Full-service airlines have to scale down, focus on routes & battle LCCs for growth: Datta

Full-service carriers (FSCs) like Jet Airways and Kingfisher Airlines will have to scale down operations, focus on select routes and compete with low-cost carriers (LCCs) to grow fast, according to Saroj Datta, former executive director, Jet Airways.

FSCs will have to live with the fact that they will grow at a slower rate than LCCs, Datta told FE in his first interview to the media after resigning abruptly from Jet in August 2011 after nearly two decades with the airline he helped build from scratch.

But consultants disagree with Datta, who narrowly escaped from Kuwait after Iraq tried to invade that country in August 1990.

?Full-service carriers will have to increase their fares and stop competing with LCCs if they need to survive,? said Vishwas Udgirkar, senior director at consulting firm Deloitte India. ?If you see the reason why full-service carriers Air India, Kingfisher Airlines and Jet Airways are making losses, it is because they are underpricing the fares.?

?This will need to change,? he added.

Most Indian carriers, barring low-cost airline IndiGo, have been making losses as aviation turbine fuel prices spiralled after crude prices soared. The two listed FSC carriers, Jet Airways and Kingfisher, and low-cost carrier SpiceJet had R1,421 crore of accumulated losses up to the quarter ended September. State-owned carrier Air India is estimated to had a loss of R6,994 crore during 2010-11.

Datta said that although he has not analysed their data, as a distant observer, IndiGo seems to do well because it did not have any legacy costs to eliminate.

Many consultants have debated where an FSC should also run a LCC after Kingfisher decided to shut down its low-cost operation Kingfisher Red as it did not give profits, while IndiGo continues to be profitable.

?We are doing away with Kingfisher Red because we don?t intend to compete in the low-cost segment,? Kingfisher Airlines? chairman Vijay Mallya said after the airline?s annual general meeting in Bangalore on September 28. ?We believe there are more than enough guests who prefer to travel the full-service Kingfisher Class, and that shows through in our own performance where the load factors in Kingfisher Class are more than in Kingfisher Red.?

The Kingfisher Class margins are better than Kingfisher Red as the yields are better, said the liquor baron who purchased the airline from Air Deccan for R550 crore in 2007. Kingfisher Airlines reported a R468-crore loss in the fiscal second quarter and rival IndiGo reported R650 crore profit for 2010-11.

?How IndiGo?s unit costs are so low is a bit of a mystery,? said Datta. ?Maybe they have been extremely cost-conscious.?

He said IndiGo?s strategy of selling new planes and leasing them back could have churned up surplus cash, and that the company also had lower maintenance costs by virtue of using newer planes.

?They also seem to have generated substantial surpluses from the successful implementation of their aircraft sale and lease back programme and negotiated heavy discounts by placing orders for a large number of aircraft under each purchase contract,? said Datta, who is now hunting for a rented house in Mumbai as he always stayed in company flats.

?IndiGo also appears to have avoided having to incur heavy maintenance costs by returning aircraft back to the lessors at an earlier stage of life that usual,? he said.

Rescuing airlines

Jet’s rival Kingfisher has sought financial help from its lenders to stay afloat. SBI Caps, the investment banking arm of India’s largest lender by deposits State Bank of India, is now drafting a restructuring script for the debt-ridden airline.

?The aviation industry is now in a state of flux and really in a terrible financial state until the government does away with archaic policies,? said Datta. ?There are no signs of a recovery starting very soon unless government intervenes.?

To begin with, he said, the government should allow airlines to import ATF and provide transportation, distribution and storage facilities at airports. About 40% of airlines’ expenses is accounted by ATF.

Mallya too had batted for direct import of the fuel by airlines as it can source cheap from international markets, saving commissions paid to oil marketing companies. According to consultants, direct import of ATF would save at least 10%.

Two, Datta suggested, the government should update the two-decade-old Route Disbursal Guidelines framed in March 1994. The guidelines require all scheduled carriers to provide 10% of their capacity operated in category I routes like Delhi-Mumbai to category II routes like the ones servicing the northeast and Jammu & Kashmir. As carriers increased flights on category I routes, they needed to deploy on category II routes. ?This resulted in the unprofitable operations,? said Datta, who started with Air India and later joined Jet before working for Kuwait Airways.

Saving Air India

His former employer Air India also needs the government’s urgent surgery.

The government should write off the flag carrier’s debts and put in a completely new, efficient management with no government interference, he said. ?If they do this, then maybe, there is hope.?

But consultants say there are few solutions to Air India and declaring bankruptcy could be one.

?Of course, declaring bankruptcy and wiping out the debt is a practice that has worked globally, especially with American airlines,? a consultant at a global consulting firm said. ?But in India, it is very difficult for a company to declare bankruptcy.?

However, according to the consultant, ?it seems more and more that bankruptcy could be the only option Air India’s revival”. He asked that neither he nor his firm be identified.

Some foreign airline executives say declaring bankruptcy helps an airline start afresh like. ?It gives airlines a clean slate,? said a former Emirates executive. ?Something similar needs to happen with Air India,?

?In India there’s a stigma attached to bankruptcy and perhaps that is why the government won’t let Air India go bankrupt but keep it on life support,? he added.

Datta said FSCs carriers like his former airline Jet Airways will shrink its market share as it grows. ?Today it is around 30% of the total domestic market,? he said. ?Going forward, it is likely that it might become as small as 15-20% of the total air market.?

Indian carriers carried 49.62 million passengers between January and October 2011, growing at 18.3% a year.

Life after Jet

Datta, who was among the few that helped ink the blueprint for Jet Airways in 1994 along with airline founder Naresh Goyal, resigned abruptly.

Well yes, it did happen somewhat suddenly, said Datta who now reads ?Our Kind of Traitor? by John Le Carre. ?I had a longer innings than I had anticipated.?

?But it was ultimately the chairman?s and board?s decision to groom younger people and replace me,? he added. ?I do not have any quarrels.?