‘India’s budget carriers have not followed international practices’

‘India’s budget carriers have not followed international practices’
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First Published: Thu, Jun 14 2007. 01 04 AM IST
Updated: Thu, Jun 14 2007. 01 04 AM IST
With India emerging as the world’s fastest growing aviation market ahead of China, airport operators, financial investors and global airlines are all scrambling for business here. Mint caught up with Andrew Miller, chief executive officer of the Australia-based Centre for Asia-Pacific Aviation (Capa) Consulting, on his views on where the Indian aviation business is headed. Capa is the region’s leading source of market intelligence and consulting, helping companies plan market entry strategies and assist in raising capital. Edited excerpts:
The record growth in passenger number in domestic travel in India has been fuelled by low fares, which Kingfisher Airlines chairman Vijay Mallya has described as being consistently below cost. Can Indian airlines earn profits, even if the market growth slows down, due to price hikes by airlines?
As a general rule, growth in the aviation sector is usually double that of the gross domestic products. So, if you assume growth rate of the economy is 8% this year then the aviation business should grow at 16%.
The question is whether this growth is creating value for shareholders of the airlines. India has had a peculiar situation of a lot of players starting out at the same time, flying the same routes and offering the same price (for the tickets). Unfortunately, even the budget carriers have not followed international best practices and instead have given away tickets cheaply.
Southwest Airlines in the US didn’t become what it is till 20 years into its existence. It grew slowly by starting at one hub and dominating it and then expanding in a scenario of limited similar competitors, despite the size of the US market.
In India, nobody is making money despite the tourist potential and the growth in GDP. There’s so much potential beyond just catering to the Taj Mahal tourist traffic which can stimulate demand for air traffic. India has a diverse range of experiences. There’s a lot of marketing required here by the government on the difference between North and South India.
In India, more people travel by trains in one day as compared to planes in a whole year. Importantly, unlike some other countries such as Germany or South Korea, which have invested in high-speed rail links to compress timeliness, nothing has been done in India. So, even short-haul flight sectors in India are not under threat.
Budget carriers in India have gained market share rapidly and estimates forecast that they will have between 50% and 70% market share in the future. Do you think they will survive in a scenario where they are selling tickets at any price?
Some 90% of the people in low-cost carriers in India are today travelling at below the cost incurred by the airlines. This ought to be 10% and that’s where the fundamentals have gone wrong. There are too many seats being given away cheap.
In Europe, airlines are able to give away some seats free because they can generate third-party revenues through selling insurance for travel such as missing an onward flight, car hire and even hotel packages. They have economic income streams which have higher margins bringing in incremental revenues. The trick is how the loss leader fare is advertised and clips are added to it. Some airlines have managed to generate as much as 30% of their revenues from third-party revenue streams.
In India, with the high proportion of first-time air travellers, the concept of travel insurance itself is unfamiliar. Also such first-time travellers tend to be largely, the “visiting friends and relatives” category and hence do not need travel packages or car hires.
The second wave of travellers tends to be those on holidays and that’s when the large third-party revenue streams kick in. It’s a process of evolution of a free market.
Consolidation in India is being touted as the panacea for all the ills facing airlines. Do you think it will be the magic wand?
It’s clear that some things have been happening in India which are not sustainable. Consolidation is happening because nobody had any critical mass. Jet Airways had that but it has been losing market share as it can’t compete with the fares being offered by some other competitors. (Capa estimates full service carriers have been losing market share at 1.5% per month.)
The consolidation between a full service and a budget carrier needs to emulate the Qantas model of two brand positions and a resulting bifurcation of business and leisure traffic.
There may be other synergies available on engine spares and engines. When airlines talk about setting up maintenance repair and overhaul facilities, the key is to see if at least 50% of the revenues at such facilities come from other airlines.
Some of the greenfield airports being developed in India have been permitted to charge higher rates per passenger than existing metro airports. Given the rising share of budget carriers looking for lower costs, do you think airports will succeed in recovering their investments through higher aeronautical charges?
The best airports worldwide realize the benefit of non-aeronautical revenues. Some of them have 60% of their income coming from such areas via food and beverage malls, duty-free stores, etc. Part of these revenues help in growing economic returns on the airport investment while part goes in cross-subsidizing landing fees. There is no point in stalling market growth by upping aeronautical charges. The idea is to grow the airport capacity and make sure the non-aeronautical revenues grow by focusing on returns from there
Land is in short supply in India and the government has rightly put limits on the amount of land that can be converted to such use. It would be a shame if the land was given up for non-aeronautical purposes entirely and the viability of the associated airport was compromised as a result.
Greenfield sites have a long horizon as regards returns. We don’t have a true greenfield airport that’s been built recently. In Europe, a lot of the so—called greenfield airports were actually airports built for the Second World War. True greenfield airports require a 25-year horizon for commensurate returns to flow through.
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First Published: Thu, Jun 14 2007. 01 04 AM IST
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