September 11, 2009
Most service providers to India’s domestic carriers are scratching their heads wondering where the industry is headed.
It’s not enough that India’s airlines are estimated to have lost some $2 billion in the last financial year. The International Air Transport Association has come up with an equally worrying forecast for the coming year. The severe hike in the oil price last year brought many to the same conclusion: India’s aviation industry has reached a dead end.
The trouble is, India’s explosive growth in air capacity had never quite matched the expansion in demand. The urge to build market share seems to have infected all carriers in the boom years. And although passengers rejoiced in cheap tickets, crimson ink has blotted the bottom lines of almost all airlines — even during the so called “good times”.
Now the trend is shifting toward low-cost service. Kingfisher Red, formerly known as Air Deccan, apparently carries already 75% of passengers that fly under the Kingfisher brand. Jet Airways is aiming to shift a similar amount of traffic to its new low cost and economy-only product, called Jet Konnect.
This is a somewhat surprising development. Both Kingfisher’s glamorous promoter, Vijay Mallya, and Jet Airways’ Naresh Goyal have always maintained that low-cost could not work in India. The “input” costs– such as parking and landing charges, fuel and lack of low cost airport infrastructure — were deemed too high. And since these conditions affected all airlines in equal measure, the thinking went, it made the model non-viable in India.
There’s some truth here. Landing, parking and navigational charges are pretty uniform in the country, and aviation fuel costs tend to be substantially higher because of various state levies and taxes, but real differences are emerging. India’s private airports can now choose to apply for an increase in their aeronautical charges, or reduce them. Some states limit their levy sales tax on aviation turbine fuel to 4%; others charge a whopping 30%. So from place to place, costs are beginning to diverge.
Interestingly, the most ardent followers of the low-cost model, SpiceJet and IndiGo, have actually managed to fly into the black. What is more, they have achieved this while increasing seat capacity.
In Case You Missed It
Jet and Kingfisher, on the other hand, have been taking out capacity as quickly as they could. They’ve done this by deferring orders, or selling or leasing new deliveries to other carriers in Africa and West Asia.
However, the conversion of aircraft to all economy configurations – shown by Jet and Kingfisher — translates into an increase in seat capacity. Thus, the efforts to reduce capacity are somewhat neutralized by this shift to low-cost operations. Air India has also announced that it will shift much of its domestic traffic on to Air India Express, its low-cost arm; it’s also converting some of its old Airbus fleet for this purpose. Hence, the downward pressure on ticket prices is unlikely to disappear soon.
Another troubling development: the management of the traditional carriers don’t appear to be carrying their employees with them in this shift to low-cost operations, as shown by this week’s work stoppage by many disgruntled Jet Airway’s pilots.
What does this all mean for the aviation sector as a whole?
subscribers.
