Jet Airways flies on innovation wings9 min read . Updated: 18 Aug 2010, 12:37 AM IST
Jet Airways flies on innovation wings
Jet Airways flies on innovation wings
Mumbai: Eight men meet at 3pm every day on the fourth floor of the Mumbai headquarters of Jet Airways (India) Ltd. In jest, they have named this informal meeting their durbar.
Over the past year, these senior executives have chartered out and implemented a plan that has seen Jet Airways—and its low-cost subsidiary JetLite (India) Ltd—fly back to profitability, even as its peers such as state-run Air India and private sector Kingfisher Airlines Ltd work out turnaround strategies and hire outside consultants to stem their losses.
However, the chairman of India’s largest airline by number of passengers flown is quick to sound a note of caution. “A lot more needs to be done," said Naresh Goyal.
There is a transparent sense of relief at Jet Airways. “It’s time to start smiling again," reads the caption of the airline’s 2010 annual report.
Smiles were wiped off the faces of Indian airline officials in the wake of the severe downturn in 2008 and 2009, when the combined losses of the industry topped $2 billion (around 9,340 crore today).
“The company was like a plane flying between two buildings," remembered Sudheer Raghavan, chief commercial officer and a member of the afternoon strategic durbar.
Navigating out of such trouble required a combination of business basics and innovation.
How it was done
“It’s all about efficiency, reducing costs and excess capacity, and being more reliable," said Jet Airways’ chief executive Nikos Kardassis, who returned to the position after an earlier stint between 1993 and 1999. “The strategy was to be best on on-time performance, own the best product on ground and air, improve yields and operating margins, deleverage balance sheet, and also grow."
Also See Braving The Storm (PDF)
While all the airlines are talking about cost-cuts and route rationalizations to turn things around, the Jet Airways durbar formulated a number of innovative strategies—some that sector experts openly disagreed with at the time, only to take back their words today.
These include improving efficiency, increasing flights on existing and new routes without adding new aircraft, reducing the weight of flights to scale back fuel expenses, and launching a second low-cost carrier.
As a first step, Jet Airways halted its expansion programme for long-haul international flights in November 2008—following an 82% rise in jet fuel costs in August that year compared with the same month a year earlier. It also pulled out loss-making long-haul routes, including US routes, and replaced some Boeing 777 aircraft with the smaller Airbus A330s.
In the preceding two years or so, the airline had been adding two new flights every month.
“We not just put our international expansion on hold, but we also leased out seven wide-body planes from the system," said Raghavan. “This helped us not only in rationalizing the capacity, but also earning revenue in terms of lease rentals."
Without adding a single aircraft, Jet Airways started expanding its flights to West Asia, where the gestation period for flights is 6-12 months, unlike 18 months for long-haul routes.
“We created a Gulf hub in Mumbai, where planes that reached Mumbai in late afternoon or evening were used to fly to West Asia during the night and returned early morning. These planes were back in flying on domestic routes during the day," said Raghavan. “Thus, we improved aircraft utilization and encashed the market of VFR (visiting friends and relatives) and labour traffic to the Gulf."
Jet Airways also started carrying passengers from Bangkok to London via Mumbai and back, a model that has been adopted by Singapore Airlines Ltd and Emirates.
Starting in early fiscal 2009, Jet Airways saved $600 million in a year’s time—$160 million through network restructuring, $170 million with cost-cutting programmes and $270 million by cash conservation measures such as delayed repayment of loans and renegotiating with vendors.
The airline identified 40 items that could help cut costs. “For instance, we restricted to two electric ovens on the flights instead of seven. We started carrying lesser water after studying the statistics of water usage," Raghavan said.
This was in line with measures earlier taken by some overseas carriers. By removing seatback phones from its MD-80s and B737-400s, a US airline shed 200 pounds (90kg) per aircraft, translating into 3,400 gallons (around 12,890 litre) of fuel saved annually. Alaska Airlines said it saved $10,000 per year in fuel in March 2004 by removing just five magazines per aircraft along with reducing the weight of catering supplies. Air Canada considered stripping primer and paint from its Boeing 767 to save 360 pounds per aircraft.
This fiscal, Jet Airways reduced its headcount by 10.9% to 11,430 in the June quarter, compared with the same period of last year. More recently, it entered into an engine maintenance contract for 10 years with Singapore Technologies Aerospace Ltd, under which it will be billed on a “pay as you fly" basis—allowing it 20-30% cheaper rates.
In May 2009, with passengers still staying away from air travel, Jet Airways astounded pundits by announcing a second low-fare carrier—converting some of its full-scale flights into a no-frills all-economy service under the brand name of Jet Konnect.
“This was the real turning point for Jet Airways. We realized that our seat occupancy is dropping. The convenient answer for that was economic slowdown. You need no Nasa-level thinking to understand there is no point in fishing at a dried pond. We had to continue to fish in the low-fare market," said Raghavan. Nasa is National Aeronautics and Space Administration of the US.
