Expect no price war, but watch out for disruption in Indian skies

23 March, 2013

The old idiom goes that one can only lose money in aviation business. However, this has been proved wrong not just by those flying super-cattle class (read: true budget carriers where passengers do the tarmac walk carrying their own luggage irrespective of rain or thunder) but also those running a full-service airlines, globally.

Ditto India. Whether it is privately held Indigo, which has been in profits for a while, or Spice Jet, which has been bobbing up and down over the red mark in its quarter results and just clocked its highest ever net profit in the three months ended December, or even Jet Airways. So there is money to be made in the business, more importantly in India, too.

From a market opportunity standpoint, it’s a no brainer. Here, we have one of the (still) fastest growing emerging markets with a large population, vast geography (with no bullet trains) and so much to see around and some relative or the other in every corner of the country.

What’s missing, however, is vibrancy.

If we look at the incumbents, there is not much to differentiate in terms of pricing strategy between a budget airlines and a full service carrier, unlike much of other overseas markets where the two co-exist. More often than not one can expect the full service carriers to have a certain mark-up over the lowest fares on any route which are offered by one of the budget airlines.

The economy class passenger of a full service carrier basically pays extra (10-20 per cent more) for a bit more free checked-in baggage allowance and a bare-boned snacks plate, compared to a passenger on a low cost carrier.

Meanwhile, all the airlines continue with the marketing charade of Rs 100-500-1,000 basic air fares (with the asterisk mark), which is as good as saying: buy a Patek Philippe watch for Rs 1,000 (* excludes cost of workmanship and brand fee). All this, under the nose of a regulator, who sometimes wakes up to even caution airlines against cutting fares.

So, while the national carrier Air India is in a financial mess and one of the more colourful full service airlines Kingfisher is grounded, though still alive, there is a ‘business calm’ for the incumbents.

It is exactly the time for a disruption to shake the peaceful co-existence between budget carriers and full-service airlines.

In this context, Malaysian budget carrier AirAsia’s move to enter India makes for an interesting read.

For starters, the local partnership itself. Tata Group has come in along with Arun Bhatia (little known Indian businessman with big connections, especially considering his son calls steel magnate LN Mittal pa-in-law) as domestic joint venture partners to allow AirAsia comply with the FDI cap in domestic airlines.

Tatas had practically started aviation in India almost eight decades ago. Long before Air India logo made a passing appearance in the Italian classic by Federico Fellini La Dolce Vita, in what was arguably one of the first instances of an Indian service brand spotted in an international flick (you won’t find this in trivia books nor possibly on Google), the domestic carrier was owned by Tata Sons. The venture was nationalised soon after independence.

The group had tried re-entering the business partnering Singapore Airlines but was stymied thanks to lobbying by incumbents. While the group has said it is a financial partner in the venture with AirAsia, apparently it has a lot of say in the venture including the final call on who would head the operations.

We should not be surprised if the group uses this venture as a basic platform to gain expertise in the business to enter on its own in the future. It has followed such a strategy with telecom (partnering Birlas and AT&T to form Idea Cellular’s predecessor Batata, before going full throttle).

So what can Indian fliers look forward to? Two things in particular: more dynamism in pricing (not necessarily a price war) and possibly new destinations to fly in and out of.

Let me pick pricing first. If you look at Europe, where budget carriers are dime a dozen, more often than not, it’s cheaper to fly rather than take a train. The proviso being you book reasonably (not atrociously) in advance, though at times even without an early purchase.

Indeed, the stripped down air fares of say a Ryanair or an easyJet can be tricky to absorb as the carriers have been able to break down monetisation to micro details (priority boarding, super extra charges for airport boarding pass re-issue and something they are infamous for- pretty strict cabin baggage rules etc).

But it provides passengers with a wide variety of choice and a no-frills journey at a jaw dropping price for a light traveller who books early. Ditto AirAsia, which also has similar dynamic pricing in its operations in South-east Asia.

Certain amount of dynamic pricing already exists in India, but the slabs are so narrow that they tend to become indistinguishable from each other.

Recently, Indian domestic airlines hit the news headlines as they came up with heavily discounted fares for a limited time period. Blame it on the demand-supply curves, the fares are now back to their Zen like state, albeit the new normal is marginally lower than what it was, say three months ago.

We can expect AirAsia to make dynamic pricing a new normal in low cost airlines business in India rather than a limited period sale. Sure enough, the quantum of super cheap seats would be a function of other factors at work such as aviation fuel and airport taxes.

That brings me to the second aspect and I would digress a bit here.

Those who have travelled in such budget carriers would tell you (and crib) that the ultra-low pricing is actually a misnomer, as you would typically end up taking off and landing in an altogether different city from where you intended or planned to.

This is especially true for Europe, which has a surfeit of airports. So you might tell yourself you are flying out of Frankfurt but might well be taking a flight out of Hahn, which is around 100 km from the actual city. I must admit the drive through the German countryside’s fantastic (and if you have some extra time before your flight you can actually drive a bit more and catch up on Luxembourg), but it costs an additional sum to reach Hahn. This should be added as a cost of flying, besides the opportunity cost of your time to get there.

Either ways, if time is not a factor, budget carriers are still super cheap compared to full service carriers abroad and that’s something we would get to in India as competition catches up with incumbents.

But to get back to the topic, India has a handful of private airports besides those managed by Airports Authority of India (AAI) and those under military control. As per AAI’s FY12 annual report, it has 125 airports under it out of which a quarter are not operational. Some of these could get a lifeline with entry of new players like AirAsia.

The me-too approach of incumbents has ensured that even among the operational airports, many barely see a flight or two take off in a day, whereas the busiest or safe routes have flights hitting the tarmac every few minutes. This is despite poor rail connectivity with bigger cities for a small destination, which means bottled up demand for air transport in such places. The new carriers may see business in connecting such markets and carve a new niche.

Overseas, there are dedicated airports for budget carriers which are no-frills airports with great on-road connectivity. We can expect some of the smaller airports take such a shape going forward.

Another aspect is airport charges, which has previously led AirAsia to quit top cities such as Delhi and Mumbai for its international flights to and from India. AirAsia in particular may look at serving a market like Mumbai from Pune, for instance.

After all, some domestic airports are so far on the outskirts of city (example Bangalore) that it practically takes on an average around a couple of hours to reach the city. So what’s stopping a passenger from travelling by road to Mumbai if the price to fly to Pune is so much cheaper and there are swift public transports to support the system?

Delhi might not have a similar neighbouring airport (probably the closest one is Jaipur), but such an approach will see more diverse routes to emerge.

Last but not the least; AirAsia is the first mover in a market made tough by local regulations (though we see some loosening with the latest move to decontrol aircraft procurement by private carriers). We may not immediately see the Ryanairs and Southwests of the world queuing up to start flights to or within India. But the entry of one of their ilk will improve the ecosystem, which should set the foundation for more such players in the future.

Indian aviation is set for a lot of action and colour and this holds true if you are an investor too.

(Vivek Sinha is Executive Editor of VCCircle)

To become a guest contributor with VCCircle, write to shrija@vccircle.com.


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Expect no price war, but watch out for disruption in Indian skies

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