low-cost airlines succeed, it could well change the rules of flying in India.
Let's accept that the demand factor promises a smooth ride for the low-cost airlines. The most affordable means of travelling in the country, railway, is in such a miserable state that nobody wants to travel by rail, only if one can help it. Concerns are many - from safety to poor quality of service, overcrowded coaches to booking problems.
Packaging is the mantra
Here it would be pertinent to understand as to who would fly these low-cost airlines in India. Keeping in mind the business model of these airlines, where bookings have to be made at least 30 days in advance, there seem to be three segments of customers - the price conscious business traveller, the leisure traveller and those who planned vacation much in advance. Now, if we talk of business travellers, a large proportion of them travel at company expense and might not have a reason to migrate from full-service airlines. The fact that most of the business meetings are not planned that much in advance is also a deterrent. And in order to tap the other two segments of air travellers, the LCAs need to tie up with the travel agents to offer the tour packages. This is a model practice worldwide, like Air Asia's tour packages from Bangkok to Penang, or a honeymoon package from Kuala Lumpur to Phuket. But the very business model of the Indian LCAs is dismissive of travel agents in order to cut the cost. As a result, many enthusiastic travellers will never come to understand that low cost air travel is simple, easy to book and a great savings option.
The grey areas
Air Deccan is already facing rough weather on the route. The airline has not yet managed to get a counter at the Delhi airport to sell tickets. Most low-cost airlines want to start their flights from metros like Delhi and Mumbai. But airport officials say they have a problem in hand as infrastructure at these airports seems over- stretched. Delhi and Mumbai airports handle 20,000 domestic passengers a day and more passengers will only lead to more congestion. There are no extra parking bays in both the airports and the new airlines may have to park their planes in nearby airports. This means their fuel costs will go up.
This is just the tip of the iceberg. In a country where the domestic aviation sector has been repeatedly complaining how difficult it is to sustain, survival logistics seem to be heavily placed. In reply to a question early this year, Parliament was told that while losses of Indian Airlines had been Rs.145 crore in 2002-03, India's largest private airline Jet lost Rs.242 crore in the same year.
Experts believe the government must ensure measures to check the high cost of infrastructure. While the landing charges at Indian airports are too high compared to international norms, state governments impose hefty taxes on aviation turbine fuel.
At what cost?
But the question still stands - cost cutting at what cost? And how much will it save? Obviously, no frills on board means lesser crew staff, which can cut the cost up to 10 per cent. Secondly, by selling the tickets through the Internet, which can also save the commission of travel agent, there can be, a saving of another 10 per cent. Then selling food and drinks on board can increase revenue. Besides, this airlines is also planning to advertise on seats and boarding passes.
7. WILL AIR DECCAN SURVIVE?
It's an audacious incentive scheme -- especially in the glamourous world of the airline business. The next time customers may find an airhostess on board the no-frills airline Air Deccan cajoling customers into buying samosas, a sandwich, or even bottled water, don't be taken aback.
For the airline offers its cabin crew a 10 per cent commission on all beverages and food that they sell passengers on the flight. Captain G R Gopinath, co-promoter and managing director of Air Deccan, explains the logic.
As the airline does not offer complimentary meals, he expects the average passenger to fork out about Rs 75 to pick up a quick meal. On a margin of 30 per cent for the 1 million passengers who have flown Air Deccan over the last 12 months, that means Rs 7.5 crore (Rs 75 million) in extra revenue.
That, of course, is not the only way Air Deccan is innovating revenue. It hawks advertisement space on the seats, the cabin interiors, and even on the body of the airplane.
And it will soon offer inflight entertainment -- from movies to news and music -- at a cost, naturally. Gopinath reels off some figures -- the airline is already making about Rs 20 lakh (Rs 2 million) on each Airbus aircraft a month through ad revenue, and he hopes to squeeze in another Rs 5 crore (Rs 50 million) by hawking inflight entertainment.
