strategies followed by low cost carriers

7/24/2019 Strategies Followed By Low Cost Carriers

1/51

1

STRATEGY

FORMULATIONTHE ECONOMICS OF

LOW COST AIRLINES

THE KEY INDIAN

PLAYERS ANDSTRATEGIES ADOPTED

SUBMITTED BY:

Section B, Group 6

Kunal Jain (089

Maanic! "an#ia (090

Mani$% Ben#ani (09&

Me%a! Mon#a (09'

"ii$%a Goel (09)


2/51

ACKNOWLEDGEMENT

We extend our gratitude to Professor Sonu Goyal for her cooperation and

encouragement during the completion of this report.

2


3/51

Table Of Contents

An overview of the Indian Aircraft Industry 4

Low ost arriers !"

Strategies followed #y low cost carriers in India !$

omparative analysis 44

Present scenario 4%

&uture 'utloo( 4)

*eferences +"

3


4/51

An overview of the Indian Aircraft Industr

he Indian economy has grown at an average rate of around ), in the last

decade. -he rise in #usiness and leisure travel #oth domestic and

international/ due to this growth0 India emerging as a ma1or origin and

destination for international travel have all had a significant impact oncommercial aviation in India. According to the airports authority of India AAI/0 the

passenger traffic is expected to grow at over 2", in the next five years. Since

2""$ there has #een sharp increase in #oth domestic and international traffic

carried #y and in capacity of Indian carriers.-'n the supply side0 since 2""$0 when low fare travel in India was ushered in0 a

num#er of low cost carriers L/ have entered to serve this fast growing mar(et.

3owever0 all of the L carriers andwith rare exceptionseven the full service

carriers &S/ charging higher fares have #een ma(ing losses. 5y and large0

operating a commercial airline in India so far has not #een a profita#le #usiness. In2""60 the industry witnessed a wave of consolidations primarily to stem the tide of

red in(.

Ma!or "laers in the Industr#

Indian Airlines7

Launch7 !st August !8+$

urrent &leet7 8!

9aria#le fare0 all frills.

&lies to over )"

destinations over the

world. Largest airlines inIndia.

Air India

Launch7 !st August

!8+$

9aria#le fare0 all frills.

:erged with Indian

Airlines in 2""6.

;et Airways

Launch7 :ay 2""+

urrent &leet7 !"+

9aria#le fare0 all frills. Its

economy class su#sidiary

;etlite. &lies to over %2

destinations #oth

domestic <

international.

Spice;et

4


5/51

Air =eccan

Launch7 August 2""$

Low0 varia#le fare0 no

frills. 'nly >conomy

lass. :ix of metro and

cross?country

destinations.

Was ac@uired #y

ingfisher and later

renamed ingfisher *ed

ingfisher Airlines

Launch7 :ay 2""+

urrent &leet7 84

9aria#le fare0 all frills.Single ingfisher class.

Premium in?flight

service. 'nly metro

destinations.

Launch7 :ay 2""+

urrent &leet7 2!

Low0 varia#le fare0 #ut

not cheap @uality

service. Low frills0 small

complimentary snac(.

Paramount Airways

Launch7 August 2""+

Proposed &leet7 )

BSP7 Low fare0 all frills.

'nly 5usiness lass at

less than economy fares.

:ostly non?metros.

&ocus South India.

Indigo

Launch7 Covem#er 2""+

Proposed &leet7 !8

Low?cost0 low frill

airline. :ix of metro and

cross?country

destinations.

GoAir

Launch7 'cto#er 2""+

urrent &leet7 !6

BSP7 Low?cost0 low?frill

airline. :ix of metro and

small cities. Initial focus

to #e western India.

5


6/51

$ositionin% of Different Carriers

&OOM AND &'(T IN INDIAN A)IATION IND'(T*+

Air India and Indian Airlines retained a monopoly over civil aviation in India till

!882. -he deregulation of the Indian economy that started in the mid?!8)"s0 and

proceeded more aggressively after the Cew >conomic Policy in !88!0 led to calls for

opening up of the airline sector. 'ver the following years0 several new airlines

including =amania0 >astWest0 ;et0 Sahara0 :odiluft and C>P started operations.

3owever0 high fuel costs0 poor infrastructure0 and a regulation that re@uired them to

fly on routes to distant parts of the country as well as on non?trun( routes

threatened their financial via#ility.

5y !8860 =amania0 :odiluft0 >astWest and C>P were forced to suspend services.

;et and Sahara were thus the only survivors of the first phase of li#eralisation of the

Indian domestic airline industry. In 2""$0 ;et0 Sahara0 and Indian Airlines shared

the mar(et #etween themselves with mar(et shares of 4%,0 8, and 4",

6


7/51

respectively in the year?ending :arch $!0 2""$.

The Emergence of a New Indian Airline Industry

-he steady growth of the Indian economy after li#eraliDation at a AG* exceeding%, increased the siDe of the economy0 and hence demand for #oth #usiness and

leisure travel. Sensing opportunity0 a new phase of development of the Indian

airline industry (ic(ed off in 2""$ with the entry of new players into the airline

industry. In spite of the fact that several costs of operating an airline were fixed

irrespective of #usiness model as high as )",/0 most of the new entrants chose to

use low fares as their main competitive weapon and hoped to create low?cost

operations to ma(e these low fares via#le.

In 2""$0 aptain GopinathEs started Air =eccan0 the first low cost Indian airline

that positioned itself as an airline for the common man. It revolutionised air travel#y allowing everyone to fly #y offering free tic(ets and fares as low as rupee !.

While the esta#lished players F Indian Airlines0 ;et and Sahara ? initially ignored Air

=eccan0 the o#vious demand for air travel at lower fares and the urge to fill vacant

seats prompted them to start discounting fares as well. -his too( the form of a

limited num#er of seats sold at lower prices apex faresH/ if purchased 60 !+ or 2!

days in advance with su#stantial penalties for cancellation. Later0 as other low?

costH carriers entered the airline industry0 discounting without the pre?purchase

re@uirements of the Apex fares #ecame the norm.

Air =eccanEs growth in the Indian aviation sector induced other players to enter as

well. -hus0 #egan the boo, "hasein the airlines industry with a num#er of low

cost and full service airlines entering the industry in a span of 2 years ingfisher0

Paramount0 Goair0 Spice;et0 and IndiGo entered in 2""+/. -wo of the new entrants

F Spice;et and IndiGo F followed the classical low?costH airline model of very

competitive fares0 a single type of aircraft and a single class of service0 point ?to?

point operations0 @uic( turnarounds0 no frills0 and internet?#ased tic(eting. -hree

other airlines F ingfisher0 Paramount0 and GoAir? also entered the industry and

followed diverse approaches to the airline #usiness.

Competitive Dynamics

-he rapid entry of new players into the Indian Airline industry changed its

competitive dynamics. 'n one hand0 the low fares of the low ?costH players

7


8/51

changed the growth dynamics of the industry. 'n trun( routes such as :um#ai?

=elhi or =elhi?5angalore0 the fares of these airlines were close to the fares of air?

conditioned rail travel. 'n the other hand0 since airlines had an expensive fixed

asset a new Air#us A?$2" had a list price in excess of BS 6" million/ and a

perisha#le commodity each seat on a given flight/0 they strove to fill their seats #y

offering attractive deals such as special fares of *upee ! or *upees 88 perpassenger for a seat that had cost passengers more than *s. !"0""" in the past.

&ull service airlines were forced to drop fares as well though their minimum fares

tended to #e still higher than those offered #y the low?costH carriers.

-hese low fares attracted leisure travelers to fly #y air. -he overall growth rate of

the mar(et was a#out three times faster than the growth in #usiness travelers. -he

proportion of #usiness travelers on full?service carriers such as ;et Airways came

down to a#out two?thirds.

Airlines sought to #uild strong relationships with the manufacturers of aircraft so as

to get the #est possi#le terms and support. Low?cost carriers sought to supplement

their revenue streams #y advertising0 sale of food on #oard0 and selling other

services e.g. insurance/. In the full?service airline category0 competition too( on

several new dimensions. ingfisher Airlines introduced leather seats0 in?flight

entertainment with live television0 gourmet meals0 and a luxurious ingfisher &irstH

for its #usiness travelers on #oard its fleet of new A?$2" aircraft0 and valet services

on the ground.

