Ten years ago, when Air India began reporting huge losses, merger with Indian Airlines and induction of new aircraft in numbers more than what it could afford or gainfully deploy were attributed as the prime causes.
In 2011-12, when Kingfisher collapsed, Vijay Mallya’s flamboyance was described as one of the primary contributing factors.Now, when Jet Airways has probably already taken its last flight into oblivion, a debate has been unleashed: What’s wrong with Indian aviation?Jet was a good airline and so was Kingfisher! So why did they meet this fate?What’s unfortunate is that all associated with the industry have overlooked the realities of market dynamics even as Kingfisher’s collapse and Jet Airways making profit in only two of the last 11 years gave clear signals?Clearly, producing a world class airline is not enough for ensuring survival. Air India, Kingfisher and Jet Airways are/were full service carriers (FSCs) unlike Indigo, SpiceJet, Go Air, which are low cost airlines (LCCs) and, therefore, better placed financially. The latter three along with Air Asia account for over70% of the domestic market. In this market domination of LCCs lie the cause of the financial travails of full service carriers.LCCs because of their stranglehold on market decide the fares. While they ensure recovery of their costs, FSCs, which provide additional amenities like food, better seats, frequent flyer mileage points, etc are just not able to recover the costs. FSCs, in our price sensitive market, have consistently failed to command a premium on fares for the superior travel experience they offer. This is because an overwhelming majority of passengers seek value for money in travelling and aren’t looking for the frills.
Ask any passenger on how they select the airline while travelling? Cheap fare would be the instant response. FSCs, in their quest to fill up seats as they are a perishable commodity – nil value once the flight has taken off, therefore offer fares only marginally higher than the LCCs (instances of FSCs fares being even lower are not rare). Losses sustained over a period of time lead them to risking their future unless the promoter, as in the case of Air India, can periodically infuse more and more funds to ensure survival. With banks disinclined to bankroll operations indefinitely the future being bleak of FSCs is a foregone conclusion.
LCCs, on the hand, feel that to ensure sustained growth fares must be kept at affordable levels so that more and more first timers can fly. Double-digit air traffic growth has also become imperative for LCCs own business plans since they have collectively placed orders for more than 600 new aircraft to be inducted in the next five years. What will they do with the new aircraft if the healthy growth is to wither away due ‘unaffordable’ fares?
Tragically, JRD Tata had in a speech on 22 June 1953 observed: “The main causes of the losses are to be found, not in high operating costs, but in the uneconomically low fares and mail rates and the crushing burden of fuel taxation imposed upon it”.
If only promoters of FSCs realise that passengers’ psyche of price sensitivity cannot be altered and uneconomically low fares shall continue to prevail, the options before them are clear: tweak the business model or keep infusing more and more funds to prolong the life span because the option of fares going up in the LCCs dominated and competitive market does not appear to be on the horizon.
This message ought to have been read and understood by Naresh Goyal many years ago but over confidence, perhaps emanating from his easy entry into the business when govt owned airlines were his only competitors, did not allow the message to sink in that market dynamics had changed over the years and today he was competing with private airlines - Indigo and SpiceJet, who’s promoters were also equally deft in playing all the games that he did in the world of crony capitalism not too long ago.(The author is former executive director, Air India & author of The Descent of Air India)