Flying international seems to be the route to more profits. Quite aptly, players like Jet and Kingfisher are increasing their focus on international operations. The numbers say it all. At the moment, the Indian skies have 355 aircraft circling around. These are the total number of planes deployed by domestic carriers. The number is set to go up to about 500-550 by the end of 2010. At the rate at which domestic traffic is growing, however, supply seems to be more than demand.

The total number of passengers carried in the domestic market, in calendar year 2007, was 45 million. The growth in this air traffic, according to the Centre for Asia-Pacific Aviation (CAPA), will be over 25%, in the next few years. At 25%, the year-on-year growth till 2010 comes to about 88 million. With an increase of 1%, the growth works out to about 90 million. At 27%, it is just about 92 million. This is clearly not enough for the 550-odd aircraft that will be deployed by domestic carriers by then.

In comparison, the picture appears rosy on the international front simply because there are fewer Indian carriers, just Jet and Air India, operating in that segment. But the number of international carriers operating flights to and from India is quite a bit.

For instance, all major carriers including Continental, Cathay Pacific, Singapore Airlines, Malaysian Airlines, British Airways, Emirates, Etihad, Qatar Airways, Virgin Atlantic, Lufthansa, etc, have been increasing their frequency of flights to India over the last few years. This speaks of the potential that exists in the segment.

Sample the figures: The number of passengers carried to and from India was 25 million last year. This is set to grow closer to about 20% in the next few years, according to CAPA. At about 20%, the year-on-year growth, till 2010, works out to about 45 million. Though lower than the domestic traffic growth, it is still substantial for local full service carriers to devote their attention to the segment. Says Kapil Kaul, chief executive officer, Indian sub-continent and Middle East, CAPA, ?Though closer to 20% as of now, the growth in international traffic could get into the high 20s, going forward.? So the potential is enormous.

Seeing an opportunity, fifteen-year-old Jet forayed into the international space three years ago, launching full-fledged operations. Till then, it flew to destinations such as Kathmandu and Colombo, but following launch, places such as London (Heathrow), Brussels, Kuala Lampur, Singapore and Bangkok were added. This was at a time when identifying a prospect was critical. Now the company has moved into the next phase, increasing its thrust on the international sector by adding flights to the Gulf (Bahrain, Kuwait, Muscat and Doha) and North America (New York (Newark) and Toronto via Brussels). Jet Airways chairman Naresh Goyal said at the time of the inaugural flight to Bahrain early this month, ?We will be looking at a hub in South-East-Asia besides increasing our capacity on the Gulf and US sectors. Our main strength will continue to be service because that is what will help us get occupancies.?

In short, onward connections from various hubs, more flights to locations such as Hong Kong, Zurich, Bangladesh, where it currently operates a flight to Dhaka, Nepal, Sri Lanka and Male are all on the cards for Jet. The company incidentally is looking to start a Mumbai-Shanghai-San Francisco flight shortly.

The effort, of course, that Jet is putting in to beef up international operations is not lost on its rivals. Kingfisher, for one, is keeping a close watch even as it gears up for a foray into the international market by August this year, launching both long-haul (non-stop Bangalore-San Francisco and Bangalore-New York, to begin with) and short-haul flights at the same time. Kingfisher Airlines chairman Vijay Mallya had indicated this at the unveiling of the new look of Deccan in October last year. He had said, ?Kingfisher will fly international in 2008, taking long-haul flights, while Deccan will fly to neighbouring countries.? This announcement had effectively put all speculation to rest about Kingfisher’s overseas plans. Indian aviation policy stipulates that operators with a domestic flying experience of five years can be permitted to fly overseas. But Mallya, following the go-ahead from the Union Civil Aviation Ministry, had managed to bring that criterion down to three years for his airline. Why did he do that?

Because ferrying passengers to and from India is a lucrative proposition. Net realisations per seat kilometre, according to Raajeev Batra, executive director, KPMG, are higher on international routes than domestic routes. This means that flying international is profitable. As Kuljit Singh, partner, Ernst & Young, explains,

?The average yield per passenger for an airline in the domestic sector, whether budget or full-service is about Rs 2,000-2,700. In the international sector, the average yield works out to about Rs 20,000-25,000 per passenger.?

In an environment, where domestic full-service carriers have been competing for market share with budget carriers, it makes ample sense for them to go international then. As Hitesh Patel, executive vice-president, Kingfisher Airlines, says, ?It was always part of our vision to fly international. We’ve been saying it from day one.? A vast Indian Diaspora wanting to use an Indian carrier as well as local travellers increasingly flying abroad make it compelling enough for domestic full-service carriers to target them as budget carriers dominate the local space with a strong value-for-money proposition. Says a Mumbai-based aviation analyst, ?Preference for a home-country airline will always be there among travellers belonging to a certain region. It’s a matter of pride for them. If an airline can step in and fill the gap, it works wonders.?

Jet, for instance, has seen this sentiment of pride for its London flights, which take off from Mumbai, Delhi, Ahmedabad and Amritsar. They are preferred over archrival British Airways. What has worked for Jet on this route is not only the feeling of brotherhood shared by Indian travellers for the airline, but also superior service, which has attracted one and all, both Indian and foreign travelers.

An interesting fallout of a ready global market is that it allows local carriers to optimise their fleets, deploying them on routes that can fetch good rates. Says Patel of Kingfisher, ?To a certain extent going international can help offset the excess capacity that exists in the domestic marketplace.? Adds Vishwas Udgirkar, executive director, PricewaterhouseCoopers, ?Not only can you optimise your fleet, but also your personnel.?

Narrow-body aircraft such as the Airbus A320 and Boeing 737-800, which are used by operators in India, can be easily deployed on short-haul flights to neighbouring countries. That’s precisely what the three aviation combines-Air India-Indian (now simply called Air India), Jet-Jet Lite and Kingfisher-Deccan-are doing, keeping wide-body aircraft for medium to long haul operations and narrow-body aircraft for short-haul operations. This way, things are streamlined and segregated.

Says Ravi Menon, India director of aircraft maintenance & repair facility, Air Works, ?Operators at one point realised that there was no point having too many verticals, which is why the consolidation is taking place. Horizontals, in my opinion, are key.? Says Kaul of CAPA, ?I see the combines making their presence felt in all segments of the business.?

That’s the point. Because yields have been close to the cost of operations in the domestic marketplace, going international, in a sense, helps de-risk an operator’s business model. In other words, points out Menon, an operator is not dependent on one segment alone, but a presence across a horizontal rather vertical approach. Says Kaul, ?Operators, going forward, will derive 50% revenues from domestic operations and 50% from international operations.?

What makes the international air travel business exciting for domestic full-service carriers is the fact that fuel costs are cheaper abroad. So the cost of operations can come down, almost 30-40%, by some estimates. Says Batra of KPMG, ?Aviation turbine fuel (ATF) is a controlled commodity in India. It is not so abroad. It is freely tradeable there. Naturally players flying abroad will stand to gain from this since fuel is a big component of operating cost for an airline. If it comes down, there are significant savings for the carrier.?

For instance, Air India does not miss out on filling its planes’ fuel tanks, when they land abroad. One reason for this is that it is cheaper there as opposed to here. Another important point to bear in mind about international operations is that earnings are in foreign exchange. So, coupled with lower costs, it makes the business an enticing proposition.