THE ECONOMICS OF LOW COST AIRLINES – THE KEY INDIAN PLAYERS AND STRATEGIES ADOPTED FOR SUSTENANCE.

THE ECONOMICS OF LOW COST AIRLINES – THE KEY INDIAN PLAYERS AND STRATEGIES ADOPTED FOR SUSTENANCE.

Made By:

Section B, Group 6

Kunal Jain (089)

Maanick Nangia (090)

Manish Bengani (091)

Mehak Monga (093)

Nimisha Goel (094)

Made By:

Section B, Group 6

Kunal Jain (089)

Maanick Nangia (090)

Manish Bengani (091)

Mehak Monga (093)

Nimisha Goel (094)

The Indian economy has grown at an average rate of around 8% in the last decade: The rise in business and leisure travel (both domestic and international

Since 2003, when low fare travel in India was ushered in, a number of low cost carriers (LCC) have entered to serve this fast growing market

However, all of the LCC carriers and—with rare exceptions—even the full service carriers (FSC) charging higher fares have been making losses.

Operating a commercial airline in India so far has not been a profitable business

An Overview

Major players in the Industry

Positioning of Different Carriers:

BOOM AND BUST IN INDIAN AVIATION INDUSTRY

Monopoly of Air India and Indian Airlines

• Growth of the Indian economy at a CAGR exceeding 6% • In 2003, Captain Gopinath’s started Air Deccan• Thus, began the boom phase in the airlines industry .

The deregulation of the Indian economy that started in the mid-1980s, and proceeded more aggressively in 1991

The Emergence of a New Indian Airline Industry

Competitive Dynamics

• Full service airlines were forced to drop fares• Airlines sought to build strong relationships

with the manufacturers of aircraft• Low-cost carriers sought to supplement their

revenue streams by advertising, sale of food on board, and selling other services

• In the full-service airline category, competition took on several new dimensions.

Restructuring of the Industry

Jet-Sahara merger

Kingfisher-Air Deccan merger

Air India-Indian Airlines merger

Point to point service

Do not provide frills

Minimum number of air hostesses on the flight

Removing business class, storage space for the meals and limited seat pitch

do not issue tickets to Passengers

Try to minimize capital costs and costs of the crew and hangerage

Save on distribution costs

Low Cost Carriers:

Breakdown of Cost savings

Air Deccan

• Empowering every Indian to flyVision:

•To demystify air travel by providing reliable, low cost and safe travel to the common man by constantly driving down the fares as an on going mission. For

the same reason Mr. R. K. Laxman’s ‘Common Man’

was chosen as the brand ambassador

Mission:

Corporate (middle-level employees),

small and medium

enterprises (SMEs),

AC/ Second class travelers (middle class) of Indian Railways. This can be

again divided into two parts:

(a) Travelers who dream to travel by air at least once in their life time

(b) Travelers who did care about time but couldn’t

afford the price which was being charged by the full

service airline

Air Deccan’s targeting

High Frequency:

Dynamic fare pricing :

Concentrated on unconnected regional areas

Two pronged fleet strategy

Lease with AIRBUS

Quick turnaround

High Frequency

Lean Staffing

Reduced expenses on Cabin crew

Booking/customer touch points

Dynamic fare pricing

The Business Strategy

SpiceJet• ModiLuft-> Royal Airways -> SpiceJet. • By 2008, it was India's second largest low-cost airline in terms of

market share. • Cost Control• Follows the classical “low-cost” airline model –

– Very competitive fares– Single type of aircraft and a single class of service– Point -to-point operations, quick turnarounds, – No frills, and internet-based ticketing. – But unlike other low-cost airlines, water and snacks served on-board

SpiceJet aircrafts is free. • Curved winglet design which reduces noise and improves fuel

economy by 2-3 per cent.

Pricing strategies• Marked its entry with Rs. 99 fares for the first 99 days, with 9000

seats. Their marketing theme is "offering low 'everyday spicy fares‘. • In May 2007 offered two-lakh seats at a special price of 99

paise.• In January 2009 – ‘Book two air tickets, Pay for one’.

Value-addition to customers• Online travel insurance in partnership with TATA AIG.

Maintained a consistent rate of 28 per cent of sales since.• Internet banking for customers.• Plans to introduce an on-board wireless telephone system for

all Spicejet passengers.

Operational efficiency• Partnerships with global leaders to enhance safety and reliability.

– In the maintenance department by KLM – State-of-the-art technology from Star Navigation, Russell Adams and Tech Log.

• Partnered with Navitaire, the world’s renowned low-cost support system for reservations and revenue management.

• These approaches resulted in SpiceJet achieving the lowest costs in the industry (Rs. 2.65/ (ASKM) in 2008).

