Mumbai: India’s top two full-service private airlines Jet Airways (India) Ltd and Kingfisher Airlines Ltd are taking diametrically opposite routes towards the same goal—survival and revival.

Kingfisher Airlines, founded by liquor tycoon Vijay Mallya in 2003, is exiting the low-fare segment and positioning itself as a full-service carrier once again. All of the airline’s Airbus aircraft are being reconfigured to have eight first-class seats and 156 economy seats, increasing capacity by 10%.

Weighed down by mounting losses and debt, India’s airlines are tweaking their business models as high operational costs and rising competition counter passenger traffic growth in the world’s ninth largest aviation market.

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With the past year being particularly turbulent for the Indian aviation sector, leading carriers like Jet Airways and Kingfisher are looking at diametrically different yet innovative solutions to stay afloat. Mint’s P R Sanjai tells us what they and other Indian airlines are doing in order to survive and revive their fortunes.

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Will the changes work? Both have attendant risks, experts said.

“Where this involves a radical change (from full service to budget, or the other way round), it is a risky move because of legacy issues such as the existing culture of the airline, managerial and crew skills, unionization, type of fleet, etc.,” said Loizos Heracleous, a professor of strategy and organization at Warwick Business School in Coventry, UK.

“Where there is a partial shift, it still risks creating misalignments within the airline,” added Heracleous, a close observer of the airline industry. “For a strategic repositioning to succeed, there needs to be a coordinated effort to align organizational processes, values, people skills and infrastructure accordingly. Absent this alignment, such shifts are merely superficial and won’t lead to lasting competitive advantage.”

Other airlines, besides Jet Airways and Kingfisher, are also experimenting with business models.

India’s largest low-fare airline IndiGo, run by InterGlobe Aviation Ltd, is offering meals and connecting flights to corporate clients bundled with the airfare.

Closest rival SpiceJet Ltd has started flights to secondary destinations such as Surat, Tirupati, Rajahmundry, Vijayawada, Visakhapatnam, Mangalore and Bhopal with a fleet of Bombardier Q400s distinct from its existing Boeings.

National flag carrier Air India Ltd is sticking to the full-service model, but continues to sell tickets at a steep discount to increase market share.

According to the Federation of Indian Airlines lobby group, Air India cut fares by more than 20% in January. GoAir, a small low-fare carrier run by Go Airlines (India) Ltd, continues to offer higher-priced seats on its flights with extra legroom and food. GoAir is also considering buying small planes to connect regional markets in addition to its existing Airbus fleet.

There’s a price to pay for airlines’ refocusing strategy. A senior executive at a private airline, requesting anonymity, said “the bottom line is additional cost—cost and loss”.

Inevitable change

A departure from established business strategy was perhaps inevitable in a country where airlines are piling up losses despite 30 consecutive months of growth in passenger traffic, including 15 months on the trot, at a double-digit pace.

India’s domestic aviation traffic increased 17.6% in January-November to 55 million passengers. Yet, airlines lose $25-30 (Rs 1,233-1,480 today) every time a passenger boards an aircraft, according to a December calculation by consulting firm Centre for Asia Pacific Aviation (Capa).

Indian carriers combined are estimated to lose $2.5 billion in the 12 months ending March on revenue of just under $10 billion, said Capa—worse than fiscals 2008 and 2009, when traffic was declining and fuel prices spiked at $150 per barrel in the aftermath of the global financial crisis. The industry lost $2 billion each in 2008 and 2009; excluding Air India, it made a $300 million profit in 2010.

Structural issues in the Indian aviation market have made it difficult to operate economically viable flights, said a January note by Malaysian airline AirAsia X Sdn Bhd. Airport and handling costs in Delhi and Mumbai are already more expensive than even airports in Australia, and authorities have approved a 280% increase in airport fees effective April, it said.

AirAsia X decided to withdraw services to Mumbai and Delhi starting 31 January and 22 March, respectively, citing high airport charges. AirAsia X launched flights to Mumbai and Delhi in 2010.

Jet Airways set the process of change in strategy rolling. In May 2009, the airline announced the launch of a low-fare carrier by converting some of its full-scale flights into no-frills, all-economy service under the brand name Jet Konnect that could introduce or withdraw flights depending on market conditions.

Jet Airways already had a low-fare subsidiary in JetLite (India) Ltd, the erstwhile Air Sahara. It offers flights at ticket prices cheaper by 10-15% than those operated by Jet Konnect.

The brain behind Jet Konnect was Anita Goyal, executive vice-president (network planning and revenue management) and wife of founder chairman Naresh Goyal.

