Jet switches strategy in overseas push

Jet switches strategy in overseas push

New Delhi : Three years after establishing a European hub in Brussels, India’s largest airline Jet Airways (India) Ltd is scouting for a second external hub, this time in the Asia-Pacific, before beginning the second phase of its expansion on international routes in mid-summer 2011.

Jet Airways, which has a 27% domestic market share that tops rivals Kingfisher Airlines Ltd and Air India, is looking at cities, including Hong Kong and Bangkok, to locate the eastern hub that will service a market worth $17 billion (75,480 crore) in annual passenger traffic from the US and Europe to the Asia-Pacific and back.

The attempt is to go beyond its current focus on passengers from India and the Indian diaspora and loosen the hold that hub carriers such as Deutsche Lufthansa AG, Air France-KLM Group, British Airways Plc, Emirates and Singapore Airlines Ltd have on the market, in which Indian carriers have a share of less than 1%.

“We need to be part of the global movement of people," says chief commercial officer Sudheer Raghavan, a former Singapore Airlines executive.

“If we take a look at our geographic location, we are within flying distance of 30% of the world’s population," he says. “Many of them (countries) until now were in the throes of social upheaval addressing social and political problems, and so many have resolved them and are looking at economic growth. There is an opportunity sitting around within a five-hour radius."

“Sri Lanka is a classic example, and I think very soon will follow Nepal, Bangladesh and many South-East Asian countries," Raghavan goes on. “Don’t forget there are new Gulf countries which are coming into prosperity. And India is in the centre of all this."

Locating a transit hub in a city such as Hong Kong or Bangkok would help the airline to transport passengers from the US and Europe to Asia and disperse passengers to other destinations. Jet is betting that such a hub would boost its international passenger traffic.

Jet Airways, which started domestic services in May 1993 with four leased planes, earned more than half its revenue of 10,600 crore in the last fiscal from international operations that it launched in 2004, with flights to Colombo and Kathmandu.

The airline, 80% controlled by London-based billionaire Naresh Goyal, now flies to 24 international destinations—from New York and Newark, London and Brussels, Abu Dhabi and Bahrain to Bangkok, Hong Kong and Singapore—with a fleet that has expanded from 34 aircraft in 2004 to 112.

But profits have eluded the airline since 2006-07, when it set off on an international expansion spree, as intense competition, high costs and the global financial crisis laid low the airline industry. The challenge for the airline, experts say, is to combine expansion with profit. The airline is likely to post a profit this fiscal.

“In the past five years we were largely an O&D (origin and destination) player," says Raghavan. “We started off by going to places where there was a strong Indian diaspora... In addition, we said to ourselves we want to be a premium service carrier, so we focused on the corporate travel market."

“After that, about two years ago, we said to ourselves that for growth, we can’t just depend on O&D... That’s how we got into (taking passengers from) London to Bangkok, London to Hong Kong, the US to Colombo," he adds.

The airline’s search for a second external hub follows some initial success as a network carrier of international traffic. Nearly 70,000 non-Indian passengers from Britain fly Jet Airways annually from London to Bangkok via Mumbai and some 20,000 to Hong Kong. Jet covers most key destinations in South-East Asia such as Kuala Lumpur and Singapore and West Asia, including Dammam, Doha and Dubai.

Traditionally, all these cities have been home to a large population of people of Indian origin. From December, though, Jet will start flying even to Italy’s fashion capital Milan, a city with a sparse Indian population though it has, according to Raghavan, the biggest Sikh temple in Europe and a significant north-Indian interest in the leather business there.

“There is no Italian carrier and no Indian carrier flying between India and Italy. But we know the traffic is going via Emirates. It’s all part of the strategy to win back our traffic," says Raghavan.

Improving airport infrastructure in India is another factor driving Jet Airways’ international ambition. A brand new integrated passenger terminal facility in the New Delhi airport, modernized at a cost of $3 billion, to be followed by the completion of an ongoing $2 billion makeover of the Mumbai airport by 2012, will help passengers transit to connecting domestic and international flights quickly. New airports have come up in Bangalore and Hyderabad, and airports in Kolkata and Chennai are being refurbished.