These permutations aside, what is Gopinath's secret mantra for running a low-cost airline? "My cost per kilometre per seat is only 4.3 cents," he says simply, "my competitors fly at 8-16 cents. My revenue yield is 5.1 cents. And now, by expanding the network and adding more flights, I will reduce costs even further".
That is precisely what Gopinath and his team are busy with: Air Deccan is on a major overdrive and wants to transform itself from a small regional feeder route carrier to a pan-Indian player.
Taking off rather shakily (its inaugural flight had caught fire) with only two ATR turbo-prop aircraft in September 2003, the fledging airline has targeted a fleet of over 35 aircraft by March 2006 (which will include 13 Airbus 320s).
At the moment it flies 64 flights a day, with 7 ATRs and three Airbuses, but has set itself an ambitious five-fold increase in the number of flights to about 300 by March 2006.
That's not all. By March 2005, the airline hopes to grab a 10 per cent market share (up from 3 per cent in March 2003) with a passenger load of 1.4 million. It will add 10 new cities on the map within the next four months. The target is to have over 30 Airbuses and a similar number of ATR turbo-props in the next three years.
The cornerstone of the aggressive expansion is rock-bottom tariffs to impel users of railways to upgrade to air travel. The first salvo was shot last year when Air Deccan offered tariffs that were at least 50 per cent cheaper than scheduled airlines.
But the bigger bombshell was thrown this year when Air Deccan offered air travel at an amazing Rs 700 (on only a few seats) -- virtually half the price of a railway ticket in many destinations. By next year the airline hopes to push down tariffs by at least another 10-20 per cent.
And Gopinath is not complaining. Already, as much as 90 per cent of the 10,000 seats till March 2005 on the Bangalore-Mumbai sector are booked. On the Delhi-Mumbai sector, 65 per cent of the capacity for the same period is full. But the pygmy airline is still thirsting for dollops of cash if it is to fly into the big league.
Industry watchers say the going had been easy so far as Air Deccan mostly leased turbo-prop ATRs. But the game will change dramatically with the introduction of Airbuses and forays into metro routes where Indian Airlines and Jet Airways reign supreme.
Inevitably, this had led to speculation about Air Deccan's survival. Already, the company has slipped from its turnover target of $120 million by March 2005 because of delay in aircraft acquisition, scaling it down to $90 million.
Nor will the going be easy. Says Kapil Kaul, senior vice president of the Centre for Asia Pacific Aviation, an aviation consultancy firm, "Air Deccan will have to face intense competition from new airlines like Wadia, Kingfisher Air and Royal Air next year, all of which are looking at low-cost models. Also, the existing carriers will not keep quiet."
The three big carriers, for instance, have been quick in responding to the Air Deccan challenge on metro routes by dropping tariffs on select flights where, unlike an apex fare, you need not book earlier.
Indian Airlines has responded by bringing down tariffs on its flights that coincide with those of Air Deccan. For instance, IA is offering Fly Select fares on three flights from Delhi to Mumbai -- at 9 am, 10 am and 6 pm -- for Rs 4,200. (Air Deccan flies at 8.55 am and 4.30 pm.) Says an IA executive: "Passengers may pay Rs 500-1,000 more, but they get major advantages -- they don't have to book in advance or lose their money if they cancel, and will get food and beverage on the flight. The premium they pay is very little".
Even Jet (through their Check Fares) and Air Sahara (through Steal a Seat) are using the same model. IA is also planning to have at least three of its Airbus 319s, which will be delivered next year to run with only economy seats and cheaper tariffs.
Competitors point out that the average tariffs for Air Deccan aren't as low as they are made out to be, and even Air Deccan admits to an average ticket yield of Rs 3,750 on its Bangalore -Delhi leg.
The hyped Rs 700 seat is booked within hours, and for many passengers seems more an advertising gimmick than reality. In most cases, the apex fares offered by the three airlines are more or less similar to what you can book on Air Deccan.
Says a senior executive of a competing airline: "If you book three months in advance, you get a cheap price, but between the seven-30 day advance booking period there are many cases where tariffs of full carriers are cheaper".