Restructuring of the Industry

-he rapid increase in costs com#ined with competitive pressures to (eep fares low

threatened the survival of relatively less efficient airlines. At the same time0

leadership in terms of siDe and mar(et share emerged as a @uest of some of the

industryEs important personalities. -hese developments spurred consolidation

initiatives.

-he first of these was the ta(eover of Sahara #y ;et Airways. -his ac@uisition gave

;et access to SaharaEs fleet of 5oeing 6$6 and *; aircraft0 and0 more importantly0SaharaEs par(ing slots in ma1or Indian airports. -hough the deal was announced in

early 2""%0 ;et completed ac@uisition of Sahara in April 2""6 and decided to run

the airline as a value carrier su#sidiary under the #rand name ;etLite.

An even #igger ac@uisition was followed F in mid?2""60 ingfisher ac@uired a

controlling sta(e in Air =eccan. ingfisher 1ustified the ac@uisition #ased on

8


9/51

synergies in aircraft maintenance0 and spares since Air =eccan and ingfisher #oth

had fleets of the same types of aircraft A ?$2" 1ets and A-* tur#oprop/. 'ther

shared services would include sales and mar(eting0 ground handling0 engineering

services0 customer service0 and training. 'ver time0 ingfisher hoped to mesh

routes and fre@uencies through com#ined strengths of networ( reach0 connections0

fre@uencies0 and infrastructure.H

Since =eccan would #e eligi#le to fly on international routes #y August 2"")0

ingfisher planned to use the =eccan #rand to enter international routes in case it

was una#le to get the policy re@uiring five years of prior operating experience

changed.

&ollowing the ta(eover of =eccan0 it was re?christened as Simplifly =eccan0 and

=eccanEs aircraft were re?painted in the distinctive red and white livery of ingfisher

at a reported cost of *s. %"" million. Ground handling e@uipment and #uses

reflected #oth the ingfisher and =eccan #rand names. &ollowing the ta(eover0

=eccan served free water on #oard0 operations were streamlined0 and =eccanEs

prices increased. -he airline was renamed once again as ingfisher *ed in 2"").

-he third ma1or consolidation was the merger of the two national carriers Indian

Airlines and Air India into a single national entity under the corporate name of

Cational Aviation ompany of India and the #rand name of Air India. -his move

was first mooted several years earlier0 #ut was ultimately consummated only in

2""6. Shortly #efore the official approval of the merger0 the #oards of Indian

Airlines and Air India approved ma1or fleet expansion plans that would result in a

complete overhaul of their respective fleets.

With no ma1or new carrier having entered the airline industry since 2""% partly

due to the intense competition in the industry0 and partly due to the reluctance of

the government to allow more airlines to 1ostle for an already congested air

infrastructure/0 consolidation is expected to help the long?term sustaina#ility of the

airline #usiness.


10/51

Low Cost Carriers

A low?cost airline offers a point to point service0 rather than the hu# and spo(e

model concept followed #y conventional full service airlines. In the hu#?and?spo(e

model0 the aircraft flies out from the airport only when all the connecting flights

come in. While in the point?to?point model a passenger travelling on two separateconnecting flights is issued two separate tic(ets. 3e has to chec( out his #ag and

then chec( in to ta(e the connecting flight.

Cost advanta%e#

Low cost airlines provide air service at costs 2+?+", lower than a full service

airline. -he cost structure of a full service Indian airline is given in the figure #elow7

An Illustration of the ost structure of &ull Service Airlines as a , of 'perating>xpense7

Sour

ce7 I*A report0 ivil Aviation0 April 2""+/

1!


11/51

Breakdown of Cost savings

Source7 www.indiastats.com/

-he cost advantage of the low cost carrier is a result of savings on various factors

given #elow7

&ull service airlines provide their passenger with many attendant services li(e

hot meals0 fre@uent flyer programmes0 spacious legroom etc. While low cost

carriers do not provide frills li(e hot meals and fre@uent flyer programmes and wor(

with the minimum num#er of air hostesses on the flight. *emoving #usiness class0

storage space for the meals and limited seat pitch maximum inclination of the

seat/ ma(es space for additional seats which can increase the seat capacity of the

plane #y 2",.

Low cost carrier aircrafts ta(e less time to leave the airport after landing

which increases their flight time #y 2"?2+, as compare to the full service carrier

aircrafts. -hese airlines do not issue tic(ets to passengers to save costs on printing0

mailing and processing tic(ets. Passengers are issued a #oo(ing num#er0 which they@uote at airport chec(?in0 and present their photograph to collect their #oarding

pass. -hey also save on distri#ution costs #y disintermediating travel agents and

central reservation systems and selling through internet and call centre. -hey also

try to minimiDe capital costs and costs of the crew and hangerage.

In >urope and the B.S. low cost airlines avoid flying into the mainland

airports and save on high par(ing and landing fees. India has very few secondary

11
http://www.indiastats.com/http://www.indiastats.com/


12/51

airports0 #ecause of which the airport charges constitute a siDea#le portion of the

cost structure that could #e reduced considera#ly.

T-E .LCC/ $-ENOMENON IN INDIA

Southwest Airlines0 now a ma1or carrier in the B.S.0 operating local routes in

-exas in the !86"s pioneered the low cost carrier #usiness model. In India0 the

model was introduced in 2""$ #y Air =eccan. 3owever0 the same descriptive la#el

mas(s the significant differences in ways the model has wor(ed in India vs. B.S.

&irst0 in terms of mar(et share0 Ls accounted for almost $", of all

domestic passengers carried in 2""% . As of Covem#er 2""%0 it rose to $+,. -his

rate of mar(et penetration of Ls is remar(a#le given that the mar(et share was

Dero in August 2""$. Low cost carrier operations account for 44, of all flights

within India compared to!8, in the B.S..

-he second significant difference has to do with the relationship #etween low

cost and low fare.In B.S.0 the Ls offering low fares are also truly low cost

operations. In India0 the airlines that offer low fares are in reality not low cost

operations. -hey are Ls only in name. Among the Ls in India0 Spice ;et has

the lowest unit cost at %.2 cents per AS0 which is compara#le with Southwest0

>asy ;et0 and ;et 5lue. 5ut this is more than twice that of the #est performer0 Air

Asia with unit cost of slightly over $ cents per AS..

-his flies in the face of what Ls outside India li(e *yanair have done when

they were in a similar stage of their growth. *yanair focused on lowering costs

while finding ways to enhance revenues #y selling food and drin(s during flight to

captive passengers and selling services such as insurance0 hotel reservations0 and

rental cars on its we#site. =eccan seemed to have followed similar strategy in

terms of charging for #aggage #y offering limited #aggage allowance/ and food0

and expanding capacity #ut with a crucial difference that it did not share the

o#session of *yanair and Air Asia to reduce costs.

12


13/51

(T*ATEGIE( 0OLLOWED &+ LOW CO(T CA**IE*( IN

INDIA

AI* DECCAN

Air =eccan started its operations in August 2""$0 offering a low #udget0 no frills

airline service. It was operated #y =eccan Aviation Pvt. Ltd and head@uartered in

5angalore. It started operations on non?trun( short?haul routes in South India and

offered fares that were compared to high?end railway fares. -he airline also offered

flights on trun( routes on significant discounts to the full?service operators li(e ;et

Airways and Air Sahara. Air =eccan had positioned itself as the first domestic low

cost carrier.

aptain Gopinath0 the promoter0 owns 2%, of the e@uity in the company0

while venture capital funds0 III 9entures and apital International0 had infused

e@uity worth BS 4" million with an option to infuse a further BS !" million at a

later stage.

-here was demand for airways in various small towns that had airports #ut

did not have any connectivity. -his pointed to a dormant need for scheduled air

services to connect the hinderland. Air =eccan was launched as a low cost airline to

meet this need. :r. Gopinath did not dream for =eccan to #e the #iggest airline in

the country0 #ut one that was tapping into a niche mar(et. It initially connected

only the smaller towns with metropolitan cities0 starting with airports in South

India.

'nce Air =eccan got experience in connecting the unconnected airports0 it

ventured on the trun(?routes #y see(ing to connect the larger airports. Leveraging

on its initial success0 the enterprise entered the trun( route segment with an Air#us

A$2" 1et aircraft.

