It has taken just three years for low-fare carriers (LFCs) in India to capture a share of almost 49% in the Indian civil aviation market. The key reason for this performance is that the price difference between the AC rail fare and airfares of low-fare Carriers (LFCs) has narrowed considerably.
Jeh Wadia, managing director, GoAir
Around 700,000 of the 15 million odd rail passengers in the country travel in air condition (AC) coaches. And it is the effective targeting of this segment of travelers that has seen the growth of the LFC segment
LFCs has also grown because of their ability to establish connectivity to Indian hinterland.
The question is: Will budget airlines work in India? We believe the growth potential for this class of carriers in India is immense and we have only managed to scratch the surface.
In due course, Indian LFCs should be able to replicate the success of those in Europe. If a parallel has to be drawn, in Europe, the number of passengers is much lower, journeys are much shorter, and traveling by train is a nice experience. Yet, the low-cost airline model has worked very well. Given the size of the Indian market, the potential is definitely much bigger than that of Europe. This is because, unlike in Europe, there are no reliable train connections between large cities in India and the journeys are hardly comfortable.
Operating conditions, however, present severe challenges to the growth prospect of LFCs in India. Airport charges are 62% higher and fuel prices, in most cases, are more than twice the global benchmarks.
Fuel prices amount to almost 45% of the total cost of operations whereas in most countries globally, it is not more than 18-20%. Distribution costs also increase, as Internet penetration, the main ticketing medium for low fare carriers, is poor. Non-scheduled aircraft utilization is higher due to poor infrastructure (few runways and hangars, among other things) at Indian airports.
Beside this, certain regulations like all airlines have to fly to some unprofitable routes add up to throw the airline’s budgets out of gear.
Government’s action towards reducing the existing sales tax on fuel (the average is 27-30%) to a 4% declared goods tax will go a long way in fueling future growth of this sector and make low fare models more profitable in India enabling them to offer even lower fares then what they are at present. It also should be noted the Minister of Civil Aviation is doing an outstanding job in improving the infrastructure and policies and the impact of these improvements can already be seen and felt.
Unfortunately, infrastructure development, tax reduction and policy changes cannot happen overnight and we have to be patient and ensure that we have a growth plan linked to the realities of today and not the dreams of tomorrow.