Also, these carriers are cutting costs too. Says Rono Dutta, CEO of Air Sahara: "There are smarter ways of cutting costs than by stripping down the product. In fact, today our costs are not any higher than those of Air Deccan."
Sahara has restructured its routes by creating a hub in Hyderabad. Dutta says this will improve utilisation of his fleet by over 10 per cent and save passengers travel time of over 50 per cent for those taking onward flights, as they don't have to wait long to take the next flight.
Plus, with the carrier spending $20 million, it will save cost by having a single hub, spare parts depot and maintenance centre for its whole operation.
So where have Gopinath and his men cut costs? Gopinath suggests that his Airbus aircraft have 180 seats -- 22 per cent more than what his competitors squeeze in -- and that he flies his aircraft for over 12 hours compared to the competition's eight-nine hours.
Besides, his sales and distribution costs constitute only 8 per cent of the total cost compared to the full-service airlines that spend as much as 28 per cent.
That's because he has managed to shift bookings away from travel agents to the Net, ensuring his money upfront (you pay by credit card or cash), does not use international reservation systems (like Amadeus), which charge money for each transaction, and saves on agency commission.
There are also savings in avoiding the printing of tickets, and keeping staff on a tight leash. Besides, he only flies point to point with no onwards or connecting flights, saving on both fuel and time.
But many analysts and competitors say the cost-cutting model might not work here at all. For instance, IA says it also flies its aircraft for 11 hours, so that's not a big deal.
Adds Sahara's Dutta: "Low-cost made sense in Europe and US where labour costs constituted over 45 per cent of total cost; in India it is not more than 15 per cent. Instead, 50 per cent of the cost is fixed."
Analysts suggest that Air Deccan's ATRs did not have to pay landing fees, and forked out nominal navigation charges (government allows special rates for aircraft with less than 50 seats).
"But with Airbus, this saving (which is as high as 18 per cent of total cost) will cease to exist. Then the battle will be different." Worse, unlike in Europe, there are no no-frills airports (such as Gatwick in UK) that charge a fraction of the cost for landing and parking compared to the main airport.
Competitors also point out that the key ingredient for success of a low-cost airline is its dependance on e-ticketing. But in the case of Air Deccan, as much as 40 per cent ticket sales are through agents.
Says an airline executive: "He offers them the same 5 per cent commission we do, and is now also offering them credit lines. If they were not important, why should he do so?"
For instance, Air Deccan has recently tied up with ICICI Bank under which agents are issued a special Air Deccan credit card to buy tickets from the Net with a 40-day credit free limit. (Gopinath says he still gets his money upfront from the bank.)
The managing director of Air Deccan knows it isn't going to be a cakewalk for him. But he points out that he should be able to make a profit in the first year of operation itself.
No doubt he is also banking heavily on how successfully he can raise the funds for his next expansion phase. That could well be his acid test. And he knows the battle will only get fiercer.
Money matters
Air Deccan has an equity capital of only Rs 30 crore (Rs 300 million) and a debt component of Rs 15 crore (Rs 150 million). That might be passable when you run a small operation with turbo props, but running a pan Indian airline with Airbuses is a different kettle of fish.
Company finance director Mohan Kumar agrees that the funding requirement will change dramatically -- he is scouting for $300 million to buy six Airbus aircraft next year -- by roping in fresh investors to expand the equity capital base.
Already, Air Deccan is in the final stage of negotiations with three equity investors (ICICI Venture and Capital One among them) to raise $50-60 in fresh equity.
Says Kumar: "We might do a deal with all three, or with one of them. An option is to issue zero-interest convertible debentures to these investors where the conversion would be tied up with the company's performance." The company is ready to offer up to 26 per cent to the new investors.
That still leaves a yawning gap of $240 million. Air Deccan says this will be raised through debt, talks for which are on with Export Credit Agency of Europe that funds up to 85 per cent of the cost of the plane as long as companies buy European products.
But that could overburden the company with debt and high interest costs. Kumar says the debt to equity ratio will go up from 0.5 to 2 -- beyond this would put a strain on the company's bottomline.
