Airlines Tying The Knot Shouldn’t Surprise You!

I heard them say that you can have your cake and eat it
But all I wanted was one free lunch 
How can I eat it when the man that’s next to me, he grabbed it 
Lord, he beat me to the punch
 —You Make Me Feel So Free, Van Morrison 
    
IN Bengal it is good form, indeed advisable, to carry antacids when attending a wedding feast. It’s like an insurance policy against the malevolent after-effects of genuine culinary appreciation. Unfortunately, the Indian aviation industry also should have remembered to carry its component of acidity busters. A prolonged indulgence has resulted in an inevitable consolidation among the no-frills airlines, or low-cost carriers (LCCs), though it may still be a bit too early to sing a dirge. The music’s stopped and the party was good till it lasted, but the bill has to be paid now. As a result, Air India’s merging with domestic PSU airline Indian, Jet’s taken over Sahara and, now, Kingfisher has wrapped its wings around Air Deccan. These are symptoms of a feast gone on for too long. Call it, if you will, “the alka-seltzering of the Indian aviation industry”!

The former chief executive of a large blue chip looked visibly traumatised after he once had to fly a low-cost carrier from Goa to catch an unscheduled meeting in Mumbai. Reason: there were only two passengers in the entire aircraft, apart from the full crew component! This, to an extent, shows the degree to which some of the low-cost carriers (LCCs) might have built in over-capacity without caring about yields. Over-capacity and a mad spree for market share resulted in cut-rate ticket prices, leading to negative yields.

But, that such a consolidation was overdue should not have come as a surprise. In January, industry magazine Flight International carried a story titled “Indian aerospace: Too much choice?” The question might have seemed rhetorical then, but subsequent events seem to be bearing out the story’s main contention: “Many see 2007 as the year in which consolidation may finally begin, and it could prove to be a pivotal one for the country’s airline sector.” Watch out for what now happens to the remaining LCCs — SpiceJet, IndiGo, and GoAir.

But, seen globally, India could be following only what’s been recognised world over. The outlook’s grim for most US airlines as domestic demand loses altitude. Even Britain’s LCCs are reporting lower passenger demand as airport taxes have soared. Questions have been raised time and again about the viability of the low-cost model, especially when the legacy carriers have themselves launched LCCs as a flanking strategy (though a majority of these had to be wound up later). With the exception of the first, true-blue LCC — Dallas-based Southwest Airlines — most other no-frills have struggled to maintain their yields or margins. Southwest is known for its ability to keep tweaking its model — within the overall LCC framework — as and when market dynamics change.

But, all this also raises another larger question: at which point does the consumer trade off between value and price? Nirmalya Kumar of London Business School wrote recently: “Most low-cost players alter customer behaviour permanently, getting people to accept fewer benefits at lower prices. Low-price warriors are aided by the fact that consumers are becoming cynical about brands, better informed because of the internet, and more open to value-for-money offers.” HBR, December 2006) The key term here is: ‘value-for-money’! Most LCCs in India felt that only low prices mattered to the consumer. In fact, they got the first part of the model right — a single passenger class, a single type of aircraft (to reduce training and maintenance costs), unreserved seating, reliance on electronic sale of tickets, no “free’ meals on flights and reduced in-flight crew component. But, they were also tripped by an exogenous factor — the miserable state of the country’s aviation infrastructure.

Most LCCs in the world rely on secondary airports, which are cheaper and relatively less crowded (UK-based LCC easyJet flies to Luton, Stansted and Gatwick in London instead of crowded Heathrow). In India, the concept of secondary airports does not exist. Plus, flying to the mainline airports adds to delays and longer turn-around cycles, all of which add to the overall cost. This then defeats the LCC model, especially if the airline is pricing its tickets substantially lower than legacy carriers. In desperation, LCCs then dilute value to keep margins afloat — deliberate mis-statements to passengers about delays, turning off the air-conditioning till the aircraft is airborne, faulty ticketing. All this infuriates passengers.

But it would be a mistake to write off LCCs altogether. Watch out for Chapter II of the Indian LCC story. Coming soon.
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