Unlike Heathrow or Frankfurt, Indian airport terminals haven’t been sufficiently integrated until recently, meaning passengers faced a risk of missing connecting international flights. India has a passenger base of 44 million growing at an annual pace of 18%.

“If you look at all the sunrise economies—they are east of India—and plateau economies west of India, there is the Far East, South-East Asia, Australia, Indonesia that is picking up, Vietnam that is picking up," Raghavan says. “That’s driving the search for a hub in the Asia-Pacific."

“We are exploring various locations. Hong Kong is a possibility, Bangkok is a possibility. We’ll have it by the next one year. We’ll have to have an Eastern strategy to have a high growth rate," he adds.

To qualify as a hub, an airport would have to be able to provide speedy transfers for passengers to connecting flights. Jet Airways would also require a partner that does not compete with it directly to an extent where both risk eroding each other’s traffic.

Next year promises to be busy and challenging for Jet Airways’ management. Four long-haul and expensive Boeing 777 aircraft, which the carrier leased out to Turkish Airlines during the downturn of 2008-09, will return between July and October 2011.

The carrier has also sought approval from the civil aviation ministry to lease five long-range Airbus A330s, possibly to connect several European cities.

Jet Airways already has on order five Airbus A330s, two of which will be delivered in 2012, two in 2013 and one in 2014, besides two Boeing 777s, one each set to arrive in 2012 and 2013. Narrow-body aircraft orders include 20 Boeing 737s for delivery between 2010 and 2014, with an option of 10 more for 2013-15.

In August, about a dozen top managers of Jet Airways trooped into the corridors of the civil aviation ministry to make a case for flying rights to more international destinations. They were led by Goyal, who controls the airline through Tail Winds Ltd, an investment company registered in the Isle of Man. It was the first time Goyal himself had led such a team to the ministry in at least three years.

The airline also wanted the government to be “prudent" in granting more flying rights to India to international carriers, said an aviation ministry official, who asked not to be named. Foreign airlines had been given on an average about 100,000 seats a year for the four years ended 2009, leading to massive capacity addition.

“They wanted to tell us how to do our job," the ministry official said. He added that Jet Airways had been given flying rights to several destinations starting with Milan.

Nearly 65% of international traffic carried to or from India is by international carriers, unlike in other countries where domestic carriers dominate.

“I think our next expansion will come around the second half of 2011 by way of new cities...," says Raghavan. “There are a handful of hubs—Frankfurt, Amsterdam, Paris, Zurich, Vienna in continental Europe. If you want to be a network player, we cannot close our network development to these hubs. That’s where the markets sit, we go where the market sits."

Besides international carriers, Jet is competing on overseas routes with Kingfisher and Air India that are, like Jet, burdened by losses and debt.

Low-cost airlines such as SpiceJet Ltd and IndiGo that are profitable and have little debt on their books, plan to expand international services to West Asia and South-East Asia, increasing the competition. Raghavan says Jet expects a turbulent initial phase when that happens, but the situation will gradually settle down.

A London-based analyst, who didn’t want to be named as he’s not authorized to speak to the media, says Jet Airways risks making losses as it expands to newer overseas destinations.

“Passengers living abroad are tied to frequent flier schemes of (the airlines of) their resident countries and many VFRs (visitors, friends and relatives) passengers will simply fly the cheapest fare," the analyst said. “Thus, Jet has to target resident Indians and become the No. 1 carrier for Indians flying abroad by creating a world class frequent flier scheme."

While Indians may prefer to fly Indian carriers because of the familiar cuisine and other services they are offered, Jet Airlines will require to make a cultural shift to woo a different set of travellers, the analyst adds.

Jet Airways started international flights to San Francisco from Mumbai via Shanghai in 2008 after long negotiations between China and India, according to ministry officials, but soon stopped the service for commercial reasons. It may need to turn to the government for help once again when charting new territories.

“India needs to develop more political ties with China, Central Asia, Vietnam, Indonesia, etc. Once that happens, then demand for flights will grow and Jet can be part of the growth. India should grant a visa on arrival for passengers from countries like Thailand, Malaysia, Singapore, Indonesia and Vietnam (with reciprocal arrangements) to encourage business and tourism growth," says the analyst, who tracks Jet Airways closely.

“Without the political lead, it will be tough for the airline to create that market," he adds.