So on an equity capital base of $67 million (after the new investors have been roped in) it will be able to raise debt to a maximum of another $130 million.
That still leaves a gap. Kumar's answer is to get into a contract with Airbus to buy the aircraft (as the Export Credit Agency does not give loans for leasing out), then transfer the contract to a bank or a leasing company which will then buy the aircraft and lease it back to Air Deccan.
Talks are already on with international banks, he says, that will ensure Air Deccan's debt burden is under control. He says the company might be able to buy two aircraft (the price of an Airbus 320 is around $56 million) and take the rest on lease.
Analysts say the airline's future is uncertain until the financial deals are closed. Especially as the financial restructuring does not include the leasing of more ATRs.
They also say the debt burden could put tremendous pressure on the company's bottomline, something Kumar refutes as he says that these are long term loans spread throughout the life of the air craft.
8. FUTURE OF THE INDUSTRY
India Inc is going places, literally. With the civil aviation and tourism portfolios at the Centre under the charge of able ministers like Praful Patel and Renuka Chowdhary - combined with a leadership inclined to open up the economy, one suddenly witnesses great dynamism in these sectors. The country is witnessing an unprecedented revolution in the aviation industry that is opening the skies to private carriers, driving down ticket prices and giving foreign airlines and equipment suppliers unmatched access to one of the world's fastest-growing markets. But how long will this boom sustain? Express Travel & Tourism takes a look at both sides of the coin - the good and the bad of the sudden aviation boom.
Picture Perfect: Aviation Boom
The explosion in Indian air travel is driven by a booming economy, a rapidly growing middle class and increased deregulation. Not a week passes without one airline or another coming out with announcements on introducing new routes or expanding services on existing routes. The liberalised policy has also been permitting airline companies in India to expand operations both within and outside the country.
Air Traffic Booming
Despite the nation's population of more than a billion people, it has just 165 commercial planes. The United States, which has about 300 million people, has about 6,000 commercial airliners. But India is changing rapidly, emerging as one of the fastest-growing markets. Air traffic in India has been growing rapidly, adding around 275,000 passenger seats in 2004, and it is expected to add more than 325,000 in 2005. Even aircraft manufacturers are working out their strategies for India and to that effect, Boeing itself has revised its projections upward. Barely six months ago, it projected its business in India would reach US$ 20 billion within 20 years. Now, the company is saying it will grow to US$ 35 billion in that time.
Route Expansion
After a gap of nearly 15 years, one witnesses tremendous activity at state-owned Air-India and Indian Airlines. Inept and poor political leadership, lack of resources and the absence of new policy initiatives have bedeviled these airlines. All these seem to have been pushed back in the last couple of years. Both companies have been busy planning major fleet expansions. Boldly going for lease options, these state-owned airlines are preparing themselves to win a good stake of the present boom in air travel. Air-India posed impressive plans for its no-frill subsidiary, Air-India Express that offers attractive introductory fares to countries in the Gulf from Delhi, Mumbai and Kerala.
Recently, Britain and India agreed to more than double air flights on existing routes between the two nations and open up lucrative new services to Indian cities. A similar deal was signed between India and the US. Jet Airways, India's largest domestic carrier, announced that passenger traffic would increase by 15-18 per cent this year.
The boom in the Indian aviation industry has boosted the fortunes of international aircraft leasing companies, whose business in India has tripled over the last two years. Almost every airline, public or private, is taking the lease route to raise capacity in the shortest possible time. Benefits of operating leases include lower cash outlays to preserve working capital, the flexibility to increase or reduce capacity quickly and the ability to induct new aircraft models with no need for pre-delivery payments.
Lufthansa, is the perfect example for being the most successful in capturing emerging opportunities. Bangalore and Hyderabad in the South have been receiving a lot more attention well before the new airports in these cities have taken shape. Lufthansa and Saudi Arabian Airlines have introduced new flights from Hyderabad. Asian, European and Middle Eastern airlines are already ramping up flights to India. Britain's Virgin Atlantic Group even hopes to buy a stake in an Indian carrier, although civil aviation authorities have yet to permit such investments.
