Empty seats force Vistara to consider a course correction
8 min read 01 Oct 2015, 07:37 AM ISTVistara's brand-new Airbus planes have an unusual seat configuration: business, premium economy and economy
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New Delhi: When the first Vistara flight took off from Delhi’s Indira Gandhi International Airport on a cold winter morning in January, the goals were lofty: Redefine the way Indian air passengers travel, make them “fly the new feeling".
Nine months later, the Tata group-Singapore Airlines venture is considering something far more mundane: Reconfiguring its aircraft to accommodate more passengers.
Makes sense: Flying four out of 10 seats empty wasn’t what Vistara would have had in mind when its leaders named the airline after a Sanskrit word that translates as ‘limitless expanse’.
Vistara’s brand-new Airbus planes, sporting its eight-point star logo in gold and aubergine, have an unusual seat configuration: while other full-service airlines such as Jet Airways and Air India offer business and economy classes, Vistara divided its cabins into three categories—business, premium economy and economy.
This flew in the face of logic since the market in India has shifted to flying economy in the past decade. Low-fare carrier IndiGo, India’s largest domestic airline, has a single-class configuration, with only economy seats.
The result: Since 9 January when it took to the skies, Vistara has flown its planes nearly 40% empty. The low occupancy stands out in a market where passenger traffic is rising after years of muted growth; Vistara’s rivals are flying only 10-20% empty. Flying so many empty seats means lost revenue at a time when the company is spending money to differentiate itself as an upmarket brand.
“What did not turn out as planned was the load factor in the business class in the first few months," says Vistara’s chief executive officer Phee Teik Yeoh.
That’s the market Vistara, with its focus on service, gourmet meals and bright new planes, wanted the most.
Ironically, the premium economy class, which was a worry for the launch team, has done well. These seats are priced about 30-40% more than economy class and offer sumptuous meals and more legroom than economy.
With seven planes in its fleet and two more being inducted by year-end, there is little time left for Vistara to decide whether to stay the course or change what is not working. And the management has finally decided to review the configuration.
Changing aircraft configuration
“We approach our business with humility," said Yeoh, who joined Vistara from Singapore Airlines. “We may not have done everything right from day one, but we are always ready and nimble to change as and when required," he said.
Changes could include removing the poor-performing business class altogether, if that’s what is needed to boost occupancy.
The decision won’t be simple. There will be questions on whether to have a new configuration in all planes or only those joining the fleet. Besides, any decision will entail costs.
For context, Vistara’s parent Singapore Airlines has just finished retrofitting its 104 planes with premium economy seats at a cost of $80 million in a process that took two years.
Aircraft lessors, who keep tabs on planes being built, seem to have got wind of Vistara’s plans.
“Very shortly, you will see them change the configuration of the aircraft to add more seats as I don’t think the current configuration is generating enough revenue for them to come close to break even," said Hitesh Patel, CEO of Veling Ltd, an aircraft leasing firm based in Mauritius.
The business
Vistara steered clear of talking about its financials. What is known is that out of the ₹ 600 crore that Vistara’s promoters have committed for the airline, ₹ 300 crore was invested first, followed by ₹ 200 crore this year. It is not clear if the first ₹ 300 crore tranche has already been spent.
While those details will only be known when the airline’s full-year earnings are reported in September 2016, Kingfisher Airlines Ltd, with almost a similar fleet of 11 Airbus A320 planes, ran up a loss of about ₹ 239 crore in the first year it flew, in 2005-06.
Agreed, the two airlines are separated by a decade and have entirely different corporate cultures, but the cost of jet fuel is around the same as in 2005-06. The price of aviation turbine fuel—which accounts for half the costs for any airline in India—was ₹ 41 a litre in September 2015, compared with ₹ 44 in September 2006. In 2014, that price was at ₹ 75. Similar fuel costs help in understanding the cost levels of the two airlines.
Some seats may be flying empty, but Vistara is fighting back. Vistara recently hired Vishesh Khanna as its new head of sales, who has previously worked with IndiGo and Kingfisher. According to a promotional mail it sent to travel agents recently, the airline will offer free promotion tickets to travel agents in addition to their commissions: One free business-class ticket on the sale of 10 similar tickets.
The customer
What works in Vistara’s favour is the passenger.
Indian Institute of Management (Lucknow) graduate Somil Agrawal, who works with a multinational company in Gurgaon, used to be a regular Kingfisher flier. He lost hundreds of air miles when the airline shut down in 2012, and shifted to budget airline IndiGo. IndiGo had a corporate tie-up with his firm and also offered more flight options for him to return the same day. He tried Vistara last month.
