Low-Cost Carriers tranforming Indian aviation

The aviation sector is often believed to be in very close correlation with a region’s economic growth and prosperity. In parallel with rapid globalization and India’s recent growth story, the Commercial Aviation sector in India has witnessed a paradigm shift over the past two decades. It has changed from an over regulated, monopolized and ill-managed sector to a liberal and investor friendly playground. In 1953, nine existing companies were transferred to two government run entities: Indian Airlines (serving domestic routes) and Air India (serving international routes. From such a nationalized beginning the sector gradually opened up and 1992 was marked with the government deregulating India’s aviation sector. This marked the beginning of a new era in Commercial Indian Aviation where private airlines flourished and air travel came of age.
Simultaneously, on the global picture, dynamics of the aviation sector in the international market changed drastically with the introduction of Low Cost Carriers (LCCs) like Southwest Airlines (USA) and Ryanair (Europe). It was finally in 2003 that the launch of Air Deccan marked a beginning for Low Cost Carriers in India. This led to a reincarnation of air travel in India from “for the elites” to “for the people”. Ever since Air Deccan started the revolution, many such players have entered the industry and they continue to flourish with rapidly climbing revenues and air traffic figures.
Through a broad view point, the Indian LCCs have emulated their international counterparts who achieved success much earlier but there have been considerable efforts to include the Indian pulse.

Low Cost Carriers in India: Business Model

The LCC model is not just about low fares but also about more efficient operations and a constant drive to reduce operational costs. Very plainly, LCCs represent a leaner and fitter organization. The entire structure rests on the important principle of volume gain, no-frill plain travel services and an aim to commoditize air travel for the common man. Their operations are characterized by low margins and load factors are crucial for profitability.

Growth Drivers

Passenger Growth:  Airline passenger growth is generally related to the GDP of a country. It is seen that air transport grows at twice the rate of GDP growth. The international passengers have grown by around 16% and the domestic passengers have grown by over 22% over the years. Air travel has increased a lot over the years because of multiple reasons. Some the important ones being:
  • Increase in inbound and outbound tourists and medical tourism
  • Over 300 million strong middle class which can be tapped as a potential passenger and can be drawn away from railways.
  • Disposable incomes are expected to grow at an average rate of 8.5% per annum till 2015, which shows willingness on the part of passengers to shift to air travel.
Passenger Growth Data
Low Entry Barriers: Recent analysis in the sector has suggested that airline launch can be done with a capital of $10 million. Most of the components of air service ground handling; catering, training, reservation etc are outsourced by airline companies. Costs are further reduced by recruiting retired personnel from the Air force or PSU airlines in senior positions.
Economic factors:  The economy of India in the recent past has played an important role in giving a boost to many sectors in the country out of which aviation is a prominent one. The economy of India is growing steadily at about 9% per annum which has led to overall prosperity, growth and investments. More and more players want to be part of the aviation sector and offer better deals and better deals and service to the passenger.

Strategies adopted by different LCCs in India

Differentiation: The LCCs in India are mainly characterized by low fares but are positioned very differently in the market. They offer different value propositions to the customer and this is a major factor in the success of one airline over another.

Differentiation Strategies:
  1. IndiGo (http://www.goindigo.in) – On time performance guaranteed. Even at low fares.
  2. Spicejet (http://www.spicejet.com)– No Frill plain vanilla air travel at cheapest rates.
  3. Kingfisher Red (http://www.flykingfisher.com)– Value added services like snacks at LCC fares.
Market Share Distribution
Conquering the rail market: The demand potential for LCC air travel is huge. As of today, Indian railways carry about 17 million passengers every day which is more than what Indian Airlines carry in a year. Even a small percentage of it if attracted to LCCs will generate enormous revenues for the carriers. It is also observed that 20% of the railways’ revenue is generated by upper class travellers and that is exactly where LCCs wish to target their marketing campaigns.
Consolidation: Being an extremely competitive industry, the aviation sector has seen a fair amount of consolidation. In the near past we have seen lot of activity happening in this sector when it comes to consolidation. The Jet-Sahara deal and the Kingfisher-Air Deccan deal for example define the dynamics of the industry. These consolidation activities have been a direct result of the introduction of the concept of LCCs.

Impact of Low Cost Carriers on Indian Aviation

From an era of natural monopoly dominated by the state-run Air India and Indian airlines to a hypercompetitive industry that is integral to India’s vision for growth; the aviation industry has evolved and so have the business practices and industry dynamics. In addition to the liberalization by the Indian government in 1990 which allowed private players to enter the aviation sector, the introduction and establishment of Low Cost Carriers – as discussed in previous sections – has been a significant game changer. 
Impact on passenger traffic
The development of LCCs was well supported by the policy changes that happened simultaneously viz. Increase in FDI Cap, Encouragement of development of airports and infrastructure, allowing private carriers to operate overseas etc. The increase in passenger traffic was enormous and unexpected. Domestic passenger growth in the aviation sector was about 11 percent in 2003-04 but saw a massive increase to 25 percent in 2005.
A micro level representation of impact of low cost carriers in India can be seen by the effect of Air Deccan flights on the Delhi-Guwahati route. Soon after Air Deccan’s launch the average load on the Delhi-Guwahati route grew from 162 passengers a day to 215 passengers a day and average fares plummeted from INR 6000 to INR 4000. 
Impact on fleet sizes and seat capacity
The increase in passenger statistics due to evolution of LCCs has had a direct impact on capacity expansion in the aviation sector. Fleet sizes, routes and available seat capacity have grown tremendously. The increase in traffic on air routes has opened up opportunities that allow scalability in operations and thus airlines have been increasing fleet sizes. At present India accounts for more than 11% of global aircraft demand which is huge considering the low penetration of air transportation in India. 
Impact on Air Fares
As a fundamental of the LCC business model the average air fares in India have dropped considerably. Low fares are aimed at higher penetration levels and at commoditizing air travel. LCCs consistently offer 10-40% lower fares than FSCs. Low fares have been the most important factor in the success of LCCs in India. However, the LCCs face constant pressure on fares due to variability issues in demand and ATF prices. 
Impact on Full Service Carriers (FSCs)
Rise of LCCs has had strong impact on FSCs in Indian airspace. The popularity of the initial LCCs such as Air Deccan forced the FSCs to rethink their business moves and induced stiff competition between the airlines. Fares have been the main point of competition. Although the FSCs viz. Jet Airways and Kingfisher airlines are still preferred over LCCs for the quality of service, the economical flying segment demonstrates much greater growth rates for the years to come. The LCC phenomenon led to Jet Airways launching its own all economy class airline JetKonnect which is aimed at competing with the LCCs.
The LCCs have also proven to be robust and easier to sustain than FSCs during business downturns that have been more frequent than ever before. Even during the financial crisis, among volatile ATF costs and a bleeding aviation sector, LCCs fared decently well and performed much better than heavy debt laden FSCs who continue to make losses.

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2 thoughts on “Low-Cost Carriers tranforming Indian aviation

  1. Well written article but lacks the profit models subscribed by the LCCs i.e. over the period after which the profit is expected to be generated, ageing cost of the aircraft and the inflation of the economy etc.

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