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Airlines - Low Cost Catches On

Issue: 09-2009By Our Staff Correspondent

The Indian faith in the LCC model—initiated by Air Deccan, kept alive by IndiGo, SpiceJet and GoAir and recently rejuvenated by all the three full service carriers—is vindicated by recent figures

In January 2006, Naresh Goyal of Jet Airways scoffed at the Low Cost Carrier (LCC) threat, saying: “We are catering to an entirely different market compared to the so-called LCCs. There is no such thing as an LCC in India; the costs are all the same for every airline.” This year, inordinately high losses compelled Jet Airways to announce Jet Konnect, described on its website as a “Jet Airways Low Cost Carrier”—slated to eventually field two-thirds of Jet’s total domestic capacity.

In yet another instance, albeit different but nonetheless connected, Kingfisher Airlines in April launched a campaign directed against LCCs. One-half of the hoarding read “Indignity”, while the other juxtaposed “Respect” inked in Kingfisher fonts and colours. Kingfisher’s campaign implied that the Full Service Carriers (FSCs) provided what LCCs could not. Shortly afterwards, Kingfisher announced a shift to the LCC model with a commitment to progressively allocate 70 per cent of its total capacity to LCC. This volte face by the two largest domestic airlines in India tells the whole story of the birth and maturation of LCCs in India. This indeed is a vindication of the LCC model in the Indian airline industry.

The Price War

Air Deccan was launched in 2003 by Captain G.R. Gopinath as the first Indian low cost airline, purported to be for the common man. The fares were variable and the offer of a one rupee ticket fired the imagination of not only the adventurous passenger but also the calculating and enterprising one. With no concessions for LCCs in infrastructure costs, airlines tried to balance their books by cutting operating costs. Initially, though under threat of competition, Indian Airlines, Jet Airways and Air Sahara were dismissive of Air Deccan and believed that the experiment would be a fading dream. However, the growing demand for air travel in a resurgent economy, the lure of low cost air travel, the growing success of the LCC model and the imperative need to sustain load factors as also retain market share, left the FSCs with no option but to discount fares.

Limited number of seats were sold at lower prices under the Apex Fares scheme if purchased specified days in advance with substantial penalties for cancellation. Later, as other LCCs entered the fray, discounting without the prepurchase requirements of the Apex Fares became the norm. Air Deccan’s growth story encouraged other players to enter the Indian aviation scene. The boom phase in the airlines industry commenced. GoAir, SpiceJet and IndiGo followed the classical LCC model with highly competitive fares, single type of aircraft, a single class of service, point-to-point operations, quick turnaround, no frills and web-based ticketing while Kingfisher Airlines and Paramount Airways entered the fray with their unique approach and business model.

The entry of a number of LCCs altered the dynamics of competition. On trunk routes such as Mumbai-Delhi or Delhi-Bangalore, fares charged by airlines were close to those of AC rail travel. However, the need to fill up as many seats as possible became an overriding consideration. Seats that had been sold for Rs 10,000 in the past were now available for Rs 99 plus tax. FSCs were compelled to drop fares, though their minimum fares were still higher than those offered by the LCCs. The rapid increase in costs combined with competitive pressures to keep fares low, threatened the survival of relatively less efficient airlines. This spurred consolidation initiatives; the Jet-Sahara and Kingfisher-Deccan mergers followed.

Future Prospects

Prognostication with respect to the LCC model is difficult. The market, as far as the airline passenger is concerned, is undergoing complete transformation as the FSCs embrace LCC operating structures, which in turn, find innovative ways to increase the market share. GoAir, for example, has modified its A320s for full-economy seating by removing a row of seats and distributing the extra space thus obtained to increase the pitch (distance between seats) for the front four rows designated as ‘Business Class’. The increased pitch provides extra leg space for economy class and keeping all the middle seats vacant in the business class provides increased elbow space. Thus, with minimal investment in modification, a new and enhanced product has been offered to the passenger. This illustration highlights the rapidly evolving diffusion between LCCs and FSCs.

Jet launched Jet Konnect in May ostensibly “to meet the needs of the low fare segment”. The motivation, undoubtedly, was to counter the loss of market share to the LCCs, especially to Indigo and SpiceJet. Jet Konnect commenced operations with three B737s and six ATRs. Its strength is to be finally increased to 19 B737 and 10 ATRs. Jet also plans to merge Jet Konnect and its budget airline, JetLite, on resolution of the ongoing legal dispute with Sahara.