Can Indian airline players benefit from some of the successful best practices implemented in other geographies? To this question, a ready reference that Pankaj Narayan Pandit, Head-Airlines Practice, Sonata Software Ltd, makes is to the Southwest Airlines, US, which has pioneered a low-cost model.
Southwest has the distinction of being the only airline that is consistently profitable for the last 38 years, he mentions during the course of a recent telephonic conversation with Business Line. “Airlines such as Air Asia have successfully adopted Southwest model in Asia. By zealously reducing every cost item, low-cost carriers (LCCs) have emerged with operating costs that are 40-50 per cent lower than traditional airlines.”
Choice of business model for an airline has lot to do with ability to reduce such costs, opines Pandit. For example, one class configuration, one type of aircraft, can save huge costs. Reason: the first and business classes have low utilisation. “Apart from high opportunity costs, premium class cabin demands other investments such as extra crew complement, airport lounges, premium catering, and so on.”
As someone with over two decades of experience in the airline industry (both passenger and cargo), and IT practice, Pandit urges traditional airlines to question every cost item that may be considered not relevant to their passenger, while retaining those services that are perceived to be of value by their passengers. “Airlines need to be paranoid in saving costs as even during better times, airlines have typically thin operating margins of less than 4 per cent.” Our conversation continues over the email.
Excerpts from the interview.
Do you find the airline industry ailing from factors that go beyond what have generally been attributed to global economic crisis?
Post liberalisation of the airline industry in 2003, the airline industry in India is no longer immune to global recession. Adding to slow down is overcapacity situation in India. Prior to liberalisation there was a lot of pent up demand. So, private domestic airlines as well as foreign airlines deployed huge capacity in India. The national airlines too initiated fleet renewal program that was long pending.
Thus aircraft capacity (measured in ASKMs or available seat KMs) of scheduled airlines in India went up almost three times to 1,21,332 million in 2009, from 44,239 million in 2003. As long as demand growth from domestic market was in sync, such high growth in capacity was absorbed.
However, 2008-09 was the first year when domestic air market in India registered a negative growth of 11 per cent. Hence the extra capacity is hurting now.
During the last two years 2006-08, the airline industry in India has incurred operating losses of over Rs 10,900 crore. More significantly, India’s national airlines have been relegated to being a non-entity by India’s private airlines. Domestic market share of national airlines (Indian Airlines + Air India) has gone down drastically to a miniscule 15.7 per cent in 2009 way down from 57 per cent before the liberalisation era in 2000. Thus the eminent position previously held by the national airlines in India’s domestic aviation sector has been completely usurped by private players such as Jet and Kingfisher.
On the international front, however, India’s private airlines are pitted against much powerful international airlines such as Emirates, Lufthansa, British Airways, and Singapore. These airlines offer better connectivity to India from the US and Europe (these are known as sixth freedom connections in aviation jargon). Benefits of opening skies have been cornered by international airlines, as their share of India’s international air market increased by 8.2 million after liberalisation, while India’s airlines could add a meagre 4.2 million passengers.
Over the next few years, airlines in India may be relegated to providing connecting traffic to hubs of their counterparts in airline alliances. Such a model seems viable where airlines can offer value to their international major partners. At this time, airlines in India are not part of international alliances except Air India which has joined Star Alliance.
What are the challenges that the airline companies encounter when working on the costs and pricing sides?
For scheduled airlines, even variable costs, in terms of behaviour are sunk costs, akin to the fixed costs. These variable costs do not vary much in proportion to passenger numbers. They are unaffected if you carry full passenger load or operate empty flight. Hence in a low demand scenario, airlines have to make a Hobson’s choice between carrying empty seats or offering fares lower than break-even costs.
Low fares have tremendous appeal, yet the fact is that no airline can sell seats below break-even costs for long. Thus airlines have to clearly differentiate their price offerings for different traffic segments such as business travellers, leisure travellers, VFR (visiting friends and relatives) traffic, GIT (group inclusive tours), students, and employment-seekers who travel abroad.
Is technology making a big difference to cost management and operational efficiency?
Yes, technology in new aircraft design is expected to bring down fuel costs. Optimised flight plans have reduced fuel expenses and weather related problems. Internet channel has opened new era of ecommerce for airlines, thereby reducing their distribution costs, booking fees, and travel agency commissions.