New Carriers…New Options
With more competitors flocking to the India market, prices of tickets for domestic and international travel are plummeting. As Air Deccan has upped the ante with a Re 1 flying offer, Kingfisher Airlines, that has started services on the Mumbai-Bangalore route recently, is talking of becoming the number one domestic airline by 2010. With the announcement of the UB Group's foray in the Indian aviation industry, Kingfisher Airlines has already become a force to reckon with. After Kingfisher Airlines, the rank of budget airlines will have other new entrants like Magic Air and SpiceJet that have already commenced service in May and took the industry by surprise with its Red Hot Rs 99 offer, Go Air and Air One in the coming months. Last but not the least is the re-launch of East West Airline, after almost a decade. The Airline hopes to take wings again by the end of this year and is in the process of renewing its license soon. It is in talks with Boeing and Airbus for buying aircraft, and with two foreign investors to raise US$ 50 million to US$ 60 million in the next two years. Further, according to the Centre for Asia Pacific Aviation, the new low-cost airlines will help add at least five million new passengers every year taking the total number of air travellers to 50 million by 2010.
Open Skies - The After-Effects
One of the arguments for the open skies policy is that it will lead to huge benefits for tourism. A November 30, 2003 government-appointed committee report titled 'A Roadmap For The Civil Aviation Sector' unequivocally states: 'The international air transport segment is inexorably moving towards liberalisation, particularly at the regional and sub-regional levels. Even within bilaterals, which continue to be a dominant form of regulating international air transport, many of the recent agreements and amendments are reported to contain some features of liberalisation. Many countries have unilaterally opted for liberal air transport policies, often based on a broader perspective of national interest, including economic development and trade benefits.'
If Asia's fourth-largest economy is poised to grow significantly over the next five years then even the most conservative analysts predict massive growth in India's air travel market. India, and the wider Asian air travel market represent an opportunity that most airlines are grasping with both hands. Competition will be intense, with new domestic airlines pitching in.
The Challenges Ahead
The aviation ministry, which till very recently was henpecked by the industry for its obdurate stance on deregulation, is now receiving shouts of support for not going too fast too soon. Aviation experts forecast that India's annual passenger load will hit 50 million by 2010. International travel to and from India is soaring at a 20 per cent annual clip. According to the International Air Transport Association (IATA), international airline passenger numbers are set to grow by six per cent year-on-year till 2008. The key driver for the growth would be the economic expansion in India and China. Cargo volume is also likely to be up by six per cent annually over the 2004-08 period. The growth, however, will strain airports and other infrastructure. Though some changes in the management of airport infrastructure have been initiated, India still has a long way to go.
Airport Apathy
Liberalisation and restructuring of airport infrastructure is going to be a far more complex and difficult task than the restructuring of air services. Nearly every aspect of services, from runway maintenance to air-traffic control and baggage handing, needs huge upgrades to cope with bigger demand. The government has earmarked US$ 3 billion to upgrade main gateway airports at Mumbai and New Delhi, and as much as US$ 300 million to build airports at Bangalore and Hyderabad.
V Thulasidas, chairman and managing director, Air-India, takes first guard, "An increase in the international airline seat capacity to and from India is no doubt good for the promotion of tourism. However, this is only one of the facilities required and unless it is supported by other infrastructure facilities like adequate number of hotel rooms, good airports, tourist friendly procedures, good roads and rail connectivity, overall cleanliness etc. An increase in the number of airline seats alone cannot lead to more tourist travel." Therefore, the immediate need of the hour is not so much to start new airlines so much as to develop the airports infrastructure.
He further points out that many of the competing airlines are more interested in exploiting the Indian travel market and not necessarily promoting international tourist travels into India. "What we need is a carefully orchestrated and balanced plan for opening up the international travel sector with adequate emphasis on the growth plans of Air-India. Allowing more foreign airline capacity into India or alternatively permitting domestic airlines to fly international routes need not be the only solution for increasing the international air travel capacity," he adds.
