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Updated: March 3, 2013 22:52 IST
Talking Business

‘We will not sell under cost’

Lalatendu Mishra
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R.Rajesh
R.Rajesh

At a time when airlines are dumping millions of seats at heavily discounted fares to create demand, the Wadia group’s GoAir is still sticking to its conservative approach.

In a recent interview with The Hindu, Giorgio De Roni, CEO, Go Airlines, maintains that he will not follow the trend but instead concentrate on delivering profitable growth.

Excerpts:

The Indian airline industry is reeling under massive losses. How is business at GoAir?

We definitely are in a challenging environment. Demand is going down. In the April to December period, demand decreased by 6 per cent. However, during this period Go Air increased its number of passengers by 15 per cent.

I would not say we are extremely happy, but we are satisfied. As per forecast, India will be the third largest market worldwide by 2020, and we are very confident that we will be able to contribute to this growth. So far, we have had a very cautious approach in terms of growth. From 2016 to 2020 we expect a steeper growth rate and for that we placed an order for 72 new aircraft in 2011.

We are following our strategy, and we are on track. As we often say, we are not running a sprint, we are running a marathon, and will be here for a long period.

Has your conservative approach helped?

Our vision has been to grow and to sustain our growth. India is now constrained in terms of regulations, and there is problem in cost. Just to give you an idea, from 2010 to October 2012, the price of fuel went up by 79 per cent. So having more aircraft in the air meant having a higher cost. We had a cautious approach in order to maintain continuity and profitability. However, we forecast that the market will grow significantly in the future, and that is why we have put an order for 72 new Airbus A320 aircraft to be delivered between 2016 and 2020.

What is your network expansion plan?

Currently, we are operating 108 flights a day and operating from 22 airports. We will get 8 new aircraft by July 2014, and our strategy is to increase frequencies in the existing routes and add new routes.

How viable is GoAir, financially?

Fuel represents 54 per cent of our cost. If we include navigation charges, it is as high as 70 per cent. We also suffer in terms of devaluation of the rupee.

Thus, we are working in a very challenging environment. Despite that, we are able to deliver profit. As I told you, our vision is to have a sustainable airline. Definitely, it is important for us to expand our network, but our stress is on profitability.

We want to deliver a profitable project. Otherwise, it does not make sense. Other competitors, who followed a completely different strategy, have run into some inconvenience.

So, we learnt a lesson from that. We need a stronger and more profitable airline business.

Why are you not flying international?

Our core business will remain domestic for a long time as we strongly believe in its potential.

However, Indian regulations require a minimum of five years operations and a minimum of 20 aircraft in the fleet to be eligible to fly international. Thus, we are not allowed. I think this is unfair not only to GoAir but also to the system.

Foreign airlines with just two aircraft are allowed to fly here. Thus, the Indian government is penalising its companies and citizens. Last year, we had applied for a waiver to fly international. We are confident that we will receive an approval.

That said, the domestic market will remain our core, and the opportunity to fly international will just open new opportunities for better utilisation of our aircraft. Currently, our aircraft utilisation is the highest, at more than 13 hours a day, and, by flying international, we may increase the aircraft utilisation and make our cost structure more efficient for the benefit of our customers. We can transfer the benefit to customers through more appealing fares.

All international airlines are looking at investing in Indian carriers after the recent policy change. Is anyone talking to you?

FDI is a very good option for cash availability. It will also import best practices. As a management, we need to analyse every opportunity. We are evaluating. The shareholders will take the appropriate decision.

Despite the adverse business climate, airlines are slashing fares. What is your approach?

In three years up to March 2012, Indian airlines lost Rs. 8,000 crore. This is due to an inefficient cost structure, heavy taxation and infrastructure problems. Some airlines were interested in increasing market share rather than thinking about profitability. They dropped fares to get additional market share. This is not our approach. We want to deliver value for money.

But we don’t want to deliver value for money today and not be there in the market tomorrow. We try to provide the most appealing fare but at every increase in cost, we will transfer it to customers. We can’t operate by losing money. Now we are facing a weak season, so of course there will be some pressure. I will not comment on some actions implemented by some airlines, but Go Air is not going to follow this path. We will not sell under cost. It can’t be. We will follow our strategy, and so far this strategy has been rewarding.

GoAir was the first low-cost airline to offer business class seats. How has the experience been?

We are very satisfied. We are reporting significant seat occupancy. In terms of pricing, the value proposition is amazing. While our competitors are charging over Rs. 30,000 for a one-way business class seat in the Delhi-Mumbai sector, our business class seat comes at almost one third of that cost. So, our product has become highly successful. We are trying to further improve it.

What are some concerns that you think the Government should address?

Airlines should have a more efficient cost structure. For that taxes on aviation turbine fuel (ATF) must be brought down and infrastructure must improve. We pay around 30 per cent tax on fuel. Between 2010 and 2012 the price of fuel has gone up 79 per cent so it means taxes have also gone up by 79 per cent.

In 2010, cost of fuel accounted for 37 per cent of the operating cost. Now it has gone up to 50 per cent.

Last December, the cost of fuel for a Delhi to Mumbai flight was Rs. 3,54,000. In Europe, an airline with a similar flight time and same aircraft spends only Rs. 1,98,000 for fuel, which is a saving of 78 per cent. Now you understand why in a country of 1.2 billion people, we have lower number of domestic passengers, and why we have only 300 commercial aircraft. The Government must address these concerns.

lalatendu.kn@thehindu.co.in

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