Wednesday, May 27, 2009

Survival instinct

New Delhi: On August 25, 2003, Gorur Ramaswamy Gopinath, an ex-Army officer who ran helicopter services on charter, launched India’s first low-cost airline, Air Deccan. Food was not free on board and travellers had to pay for their meals. The tickets didn’t carry seat numbers — those who came in first got the best seats. Gopinath’s unique selling proposition was rock-bottom ticket prices: The fares he offered were half of the other airlines in business. Indian travellers had never seen anything like this before. The rush of passengers on Air Deccan was huge.
Rivals were smug and confident that Gopinath had committed hara-kiri. Naresh Goyal’s Jet Airways, which lorded over the Indian skies, publicly declared that the low-cost model was a sure recipe for disaster. Unlike Europe and the United States, India did not have separate low-cost airports with cheaper landing and parking charges which are essential to keep costs down. Cutting out the meal would indeed save some money but not enough to offer such low prices and still make money.
Then, two years ago, in 2007, Goyal acquired full-service carrier Air Sahara for Rs 1,450 crore and quickly turned it into a “value carrier” called JetLite. He may not have called it a low-cost carrier but the fares on offer matched those of the low-cost carriers. Not to be left behind, in 2008, Vijay Mallya’s Kingfisher Airlines, which had positioned itself as a premium airline, bought Gopinath’s Air Deccan with the promise that it will add to it the zing of special customer service (which meant meals on board) akin to its full-service operations. But it remained a low-cost service. The message was hard to be lost: The low-cost model was here to stay.
Last fortnight, the wheels of destiny turned one more time. Not content with one low-cost carrier, Jet Airways announced the launch of a new all-economy, no-frill service called Jet Konnect. For all practical purposes, it is another low-cost service with low-cost fares. For the new service, the company has diverted about 20 per cent of the capacity of its full-service carrier, Jet. The service will be the same as on a Jet flight, except there will be no food. As many as eight aircraft will be pressed into service under Jet Konnect for 54 flights a day on select routes.
This, mind you, is just the beginning. Jet Airways plans to add another aircraft to the Jet Konnect fleet by the end of May. Once this happens, a quarter of Jet’s capacity will have become all-economy and no-frill. Jet Konnect will then operate no less than 68 flights a day.
Meanwhile, Mallya’s Kingfisher has quietly diverted about 10 per cent of its full-service capacity to its low-cost arm, Kingfisher Red, which comprises the Air Deccan fleet. As a result, Kingfisher Red has now got 24 flights a day.
Six years after running down the low-cost model, Jet and Kingfisher are betting on the same business model for survival. The shift is serious enough for many sector experts to pronounce the death of the full-service model in the country.
The axe has actually hung for quite a while over the full-service carriers. Their passenger load factor has fallen steadily for several months now, while that of the low-cost carriers has steadily gained ground. To make matters worse, the economic slowdown has driven passengers en masse to the low-cost carriers.
Naturally, the low-cost carriers have ramped up their share of the passenger traffic. One year ago, they accounted for 47.8 per cent of the traffic. It has risen to over 50 per cent now.
Many observers of the aviation sector say that much of the problems faced by Jet and Kingfisher have been of their own making — they misread the market when the economy was slowing down and the flip-flops in their fares only went to benefit the low-cost carriers. In January, for instance, all carriers cut prices by 30 per cent, though it did not immediately fetch more passengers. Instead of letting the low fares play for a while, a month later the full-service carriers raised their prices.
To add to the confusion, the full-service carriers dropped fares again in March to come closer to the low-cost carriers. Kingfisher announced a 65 per cent cut in fares, which was followed by other full-service and low-cost carriers.
Can the new strategy of the full-service carriers to shift capacity to their low-cost arms work? Will they be able to stem the shift to rival low-cost carriers? Do they have the bandwidth to drop fares? After all, costs need to be brought down drastically before full-service fares are brought down to the level of the low-cost carriers. If not, there could be a larger financial mess than ever before.
26/05/09 Surajeet Das Gupta & Anirban Chowdhury/Business Standard
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