Vision

>mpowering every Indian to fly

Mission

13


14/51

-o demystify air travel #y providing relia#le0 low cost and safe travel to the common

man #y constantly driving down the fares as an on going mission. &or the same

reason :r. *. . LaxmanEs Jommon :anEwas chosen as the #rand am#assador.

Air Deccan1s Icon# The Co,,on Man

Air Deccans targeting

!. orporates middle?level employees/0 small and medium enterprises S:>s/0

2. AK Second class travellers middle class/ of Indian *ailways. -his can #e

again divided into two parts7

a/ -ravellers who dream to travel #y air at least once in their life time

#/ -ravellers who did care a#out time #ut couldnEt afford the price whichwas #eing charged #y the full serivice airline.

14


15/51

Here, we can see that Air Deccan is competing with other airlines on fares

euivalent to the railways!

The &usiness (trate%

-ypically0 Ls provide point?to?point service avoiding connecting flights and

#aggage transfers while &Ss #ase their operation on a hu#?and?spo(e

system. Air =eccan has deviated from the L #usiness model in the sense

that instead it has a hu#?and?spo(e type operation to connect metros with

smaller towns. It also provides point?to?point service #etween metros and

large cities. 3owever0 industry analysts have pointed out that this has

increased the costs for Air =eccan.

Concentrated on unconnected re%ional areas#

-hey did not connect with the metros initially. -hey entered the regional areas0

which were disconnected0 #ut promised capacity traffic.

Two "ron%ed fleet strate%#

-hey were plying 4) and 62 seater A-*s on the regional routes and the !)"?

seater A$2" on the trun( routes. -he logic #ehind the strategy was that the

15


16/51

smaller aircrafts were suita#le for the shorter runways at the regional airports0

which were much smaller in siDe while the 1et aircrafts on the trun( routes

helped it to achieve higher capacity and carry passengers over a longer range

than the A-*s.

Lease with AI*&'(7-hey entered into a operating lease with Air#us0 wherein the title remained with

the aircraft owner0 while the operator paid up rental payments0 which were tax

deducti#le and reduced not only the capital expenditure on the operatorEs

#alance?sheet #ut also the operatorEs exposure to uncertainty of the aircraftEs

residual value at the time of its disposal. -he lease payments comprised of a

fixed #ase payment and a varia#le maintenance reserve determined #ased on

the aircraft usage.

2uic3 turnaround#

Implying that the aircraft are utiliDed more there#y reducing the capital andcrew costs0 apart from the hangar and finance costs.

-i%h 0re4uenc7

3igh fre@uencies of flights plying #etween 2 cities0 thus ensuring customer

loyalty -he #usiness traveler thin(s if he misses one0 he can ta(e the next one

as there are flights every !+ minutes0 or the one after that/.

Lean (taffin%

It adopted a Mlean and meanM approach to staffing levels and aimed at

maintaining a low aircraft?to?employee ratio to (eep costs down and tic(et prices

low.

*educed e5"enses on Cabin crew#

Air =eccanEs pilots stayed in company guest houses and transit houses

while the full service airlines pilots stayed in five star hotels

Air =eccan did not have a separate cleaning staff. -he air hostesses

cleaned the aircraft and o#tained a cleaning allowance.

-he transit inspections were not done #y a separate engineering staff.

-he pilots themselves did the inspection.

&oo3in%6custo,er touch "oints

-he company pioneered the introduction of e?tic(eting and tic(et purchase through

multilingual call centres that were open through out the day.

'ther modes were as follows7

Airport counters

16


17/51

-ravel agents across India

*eliance We# Worlds

Indiatimes we# site

lu# 3P outlets of 3industan Petroleum orporation in 6 states of India

ity office counters at 5angalore and hennai

Dna,ic fare "ricin%7

Its fares were dynamic in nature and were governed #y the demand and supply

situation. -he earlier one #oo(ed0 the lower was the farethis was also (nown as

AP>N?advanced purchase scheme/.-he fares were advertised through the news

paper media.

Source7 I*A report on ivil Aviation

Other distinct features of Deccan as compared to Full-ervice Airline

17


18/51

Air Deccan1s innovative ,ar3etin% strate%ies#

!. =uring off?seasons sometimes even during pea(s/ it offered seats as low as

*s.+"". -his intrigued the customer to the hilt. -hey would wait patiently

rather notO/ for the announcements from =eccan to come. 'nce announced

customers would #oo( as many tic(ets as he could in the allotted time frame.

3owever0 there was a loop?hole tic(ets #oo(ed in this promotional scheme

were not refunda#le nor were any date changes permitted/.

If this wasnEt enough0 they then came up with a *e ! tic(et in ;une0"+. -hese

made the customers and the competitors/ go mad. It was evident in the

num#er of hits on the we#site the day these promotions were launched.

2. In addition to this0 Air =eccan plans sold tic(ets #y mo#ile vans and at petrol

pumps to tap the middle class segment0 with a tie up with 3industan

Petroleum orporation Ltd 3PL/ to sell tic(ets at its lu# 3P petrol pumps.

:aruti vans hired #y the travel agency installed with we#?ena#led services

will serve as mo#ile tic(eting counters to sell tic(ets six days a wee( :onday

to Saturday/ and payments could #e made in cash or #y cards. -he mo#ile

tic(eting centers will #e connected to a central reservation system to ena#le

providing confirmation of the tic(ets. -he #ul(

of the customers at petrol refueling stations were the middle class0 the verysegment that Air =eccan wanted to tap. -he proposal is a win?win situation

for #oth0 since the cash earned #y the petrol pumps could #e rolled over due

to the sale of tic(ets.

18


19/51

E5hibit 7# Milestones in the histor of Air Deccan

1


20/51

2!


21/51

!"hi#it $% Financial results of Air Deccan During $&&'-&(

Total O"eratin% *evenue 89:

'perating expenses

&light 'perations 22$.4

:aintenance and overhaul !+%.4

=epreciation !!.2

Bser harges %"

Station >xpense 2%.+

Passenger Service 2".4

-ic(eting0 sales and promotion !+.$

General and administration !!"

'ther operating expenses !).6

Total o"eratin% e5"enses 8;7

'perating result 4".!

Con?operating items ?$!.)

ProfitKloss

Net "rofit6loss before ta5 9


22/51

We can see that the ma1or share of expense of the company is on &light

operationsH and :aintenance and overhaulH. -he next ma1or area of expense is

General and AdministrationH. It is also #ecause a country li(e India doesnEt have

secondary airport which has low taxes and surcharges unli(e the western world

where its counterparts en1oy the differential taxes and surcharges on different

graded airports.

22


23/51

($ICE?ET

Spice;et is a low?cost airline#ased in Cew =elhi0 India. It #egan service on :ay 2$0

2""+. It was earlier (nown as *oyal Airways0 which was earlier (nown as :odiLuft.

It is promoted #y the ansagra family. 5y 2"")0 it was Indias second largest low?

cost airline in terms of mar(et share. Spice;et was voted as the #est low?costairline in South Asiaand entral Asiaregion #y S(ytraxin 2""6.

Cost Control

Spice;et is focused on twin pillars of cost control and growing its ancillary revenue.

It follows the classical low?costH airline model of very competitive fares0 a single

type of aircraft and a single class of service0 point?to?point operations0 @uic(

turnarounds0 no frills0 and internet?#ased tic(eting. 5ut unli(e other low?cost

airlines0 water and snac(s served on?#oard Spice;et aircrafts is free.

Spice;et has also focused on the curved winglet design which reduces noise and

improves fuel economy #y 2?$ per cent. -he company has also expanded inner

aircraft room #y reducing unnecessary storage areas and allotting them to

passenger seats.

)ricing strategies

-he airline mar(ed its entry in service with *s.88 fares for the first 88 days0

with 8""" seats availa#le at this rate. -his deal was followed #y a *s. 888

promotional scheme on select routes. -heir mar(eting theme is Moffering low

everyday spicy fares and great guest services to price conscious travelers. -heir

aim is to compete with the Indian *ailwayspassengers travelling in A coaches.

-he airline in :ay 2""6 offered two?la(h seats at a special price of 88 paise for two

or more persons travelling together on all non?stop flights covering !4 destinations.

*ecently in ;anuary 2""80 it came up with another attraction F J5oo( two air

tic(ets0 Pay for oneE.