Analysts were sceptical as the company already had a low-cost carrier in JetLite, and expected confusion among travellers.
“We were not believers in the company’s strategy of targeting the budget segment by launching Jet Konnect. We also held the view that given the company’s history of labour problems, it would be difficult to rationalize its cost structure," wrote Sachin Gupta, analyst with HSBC Securities and Capital Markets (India) Pvt. Ltd, on 22 March. “However, we have been proven wrong."
Gupta also noted that Jet Konnect helped the company gain market share and improved its load factor.
But more surprise was in store. On 26 April, the company announced the launch of Konnect Select, an eight-seat semi-business class cabin on all its Jet Konnect flights.
The move was in response to the revival of business class traffic. “The young boys and girls at Jet Airways did the magic. We converted one aircraft every night to introduce Konnect Select," Raghavan said.
All the medium-sized Konnect aircraft on domestic routes have twin classes now.
A consultant who works for an aircraft manufacturer said there is no comparable business model anywhere else.
“It’s a bit strange business model, wherein a full-service carrier operates a low-fare brand with twin-class while it is running another low-fare subsidiary that is closely managed," the consultant said, requesting anonymity as he is not authorized to speak to the media. “It will work only in India. Worldwide, there were few full-service carriers operating low-fare subsidiaries. But it’s all done at arms length."
However, Etihad Airways, the Abu Dhabi-based full-service carrier, said on 5 August that it will introduce its first “all-economy class" service in October.
K.G. Vishwanath, vice-president for commercial strategy and investor relations at Jet Airways, told an analysts conference on 26 July that the company achieved four times its target incremental revenue of $46,000 a month through Konnect Select.
“Prior to Jet Airways Konnect Select, we were operating at a seat factor of around 74-75%, which meant that 25% of the seats were anyway going empty. Now, with the reconfigured aircraft, we are operating at 78-79% load factors, with a front-end giving us close to 65% in terms of load factor. So we are revenue-positive on account of that front," he said.
Another crucial step was improving the performance of JetLite, which was created when Jet Airways bought Air Sahara in 2007. At that time, half the low-cost carrier’s fleet was grounded.
“The first effort was to put all planes back into flying. We are now in the process of phasing out old CRJs (Bombardier aircraft), leaving only new Boeing 737 planes," said Raghavan. “(The) Next thing was to focus on basic thing—leave on time or rather than minimize your delays, since it had a very bad reputation on on-time performance. In May, it has 89.6% on-time performance."
Jet Airways also started putting its airline code 9W on JetLite flights.
“With this, JetLite’s inventory was in the global distribution system (for tickets), where yields were higher and any agent across the world could sell JetLite tickets. With international passengers, too, choosing JetLite for domestic leg, the airline’s revenue was up by 25%, purely because of this change," he said.
Raghavan admits that it took some time to integrate the engineering, sales and revenue management functions of Air Sahara into Jet Airways. “But once it was done, we had improved food on board, changed the all old seats and brought in new planes," he said.
The JetLite staff will now wear a new uniform too, designed by Italian fashion designer Roberto Capucci. “The new blue and white uniforms with embroidered collars in traditional Jodhpuri style reflect youthfulness and alignment with Jet Airways," Raghavan pointed out.
Interestingly, JetLite still doesn’t have a chief executive or a chief operating officer.
Saikat Chaudhuri, assistant professor of management at Wharton School, University of Pennsylvania, US, said quick adjustments to match capacity with demand by offering the right products and services have been key to Jet Airways’ profitability. “This includes emphasis on operational improvement—this is how JetLite, perpetually known for operational and punctuality problems, was improved," he added.
But Chaudhuri credited the turnaround primarily to the overall improvement in the global economic outlook, particularly in India, which has led to better revenue for airlines worldwide—especially in the high-yielding business travel segment.
Goyal agreed that the turnaround was far from complete, with the airline staring at a 13,500 crore debt as on 30 June. He did not elaborate on the company’s reported plans to raise $400 million by issuing fresh shares to bring down the debt burden and finance expansion plans.
A senior Jet Airways executive said the carrier is in no hurry to raise funds. “Out of the 13,500 crore debt, 9,000 crore is aircraft-related long-term loans that were raised at much cheaper rates—anywhere between 3.5-4%. We have 41 planes on the book and the current market value of those planes is higher than the outstanding debt," he said.
“The remaining 4,500 crore is Indian rupee loans raised two-three years ago to fund the working capital. It would have been difficult if we continued with our losses. Since we started making cash profits, there is no need to raise funds immediately," the executive added, asking not to be named as he is not authorized to speak to the media.
Chaudhuri also cautioned that happy days may not last long. “To continue to be successful, Jet needs to continue to remain dynamic to adjust to any changing conditions. Main risk factors are a renewed partial recession as well as once again rising fuel prices precipitated by the improving economy," he said.