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Is India ready for a no-frills airline?
December 17, 2003
Low-cost air travel offers better options for the rural and middle classes, but cutting expenses on regular routes isn't easy.
G R Gopinath, Managing Director, AirDeccan
This argument is like asking whether people in India are ready for travel. People have to travel. It's an age-old itch and a fundamental need. Looking at the Indian context, we have 15 million people who travel by train in a day; of these, about 170,000 people travel in first-class AC.
There is no debate on this issue among economists from diverse spectrums. We only need some entrepreneurial spirit to unshackle the bureaucratic system. Today, all economists agree that India would be an economic superpower, behind the US and China by 2020.
You cannot achieve this unless there is movement of goods and people and transportation as a whole is an integral part of this growth. Just as one needs to increase the number of trains and buses, we also need more airports and airplanes.
To put things in perspective, a total of 390 to 400 commercial flights operate in a day in India. The US, which has one-fourth of our population, has 40,000 flights a day. If the US were to have our population or we had its economy, nearly 160,000 flights are needed.
Today, assuming that we had tapped one per cent of this potential, we still need 1,600 flights a day. Therefore, we need a quadruple jump in the number of commercial flights. And this is not the comment of a runaway optimist.
Today, if you talk to any fast-moving consumer goods company, it is clear that the growth is coming from rural areas. TV consumerism has spread deep.
As a result, the fundamental philosophy of AirDeccan, besides having the usual flights to major metros, is to connect rural India. In my opinion, it is this part of the country that has created immense wealth in the recent past and will continue to do so. There are a lot of people in these areas who are just below the existing airfare structure.
Given a choice, they are willing to travel by air at half the price as they know it will help them in their business. We need to tap that segment with no-frills airlines. Such airlines can also tap those customers who are at the lower end of the Jet Airways flights.
There are a lot of rich people who travel by the business class as it is a question of prestige. But we must not forget all those who are willing to travel by the economy class as a cost-cutting measure to their company. I know a lot of communities in Gujarat and Tamil Nadu where the CEOs of the company take the economy class and set an example for the rest to follow.
It is said that India's actual middle class constitutes about 200 million people, equal to that of Europe. If a no-frills airlines can offer its services at half the price of a regular airline, it will assure air travel to at least 50 million people, or one-fourth of this population.
Whereas, today, we have about 12 million people who actually travel by air every year. If you compare this with Malaysia, which has a population of 24 million, nearly 12 million opt for air travel. Looking at all these figures, it is clear that we do not need any market figures, debates or analysis to arrive at a conclusion that low-cost airlines is the need of the hour.
Cheap air connectivity is a fundamental need. A travel agent may be keen on selling tickets of other airlines instead of a no-frills airline. This is due to the higher margins that he derives. But once customers begin to demand a low-cost airline, the agent will be left with no option.
No-frills is symbolic not just in terms of not having more air hostesses or serving designer meals. It is more on the lines of operating on cheaper economies, flying to smaller airports, having a quick turnaround time, multi-tasking, not having business lounges, reducing distribution costs by effectively using the Internet and employing the minimum required staff. If any country has an immediate need of a low-cost, no-frills airline, then it is India.
The most profitable airlines businesses in developed economies like the US and Europe are those that offer low-cost fares like Jet Blue Airline and South West Airline (US) and RyanAir (Europe). These airlines are growing at nearly 30 per cent as they have focused on the middle class.
The priority is to cut cost as they have to offer low fares. As a result, there is no doubt that such airlines change the economy of any country for the better.
(As told to R Raghavendra)
Ankur Bhatia, Managing Director, Amadeus Indian Subcontinent
Starting with Southwest Airlines in the US, low-cost carriers deployed a basic operation model of offering no-frills service on regular routes. So, the passengers were able to compare the fare and services with those of regular carriers. The idea was to cut down fares by using less-frequented airports and reduce frills and infrastructure costs.
This model is not replicated in India. For example, what AirDeccan is doing now is entirely different. The airline is south-based, servicing routes where there is less traffic. It even plans to fly to destinations where no previous service exists. How will the travellers be able to compare the fares? I would call it a regional carrier rather than a low-cost one.
If AirDeccan says it doesn't want to compete with existing airlines and may even provide feeder service to them, the very concept of a low-cost carrier gets changed. You can't walk the thin line of being a low-cost service and offer services to regular carriers. The ideal low-cost operation model in India would be an airline flying passengers from high-traffic destinations such as Delhi-Mumbai, Mumbai-Chennai and Mumbai-Kolkata.
If you look at the cost of air travel in India, taxes and aviation turbine fuel charges account for 50 per cent of the fare. And the other 50 per cent consists of infrastructure costs such as check-in services, catering and other on-board frills. Regarding less-frequented airports, there aren't many options in India as of now.
Of course, Delhi has Safdarjung Airport. But that's not in use. Mumbai has the Juhu alternative. But that, again, needs to be worked out. After leaving the government share, there is still room for cutting down the airline distribution charges such as catering, on-board meals, entertainment and the like. Even if you do away with such frills, in the final equation there will be around 20 per cent cut in total fares. But that's almost in line with apex fares.
I'm not comparing apex and low-cost fares. They may be different conceptually. If AirDeccan managing director Captain Gopinath says even if you fly on the same day you will get the low-fare, then his airline cannot be considered the ideal low-cost example for the reasons I cited above. If you look at Air Asia or any such successful global models, the closer to the flight you book the ticket, the more expensive it becomes.
You can talk about the viability of low-cost carriers in India against the backdrop of the recommendations of Naresh Chandra Committee on civil aviation. The committee has favoured substantial reduction in inland air travel taxes and allowing foreign carriers to pick up to 49 per cent stake in domestic carriers. If implemented properly, the suggestions will go a long way in cutting down air travel costs.
Low-cost carriers can expect to operate successfully in such a situation. Aircraft leases have also come down, especially in the aftermath of the September 11 attacks on the US.
Coming back to AirDeccan, if it says it will eventually be offering 50 per cent less than regular fares, you will have to see what routes the airline will be flying. If the carrier says it will be to destinations where previously no service existed, how then can you compare fares? Unless and until AirDeccan competes with Jet Airways, Air Sahara and Indian Airlines on regular routes, you cannot call it a low-cost carrier.
In many instances, a regional carrier's operations are less competent than those of a low-cost carrier. Regional carriers have been set around the world. They are not low-cost carriers. Instead, they have low costs of operation.
I don't subscribe to the argument that successful no-frills carriers fly above water bodies, such as from the UK to Ireland or Europe. You can have viable low-cost operations within the country, cutting down on overheads and frills. But you need to differentiate between regional and low-cost carriers.
The skies are being opened up. The growth in the domestic sector was 9 to 10 per cent this year. We even had a double-digit growth of 11 per cent in certain months. The prospects are increasing for genuine low-cost models.
Two prerequisites are a must for anyone who wants to set up a no-frills carrier. He should first see how far the Naresh Chandra Committee proposals are going to be implemented. Second, he must devise viable ways to cut down the distribution cost like ground-handling catering and so on and pass on the savings to the traveller. A low-cost carrier needs to offer service on regular routes, unlike a regional carrier.
(As told to Johny Bastian)