Value-addition to customers

Spice;et has introduced online travel insurance in partnership with -A-A AIG with

which they have maintained a consistent rate of 2) per cent of sales since the

introduction of the product.

23
http://en.wikipedia.org/wiki/Low-cost_airlinehttp://en.wikipedia.org/wiki/New_Delhihttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/ModiLufthttp://en.wikipedia.org/wiki/South_Asiahttp://en.wikipedia.org/wiki/Central_Asiahttp://en.wikipedia.org/wiki/Skytraxhttp://en.wikipedia.org/wiki/Rupeehttp://en.wikipedia.org/wiki/Indian_Railwayshttp://en.wikipedia.org/wiki/Low-cost_airlinehttp://en.wikipedia.org/wiki/New_Delhihttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/ModiLufthttp://en.wikipedia.org/wiki/South_Asiahttp://en.wikipedia.org/wiki/Central_Asiahttp://en.wikipedia.org/wiki/Skytraxhttp://en.wikipedia.org/wiki/Rupeehttp://en.wikipedia.org/wiki/Indian_Railways


24/51

It provides value?adds to clients #y having internet #an(ing for customers0 wherein

they can select any #an( with which they have an account and can use their own

login credentials0 which is essentially for customers not owning a credit card or not

inclined to using one0 are among the other ma1or initiatives.

Apart from these0 it provides efficient information flow to clients0 wherein thesystem gives the clients a recorded call giving information a#out the flight creating

a portal for crew pilots and ca#in crew/0 which ena#les them to communicate with

each other. Spice;et plans to introduce an on?#oard wireless telephone system for

all Spice1et passengers.

Operational efficienc*

As :ichael Porter says0 a company can outperform its rivals only if it can esta#lish a

difference it can preserve. It has partnerships with glo#al leaders in their respectivefields to enhance safety and relia#ility. -he company is well supported in the

maintenance department #y L: and state?of?the?art technology from world

leaders li(e the Star Cavigation0 *ussell Adams and -ech Log.

Spice;et Airlines has started partnership with Cavitaire0 the worldEs renowned low?

cost support system for reservations and revenue management. >?#oo(ing and >?

tic(eting are availa#le in Spice;et. It made significant investments in information

technology to provide a #ac(#one for operational effectiveness.

-hese approaches resulted in Spice;et achieving the lowest costs in the industry

*s. 2.%+KAvaila#le Seat ilometre AS:/ in 2"")/ and a flight dispatch relia#ility

exceeding 88.+,. Spice;etEs efficiency is compara#le to that of the legendary low?

cost SouthWest airlnes.

Marketing trategies

Spice;et has a uni@ue mar(eting strategy that focuses on word?of?mouth

mar(eting0 supported #y print and Internet media initiatives. -o #uild further on its

#randing value0 Spice;et has introduced on?#oard merchandise sales such as

goggles0 airplane models0 perfumes0 caps and watches. Sales of #randed

merchandise will also #e availa#le through the companys we#site.

While there is stiff competition in the low?cost carrier mar(et in India0 the

competitive edge for Spice;et lies in the @uality of service offered during the flight.

24


25/51

-his has resulted in 42, repeat flyers0 4+, of #usiness travel and over 8", of

passengers recommending the airline through word of mouth.

trategies for Future sustenance

a+ !"pansion )lans

Spice;et started its operations with + 5oeing aircrafts in its fleet and ramped it up

to !) aircrafts covering !6 destinations and !!6 flights daily #y :ay 2""). It

reported a net loss of *s. !$$.+! crores in the year 2""6?") and a loss of *s. !6.8!

crores in $rd@uarter of 2"")?"8. Spice;et still has ma1or expansion plans. It has

another $" aircrafts on order for delivery #etween 2"") and 2"!!.

#+ Open to Foreign investments as well as #u*outs

'n ;uly !+0 2"") 5illionaire Wil#ur *oss invested )" million a#out *s $4+ crore/in the low cost airline.

"If any foreign airline comes on #oard as a strategic partner, we will certainly

welcome them!If the right opportunity is presented $pice%etcould #e a #uyer too!M

F hief >xecutive 'fficer0 San1ay Aggarwal on &e# !)0 2""8. 3e expects

consolidation in the Indian airline industry over the next !2 to 24 months as the

landscape is too small for so many players.

c+ Convenience to passengers

It plans to initiate roaming agents wherein passengers without #aggage areassisted #y the roaming agents at the airport to s(ip chec(?in are some of the other

initiatives. In future0 Spice1et plans to start We# Access Protocol WAP/ on the

mo#ile phones of the passengers and S:S chec(?in through which passengers can

s(ip chec(?in #y 1ust showing the #arcode or the notification on their mo#ile

phones.

d+ Ancillar* ,evenues

Spice;et have entered into a ;oint venture with -he B #ased online retailer

Bnder&ivePound.com. -he company through its we#site0 sells a range of menEs0

womenEs and childrenEs clothing along with other items such as 1ewellery and

houseware gadgets0 all for less than Q+ and is (nown for its discounts and free#ies.

eeping the pricing of the merchandise in sync with the image of a L0 Spice;et

expects to sell value?for?money items on #oard0 to its customers.

25


26/51

e+ Automation to sustain e"pansion

Spice;et has automated its cargo #usiness processes to support its aggressive

expansion plans for its domestic cargo operations. -his will ensure an integrated

management of cargo reservations and ground operations including flight planning0

in#ound cargo operations0 #illing and shipment trac(ing. Spice;et #ecomes the firstIndian L to use this high?end #usiness solution.

26


27/51

INDIGO

Indigo Airlines has #een one of the airlines which has #een eating away mar(et

share from its competitiors. Its mar(et share increased from +, in the first @uarter

of 2""6 to !".$, in first @uarter of 2"") to !+.4, in =ecem#er 2"") &igures #y

=GA/. -he airline has #een ta(ing radical steps to cut down on costs. -hey haveset a record for using the lightest passenger seats in India which weigh only !2.)

gs. -hey have started using paint which overall weighs +" gs less. Such weight

savings are negligi#le on their own #ut collectively0 It has #een helping Indigo to cut

on costs and function as a low cost airlineH.

-he airline has trained its crews to de?plane the passengers in % minutes and

unload the #aggage in !" minutes. It regularly acheives -urn around times of

around 22?2+ minutesIndustry Average #eing much more than $" minutes/. -he

lesser the time ta(en at the airports0 the more the airplane can fly and earn more

revenues.

Indigo has a fleet of !8 Air#us $2"s and they intend to receive )! more similar

planes #y 2"!%. All the planes have exactly the same configurations0 having the

same engines0 same num#er of seats in one class configuration. IndigoEs fleet

ma(es up approximately %.+, of IndiaEs com#ined fleet siDe and comparing this

figure with the mar(et share figures0 it shows that Indigo has #een successful in

attracting customers away from other airlines. Indigo has reported a Load &actor of

6+.6, in =ecem#er 2"") when the IndustryEs average was %+.%,.

ndigos trateg* for ustenance

Indigo has adopted a three strategy to sustain in the current difficult environment.

It tries to (eep its cost lowest amongst the low cost airlines0 provide passengers

with #est on time performance0 clean aircraft0 high relia#ility and finally grow

cautiously without tin(ering with its #usiness model.

.ar on Costs

'n an average0 an IndiGo aircraft flies for around !2 hours a day0 compared to

eight to !" hours logged #y most competitors. -he extra hours allow it to underta(e

one extra flight daily0 which translates into more seats and revenue.

-o do this0 the airline realiDed early that it has to ready its aircraft for another flight

@uic(ly. Its first target was $" minutes. IndiGo has #ested the target7 it has #rought

the turnaround time in secondary cities to 22 minutes and on many days it has

27


28/51

achieved the feat in less than 2+ minutes in #usy airports li(e =elhi.

Indigo has #ro(en up the 1o# into small parcels li(e loading0 unloading and cleaning

with time targets and each of these is monitored. -he team is trained to focus on its

1o#. -hey have even turned around an aircraft in !4 minutes.

-here are other simple ways IndiGo has employed to trim costs. -he airline0 for

instance0 was amongst the first customers for the Select! 92+"" engines

manufactured #y Rurich?#ased IA>0 a 1oint venture #etween *olls *oyce and Pratt ven full service airline

;et has only 22 per cent of its pilots trained to fly under fog.

