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Choice Pickings
No-frills carriers, rather than full-service airlines, have benefited the most from Kingfisher’s grounding
COMMENTS PRINT
Ravina Kothari

If you were flying Kingfisher Airlines in September 2011, you could have chosen from around 9,400 flights for the month, or over 313 flights a day. By April 2012, your choices were slashed to just a third, that is, 3,000 flights and by October, you couldn’t fly the king of good times at all — a lockout followed by the Director General of Civil Aviation (DGCA) grounding the airline means Kingfisher doesn’t have a place on the winter schedule of domestic flights; last winter, the airline had approval for 2,930 flights every week between October 2011 and March 2012.

Who’s picking up the slack? When it launched in 2005, Kingfisher positioned itself between Air Deccan — the first no-frills Indian carrier — and the market leader, full-service carrier Jet Airways. It very quickly became the airline of choice for executives as well as regular passengers seeking a taste of the good life — plush new aircrafts, personal screens, attractive cabin attendants and free meals — and by around end-2010, Kingfisher was the No.2 airline in India. So, now that it’s been grounded and was flying erratically for more than six months before that, pampered passengers must be flocking to full-service carriers, right?

Wrong. It’s no-frills carriers such as IndiGo, SpiceJet and Go Air that have made the most of the free fall in Kingfisher’s performance. The three airlines now account for over 53% of the market, up from 39.7% in April. Full-service carriers Air India and Jet, meanwhile, have seen their market share grow by just 4.5% from April to September 2012. How did this change happen? And what does it mean in a market that is being buffeted by strong headwinds?

Boarding call

A quick glance at the winter flights schedule — the peak travel period — reflects the changing dynamics in the airline industry. From October 2012 to March 2013, market leader IndiGo will operate 2,447 flights every week, a 30% increase over last winter, while SpiceJet is increasing its departures by 8.8%, to 2,233 a week. Even the smallest of the budget carriers, Go Air, will step up its weekly flights by 14.7% to 675. Between them, the three will account for 48% of domestic capacity this season, compared with 33% last winter.

 
 
“With Kingfisher out, we are consolidating ourselves as the preferred business airline"—Sudheer Raghavan, COO, Jet Airways
 
 
But even as the price warriors step up their onslaught in the domestic market, their full-service counterparts seem hesitant about their intentions. Instead of taking advantage of Kingfisher’s absence to grow their share of the market, Air India and Jet Airways have reduced capacity in the peak travel season. While Air India has indicated a 6.2% drop in its weekly flights, to 2,169, Jet Airways will operate 3,369 flights a week, a 10.87% reduction. Keyur Joshi, co-founder and chief commercial officer, MakeMyTrip, is scathing about the reduction in flights. “This shows lack of confidence in their business model and fear of weathering the slowdown in the market.” Perhaps that’s true but, as things stand, it makes more sense for the legacy players to cut back on their flights than to take advantage of the holiday season and get more passengers on board — they’re already reeling under huge losses because of escalating aviation turbine fuel (ATF) prices. Besides, they also have other plans.

While Air India is hunkering down to cut costs and effect a turnaround, Jet is cutting losses by rationalising over a dozen unprofitable routes such as flights connecting India to Johannesburg, New York (JFK) and some short haul flights to West Asia. Jet Airways chief commercial officer Sudheer Raghavan is clear about the group’s strategy. “We are chasing profitability, not market share. The focus has always been on improving revenue yield and bottomline,” he says. That shows even in what the airline is trying out in the domestic sector. It recently announced eight business class seats in all its single-class domestic aircraft. “With Kingfisher out, we are consolidating our position as preferred business class airline in the domestic space,” says Raghavan.

For their part, the no-frills carriers make no bones about their aggressive growth ambitions. Over the past 18 months, IndiGo has been steadily expanding its fleet; from 38 aircraft in March 2011, the airline will end FY13 with 60-odd Airbus 320s. It is also firming up its international presence with around 60-odd additional flights this winter to Dubai, Singapore, Bangkok, Jeddah and Kathmandu (significantly, these are destinations where Kingfisher was already flying). Analysts note that by sweating existing resources better, international operations help to improve aircraft utilisation. Also, operational costs of overseas flights are proportionately lower because of cheaper fuel — high taxes make ATF in India 50% more expensive than in Singapore or Dubai. Perhaps that is what gives IndiGo president Aditya Ghosh confidence — at a recent conference in Mumbai, he declared the airline would report profits in FY13, for the third year in a row. 