“Travellers were staying away from travelling amid the slowdown,” she recalled in an interview on the sidelines of the company’s 19th annual general meeting. “Flyers were keen on low fares. I was struggling to find a way out for weeks.”

Jet Konnect offered the airline the flexibility to convert all-economy class seats back to full service if demand picked up and vice-versa.

At the 19 August meeting, Naresh Goyal said Jet Airways was addressing the issue of the market shifting towards low-fare carriers and reviewing its business model.

“The primary objective of this exercise is to evolve a model which is in sync with market realities,” he explained.

Before embarking on the change, Jet Airways had styled itself as a full-service airline, competing with carriers such as Singapore Airlines Ltd in passenger satisfaction.

If Jet Airways’ strategy switch came as a surprise, a bigger one came at the 16th annual general meeting of Kingfisher Airlines in Bangalore.

Going against the grain

On 28 September, Mallya announced that the airline will exit the low-fare segment in which it operated under the brand Kingfisher Red. Kingfisher Airlines entered the low-fare market through its 2006 acquisition of entrepreneur G.R. Gopinath’s Deccan Aviation Ltd, which pioneered the concept of discount airlines.

Mallya was flying in the face of market logic, given the expanding market share of discount carriers. Low-fare carriers had increased their share of the domestic market to 48.8% in November, based on Capa estimates, from 44.5% a year earlier. Low-fare carriers’ penetration has doubled over the past five years.

Mallya recently said his airline was seeing interest from the top of the travellers’ pyramid—those willing to pay more for premium treatment. The airline is eyeing a capacity increase of around 10%.

“Operating costs of so-called low-cost carriers and full-service carriers in terms of fuel, airport charges, engineering and maintenance, and crew costs are similar,” Kingfisher chief executive officer Sanjay Aggarwal said. “Full-service carriers incur additional costs on global distribution, in-flight catering, ground amenities and the frequent flyer programme. These additional costs are more than recovered through higher yields.”

“A detailed study over the last six months when oil prices ruled high has clearly demonstrated that Kingfisher’s full-service product has generated higher yields and load factors, consistent with the assessment that the business travel segment is more sustainable than the extremely price-sensitive, low-fare segment,” Aggarwal said. The analysis also showed that of the incremental yield, only 25% is spent on providing the extra services associated with a full-service carrier. The remaining 75% is net contribution to profit, he added.

Both Jet Airways and Kingfisher said they are serious about their strategy switch. Jet Airways said it has taken a series of measures to cut costs similar to a low-fare carrier. Kingfisher believes the competition will be far more intense in the low-fare space than in the full-service one.

Indian carriers are trying to fit into a spot in the middle of the low-fare and full-fare markets, said Azran Osman-Rani, chief executive officer at AirAsia X, the Malaysian low-fare airline.

“Indian carriers are trying to position themselves according to opportunities instead of focusing on fundamentals of a business model,” he said. “But it is hard to evolve a low-fare strategy in India as the costs of jet fuel and airport charges are too high. We enjoy lower airport charges in our home country unlike Indian carriers.”

Blurring the distinction

Ajay Singh, co-founder of Chicago-based consulting firm Orchard Group Llc, distinguishes between two types of travellers. On the one hand, “road warriors”, or frequent business travellers, are willing to pay for perks such as airport lounges, fast-track check-in, premium seating and meal service. On the other hand, for those on a holiday and looking for convenience above all, the low-cost model works well, said Singh, who has held several key positions at United Air Lines Inc.

“The challenge for airlines is to figure out how to cater to both the road warriors and the most budget-conscious frugal travellers and everyone in between. The fare differential between the lowest economy class ticket and a business class ticket is manifold and, hence, the schizophrenic behaviour of ‘full-service’ carriers that offer the ‘lowest-fare guarantee’ and the ‘low-cost’ carriers that continue to offer ‘business-class’ products,” he added.

For those offering full service and low fares within their umbrella brand, it is important to offer a clear differentiation and distinction between the products and services, Singh said.

“I believe Kingfisher Airlines and Kingfisher Red blurred this distinction, thereby confusing the customer, cannibalizing the revenue base and eroding the cost advantage of Red over the full-service Kingfisher Airlines,” he added.

Both strategies may have a chance of succeeding.

“History teaches us that the airlines that win are those that achieve sustainable advantage through either real differentiation or superior cost control.” said Heracleous of Warwick Business School. “In very rare cases, an airline can achieve both. These things are relative, and hard-nosed comparative analysis is needed to determine whether an airline has such advantages or not.”

pr.sanjai@livemint.com