Marketing Strategies• Focuses on word-of-mouth marketing, supported by print and

Internet media initiatives. • Introduced on-board merchandise sales such as goggles, airplane

models, perfumes, caps and watches. Sales of branded merchandise will also be available through the company's website.

Expansion Plans

Open to

Foreign

investments

as well as

buyouts

Convenie

nce to

passenger

s

Ancillary Revenues

Automation to sustain expansion

Strategies for Future sustenance

IndiGo

Follows a Three Prong Strategy

War on Costs Reliable, On-Time Service Avoid tinkering the set Business Plan

• Successful expansion of market share; Doubled its Market share from 2007 to 2008

IndiGoWar on Costs

•Turn Around Times• Lesser the TAT, Longer it can fly; Managed to

squeeze one more flight• TAT of 15 minutes in Non Metros, 20 minutes in

Metros

•Inventory Management• Inventory in books of Air France; Not on IndiGo

IndiGoReliable and On-Time Service

•Young Fleet; Maintenance is easy and less time consuming; Lesser technical faults; Average Age of around 1 year only

•Claims of on time performance of 94%

•Centralized operations control with high degree of information for crews; also an advanced weather forecasting system

IndiGoCautious Growth

•Avoiding reckless growth which Air Deccan had

•Fleet size of 19; Touches 17 cities; Deccan with similar fleet touched 43

•Ordered 100 planes with deliveries till 2016; Business plans formulated till then and full attempts not to tinker with it

JetLite

100 per cent subsidiary of Jet airways. Positioned as a value carrier between a full

service airline and a low cost carrier. It will have less frills with economy class

details. At the same time, frequent fliers scheme will

be extended to JetLite.

Air India

Airbus A310-300

Airbus A321

Boeing 737

Boeing 747

Boeing 757

Boeing 767

Boeing 777

Fleet of same aircraft

Airlines No. of aircrafts No. of Flights (daily)

Utilization of aircraft (Flights/Aircraft)

Average fleet age (in years)

Air India 108 - - 11.9

Jet Airways 87 400 4.597 4.5

Kingfisher Airlines 75 218 2.906 2.2

JetLite 24 250 10.416 6.5

Sweating its assets

No Frills

This means that it does not offer any complementary services offered by other full-service airlines.

Complimentary services include multi-cuisine food, airport lounges, magazines, entertainment, etc.

Incur not only the basic cost of food but also the cost of oven, microwave, preheated food cabins and serving trolleys.

Moreover, the aircraft becomes lighter as a result of offloading of heating appliances which increases the fuel efficiency of the aircraft.

This reduces costs associated with food, appliances, heating and serving (stewards and stewardess) thus, resulting in major costs savings.

Online booking and IVR ticketing

Eliminates the need for commissions payable to

middlemen.

Obviates the need of ticketing agents and additional

workers, thus cutting down the wage bill.

The paperwork associated with transactions is

considerably reduced.

The tickets are sent online to the email address of the

customer and the customer can get a printout of the

ticket himself.

Cuts the cost of transactions resulting in lower ticket

prices.

• The tickets are priced according to the availability and demand of tickets.

• The marginal cost of flying an additional customer is very low.

• Thus, JetLite tries to maximize its revenue.• It earns its revenues not only from the sale of

tickets but also from the sale of food items and any other service for which it charges over and above the price of the ticket.

Dynamic Pricing

The airline plans to offer the fuselage, the exterior of the aircraft body, and in-flight space for advertising.

It is expected to generate revenues worth Rs 50-60 lakh a month from the move.

Advertising revenues

Low cost or Value carrier ??

CORPORATE STRATEGY AND CUSTOMER FOCUS

To offer its passengers a consistent, quality-assured and time efficient performance at affordable fares.

Targets the 1st, 2nd and 3rd A/C Railway passengers and Volvo Bus Passengers.

Fares - 40% lower than traditional airlines

• Quick turnaround of aircraft that average around 25 minutes.

• Uses only state-of-the-art Airbus A320 Aircraft fleets

DELIVERING VALUE TO CUSTOMERS

• Easy Booking : GoTravel Agents, GoTata Indicom Outlets, GoInlott outlets, GoCyber café and GoPCOs.

• Bookings without Passenger Service Fee (PSF) and any applicable Fuel surcharge.