At the check-in counter, Agrawal was offered an upgrade to premium economy from economy seat for ₹ 500 more. He decided to try it on a longer flight of three hours. His Delhi-Lucknow flight landed in an hour.
He found the Vistara crew more warm and courteous than any other airline. Agrawal praised the food too, and concluded that the airline is positioned somewhere between Jet and IndiGo.
“It was a good ‘wow’ factor compared to other airlines, though I am not sure how long they will be able to sustain this," he said.
One drawback for Agrawal, so far: Limited flight options. For instance, there are only two Vistara flights a day to Lucknow and back. Rival IndiGo has eight.
To retain customers like Agarwal, Vistara is preparing a tie-up with Tata’s Taj Hotels, wherein passengers can stay at a Taj hotel overnight instead of taking the same-day return flight, paying a few thousand rupees more. It will also inaugurate a premium airport lounge at its hub in Delhi in the next few weeks.
Vistara is also banking on Tata group’s annual travel business estimated around ₹ 100 crore, to prop up its fortunes. Besides better rates for corporate travel, Tata employees have been offered extra baggage space, priority check-in, bonus miles and discounts for personal travel. It’s too early to say if such sweeteners will help attract the customers it needs, or merely add to expenses. A co-branded credit card in the works may try to attract passengers from similar popular programmes offered by Air India and Jet.
However, Vistara may need a bigger course correction, that covers its pricing and flight network.
Structural changes
“Which really means they have to start a new a airline," said a New Delhi-based analyst who declined to be identified. “And if they do all of that, then what will differentiate them from AirAsia?" Tata Sons is also a stakeholder in AirAsia India, the local unit of Malaysia’s AirAsia Bhd.
Vistara seems to have taken off with its focus on international flights. Not only is its fleet designed for international passengers, the route network, too, is dominated by metros. But for that to happen, the government will have to modify its so-called 5/20 rule under which a new airline can fly abroad only after it has completed five years of domestic operations and built a 20-aircraft fleet.
Vistara’s Yeoh is hoping that those rules will be relaxed by December, or perhaps, as a “Diwali present" in November.
Air India, IndiGo and Jet Airways have been opposing any relaxation of the 5/20 rule that will increase competition on foreign routes.
The one airline that will be tough for the government to ignore is Air India, the national carrier. Before completing his tenure on 31 August, Air India chairman Rohit Nandan sent a detailed note to the civil aviation ministry saying if the rule was relaxed, it would spell the end of the road for Air India.
“I fear that the sudden withdrawal of the protection of 5/20 Rule might be the proverbial last nail in the national carrier’s coffin without bringing any significant benefit to the nation," he wrote in the same letter to the government.
Air India hasn’t made a profit since its merger with the erstwhile Indian Airlines.
Until 2005, foreign airlines would pay Air India a royalty to get the rights to fly from India, as the state-owned airline did not have enough planes to offer reciprocal flights under bilateral agreements. For instance, Emirates paid about $1 million to Air India in return for starting flights from Dubai to Hyderabad. In 2005, the government scrapped this policy and brought in the 5/20 rule.
In a 2012 report, the national auditor Comptroller and Auditor General criticized the aviation ministry for granting excessive flying rights to foreign airlines, which it said was one of the key reasons for Air India posting record losses. In the same year, Air India received a record $5 billion bailout.
Vistara CEO Yeoh only smiled when asked if he has offered any middle-of-the-road solutions like paying a royalty to Air India for a few years to absorb some of the hit the state-run carrier is likely to take.
He said protectionism does not help, but added Vistara can try new routes.
“There are also many places where Air India does not operate to," he said, “If there is potential, why not?"
Even if the 5/20 rule goes, the government is unlikely to offer prime slots like London to Vistara immediately, said the analyst quoted above.
Between Bombay House in Mumbai and Airline Road in Singapore, Yeoh, who works 16 hours a day, must convince everyone on the board and deliver results. It doesn’t help that the parent company is having problems in other markets, as well. Its plans to invest in a Chinese airline in 2008 failed and it is shrinking in some routes dominated by middle eastern airlines, said Mohshin Aziz, Kuala Lumpur-based associate director with Maybank Kim Eng Securities, who tracks Singapore Airlines.
History puts more pressure on Yeoh. This is Tata’s third attempt at starting an airline. With both the Tata group and Singapore Airlines looking for new markets to expand their businesses, the stakes are clearly high for Vistara.
“For them to stay relevant and to continue to have a future, they need to build something outside (Singapore). That’s why Vistara is important for them," Aziz said. “If they get it right, they will be very busy in India for a very long time. That’s a gamble they have to take."