 
 
“We will focus on small towns to build presence and will turn profitable in the second year"—Neil Mills, CEO, SpiceJet
 
 
Meanwhile, SpiceJet is counting on its new focus on smaller towns to build its presence across India. Earlier this year, the airline started flying to smaller cities such as Indore, Bhopal and Tirupati using its new fleet of 12 Bombardier Q400 aircraft; it currently operates nearly 100 flights a day on these aircraft and plans to expand to North India in states such as Punjab, Uttar Pradesh, Uttarakhand, Rajasthan and Madhya Pradesh. The passenger load factor (PLF) for the new line of business is 65-70% compared with 64.4% for the airline. “The operation will become profitable in its second year on a network basis,” says Neil Mills, CEO, SpiceJet. The airline is also expanding its fleet to 50 Boeing-737s and 30 Bombardier Q400s by 2016 and counting on traffic from less-serviced international routes such as Kabul, Guangzhou and Riyadh to improve revenue yields.

But really, where the airline has determinedly stepped on Kingfisher’s turf is with corporate travellers. Over the past 18 months, says Mills, SpiceJet has been focused on “aggressively wooing corporate travellers”. Meals were thrown in as part of the value proposition, while giving corporate clients more flexibility in booking and cancelling of flights. The results have been positive: currently, around 500 corporate firms are registered with SpiceJet, compared with 350 or so a year ago. “We understand that the consumer is struggling to pay. So, we focused on giving a value proposition,” he adds.

Hustle time

Will these efforts help no-frills carriers further consolidate their position? Yes. After all, the three leading budget airlines account for over half the market in terms of passengers flown and 48% in terms of number of flights. “Whosoever brings in capacity gets market share,” declares Noel Swain, executive vice-president of online travel portal Cleartrip. “Budget carriers will only strengthen their grip over passengers in the coming months.”

But where are the passengers? While the airlines are pushing for higher revenue yield to counter lower demand, the PLF is falling due to high fares and general slowdown in the economy (see: Flying empty). In September, passenger numbers went down to 4.02 million, a record 12.4% y-o-y drop. Worse, this was the fifth consecutive month of drop in numbers, which till then was limited to middling single digits. Not surprisingly, in September, the PLF touched a low of 65%, the lowest in three years since July 2009.

According to an estimate by Centre for Asia Pacific Aviation (CAPA), the industry is estimated to have lost about $470-550 million in the quarter ending September. ATF rates in Delhi have increased from Rs 57,844 per kilo litre in July 2011 to Rs 72,282 in September 2012. The industry’s woes don’t end there. Poor airport infrastructure outside the metros and high taxes on ATF mean input costs are constantly climbing — fuel accounts for 45% of operating costs of airlines in India compared with 25-30% internationally. “This burden is considerably limiting the prospects of the Indian aviation industry,” says Axel Hilgers, South Asia director, Lufthansa.

Despite a not-so friendly business environment, Indian airline companies are trying to ensure a smooth landing. Kingfisher being on the sidelines has certainly helped those still in the game. The bulk of Kingfisher’s business class passengers have moved to Air India and Jet Airways while Kingfisher’s economy passengers have moved to IndiGo and SpiceJet. No wonder the financials of listed carriers like Jet Airways and SpiceJet are expected to look much better in Q3FY13. Low-frill carriers have tasted pricing power and it remains to be seen if they will easily let go, despite allegations of cartelisation. On average, airfares have remained at 20-25% higher levels this October, compared with the same period last year. More importantly for airlines, they held on to their April-June pricing in the second quarter as well, which is traditionally a slow-traffic time. That will help revenue yields in FY13 grow by about 15%, say analysts, despite the falling PLF.

 
 
Apart from decreasing passenger load factor, poor infrastructure, high taxes on fuel continues to add on to airline industry’s woes
 
 
How will this change if Kingfisher makes a comeback? Analysts from CAPA estimate the airline will need capital infusion of around $1 billion if it is to make a serious bid at revival. But industry is divided on how the market will react. Alok Bajpai, CEO and co-founder of travel aggregator iXiGO, says it will take several months for the airline to regain its lost credibility. “Lower fares or better service won’t be enough to woo flyers back,” he declares. “Longer-term financial stability, predictability of operations and more satisfied employees should be bigger priorities for now.” Public memory is short, counters MakeMyTrip’s Joshi. “Give them a good deal and passengers will come back,” he says.

Meanwhile, the no-frills carriers themselves are guarded in their response, most saying they will wait and watch. “If Kingfisher resorts to a short-term strategy focused on acquiring passenger market share, other airlines may have to follow suit, leading to a blood bath,” says a senior executive from one of the budget airlines. “But if they decided to build a sustainable business, brick-by-brick over a period of time, there may not be significant changes in the market,” he adds. For now,  the no-frills carriers are sticking to their plan of increasing revenue yield from each passenger. Tomorrow’s weather, though, is another story.

COMMENTS PRINT
Ravina Kothari
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