Low-cost airlines are set for a great gig

Written by Shauvik Ghosh | Updated: Dec 31 2007, 04:37am hrs
The merger in 2007 of full-service carrier Kingfisher with Air Deccan and the latters re-branding has lent a new perspective to the low-cost carrier segment.

Analysts believe Air Deccan may now enter a middle area between low-cost airlines and full-service carriers, providing some basic frills but on the whole remaining low-cost.

This development could bring in new survival kits for low-cost airlines this year. In 2007, the segment exploded, with carriers like Air Deccan, Spice jet and Goair stepping up operations. The year also saw the entry of the erstwhile Air Sahara as low-cost carrier JetLite under the Jet Airways banner.

Not just this, the merger of public carriers Indian Airlines and Air India, which created the National Aviation Company of India Ltd (Nacil) with Air India Express under its wings. Air India Express is the newly formed subsidiary of Nacil that operates the low-cost-carrier business of the public carrier.

But, as far as the overall low-cost carrier segment goes, the airlines themselves are optimistic about their future. The segment will continue to drive the aviation landscape in the country and by 2010, we see the low-cost carriers together having around 60-70% market share in the country, says Kapil Kaul, CEO, Indian Subcontinent and Middle-East, Centre for Asia Pacific Aviation. Most of the travel in the domestic and international sectors will be driven by the low-cost carriers, he adds.

All low-cost airlines have big expansion plans with new aircraft set to join their fleets, new routes in the pipeline and new sectors to be entered. But there will be some shakeout soon, says analysts.

Some of the low-cost carriers that are struggling may exit the business, while some others will join the market, Kaul says.

Air India Express and JetLite are already flying on international low-cost routes. Spicejet is in talks with international airports and is getting their infrastructure ready in case the civil aviation policy allows them to fly overseas routes without having to adhere to the strict five-year-operation norm.

Their optimism is not unfounded. This is because on one hand, the market share and the load factor numbers from the Directorate General of Civil Aviation show that the low-cost carriers have been growing month-on-month.

On the other, the market share and the load factor were falling for full-service carriers in the year 2007.

There is no question of the segment going bust. In 2-3 years, the low-cost segment will have awhopping market valuation of around $1 billion, Kaul says.

Such airlines globally depend on bringing down the operating cost to the extent that it becomes viable to offer fares dirt-cheap. The operating cost is usually badly affected by variables like aviation turbine fuel prices and congestion at major airports, which lead to higher operating cost and huge losses.

In India, the price of ATF is around 70% higher than in most countries, leading to a much higher cost-variable for low-cost carriers. The ministry of civil aviation, along with the likes of the Federation of Indian Airlines, are trying to make the finance ministry, the petroleum ministry and the state governments reduce taxes on ATF, apart from asking oil companies to rationalise the ATF prices. At present, the prices are still affordable, and with crude oil coming down recently, fares are expected to remain stable for a while, Parthasarathi Basu, CFO of Spicejet, feels. And now, with hedging allowed, costs are expected to remain stable as well, he adds.

Over the past 18 months, domestic air fares have been irrational and unsustainable, leading to huge losses. I do not believe airlines can sustain these fares for long. So, I would anticipate a rationalisation of fares. However, as fares are dictated by the lowest common denominator, a new entrant into the market or a smaller player fighting for market share can upset the revenue models for the bigger players. Weve already seen fuel surcharges reach unbelievable levels, so its obvious that cost pressures exist, Ankur Bhatia, ED, Bird Group, says.The congestion at major airports in the country has led to even higher operating costs for low-cost airlines.

Next year, the Delhi, Mumbai and Bangalore airports will unveil new infrastructure, which may reduce congestion, Basu adds. Other factors that will serve the low-cost carrier cause better, Basu feels, will be the fact a train still takes around 20 hours to reach Mumbai from Delhi, whereas a plane takes around 4 hours. As time remains the most important factor, the demand for travel by air will increase, Basu says.