-o support such high on?time performance0 IndiGo has set up a centraliDed

operations control centre which monitors the weather0 anticipate delays and even

provides advance information to the ground staff in case an aircraft re@uires some

repair or maintenance while it is air#orne so that the engineers are ready to rectifythe pro#lem and waste no time once the aircraft lands.

Also0 as the average age of the fleet is a#out ! year0 the occurance of technical

faults are low and #ecause of this IndiGo has managed to achieve high 'n?-ime

performance.

28


29/51

Avoiding Deccans Mistakes and 0row Cautiousl*

-he pain which apt. GopinathEs Air =eccan faced has often #een attri#uted to

haphaDard expansion in routes which it undertoo(. Indigo has consciously tried to

stay away from such an expansion. With a fleet siDe of !80 Indigo touches !6 cities

while =eccan with a similar siDe of fleet managed to touch 4$ cities. Indigo usuallyreaches a new city0 consolidates its position and then offers new flights from there.

As mentioned earlier0 Indigo managed to get su# 2+ minutes turn around time

which even others managed. 3owever0 Indigo did not freely hire to achieve such

times. It has (ept a tight leash on staff re@uirements and has only !"" wor(ers per

aircraft while other operators are (nown to have nearly !$" wor(ers per aircraft.

Outloo3 for IndiGo

Analysts say that IndiGo has the potential to #ecome a glo#al low?cost carrier0provided it can tide over the current slowdown. If it has the cash to sustain itself for

another two years0 IndiGo surely will #e one of the #ig players in the low?cost space

glo#ally with its expected fleet siDe of a#out !"" planes #y 2"!%.

At the moment0 little is (nown a#out IndiGos financial health #ecause it is not

listed on the stoc( exchanges and0 therefore0 does not have to put its profit and

loss statement in the pu#lic domain every @uarter0 though it is certain the company

is in the red li(e all other Indian carriers.

IndiGo has hardly advertised and indulged in #rand #uilding activities. Its fastgrowth has #een solely due to word of mouth and repeat customers. 3owever such

fast growth may not #e sustaina#le without some #rand #uilding exercises. -he

airline could concentrate on surviving the tough times which the industry is facing

and then once the environment gets #etter then should indulge in #rand #uilding

exercises.

2


30/51

GoAir

-he airline was esta#lished in ;une 2""40 and it started operations on 4 Covem#er

2""+ .3ead@uartered in :um#ai0 Go Air is wholly owned #y the Wadia Group0

:um#ai #ased and ma1ority ownersof 5om#ay =yeingand 5ritannia Industries. 'n

8 ;une 2""+ GoAir announced that it intended to launch operations in 'cto#er 2""+with a fleet of 2" leased Air#us A$2" aircraft. At the time the airline was in

discussion with #oth Air#usand 5oeingon the purchase of #etween 2" and 4" new

aircraft0 with a contract to #e in place #y the end of 2""+ and with deliveries to

start #y 2""6. An order for !" aircraft from the Air#us A$2"family was announced

in ;uly 2""%.

CO,)O,A/! /,A/!01 A2D C3/OM!, FOC3

Go Airs o#1ective is to offer its passengers a consistent0 @uality?assured and

efficient performance at afforda#le fares.

Go Air airlines has tried to target the &irst0 Second and -hird AK *ailway

passengers and 9olvo 5us Passengers. GoAir has strategically divided the

fare structure in such a way that the railway passengers can #enefit most

from this arrangement.

Its fares are 4", lower than that of traditional airlines.

-he chief motto of GoAir is to provide a consistent0 time?efficient operation

while maintaining the low fare scheme through the state?of?the?art Air#usA$2" Aircraft fleets

GoAir and as part of its strategy to maintain @uality0 it has strategically tied?

up with the *adixx International0 a leading technology provider of automated

aviation and travel related software solutions

Initially0 the airline was limited to :um#ai0 Ahmeda#ad0 Goa and oim#atore.

With induction of more aircraft0 the networ( has expanded its wings and now

GoAir services can #e availed in !$ cities. GoAir has %! flights daily to all

theses places.

&ocuses on providing @uality service

5est on?time performance

uic( turnaround of aircraft that average around 2+ minutes.

3!
http://en.wikipedia.org/wiki/Wadia_Grouphttp://en.wikipedia.org/wiki/Majority_ownerhttp://en.wikipedia.org/wiki/Bombay_Dyeinghttp://en.wikipedia.org/wiki/Britannia_Industrieshttp://en.wikipedia.org/wiki/Airbus_A320http://en.wikipedia.org/wiki/Airbushttp://en.wikipedia.org/wiki/Boeinghttp://en.wikipedia.org/wiki/Airbus_A320http://en.wikipedia.org/wiki/Wadia_Grouphttp://en.wikipedia.org/wiki/Majority_ownerhttp://en.wikipedia.org/wiki/Bombay_Dyeinghttp://en.wikipedia.org/wiki/Britannia_Industrieshttp://en.wikipedia.org/wiki/Airbus_A320http://en.wikipedia.org/wiki/Airbushttp://en.wikipedia.org/wiki/Boeinghttp://en.wikipedia.org/wiki/Airbus_A320


31/51

Delivering Value to customers%

>ase in 5oo(ing7 -he passengers who may not have a credit or de#it card or

access to a omputer need not travel long distances to #oo( their GoAir

tic(ets0 #ut can #oo( them from any of the distri#ution mediums0 which

include Go-ravel Agents0 Go-ata Indicom 'utlets0 GoInlott outlets0 Goy#ercafT and GoP's.

Passengers can carry fast food items li(e the sandwiches0 #urgers in the

flight. 3owever the passengers are also given complimentary peanuts0

#iscuits and water during the flight.

ervices offered to the passengers%

" We# 5oo(ings of -ic(ets

" -ic(et #oo(ings without Passenger Service &ee PS&/ and any applica#le &uel

surcharge.

" Provision for >xcess 5aggage with the payment of a nominal amount.

" &are StructureInfants up to the age of 24 months will #e charged *s 26+

plus applica#le PS&0 provided they donot occupy a seat. -axes and &ees

include passenger service fee of *s 22+0 a fuel surcharge of *s 6+" and a

congestion surcharge of *s !+" and passenger handling fee of *s !""

T-E -'& MODEL-he strategy of GoAir has #een to #e a strong player around a hu# rather than

spread all over the country and grow step #y step. -his is an attempt to emulate

the point?to?point strategy of South West Airlines of the Bnited States the first to

come up with a low?cost airline/. -hat is why initially they concentrated on :um#ai0

then went on to Ahmeda#ad0 Goa and oim#atore and now they have services in

!$ cities.

-he logic #ehind this model is that instead of aggressively moving to new cities0 if

an airline first increases flights in the existing networ(0 it has a two?fold #enefit0 it

can spread its costs across different overheads. 3ence0 if it deploys three flightsfrom the same place it can utiliDe its crew0 fuel and aircraft more0 leading to

positive yields and thus profita#ility.

-he other point to #e noted is that its hu#s are usually metros and tier?2 cities

which have #etter infrastructure or are in the process of development and also have

higher occupancy rates due to higher levels of income. Its strategy has #een to

garner as much load factor as possi#le.

31


32/51

*ED E+E O$E*ATION(

-hese are the early morning and late night flights. -he flights get their name from

the fatigue symptom of having red eyes. -his concept is also a replication of the

strategies of airlines a#road. -hese flights usually operate during the period from

87"" p.m. to +7"" a.m. local time. -hey are also sometimes called Mdry flightM0since there is an a#sence of moisture in the air at high altitudes during late evening

and early mornings.

-he advantages of this model are7

" -hese flights lead to higher utiliDation of resources

" -hey attract traffic especially from those small and medium enterprise

S:>s/ and #usiness travelers who after finishing meetings late in the day0

need to connect with a new destination the following morning.

" 3elps reduce infrastructural pro#lems of governments as it decreases rush

during pea( hours #y diverting traffic

" Gives #enefits of lower fares to passengers

:oreover0 this model has #een implemented only for connecting metros and tier?2

cities as most of the #usiness meetings ta(e place in such cities.

-his is a perfect example of how GoAir fits its extra resources strategically to help in

#etter utiliDation #y using a com#ination of increasing operational effectiveness and

satisfying uni@ue customer need at the same time.

