The gravitation to the low-cost model has never been this apparent. Full-service carriers are deploying capacity and launching flights in the low-cost segment in right earnest. Take Jet Airways, for instance. The airline has close to 125 flights of the all-economy Jet Konnect?a new service launched by the full-service airline on select routes this May. According to Saroj K Datta, executive director, Jet Airways, the plan is to take the number up to almost 180 flights per day in the near term. For that the company proposes to take its fleet of aircraft used for the service to 16 Boeing 737-800s and 10 turbo-prop ATR-500s. At the moment, the airline has less than ten Boeing 737-800s and ATR-500s respectively for the service.
Since May, Jet has been rapidly expanding its Konnect services, taking the number of flights from 62 to 92 to 125, respectively. But Jet is not the only one to be doing this. Rival Kingfisher is already reported to have deployed almost 70% of its capacity on Kingfisher Red?its economy-class brand. Then there is the other full-service carrier Air India, which recently announced that its budget airline Air India Express, which flies to the Gulf, South-East Asian and allied regions, would be pressed into service in the domestic low-cost space as well. ?There was a gap there,? says Jitendra Bhargava, executive director, Air India. ?We needed to fill it. For those who want the services of a legacy carrier, there is Air India. For those who want a budget carrier, there is Air India Express,? he says.
The great rush
The impending launch of operations of Air India Express in the domestic low-cost space, however, draws attention to a moot point: the segment is likely to get choc-a-bloc soon enough. It already is pretty crowded with four serious players?SpiceJet, IndiGo, GoAir and Jet?s subsidiary Jet Lite. Then there are smaller regional carriers such as MDLR Airlines, which operates flights on the Uttaranchal-Delhi-Goa-Kolkata routes. But even if MDLR is set aside, there are enough players at the moment in the space. Then why are the full-service carriers deploying capacity there?
By some accounts, capacity in the full-service and low-cost segments at the moment is neck and neck?at 50% a piece. With the build-up though, the balance is likely to tip in favour of the latter in the near term. Says Kapil Kaul, chief executive officer, Centre for Asia-Pacific Aviation (CAPA), India, ?We expect capacity to go up to 70% in the low-cost segment in the next three to six months. The trend has been on for almost a year now accelerated in a sense by the downturn that began in September-October last year.?
That?s the point: the slowdown has tightened purse strings of consumers. They are not keen to spend, and even if they do, the natural choice is the low-fare or budget carrier. ?In a downturn, consumers veer towards low-cost airlines. That?s a universal phenomenon,? says an executive with a full-service carrier. ?It?s not unusual then for full-service operators to make their presence felt in the low-cost space. Don?t forget that you have to identify the pulse of the consumer, where his interests lie and what he wants. You can?t ignore that in the aviation business.?
What?s speeding up the process, however, is the price-sensitive nature of consumers in India, which restricts premium travel to largely six metros and that too during peak hours. ?That?s the reality of the market here,? says Kaul. ?Even during the boom phase full-service carriers realised there were not enough travellers for the capacity they were deploying at the premium end. The market lies at the budget end.? Says Datta, ?About 75 to 80% of the total air traffic on domestic routes is low-fare. It?s obvious where the market lies.?
Passenger traffic figures released by the Directorate General of Civil Aviation (DGCA) gives an idea of the trend. In the quarter ended January to March this year, the total number of passengers carried by scheduled airlines excluding MDLR and Paramount Airways was 95.8 lakh. Of this, the total number of passengers carried by low-cost carriers like Jet Lite, Spicejet, GoAir and IndiGo was 34.89 lakh, or 36.42% of the total traffic. For the April-June 2009 quarter, the share of LCCs has gone up 39.36% on a base of 106.7 lakh.
All of this is clearly causing the rush into the budget segment. The change seems starkly visible when compared with the scenario a year ago: Capacity build-up then happened mostly in the full-service domain. The ratio, by some accounts, of the capacity in the full-service vis-?-vis low-cost segments was 70:30. It?s different now, highlighting the importance of the latter. Passenger load factors of low-cost carriers have been in high 70s and 80s, alluding to the fact that low fares are the in thing at the moment. ?It is bound to be in these recessionary times,? points Rajeev Batra, executive director, KPMG. But there are allied reasons too for this LCCisation as it were of the industry.
