Flying high on low fares

As an increasing number of low-cost airlines target the middle-class traveller, the pie in the sky gets bigger. With budget carriers in stiff competition with each other, it is the passenger who is the gainer. Girja Shankar Kaura reports on the players in the aviation sector.

Aditya Choudhury, a sales representative with a Delhi firm, sat munching a burger and French fries and sipping from a can of cola. In the past, it would have taken him 35 hours to reach his home town, Guwahati. Used to travelling by train, it was an arduous journey which he would undertake only once in years. The past seemed so far away, he thought, as he drifted to sleep. An hour later, he was nudged awake by his wife to put on the seat belt as the flight was about to land at the Guwahati airport. Aditya disembarked from the plane with a smile on his face, feeling as fresh as ever.

Mahabir Singh, an office assistant with a government organisation, nurtures a life-time ambition of flying along with his family. In the last year of his service his wish will be realised when with his wife and grandchildren he will fly to Bangalore.

The power and the convenience low-cost airlines have managed to give to a middle-class traveller is tremendous. Opting to fly by these airlines at a cost nominally higher than the AC II-tier by train, the budget traveller can emerge a winner, with time on his side and a smile on his face.

Changed outlook

Low-cost airlines in India have changed the way people travel in the country. The sky is the limit as the mushrooming budget airlines gives travellers more options. Some of them even charge a nominal sum for the renting of ear plugs to enjoy in-flight entertainment, while others don’t carry foodstuff on board. No one is complaining because promotional fairs, some even as low as Re 1 plus taxes, have revolutionised air travel.

The concept of budget airlines was launched initially by a former officer of the Indian Army, Capt G.R. Gopinath, through his airline, Air Deccan. The boom in the Indian aviation industry was responsible for India emerging as the highest spender at the recent air show in Paris. Orders from Indian airliners were talked about, indicating a buoyant growth in the sector after the arrival of low-cost airlines.

The yet-to-hit the skies airline, IndiGo, stunned the industry by placing an order for 100 A-320 aircraft from Airbus, a deal which was estimated at $6 billion. Orders worth $12 billion were placed, according to rough estimates. Experts say the country’s market is poised to grow 20 per cent annually. Kingfisher Airlines of the UB group placed an order for five Airbus 380s (world’s largest aircraft) in a deal estimated at $2.5 billion. India’s largest private carrier, Jet Airways, placed orders for 20 Boeing aircraft worth $ 2.8 billion and 10 Airbus A-330s worth around $1.5 billion. Another latest entrant in the low-budget arena, Spicejet also ordered 20 aircraft.

Low budget

The potential of low-cost flying in the aviation sector is reflected by the fact that in the last six months the country’s private airline firms have placed orders for 250 aircraft. This is 43 per cent of the total global orders for Airbus and Boeing. The concept of low-budget flying initially originated in the West and was quickly picked up in the East Asian countries. Richard Branson of Virgin Airlines was the front-runner in the UK, while Qantas took the major chunk of the Australian budget skies. In the post-WTC days of aerial terror, seat occupancies in established carriers crashed, leaving them to operate on losses. That was the time when the wallet-friendly carriers took off and still operated with profit margins. The non-frillers were characterised by few on-board services, elimination of catering and assistance services and little inflight glitz. Basically, a barebone mode of aerial transport, from Point A to Point B.

Train to plane

Taking the lead in the Indian skies, where air travel traditionally has been expensive, Air Deccan unleashed cut-throat competition in the aviation scene ith fares mostly competing with train fares. In response, leading domestic airlines like Indian Airlines, Jet Air and Sahara Airlines slashed rates and unveiled advanced purchase schemes (Apex) to take up the new challenge. Competition, as always, brought the best to the customer and one year down the line there are already two more players in the race, with a few more lined up to grab a piece of the cake of the air.

According to Air Deccan, 40 per cent of its first-time passengers say low fares are why they have chosen to fly. Even poorly connected small towns benefit from the new trend. Spicejet Director Ajay Singh says that exploiting the train passenger is the key to the low-budget flying. That was the reason that his airline was presently looking at connecting the small towns to the metros.

Giving an example, Ajay Singh said that the recent floods in Gujarat were the biggest eye-opener for his airline. When the bigger players in the market decided to withdraw flights from the region due to low traffic, it was Spicejet which emerged as a gainer. With trains grinding to a halt in flood waters, daily travellers immediately shifted to the Spicejet flights from Surat and Ahmedabad. They realised that travelling on low-cost airlines was more convenient than time-consuming train travel.