(LOW 0LEET E@$AN(ION $*OG*AMME

>ven though GoAir follows a slow fleet expansion programme0 it does not #elieve in

aggressive expansion as it may create pro#lems in periods of slac( demands and

put pressure on costs. 3ence this is another one of its strategies to complement the

low cost model and #ring synergy in its costs and prices.

3owever0 as part of GoAirs restructuring plan0 its fleet growth does appear to have

#een ad1usted downwards. 'f the 2" A$2"s ordered0 the carrier plans to ta(e

delivery of four more A$2"s #y ;un?"8.-he airline currently has a fleet of six

aircraft0 #ut plans to return some aircraft to lessors0 for a net fleet of eight A$2"s

#y ;un?"8.

GoAir was originally scheduled to increase its fleet to ten aircraft #y the end of

2""8. -he carrier previously dramatically slowed its original growth plans of ta(ing

delivery of $$ aircraft #y the end of 2""). GoAir previously placed firm orders for

2" A$2"s0 and in Apr?") deferred a proposal to order another 2" A$2"s for

delivery after 2"!!/0 stating it planned to wait for prices to go down #efore #uying

32


33/51

additional aircraft.

Source7 entre for Asia Pacific Aviation and Ascend

-he figure depicts how GoAir has #een very conservative in its approach of adding

planes to its fleet in order to not put pressure on costs. It is also evident that #y

2"!! it plans to get rid of all the leased planes0 which would in effect wash away all

the rental costs.

A#$%&'( )%(*%'+,- ('*)$# '&,#/ 0$$,#+ %&,) $,- *) %&*% G$A,( ,''/ -(('#%*,(-(*0% (,-') *) %$$ &,+& *#/ *) -$#/'#% ('"2!13 /','( )$%) , '-$9'

availa#le as other carriers would realiDe they cannot ta(e delivery of all the A$2"s

that have #een ordered.-he carrier also awarded Air &rance >ngineering a six?year

BS=4" million contract to provide :*' services for its future fleet of A$2" aircraft.

-his gives us a glimpse of how it incorporated its future strategies into its present

ones #y (eeping cost saving at the forefront.

0*E2'ENC+ EN-ANCEMENT $*OG*AMME

Another strategy followed #y GoAir is that of increasing the fre@uency of its flights.

It is a#le to do so due to its hu# model which concentrates on enhancing presence

around a particular hu# which are essentially -ier2 cities or metros where the

occupancy rates are higher and demand is higher0 hence creating need for higher

fre@uencies. As a part of this programme it had added two new aircraft to its

33
http://www.ascendworldwide.com/aviation_and_fleet_information.aspxhttp://www.ascendworldwide.com/aviation_and_fleet_information.aspx


34/51

existing fleet in 2""60 with this it announced that it would #e dou#ling its current

flight operations from 2+8 to +%! commercial flights per wee(. -he (ey focus was to

reiterate consumer commitment and ensure consumer comfort.

-his operational strategy came at a time when the airline had #een seeing a

consistent load factor in excess of )" per cent over the past few months. 3ence itidentified a #usiness opportunity at the right time and used its resources to

leverage on it and integrate it into its overall strategy. -his programme was also an

attempt towards consolidation0 in order to integrate the !! destinations the

company operated in at that time.

GoAir has added morning0 afternoon and evening connections in :um#ai and =elhi

to connect the two metro cities to (ey #usiness and leisure destinations li(e

5angalore0 Goa0 3ydera#ad and hennai as part of its flight operations strategy.

0LE@I0A*E

In 2"")0 GoAir launched a new scheme under which the passenger would #e

a#le to ma(e unlimited changes in its travel itinerary free of cost.

5esides0 GoAir has cut the cancellation changes to *s 2"" on all Go&lexi

#oo(ings. With the new plan GoAir is see(ing a competitive edge over other

low?cost airlines0 who levy rescheduling and cancellation charges of *s +""?

6+" on their passengers.

-hrough this GoAir is targeting fre@uent?flying #usiness passengers0 such as

traders and executives. It is not the leisure travellers or occasion?flying

customers ma(ing fre@uent changes to their schedule0 #ut the fre@uent fliers

who #ring in #igger chun( of revenue for airlines.

Go&lexi #undle allows cancellations or rescheduling to #e made up to two

hours prior to scheduled time of flight departure.

A passenger #oo(ed under Go&lexi &are will not #e charged the transaction

fee applica#le for re?#oo(ing a confirmed GoAir tic(et. -he passenger will

only have to pay the difference in fare amount #etween the original #oo(ed

fare and the applica#le fare of the revised #oo(ing.

In case0 the new fare is lower than the originally #oo(ed fare0 the difference

in fare amount will #e retained in the passengers credit account with the

airline for utiliDation within six months period.

34


35/51

-his plan was initiated as an effort to gain a competitive advantage #y

catering to a uni@ue customer need of a niche customer segement there#y

increasing #rand loyalty.

LA'NC-ING O0 GOCOM0O*T

In an attempt to align its strategy to the recent trends in the environment0 GoAir

announced plans to trial a premium section0 MGo omfortM0 effective from the

Winter of 2"")K"8 Schedule. -his strategy is as part of its effort to re?#rand itself

as a Mvalue carrierH.

INDIAN DOME(TIC $A((ENGE* MA*KET (-A*E IN (E$B9#

Source7

entre

for Asia

Pacific

Source7Aviation and :inistry of ivil Aviation

3it #y high fuel prices0 intense competition and wea( growth in price?sensitive

demand0 GoAirs shift of #usiness model underscores the difficulties facing poorly

capitalised Ls. :inistry of ivil Aviation reports GoAirs captured only a !.),domestic mar(et share in Sep?").

Another reason for this move away from its current L model is the necessity to

sustain itself #y containing losses and retaining passenger num#ers aggravated #y

Indias rapidly slowing aviation sector. :inistry of ivil Aviation reports GoAirs

passenger num#ers fell a massive %2.), year?on?year in Sep?") to 4)0"""0

35


36/51

although it partially attri#utes the result to capacity cut#ac(s0 as part of its

restructuring programme.

GOAI* $A((ENGE* N'M&E*( AND $A((ENGE* N'M&E*( G*OWT-

C-ANGE +EA*ON+EA*# ?ANBF TO (E$B9

Source: *entre +or $ia -aci.c /iation &

GoAirs load factors meanwhile were comparatively higher than its domestic

competitors at +6, no year?on?year change disclosed/.

INDIAN CA**IE*( DOME(TIC $A((ENGE* LOAD 0ACTO* IN (E$ B9

36


37/51

-his carrier is positioned #etween Ls and full service carriers0 and thus aims to

create a new value for money product with passengers having to Mpay to get moreM0

while retaining its point?to?point operating strategy. As part of the repositioning

strategy0 GoAir also reportedly plans to further expand its return chec(?in facilities0

and telephone chec(?in services.

It is promoting this class as the Mcomfort of a 5usiness lass at the price of a full

service >conomy lass tic(etM. GoAir has initially dedicated the first three to four

rows of its A$2"s to the new section0 which will offer light snac(s and other MfrillsM0

charging IC* !06+" BS=$+.4"/ extra for the service. If successful0 GoAir

reportedly plans to remove further rows in the future to allow more leg room for

this segment0 and will consider offering full meals.

0EAT'*E( O0 GOAI*( HGO COM0O*TH CLA((

5etter leg space7 pitch #etween

two rows increased to $4M

omfort seating7 middle seat is

always free

Priority chec( in

*eschedule travel plans at no extra

cost

37

Source: *entre +or $ia -aci.c /iation


38/51

omplimentary &'0 >dgardo 5adiali0 the current economic slowdown was an

opportunity to attract corporate travelers0 stating there was a growing trend among

#usinesses to tighten their travel #udgets and encourage middle?level executives to

travel with Ls to cut costs.

GoAirs new Go omfort class also aims to encourage repeat #usiness travel as one

fifth of the carriers passengers currently are repeat travellers0 hence this segment

offers huge potential.

T-E C*I(I(

In ;uly 2"") was predicted to #ecome the first victim of the downturn #eing faced

#y the domestic aviation industry. -he carrier was considered to #e facing a

massive cash crunch which would eventually lead to a #ailout sooner rather than

later.

-he :um#ai?#ased carrier slashed operations #y half in a #id to cut losses spar(ed

#y soaring costs of fuel. It was operating a little over 6"" flights a month0

compared with !04"" 1ust some time #ac(. It laid off nearly !%" staffers in a wee(.

