Regional Sales Director for Embraer in Delhi Manoj Muttreja does some plainspeak on the other culprit, besides economic downturn, that has spelt trouble for airlines in India—namely, overcapacity—and stresses why small is beautiful, and very profitable

After yet another period during which the airline industry reported heavy losses and carriers continued to trim flight schedules to reflect weak demand, there is still no clear indication that the bottom of the economic downturn has been reached. The first quarter financial performance of India’s two largest airlines reflects the difficult environment shared by airlines around the world. Although much of the blame for the industry’s dire predicament has been placed on the high price of oil in 2008, there is another culprit that is equally sinister: overcapacity.

In the first three months of this year, the big two, Kingfisher and Jet Airways, filled just 66 per cent and 64 per cent of their available domestic seats, respectively. In absolute numbers, that translates to an average of 73 paying passengers per flight. That volume, by itself, wasn’t sufficient to generate positive margins. So how are some carriers responding to the glut of seats? Deferring new aircraft orders or outright canceling future deliveries are two ways of keeping a cap on the seat count. But airlines that can’t make the domestic market work are considering deploying their assets to access foreign markets that offer the promise of less competition and higher fares.

‘Start With Smaller Airplanes’
“It doesn’t have to be that way” according to Manoj Muttreja, a 20-year industry veteran who has worked at Indian Airlines, Sahara and Kingfisher and is now the Regional Sales Director for Embraer in Delhi. “Our carriers don’t have to look abroad to solve their capacity problems when there is way to address them here at home. The domestic Indian traveller shouldn’t be forced to pay for today’s financial mess.”

Muttreja’s colleagues in Embraer’s market intelligence group in Singapore analyse economic trends and their impact on air travel in Asia. They believe that demand from today’s thrifty consumers won’t be sufficient to fill all the empty seats and lead the domestic India market back to prosperity any time soon. Muttreja adds, “This is an opportune time to correct the old habit of buying airplanes that are too big. What better time to break with doing business in traditional ways that can leave you vulnerable to factors you can’t control, like the cost of fuel and falling demand?” The question refers to Embraer’s contention that smaller airplanes are needed to supplement the existing fleet serving the domestic network.

Are India’s airlines ready to acquire smaller aircraft? If you listen to Muttreja, they must. “This is the ideal time to make a mid-course correction. Our domestic industry has evolved from the days when air travel was only affordable for a select category of travellers flying to a few key cities by one or two airlines operating big airplanes.”

Demand in metro markets has grown along with the number of carriers, yet Muttreja maintains that regional cities have not seen a corresponding increase in the number of frequencies or competitors. “We simply don’t have a large base of regional or commuter-type aircraft in this country despite our population, secondary market sizes, city pair distances and strong demand. Every airline wants to fly 150-seat jets because that’s what they’ve been conditioned to believe works best.”

Much of Embraer’s 40-year history has been associated with providing small commercial turboprops and regional jets that built the commuter and regional airline industries in the US, Europe, Australia and the South Pacific islands. From the Brazilian manufacturer’s perspective, succeeding in the domestic India market depends on finding the right capacity starting point. “In the new economic reality, we believe it makes sense to start with smaller airplanes” claims Muttreja.

‘Don’t Put All Eggs in One Basket’
Embraer’s market analysis shows that the American and European fleets have a larger proportion of small-capacity aircraft compared to Indian carriers. While airlines in the US and continental Europe were acquiring new 50-seat regional jets when they were launched in the mid-1990s, India’s domestic airlines did not enjoy the same liberal regulatory or economic environment that allowed them to cash in on the regional jet boom.

The fleet composition figures highlight the stark contrast between Indian carriers and their overseas counterparts (see box.) Large, single-aisle jet aircraft between 121 and 210 seats (roughly equivalent to B737/B757 and A320/A321 capacity) account for two-thirds of India’s commercial airline fleet yet that segment comprises only half of the US and European fleets. When comparing aircraft with fewer than 121 seats, (typically regional jet and commuter turboprop capacity,) the proportion in those foreign carrier fleets is double that of Indian airlines.

“Of course, it’s always difficult to make direct comparisons,” according to Muttreja, “but the Americans and Europeans invested in small capacity equipment to complement their larger jets and to provide the right size aircraft to balance the supply, demand and frequency variations of each market. They followed a strategy where they didn’t put all their eggs in one basket.”

Embraer analysed industry trends when the American domestic market contracted after 9/11 and found that regional airlines performed the strongest. Mainline carriers used the small capacity aircraft of their regional partners to replace larger jets, maintain frequency and preserve the integrity of their networks. “That capacity safety net isn’t the same here in India” says Muttreja, “but the regulatory environment has finally changed for Category 2 and Category 3 operations and that opens the door for airlines to acquire smaller aircraft.” He adds: “During this financial crisis I think it’s essential that airlines evaluate their fleet composition and consider that maybe it’s time to go down rather than up the capacity spectrum.”