Tourism Reality Check
Qatar Airways CEO, Akbar Al Baker insists that the open skies policies are key to developing the aviation industry in the country and so too, tourism, since airlines are the chief delivery system of the tourism policy of any country. "There are approximately 30 million Indians staying abroad while only 35 million seats have been allocated through the sale of traffic rights of which 17.5 million are utilised leaving a huge gap in supply of seats even for NRIs and expatriates wanting to visit India. These traffic rights include countries that do not operate into India while additional seats are not being granted on high-density routes," he says.
LCC - Not An Easy Task
The verdict on the birth and subsequent maturity of low cost carriers (LCC) still has its jury out on a limb. While it is quite clear that for air travel in this country to become as commonplace a culture as is the case in the US, LCCs have to thrive and consolidate, their roadmap appears fraught with a despairing ignorance from the government in so much as creating a parallel cost regime that recognises the minimal framework these airlines operate within.
Trade Dilemma
Last but definitely not the least is the hot debate between airline and agents on the commission structures. Globally, the current scenario hotting up where airlines and agents are at loggerhead over the zero commission regime, in many a developing market and India is on the hit list at the moment. While the agents' boycott of Air-India did little to move the airline, a bit of history was created when non-IATA association (ETAA) was invited by TAAI and TAFI on a single platform to institute a united stand against the airlines. Further according to industry sources, the joint committee that was subsequently formed could well usher the formation of a consolidated association of IATA and non-IATA agents. Moving on a current note, the issue has been resolved to a certain extent with the committee that has been formed, resolved to push commission stand for Gulf carriers to July and a freeze on the commission paid for the next four years.
Taking the above-mentioned factors into consideration, the aviation industry is definitely in a confused situation where one good deed…gives rise to not another but many unknown hurdles. Surely exciting times for India all around with great business opportunities. But will it miss the bus is the question?
9. RECOMMENDATIONS
Reduce labour costs
All low cost carriers need to win significant concessions from their workers. Low labour outlays would consist of a mix of reduced wages, more flexible work rules and trimmed benefits including pension.
Simplify flight operations
Low-cost carriers use just a few types of aircraft, a strategy that cuts training and maintenance expenses.
Another way to simplify operations is modifying the hub-and-spoke model, which uses designated headquarter airports for transfers and increase service along heavily travelled routes.
Offer more transparent pricing
The low cost carriers have long had an exotic, almost incomprehensible pricing system. However, these days, with the Internet allowing travellers to shop for the cheapest tickets easily, and low-cost airlines offering uncomplicated set prices, these carriers have to follow suit or risk losing more and more passengers.
Get smart on fuel
With oil near $50 a barrel, airlines must be smarter about how they incorporate its price into their costs. Discount carriers lock in prices on future fuel when the price drops.
Stop chasing market share
Airlines need to be savvier about capacity. At the start of 2004, many planned to add more flights amid signs of an improved economy. When it became clear that demand wasn't as strong as originally forecast, most carriers still wouldn't retrench from their plans for fear of losing out if the market snapped back. Rather than scrambling to add seats in fear of missing out on the party, airlines would do well to take a more cautious approach and focus on efficiency and margins.
From bailouts to government partnership
Although the Indian airline industry was largely deregulated in 1990, plenty of lingering rules and regulations have made it nearly impossible for carriers to be efficient. Many believe that restrictions on foreign ownership and labour laws have kept the industry from innovating. So instead of lobbying for protective measures like bailouts, airlines need to work with government to tackle longer-term projects like building more runways, running airports more efficiently, and reining in labour costs.
A new model for premium pricing
Most of the industry's improvement efforts have focused on whittling down costs. However, boosting revenues also needs to be a priority. After all, people are willing to pay more if they believe they're getting more value, especially to the business traveller including airport lounges and more comfortable seating.
Make positioning
Cutting down cost can never be the strategy to attract customers in the longer run. Any carrier should take care of his positioning in customers mind for longer growth and survival in this cut throat competition.
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