Your observations about the currently-practised cost management initiatives of airlines.
Airlines in developed countries are outsourcing their back-office operations, IT services, IP technologies, and blue-collar MRO services to places with lower labour costs. Airline alliances integration can also achieve significant cost savings.
Traditional airlines have to focus on their core strengths such as long haul flights, and compete with LCCs on domestic sectors on cost competitiveness.
What have been the trends in cargo revenues for airlines?
Traditionally airlines have considered cargo revenues as marginal to their business. Most airlines are primarily focused on passenger operations. Airlines can learn from integrators such as FedEX, UPS, and DHL to raise cargo revenues.
However, this year air cargo is locked in the worst depression it has ever known, with no signs of recovery until 2013. As per the IATA, 227 freighters – more than 10 per cent of the global freighter fleet – are now parked in the desert. Industry analysts are questioning feasibility of operating freighters in the near-term as belly capacities are available in plenty.
In what areas of airline industry can policy and regulatory changes make a big difference?
Last year, the Government raised FDI cap in ground handling services, cargo airlines, non-scheduled airlines and chartered airlines from 49 per cent to 74 per cent. Also, 100 per cent FDI is now allowed in maintenance, repair and overhaul (MRO), pilot training and helicopter services. However, no foreign airline is allowed to invest in India’s scheduled airlines. Relaxation in this investment norm can help the airline industry in India raise fresh capital from foreign airlines.
The airlines in India can play strategic leadership role by making investment in the SAARC countries’ airlines. During the last 5 years, India’s airlines have built enviable brand new aircraft fleet, MRO facilities, flight simulators, with an army of youthful, enthusiastic and trained human resources. Huge capital outlays as well as very large human capital, both from public as well as private sector, are locked in the India’s aviation sector.
Does the airline industry hold the key to social development especially in the economically backward regions of our otherwise growing economy?
Airlines can play a major role by encouraging tourism in remote areas such as Bihar and the North East region. Air travel is a cost-effective option in places where surface roads or railway infrastructure are not existing.
Take telecom, for example. Mobile phones were earlier perceived as elite luxury accessory while telephone landline was perceived as cheaper mode of telecommunications. Questions were raised if an average Indian can afford mobile tariffs. As new entrants reduced call rates, mobile phone usage leapfrogged from classes to masses. Today the common man has greatly benefited from India’s mobile revolution led by private telecom operators. Mobile phones are providing excellent connectivity to India’s remote and rural areas that have no fixed line infrastructure.
Such a transition from classes to masses appears difficult, however, in the case of airline industry in India. The reason is that aircraft, as well as most spare parts, and even aircraft fuel, are imported. With very little import substitution, costs of operating flights are very high. Airlines such as Air Deccan that promised revolutionary low fares for masses, could not sustain profitable operations for long. Hence the promise of cheap air transport appears distant in the near future.
Outlook for the industry.
The global airline industry could manage to recover gradually post-dotcom bubble and the 9/11 attacks. 2007 was the best year for the airline industry globally, after which it is in a downward spiral again. In 2009, premium business class traffic has declined by 21 per cent. Even economy fares are down by 20 per cent. As per IATA, the global airline industry is expected to stage slow recovery only by later half of 2010, as overall business situation improves. The airlines that will survive the current economic downturn will be the ones that are paranoid about cutting operating costs and conserving cash in order to run profitable operations.
Any other points of interest.
Smarter airlines have fully owned subsidiaries (which are later listed independently) providing services to the entire aviation value chain, starting from airline IT providers, GHAs (ground handing agencies), in-flight catering, MRO services, BPO services, leisure airlines and travel agencies. Such airlines are able to unlock value from providing services to aviation chain, and thus smoothen cyclical variations in airline industry in a much better way.
Airline industry in India was first liberalised in 1990s. Only Jet Airways has managed to survive among the group of airlines launched around that time.
High dollar-indexed salaries paid to pilots, engineers, and technicians, are robbing low-cost competitive advantage with Indian industry as enjoyed by IT, pharma, steel, and so on. As per DGCA, Indian pilots’ gross salaries are Rs 60 lakh per annum. Such high salaries cannot continue for long if the industry has to be viable. Variable pay based on airlines’ profitability or offer of ESOPs to employees may give a sense of ownership to employees.