Saturday, January 11, 2014

The Indian Aviation Industry -All is not well



The Low cost carriers (LCCs), often referred as “No frills” or “Budget airlines” gained momentum in India during the period 2003-2007, with Air Deccan, Sahara Airlines, Indigo, Kingfisher, Go Air, Spice Jet entering the aviation industry offering low fares and making air travel affordable to the average middle class families. The low barriers to entry, the rise in disposable income, the liberalization of the Indian economy, and increase in FDI are some of the reasons attributable to the aggressive growth of LCCs in India. Today 70 % of the Indian aviation sector is dominated by the LCCs, as the result of which even the Full Service carriers like Jet airways and Air India are forced to reduce their fares, in order to make themselves saleable in the market.

Today the biggest challenge faced by the airlines industry is to achieve cost efficiencies and maximize productivity. As can be seen, many low cost airlines had to discontinue their operations or were grounded because they failed to survive the pressures of high operating costs, low returns and Debt crisis. In 2012-2013, the Indian carriers made a loss of Rs 10,983 Crores.

Most of the LCCs follow more or less similar business model. The cost efficiency is partly achieved by charging extra fee for the in-flight services such as catering, personalized attention by the flight attendants, seats with more leg space priced more etc. The LCCs often do not provide any differentiation between the business and economy class since they have the same type of seats in the aircraft. At the most, the first two rows are reserved for the business class, and passengers occupying these have to pay more than the others, thus fetching a few extra income for the airline. However, these techniques are not enough to achieve the desired cost efficiency given the high operating costs of running an airline. The major expenses for any airline are: ATF (Air turbine fuel) costs which are ever increasing coupled with increase in dollar rate, cost of hiring and paying experienced qualified pilots, maintenance costs, salaries paid to the ground staff etc. Airlines also suffer a bigger chunk of loss from unsold seats. A standard A-320 aircraft is 180 seater, but not all seats are sold out for a given flight. The unsold seats are a kind of additional cost for the airline, as they are carrying fewer passengers, thus sales is lesser compared to the fixed operating costs.

Pricing also plays a pivotal role in determining the revenues earned by a LCC. Since there is large number of market players, the LCC industry is close to perfect competition scenario, wherein the prices are not influenced by any one particular airline, rather any fluctuation in the air fare impacts all the airlines equally. When the demand is more, especially during the holiday season, the cost per ticket is kept high, because the consumer is willing to shell out extra money for the same product. Most LCCs take advantage of the consumer behaviour/sentiments and raise the price of the tickets with the flight departure timings approaching closer. If there are no buyers at the revised price, the hikes are rolled back in order to increase the load factor. Nevertheless, the LCCs can also be very ruthless with their policies. If a passenger fails to check-in on time, their seat may be sold off to another passenger with no refunds applicable or the customer may be given an option to take the next flight subject to additional payment of cancellation charges and differential cost (the difference of original and new flight fare). If there is delay in booking cancellation, the customer may have to forgo the base fare.  These are some of the indirect tactics followed by airlines to earn revenues.

RECOMMENDATIONS

Since the airlines industry is price sensitive, and the customers choose to go for the lowest fare, irrespective of the airline offering it, therefore more needs to be done on the operational front .


To achieve the operational efficiencies, the LCCs can plan their routings in such a way that they can connect 2-3 cities in a single trip, by means of transit/connecting flights. This will help in reducing the cost of one trip, at the same time expand the network and connectivity. Eg: including a non-busy sector with a busy sector during non-busy hour. This will also address the problem of empty seats, as the probability of having a full flight plying on connecting routes is higher. To maximize revenue or determine the break even, linear programming method can be used to determine how many seats should be allotted between the two destinations.

The non-profitable sectors could be eliminated and the fleet can be utilized on the more promising sectors.

Almost 40% of the total fare is attributed to ATF, and any rise in the cost of fuel hurts the customer’s pocket directly, and increases the operating the cost for the airlines. Fuel Hedging can be practised in view of the Dollar rate volatility.  

Each low cost airline should design a strategy for differentiation. It could be like providing exceptional customer service in terms of comfort, on time flights, better customer loyalty offers for the frequent fliers, choosing a sector that is still untapped by other players.

FUTURE

With Government’s nod to 49% FDI in aviation industry, the future sees new entrants in the Indian aviation sector – Air Asia and SIA-Tata alliance. This will further increase the competition. Air Asia’s primary focus will be Southern India, while SIA-Tata will operate on the all the major sectors. The stocks of major players have already dipped by almost 50% . The number of flyers rose by 5.5 % in 2013 and with the new market players, it is expected to jump up in 2014. This will force the other LCCs to revise their strategy, and focus more on the operational efficiency, and to keep going..

 

 

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