-he airline was so starved for cash that it was selling :um#ai?=elhi tic(ets for

around *s68+ plus taxes of *s$0$2+/ compared with *s20""" plus tax/ that other

operators charge for the sector. It operates the maximum num#er of flights on this

sector0 which is the countrys #usiest route.

-his is a typical example of what was happening all around in the L Airlines as a

result of the hi(e in A-& prices as most of these airlines only employed a low price

#ut not a low cost structure.

38


39/51

?etLite

;et Airways ac@uired Air Sahara in April 2""6 and decided to run it as a !"" per

cent su#sidiary under the #rand name of ;etlite. At the time of merger0 it was also

decided that ;etLite would #e positioned as a value carrier #etween a full service

airline and a low cost carrier. It will have less frills with economy class details. Atthe same time0 fre@uent fliers scheme will #e extended to ;etLite. In order to

provide its services as a value carrier0 ;etLite stove to cut down its costs in every

possi#le way. Some of the strategies adopted #y it were7

Fleet of same aircraft

;etLite currently operates a fleet of 24 aircraft0 which includes !6 5oeing 6$6 series

and 6 anadian *egional ;ets 2"" Series.

&oein% F=F Canadian *e%ional

?et :BB

omparing these figures with the fleet of other full?service airlines

Airlines -ype of aircraft Co. of planesAir India Air#us A$!"?$"" 28

Air#us A$2! !25oeing 6$6 $5oeing 646 $"5oeing 6+6 !5oeing 6%6 $

5oeing 666 !4;et Airways 5oeing 6$6?4"" $5oeing 6$6?6"" !$5oeing 6$6?)"" $$5oeing 6$6?8"" 25oeing 666?$"">* !"Air#us A$$"?2"" !2A-* 62?+"" !4

3
http://en.wikipedia.org/wiki/ATR_72http://en.wikipedia.org/wiki/ATR_72


40/51

ingfisher Airlines A-* 42?+"" %A-* 62?+"" 26Air#us A$!8?!"" $Air#us A$2"?2"" 2%Air#us A$2!?2"" )

Air#us A$$"?2"" +source7 www.airfleets.net/

Since ;etLite uses only 2 types of aircrafts compared to 4?+ types of aircrafts used

#y full?service airlines0 it is a#le to save maintenance costs. Bsing similar aircrafts

ensures interchangea#ility of crews0 furnishings and spare parts0 and results in

ma1or costs savings for ;etLite. :oreover0 #ul( purchases of spares can #e made

which results in economies of scale. Similar types of aircraft also means reduced

training re@uirements for the pilots as they had to only learn to operate a single

type of plane which further #rings down the costs.

weating its assets

Airlines Co. of aircrafts Co. of &lights

daily/

BtiliDation of

aircraft

&lightsKAircraft/

Average fleet

age in

years/Air India !") ? ? !!.8

;et Airways )6 4"" 4.+86 4.+

ingfisher

Airlines

6+ 2!) 2.8"% 2.2

;etLite 24 2+" !".4!% %.+source7 http7KKwww.indiainternalflights.comK 0 www.airfleets.net/

ompared to other full?service airlines0 ;etLite draws the maximum out of its

assets. >ven if the utiliDation of aircraft #y 1et airways and (ingfisher is discounted

considering the fact that they fly international also0 even then ;etLiteEs utiliDation is

much higher than full service airlines. -his results in significant cost savings as

fixed costs are incurred whether the planes are flying or not. So its #etter to fly

more and earn revenue than (eeping your aircraft idle.

&urthermore0 the average fleet age of ;etLite is %.+ years. -hough it does not have

the youngest aircraft in the industry0 still the fleet is not very old when compared tothat of Air India. 3aving a relatively young fleet means efficient engines0 which

translates into fuel savings for the airlines. Since air tur#ine fuel A-&/ is a ma1or

cost component0 having fuel efficient engines results in significant cost savings.

2o frills

4!
http://en.wikipedia.org/wiki/Airbus_A320http://www.airfleets.net/http://www.indiainternalflights.com/http://www.airfleets.net/http://en.wikipedia.org/wiki/Airbus_A320http://www.airfleets.net/http://www.indiainternalflights.com/http://www.airfleets.net/


41/51

;etLite follows a no?frills policy to (eep its costs to #are minimum. -his means that

it does not offer any complementary services offered #y other full?service airlines.

omplimentary services include multi?cuisine food0 airport lounges0 magaDines0

entertainment0 etc.

Airlines that serve food on flight incur not only the #asic cost of food #ut also thecost of oven0 microwave0 preheated food ca#ins and serving trolleys. Cot serving

food on?#oard minimiDes these costs. :oreover0 the aircraft #ecomes lighter as a

result of offloading of heating appliances which increases the fuel efficiency of the

aircraft. 'n an average0 a#out !$" (g to !+" (g of the #asic aircraft weight is #eing

shed which results in a saving of !+, to 2", on operating costs annually per

aircraft.

;etLite has a fixed menu of very few items which are served only when ordered #y

the passenger. -his reduces costs associated with food0 appliances0 heating and

serving stewards and stewardess/ thus0 resulting in ma1or costs savings.

'ther special services li(e airport lounges0 coach services0 on?#oard entertainment0

etc. are a su#stantial part of an airlines cost structure. Since ;etLite doesnEt

provide any of these services0 it doesnEt incur any of these costs and passes its

savings to the passengers in the form of low prices.

-he exhi#it shows the in flight menu of ;etLite.

41


42/51

E1%i2it: In34li#%t enu

42


43/51

Online #ooking and V, ticketing

;etLite allows you to #oo( tic(ets #oth online and #y an Interactive 9oice *esponse

I9*/ system. -his eliminates the need for commissions paya#le to middlemen.

Internet #oo(ing also o#viates the need of tic(eting agents and additional wor(ers0

thus cutting down the wage #ill. :oreover0 the paperwor( associated with

transactions is considera#ly reduced. -he tic(ets are sent online to the email

address of the customer and the customer can get a printout of the tic(et himself.

All this helps in #ringing down the cost of transactions resulting in lower tic(et

prices.

D*namic )ricing

;etLite tries to sell maximum num#er of tic(ets through dynamic pricing. -he tic(ets

are priced according to the availa#ility and demand of tic(ets. In airline industry0

the marginal cost of flying an additional customer is very low. -hus0 ;etLite tries to

maximiDe its revenue #y selling the maximum num#er of tic(ets possi#le. It earns

its revenues not only from the sale of tic(ets #ut also from the sale of food items

and any other service for which it charges over and a#ove the price of the tic(et.

43


44/51

Advertising revenues

;etLite is loo(ing forward to enhancing its ancillary revenues #y opening itself up toadvertising. -he airline plans to offer the fuselage0 the exterior of the aircraft #ody0

and in?flight space for advertising. It is expected to generate revenues worth *s +"?

%" la(h a month from the move.

44


45/51

COM$A*ATI)E ANAL+(I(

45 ,!)O/O220 /O 6VA73! CA,,!,8 A,72!

'wing to the rising A-& prices and increasing losses and massive cash crunches0

intense competition and wea( growth in price?sensitive demand Indias domestic

L mar(et appears to #e shrin(ing0

-hree main players have employed the value carrierH model which give higher

#enefits such as priority chec( ins0 inflight &


46/51

It is evident from the a#ove ta#le that the airlines flowing the point to point model

tend to employ ! or maximum two types of aircrafts in its fleet in order to save

costs0 #ut those following a hu# and spo(e utiliDe more in order to use smaller

aircrafts for the short haul distances and the large ones for long haul distances.

'5 MOD!7 ADO)/!D

AI*LIC> :'=>L A='P->=

;etLitePoint to point #etween metros0

hu#?n?spo(e for non?metros to

metros and vice?versa or #etweennon?metros

GoAir 3u#KPoint?to?point model

Spice;et Point?to?point0 and regional hu#?n?

spo(e

Indigo Point?to?point model

Air=eccanKingfisher *ed 3u#?n?spo(e model

-he airlines connecting only #etween metros and tier?2 cities follow the point?to?

point model in order to increase fre@uency and concentrate on specific hu#s in

order to optimiDe costs0 and the ones connecting metros to non?metros follow the

hu#?n?spo(e model in order to connect all non?metros through one ma1or hu#. 5ut

there are still others following a mixture of the two 0 i.e. they follow the point?to?

point model for metros and the hu#?n?spo(e in regional areas. -his helps the

airlines operate #etween multiple locations and follow different strategies for

different types of places in order to save costs.

