Will Air India's new avatar work?

New Delhi: If the loss in bilateral rights and high aviation fuel prices were not enough to bankrupt Air India, the Ministry of Civil Aviation’s plans to convert Air India into a low-cost carrier is likely to bankrupt the airline even faster. And with Air India vacating the full service carrier space, rivals Kingfisher and Jet Airways are likely to benefit.
The decision to move towards low-cost carriers (LCC), of course, is not entirely unexpected. Thanks to the economic slowdown, passengers are increasingly gravitating towards low-cost airlines — as for those flying for the first time in preference to rail travel, the allure of low-cost is obviously far greater. Which is why the market share of full service airlines (all of whom also offer low-cost travel, but to a lesser degree) has fallen while that of the low-cost carriers has risen. Jet Airways’ market share fell from 17.9 per cent in January this year to 16.6 per cent in June, Kingfisher’s from 27.6 per cent to 24.4 per cent and Air India’s rose marginally. Budget carriers like SpiceJet saw their share rise from 11.8 per cent to 12.8 per cent and IndiGo’s share remained the same at 13.6 per cent. More than that, the passenger load factor (PLF) of budget airlines rose dramatically while those of full service airlines rose a lot less — SpiceJet’s PLF rose from 68.3 to 77.3 per cent in the same period, GoAir’s from 64 to 85.1 per cent while Air India’s rose from 60.2 to just 67.9, Jet from 64.8 to 67.8 and Kingfisher from 64 to 72 per cent.
Given this, Air India chief Arvind Jadhav’s decision to shift a sixth of the airline’s 300 domestic flights to low cost operations by next month and, if the plan works, half the flights will also be shifted to this format soon. In-flight food services are to be scrapped on these flights and baggage allowances to be cut by half from the present 20 kilogrammes per passenger.
The problem with this model, as with all models, is that there are several assumptions which need to be fulfilled first. If the airline is not able to reduce costs dramatically, the move will bleed it further. A look at the cost and revenue structures for the two types of airlines makes this clear. Last year, on average, the LCCs spent around Rs 2.91 per seat kilometer — that is, take their total costs and divide this by the total number of seat kilometers the airline flew, the latter being the multiple of the number of seats and the number of kilometers flown. Do the same for revenues, and the revenues per available seat kilometer (RASK) was lower at Rs 2.39 — which is why, on average, the LCCs made a loss. A reduction in costs this year has reduced the costs per available seat kilometer (CASK) to Rs 2.5 and better rationalisation of fares has increased the RASK to Rs 2.6 — which is why budget carriers like SpiceJet are making money right now.
15/08/09 Surajeet Das Gupta/Business Standard

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Categories: NACIL Aug 2009