Ajay Singh points out that the market really lies in the small towns, where 90 to 95 people need to fly to big cities each day. His airline has identified such routes across India and feels that 40 per cent of the national demand is going to come from these routes.

These travellers don’t mind catching a flight at odd timings as they are already used to boarding a train at such hours. Spicejet has been operating flights either earlier or later than peak hours, specially at metros, and has announced its late night flights which would offer a seat at prices varying from Rs 599 to Rs 1599 to target the business traveller.

Stealing a march

The low-budget airlines have actually been stealing a march over the regular airlines with a load factor of over 90 per cent, an achievement in the lean season. Analysts point out that the fares can be expected to decline further. After the Apex fares last year, regular airlines this year have again come out with their low-fare schemes to increase its load factor. Private operators believe that the sales/passenger potential in India is huge with a population of more than a billion people, a majority of them train travellers. In the fiscal year that ended in March 2005, some 16 million plane tickets were sold in India. This number accounts for just about five days of air traffic in the USA. As far as India is concerned, even these 16 million seats reflected a 27 per cent jump over the year before. Aviation experts believe that the business would continue to rise at about 25 per cent every year over the next few years.

Incidentally, all of India’s airlines, including the public sector giants Air-India and Indian Airlines, own fewer than 200 planes. In the US, just one airline has as many as 500 aircraft. Indian aviation industry watchers believe that there is a potential of as many as 450 to 500 million people for low-cost flying. There is place for at least five low-budget airlines to operate in the country. While releasing the Rs 500 tickets for the trunk routes, Gopinath commented, "An air ticket for Rs 500 plus taxes was our promise to the Indians and every release of new set of tickets brings us closer to the dream of ‘empowering every Indian to fly.’ Every Air Deccan flight has passengers from diverse backgrounds, ranging from a retired school teacher to a Vice-President of a multinational. Enabling them to fly at affordable fares is our motivation to strive harder to expand our network and bring down the fares further".

Investment opportunities

Low-cost carriers keep costs down by going in for rationalisation and revenue optimisation. The new business opportunity has also made investors sit up and take note. Air Deccan obtained venture capital funding of $40 million in late 2004 and plans an initial public offer of stock to raise at least $250 million. Kingfisher will invest $40 million and SpiceJet will spend $28 million to build their fleet and train personnel. AirAsia of Malaysia, which claims to be the world’s most low-cost airline, pays its flight attendants to clean planes instead of employing special crews. This lowers costs and cuts the time spent on boarding at terminals to 25 minutes—about half as much taken by major airlines. Its pilots are trained to land at a later point on the runway and at a slower speed to conserve fuel and reduce wear and tear of tyres. And, half of AirAsia’s tickets are sold over the Internet, eliminating travel-agent fees.

Foreign players

There could also be the possibility of some airlines adopting unfair means to garner passengers. Here the role of the Directorate General of Civil Aviation (DGCA) and that of the Ministry of Civil Aviation would become crucial. The fight in the low-budget sector is not expected to remain within the country but would soon extend to foreign skies. According to industry insiders, two of the leading names in the low-cost airline business from Southeast Asia — Singapore-based Valuair and Qantas subsidiary JetStar — have already firmed up plans to enter the Indian skies.

JetStar is expected to offer India-Singapore return tickets between Rs 7,000 and Rs 8,000. The regular air fare on the same route today is in the range of Rs 21,500. While Valuair is planning to enter the North Indian markets, JetStar is seeking permission to use Kolkata as its gateway to India besides flying to other destinations in India. Not to be left behind, other carriers from the region — Tiger Air, Air Asia and Nok Air — are thinking of starting services to India. The interest stems from the fact that air travel between India and Southeast Asia has grown by nearly 40 per cent this year with entry of new airlines like Air Sahara, Jet Airways and Myanmar Airlines. Australian carrier Qantas Airways has plans to include Indian cities on its route since its low-cost airline would be launched in November this year.

The opportunity low-budget flying offers has forced airline biggies in India to join the race. The country’s flag carrier, Air-India has already started a low-budget subsidiary called Air-India Express, which is an international low-cost airline. With a fleet of 14 Boeing 737-800s, which have been taken on dry lease in three phases, these aircraft will have 181 economy class seats in single class configuration. With the induction of four more aircraft, effective winter 2005, Air-India Express will operate 38 additional flights, and add another 26 flights in the third phase which will be effective from April 2006, when four more aircraft will join the fleet. Within a year of operations, Air-India Express will operate a total of 127 flights with 14 aircraft to destinations in the Gulf and South-east Asia.

Experts point out that everybody in the game wants a piece of the cake and has chalked out plans to beat their competitors. As it turns out, the battle for budget skies has only just begun.