46


47/51

$*E(ENT (CENA*IO

7ow cost v:s low fare

In India0 the airlines that offer low fares are in reality not low cost operations. -hey

are Low cost carriers Ls/ in name only. Among the Ls in India0 Spice ;et has

the lowest unit cost at %.2 cents per AS0 which is compara#le with Southwest0

>asy ;et0 and ;et 5lue. 5ut this is more than twice that of the #est performer0 Air

Asia with unit cost of slightly over $ cents per AS. -here were operating losses for

Air =eccan in 2""6?").

-ypically0 Ls provide point?to?point service avoiding connecting flights and

#aggage transfers while &Ss #ase their operation on a hu#?and?spo(e system. Air

=eccan has deviated from the L #usiness model in the sense that it has a hu#?

and?spo(e type operation to connect metros with smaller towns. It also providespoint?to?point service #etween metros and large cities. Industry analysts have

pointed out that this has increased the costs for Air =eccan.

-here are serious dou#ts a#out whether Ls as we (now them elsewhere in the

world/ exist in India. According to 5ill &ran(e0 the :anaging =irector of leading

airline investment firm Indigo Partners0 -here is not a single airline in India that

operates a true low cost structure0 only low?fare and low?margin.H

Is the lowcost carriers1 business ,odel in India sustainable

Low?fare airlines outside India have many features in common F a single type of

aircraft to facilitate pilot training0 maintenance and aircraft utiliDation no free food

service to save costs and reduce turnaround times no inter?line transfer of

#aggage direct selling to avoid commissions to travel agents0 etc.

-hese features are easy to replicate and are an integral part of the low cost airlines

in India. As a result of their replica#ility0 they do not0 #y themselves0 offer a

sustaina#le competitive advantage.

-he dynamics of a low?cost airline are e@ually important. -ypically0 a successful low?fare airline chooses routes that are not already operated #y other low?fare airlines.

It increases demand for air traffic #y cutting fares0 and provides fre@uent services

to saturate the route. In contrast0 head?on competition #etween two low?fare

carriers on the same route often results in a price war that #enefits consumers #ut

is not profita#le to the airlines themselves.

47


48/51

-he low cost airlines in India are not targeting distinctive routes. Instead0 they

seem to #e moving towards creating huge capacities on the trun( routes. Since

shorthaul services impose other cost disadvantages on an airline0 @uic( turnarounds

to achieve high utiliDation #ecome critical. learly0 on?time passage is an important

value proposition for this type of service and delays are extremely annoying to

passengers.

*unning a low?fare airline is a ma1or managerial challenge. In addition0 the

government will need to improve airport infrastructure @uic(ly if this model is to

succeed. -he increase in air traffic is not matched with the increase in the

infrastructure at the airports. -he airlines prefer to halt and ply #etween only

metros and airports which have sufficient landing and par(ing place0 this leads to

long halts and waiting of these planes at metros and also traffic congestion and

delays #esides loss of precious air fuel.

In India0 air fuel and not salaries < wages constitute the largest share in expenses

of airlines as the airlines have to procure their Air fuel from oil companies. -he

under?developed commodity hedging mar(et also puts a stum#ling #loc( on these

companies to hedge against fluctuating prices of air fuel.

-he cost of procuring new fleet also needs consideration #ecause they should #e

a#le to have at least )", occupancy of seats to #e via#le in long run. Cow if most

of the flights operate on the popular routes chosen due to a#ove reasons0 there

would surely #e a saturation of mar(et sooner or later. -herefore0 these airlines

must thin( of exploring low?cost routes0 less time ta(ing routes0 rather than hauling

on the same popular routes0 if they wish to remain via#le in long run. &or example

the north?east region of our country completely remains outside the gamut of

competition from these Ls.

-he re@uirement for trained commanders to operate these flights also is another

issue that needs urgent attention. A severe demand supply gap is emerging

resulting in price hi(e #y these commanders this may also lead to increasing cost

and defeating the entire spirit of operating a L.

48


49/51

0uture Outloo3

Almost all the airlines in India are facing financial difficulties. -here are couple of

factors that account for this. 'ne factor is the ina#ility of the airlines to reduce

costs0 and the other is the irrationalH pricing that set in after the advent of Ls..

-hey have chased mar(et share0 i.e.0 revenue maximiDation and forced the

incum#ents to match their low prices. -hey have #een successful in ta(ing the

mar(et share from the &ull Service arriers &Ss/.

While revenue maximiDation may seem li(e a good short term strategy to enter the

mar(et0 sooner or later0 the Ls have to #e #ecome profita#le. -hese depressing

financial conditions can lead only to two types of outcomes for the airlineseither

some of them go #ust in a mar(et sha(e?out or they mergeKget ac@uired #y other

airlines or #usiness groups. 2""6 #ecame a landmar( year in the industry #ecause

of the ma1or consolidations that too( place during the year.

-he airlinesE plans to expand capacity and replace ageing fleet aggressively should

ena#le them to meet this growing demand more efficiently. 5ut in the near term0

they have to face significant challenges such as7

!. *ealiDing the #enefits of the consolidations.2. *ealigning their competitive strategies to #ecome profita#le.$. Pursuing aggressive cost reduction.4. -he availa#ility of capital.+. onstraints due to poor infrastructure for aviation in India.

2ew trategies

According to a survey conducted #y enter for Asia Pacific Aviation APA/0 %6, of

&ull Service arrier &S/ passengers and +!, of Low ost arrier L/0

passengers would still have traveled #y air if the fare had #een dou#le and0 +6.+,

of &S passengers would fly with an &S rather than an L even if the trip was

personal and self?financed.

Another strategic change will #e in the #usiness models. ;et Airways is now

concentrating on expanding its international operations targeting passengers ofIndian origin who travel to India mainly from B.S.0 B..0 anada0 >uropean

countries0 and South Africa. It has esta#lished a hu# in 5russels0 and in August

2""6 inaugurated flights from India to B.S. -his strategy helps ;et Airways escape

the #rutal competition in the domestic sector. It hopes to generate more than half

of its revenues in 2""8 from the more lucrative international flights. Its only Indian

4


50/51

competitor for such long haul flights would #e Air India0 which it can out?compete

due to ;etEs superior service advantage.

According to Indian Government Policy0 private carriers are not allowed to have

overseas operations unless they have #een in domestic #usiness for at least five

years. ingfisher and Spice ;et have lo##ied for the waiting period to #e changed tothree years0 #ut the government is li(ely to stand firm on its current policy.

An interesting #usiness model #eing tried out is long?haul low cost carrier. Air India

and ;et Lite are flying international routes using this model. -his model is different

from and more complicated than the short?haul L model. &or instance0

passengers are willing to pay for more comforts during long flights. Airlines have to

serve food and maintain a larger crew. It is difficult to achieve the same level of

cost advantage as short?haul Ls.

-here are many opportunities for these Ls0 #ut challenges are no little. -hose

pro#lems must #e resolved #efore further expansion else it may spell doom due tosevere dissatisfaction among the customers and the airlines may find only new

demand and not repeat demand. It is not new among foreign low&cost carriers that

they have either merged or sold off their #usiness due to long&run un&sustaina#ility!

5!


51/51

*E0E*ENCE(

Co,"etitive (trate% for Low Cost Airlines ? 3ongwei ;iang

R'IT (niversity, Australia

Aspirations0 >nterprise Strategy and Sustenance of a Start?up in a ompetitive>nvironment7

A Study of =evelopments in Air =eccan FM< *< Di5itJ (unil (har,a and A,it

Karna

Airports and airlines F sector focus A*-IL>

www.livemint.com

www.theindusview.com

http7KKwww.centreforaviation.com

www.airfleets.net

http7KKwww.indiainternalflights.comK
http://www.livemint.com/http://www.theindusview.com/http://www.centreforaviation.com/http://www.airfleets.net/http://www.indiainternalflights.com/http://www.livemint.com/http://www.theindusview.com/http://www.centreforaviation.com/http://www.airfleets.net/http://www.indiainternalflights.com/

strategies followed by low cost carriers

Documents