HUB MODEL• Emulates point-to-point strategy of South

West Airlines• first increases flights in the existing network – spreads costs across different overheads. It utilize

crew, fuel and aircraft more.• Used mostly in metros and Tier-2– Higher income levels : higher occupancy rate– Better infrastructure

RED EYE OPERATIONS• Usually operate during the period from 9:00

p.m. to 5:00 a.m. local time.• higher utilization of resources • Attracts traffic especially from SMEs and

business travelers• Decreases rush during peak hours by diverting

traffic• Lower fares• Satisfies unique customer need

SLOW FLEET EXPANSION PROGRAMME

•Conservative approach•Plans to get rid of leased aircraft by 2011•Current prices are too high

FREQUENCY ENHANCEMENT PROGRAMME

• Adding flights to its to its existing network • There is demand for increased frequency in

Metros and Tier-2 cities• Added two new aircraft in 2007:doubled

current flight operations• At this time consistent load factor was more

than 80%

FLEXI-FARE• Unlimited changes in its travel itinerary free of

cost• Cut cancellation charges to Rs. 200 on all GoFlexi

bookings• Targeting frequent-flying business passengers• Allows cancellation/rescheduling upto hours

before scheduled departure• Transfer to customers credit account incase of

difference between new and original fare

GoComfort• Reasons

– High fuel prices,– Intense competition– Weak growth in price-sensitive demand

• positioned between LCCs and full service carriers

FEATURES• Better leg space: pitch between two rows increased to 34"• Comfort seating: middle seat is always free• Priority check in• Reschedule travel plans at no extra cost• Complimentary F&Bs• Aims to increase repeat business travel

COMPARATIVE ANALYSIS

1. Repositioning to Value Carrier Airlines– Kingfisher Red– GoAir to GoComfort– JetLite

A result of rising ATF prices, losses, cash crunches, low rise in price-sensitive demand

AIRLINE TYPES OF AIRCRAFTS

JetLite Boeing 737 series and Canadian Regional Jets 200 Series.

GoAir Airbus A320s (leased and purchased)

SpiceJet Boeing 737-800Boeing 737-900

Indigo Airbus A320

AirDeccan/Kingfisher Red 48 and 72 seater ATRs on the regional routes and the 180-seater A320 on the trunk routes.

2. Fleet Of Aircraft Utilized

AIRLINE MODEL ADOPTED

JetLite Point to point between metros, hub-n-spoke for non-metros to metros and vice-versa or between non-metros

GoAir Hub/Point-to-point model

SpiceJet Point-to-point, and regional hub-n-spoke

Indigo Point-to-point model

AirDeccan/Kingfisher Red Hub-n-spoke model

3. Models adopted

Low cost v/s low fare• Spice Jet has lowest unit cost at 6.2 cents per ASK;

– Comparable with Southwest, Easy Jet, and Jet Blue. Twice that of Air Asia with unit cost of 3 cents per ASK.

• Usually, LCCs provide point-to-point service while FSCs work on hub-and-spoke system. – Air Deccan has deviated from the LCC business model ;

has a hub-and-spoke model to connect metros with towns.

– This has increased its costs. Bill Franke, Managing Director of leading airline investmentfirm Indigo Partners – “There is not a single airline in India that operates a true low cost

structure, only low-fare and low-margin.”

Is the LCC business model in India sustainable?

• Low-fare airlines have common features.– Easy to replicate and are integral to LCC in India. As a result, they do not

offer a sustainable competitive advantage.

• Typically, a low-fare airline chooses routes that are not already operated by other low-fare airlines. – Head-on competition -> price war -> benefits consumers -> not profitable

to the airlines.

• Government has to improve airport infrastructure if this model is to succeed.– Increase in air traffic not matched with the increase in the infrastructure;

leads to long halts and waiting of these planes, delays besides loss of precious air fuel.

• Shorthaul services impose cost disadvantages. – Quick turnarounds to achieve high utilization become critical.

• Air fuel constitute the largest share of expenses.– The under-developed commodity hedging market puts a stumbling

block on these companies to hedge against fluctuating prices of air fuel.

• The cost of procuring new fleet. Aircrafts need to have at least 80% occupancy of seats to be viable in long run. – Must explore low-cost routes, less time taking routes, rather than

hauling on the same popular routes, if they wish to remain viable in long run.

• Requirement for trained commanders to operate these flights.– Severe demand supply gap -> price hike -> increasing cost.

Future Outlook• Chased market share, i.e., revenue maximization and forced the

incumbents to match their low prices. – While revenue maximization is a good short term strategy to enter the

market, sooner or later, LCCs have to be become profitable. – 2 outcomes — either they go bust in a market shake-out or they

merge/get acquired by other airlines.

Near term challenges– Realizing the benefits of the consolidations.– Realigning their competitive strategies to become profitable. – Pursuing aggressive cost reduction. – The availability of capital. – Constraints due to poor infrastructure for aviation in India.

Not new among foreign low-cost carriers; have either merged or sold off their business due to long-run un-sustainability.