No-frills service
Being lean, mean and healthy is the magic mantra in an industry bogged down by volatile fuel and service costs. In a slowdown, cutting flab is even more imperative, given that people take to the skies much less than they would do in a boom phase. ?There is a tightening of the corporate belt across the board,? points out Ashwini Kakkar, executive-vice-chairman, Mercury Travels.
In this era of cost-cutting, the corporate segment is indeed clamping down on expenditure including travel expenditure. ?If mid to senior-level executives took full-service flights earlier, many are being advised to take budget carriers instead. Of course, the top management continues to fly business class, but the ones lower down are being advised to opt for cheaper modes of travel,? points Vishwas Udgirkar, executive director, PricewaterhouseCoopers. So even as this corporate segment shifts, there is the other big chunk?visiting friends and relatives (VFR)? which is largely a budget segment, which is not making trips as often as they did earlier.
Passenger traffic for the first half of this year bears this out. According to the DGCA, the number of passengers carried by scheduled airlines in the first half of 2009 was lower by 8.05% as against the passengers carried by operators in the first half of 2008. In absolute terms, the figures stood at 210.99 lakh in H1 this year vis-?-vis 229.45 lakh in the corresponding period last year.
Now when fewer people are flying, filling planes becomes difficult, which is why airlines are cutting costs even as they redeploy capacity to align themselves to market reality. Says an aviation analyst based in New Delhi, ?The level of service in the business class of Kingfisher today vis-?-vis a few months ago is different. What they were offering six-eight months ago and what they are offering now is not the same.?
Service levels in business-class as well as economy-class of full-service carriers have indeed come down. This in a sense is blurring the line between full-service carriers and low-cost carriers. ?I hardly find any difference between the two,? points Kakkar of Mercury Travels. That?s also because it becomes unviable for full-service carriers beyond a point to stretch their budgets or service levels when costs are not significantly coming down. Fuel, lease rentals and airport charges, for instance, continue to be constant for both full-service and low-cost carriers. ?But there are some subtle differences,? points an executive from Gurgaon-based InterGlobe Enterprises, which promotes low-cost carrier IndiGo.
?Typically, a two-configuration plane limits the number of seats to about 150 for full-service carriers. Low-cost carriers, on the other hand, have a single configuration, that is, economy class, which increases the number of seats to about 189-190. Some planes could have a seating capacity of about 175, but it is still more than what is available on a full-service flight. Obviously, the number of passengers would go up with more seats available.?
Apart from this key differential, an online distribution model ensures that low-cost carriers can rein in their expenses considerably as against full-service carriers who have both a direct and indirect model of distribution. ?The costs obviously go up like this,? points out the executive from InterGlobe. ?The number of cabin crew you fly on a full-service flight and a low-cost flight also varies. A low-cost carrier can restrict its cabin-crew to about 24 per plane. For a full-service carrier, it is higher at about 40.?
Fuel consumption also tends to be lower for low-cost carriers, he points. ?The weight of the plane is lighter. Low-cost carriers don?t carry ovens and heaters, which brings down the weight a bit. Many of them don?t serve food on board. If they do, customers are charged for it. All of this helps monetise your expenses.? By some accounts, the operating expenses for a low-cost carrier are lower by about 30-36% as opposed to a full-service carrier due to the tight business model employed by them. All of this then is contributing to this gravitation to the low-cost model by full-service carriers. The question is: Is it sustainable?
Can one size fit all?
According to Datta of Jet Airways, the rush to increase capacity is actually creating a situation of oversupply in the low-cost segment. ?Fares are coming down to such an extent that it is becoming difficult to cover the costs incurred,? he points out. Kaul of CAPA adds, ?Ideally, LCCs and FSAs should have been moving away from each other. In India, they are all congregating together with the result that the market appears directionless at this point.?
It is highly unlikely though that the market will remain in this state of flux for long, say analysts. ?A round of consolidation and shake-up is inevitable,? says Datta.