New Delhi: Kingfisher Airlines on Wednesday justified its plans to close down its low-cost carrier in four months saying the operating costs involved were the same as in a full-service carrier and the revenues lesser.

Maintaining that there was more competition in the no- frill segment than the full-service segment in India, Kingfisher CEO Sanjay Aggarwal said the decision would help the airline company generate additional revenue after its exit from the low-cost service, where competition was more intense and a price war could hit the margins.

File photo of Kingfisher Aircraft at New Delhi Airport. Photo by Harikrishna Katragadda/ Mint.

Kingisher’s shares were battered sharply soon after its chairman and key promoter Vijay Mallya last week announced the plan to exit from the low-cost segment.

It’s shares fell by over 20% in three days, but the company was seen trading higher by 1.5% at 20.40 on Wednesday in afternoon trade at the BSE. It had fallen to a 52-week low of 18.85 on 30 September.

Aggarwal said the operating costs of the “so-called low cost carriers" were similar on fuel, airport charges and other costs and any additional expenses incurred by the full-service carriers were “more than recovered through higher yields".

He maintained that the decision was taken after a detailed study over the last six months during the high oil price regime which found that Kingfisher’s full service product had generated higher yields and load factors.

The study found that of the incremental yield, only 25% is spent on providing the extra services associated with a full service carrier and the remaining was the “net contribution to the bottom line."

“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," the Kingfisher CEO said.

Over the next four months, the airline would reconfigure all its Airbus aircraft, including its single-cabin aircraft, into dual-cabin ones, with a reduced premium business class cabin and an increased number of economy seats. It would lead to a capacity increase of about 10%.

“The economy class will offer the same comfort as it does today. Space requirement for additional economy seats will be made available by reducing the number of business class seats," Aggarwal said, claiming that the reconfigured planes would have seat equivalency of a low-fare carrier and provide an opportunity to generate “much higher revenue".

He said the low-cost segment was expected to witness over-capacity and a price war with declining yields, as Indian low-cost carriers have placed large orders in recent months.

“Addition to large aircraft orders placed at the time of start up in 2004/2005, the Indian LCCs in the recent months have placed orders for over 250 aircraft. In the last two years, capacity induction of the LCCs has outpaced the demand growth in the domestic market.

“The induction of so many additional aircraft in the low cost/low fare segment will potentially lead to substantial over capacity and a price war with declining yields," he said.

Aggarwal also pointed out that while there were five airlines participating now in the low cost/low fare segment, there were only three full service carriers in the field.

Kingfisher had entered the low-cost segment through its acquisition of Air Deccan, the country’s first no-frills airline, which it later rebranded as Kingfisher Red.

Aggarwal said that the airline considers business-related travel to be increasing significantly with sustained economic growth and such travellers prefer to fly with “full service carriers because of ease of buying tickets, frequent flyer program and convenience offered".

“They are willing to pay extra and this segment is not as price sensitive as the classic low cost/low fare segment where there is a lot of discretionary travel involved," he added.

Elaborating on the closure of Kingfisher Red brand, Aggarwal said the single-cabin no-frill airline meant that “Kingfisher does not offer its premium Business Class or full service economy class product on all its routes. As a result Kingfisher is losing a certain amount of business class traffic on many routes."

He said the airline would achieve incremental business- class revenue as a result of wider and uniform availability and it will also generate incremental revenue through higher number of full-service economy seats.

The airline chief also made it clear that there would be no reduction in Kingfisher’s fleet size or its network of connectivity to 60 domestic and eight international destinations.

“Kingfisher’s integration into the ‘oneworld Alliance´ is on track. ‘oneworld´ is supportive of Kingfisher’s move to focus its energy and resources on a full service and premium product which is in line with the philosophy of ‘oneworld´ and its member airlines," he said.