Hybridization in aviation is inevitable in India: Capa4 min read . Updated: 02 Oct 2013, 04:48 PM IST
Capa says Indian airlines will eventually have to combine low costs and premium services
Mumbai: Consulting firm Centre for Asia Pacific Aviation (Capa) says India’s aviation industry would have to eventually move to a hybrid business model, combining low costs and premium services given the country’s limited market for full-service airlines.
The US follows a hybrid business model in which a full-service airline could adopt strict cost-cutting measures that are typically followed by low-fare airlines, but without compromising on services offered to passengers.
India has two full-service airlines—Air India Ltd and Jet Airways (India) Ltd. The list of low-fare airlines include IndiGo (run by InterGlobe Aviation Pvt. Ltd), SpiceJet Ltd and GoAir—run by Go Airlines (India) Ltd.
Unlike most Western countries, India does not have separate low-cost airport terminals and hence there is no difference in operating costs for low-fare and full-service airlines.
“India’s domestic market is almost entirely a low fares market, with full-service carriers pricing economy class at a level comparable with LCCs (low cost carriers). This is a fundamentally unviable situation, given the difference in their cost structures," Capa said in a report released on Tuesday, adding that restructuring of the full-service business model is inevitable.
Capa’s comments come at a time when Tata Sons Ltd and Singapore Airlines Ltd (SIA) have teamed up to set up a new full-service airline based out of New Delhi with an initial investment of $100 million. Tata Sons will own 51% of the airline.
Tata Sons has also agreed to join a venture with Malaysia-based AirAsia Bhd and Arun Bhatia of Telestra Tradeplace Pvt. Ltd to form a local low-fare airline—AirAsia India. It is awaiting the Indian aviation regulator’s final go-ahead. AirAsia has a 49% stake in the venture, Tata Sons 30%, and Bhatia the rest.
“If Air India and Jet Airways want to participate in the larger and faster growing segment of the market they must achieve a lower cost base. It is no longer a question of deciding how or whether to establish a lower cost subsidiary. Instead, the market has progressed so far that the core operations need to be hybridized to some extent," Capa said.
Low-fare airlines are offering select services of full-service airlines on a user-pays basis while full service airline offers several services for free.
Capa also estimated that full service airlines lost $200-225 million in the first quarter of the current fiscal year compared with an estimated profit of $60 million for the low-fare airlines. All three independent low-fare airlines were profitable during the quarter, it said.
“Neither Air India nor Jet Airways has a clear domestic strategy and both of them have been reluctant to decisively move away from their legacy model. Jet confused the market with a half-hearted approach to low cost in which the carrier operated two LCC brands, with an unclear and changing passenger proposition," Capa said.
Jet Airways flies JetLite (India) Ltd and JetKonnect as low-fare services.
India’s oldest airline Air India is also in the process of cutting its legacy costs and adopting a hybrid model in its bid to turn around. The debt-laden airline is trimming business class seats in its existing domestic flights and opting for all-economy seats in new flights.
Air India has total debt of ₹ 40,000 crore and is in the midst of a ₹ 30,000 crore government bailout after reaching near bankruptcy in the past six years. The airline will get the funds only after meeting certain turnaround targets.
“Tata-SIA may eventually offer a hybrid rather than a premium full-service product to reflect market realities, which would result in less differentiation with AirAsia India," Capa said.
While Tata Sons is investing in two different business models—full service and low fare—its partner SIA has also exposure to different airline models.
Besides running Singapore Airlines as a full service airline, SIA has investments in regional airline SilkAir (Singapore) Pvt. Ltd, low-fare airline Tiger Airways Singapore Pte Ltd and ultra-low fare airline Scoot Pte Ltd. SIA calls this approach as “portfoilo approach".
Nicholas Ionides, vice-president of public affairs at SIA, said this portfolio approach gives his airline exposure to different airline business models and different customer bases. SIA has always been a premium full-service airline, while Scoot was established to provide a new engine of growth for the SIA gGroup.
“Scoot has a partnership with Tiger, in which the two low-cost airlines provide feed to each other. SilkAir, meanwhile, is a key part of SIA’s full-service operation, providing important feed to the global SIA network with its smaller aircraft that serve points within the Asia-Pacific region," he said.
Both Tiger Airways and SilkAir fly to India into multiple cities.
Ionides did not disclose specific data.
“Although Scoot is a wholly owned subsidiary, it is independently operated and has its own management team. Tiger, in which we have a stake of about one-third, operates entirely independently of SIA and is a separately listed company on the Singapore stock exchange. SilkAir and SIA work very closely together at the premium end of the market," Ionides said.