SouthWest airlines, the Texas based giant is a pioneer in low cost operation in North America. The success of this model was then replicated in Europe and then the model was introduced in Asia and Latin America. In India, the aviation industry started growing rapidly since the end of the previous century. With only one established, yet struggling, carrier in India till that time, a splurge of carriers such as Jet and Sahara entered the market. A few years later, low cost carriers, led by Air Deccan, started emerging in India.
With respect to the low cost operations, India and rest of the world had a lot of similarities such as the raise of the middle class in millions and who are ready to spend extra cash for quicker mode of travel. However, there are some glaring dissimilarities in the way low cost carriers are operated in the country. This paper discusses the opportunities and difficulties that arise from the dissimilarities between the way low cost carriers operate in India and in rest of the world.
In general, low cost carriers try to save money in whatever way they can. Revenue generated per passenger mile by these airlines is normally lesser that that of its full service peers. Hence it is important to concentrate on costs to stay afloat. In the late sixties, US had a handful of full service carriers. SowthWest airlines tried to tap the new middle class segment by flying them at low cost in a point to point service. These customers do not mind odd timings and airport location in exchange for cheaper fares. Thus a new model to run an airline emerged.
So, how does the low cost carriers manage to cut its cost so much, constantly? Almost all of the successful low cost carriers have used a single aircraft model. In this way, they can save money by effectively utilising the flight crew and cabin crew from a single pool. Also, the airline can manage the skill set of MRO and all other support staff. However, in India, some low cost airline does not follow single aircraft type strategy. This is because they are a part of the full service group that utilises multiple aircraft types.
During the aviation boom in India, the airlines wanted to cater for all the segments in the market. Full service airlines also had completely owned low cost subsidiary and some carriers integrated low cost operation within its full service operation. Even though low cost operation enticed price savvy customers who otherwise wouldn’t have taken to the air, it also entices some full fare customers. The growth of low cost operation cannibalised the full service operation in more way than one. Both the full service and low cost arm had to optimise their aircraft usage, routes and timetables so that they don’t compete against each other. In the end, the focus was on neither.
In the developed western markets, the low cost carriers operate point to point from a less congested out-of-the-city airport that charges less takeoff, landing and parking fees. But, in India, the low cost carriers operate from the same congested airports from which full service carriers also operate. Hence, the low cost operators do not save money from the takeoff, landing and parking fees. For a normal customer, the difference between flying a low cost and a full service airline is minimal when compared to Europe or US. For a short flight, the customer would be willing to sacrifice the additional services, such as IFE, for a lesser fare.
The pace of the growth in the aviation industry had outpaced the infrastructure growth that supports aviation industry. Airports became congested and hence the on-time performance of various airlines came under pressure. For a low cost airline, one of the major drivers for cost saving is higher aircraft utilisation and lower turnaround time. Since the low cost operation is also using the same congested ageing infrastructure, they were unable to utilise the aircraft as much as they would have hoped. Boarding is normally quicker in western low cost carriers as seats are not reserved for the customers. Early customers get better choice of seats. Due to the mandate from the Indian Government for mandatory allocation of seats, the Indian low cost carriers were unable to board passengers in quick time.
The “Low cost” brand image that the western airlines generated helped them to take some bold steps that no full service airlines even thought of. For example, the 100% usage of website for bookings, using own reservation system, minimal code share and loyalty programs were some of the innovations of the low cost industry. Also, these airlines in the western market de-bundle the fare they charge to fly a customer. A full fare airline charge fare that includes food, In Flight Entertainment (IFE), baggage handling and other services. The low cost carriers made all the additional services other than flying optional. If a customer wants to check-in a baggage or wants a priority boarding or wants an in-flight meal, the customer has to pay extra money along with the fare. This gives the customer extra benefit in terms of picking and choosing only the services that are required. Low cost airlines are looking for generating incremental revenue from these services in the coming years. Some airlines even think in terms of charging the customer for washroom usage on board and opening of casino on board. However, in India any such innovation drive from the low cost industry is yet to emerge.
In terms of generating auxiliary revenue, the low cost carriers in developed markets sell packages containing flights, hotels, car hire and other related services. For Indian carriers, these kind of packages may not look attractive now, but it is certainly an area to look at in the near future.
Generally, the fare structure for a low cost carrier in the European market is very simple. They only sell one way point to point fares. A return trip consists of two one way fares. The Indian low cost carriers, like their US peers, sell more than point to point fares. Carriers like IndiGo offer return fares with a discounted price. Also, it lets customer to book multi segment flights. With these types of fares, the revenue for each segment for that particular seat is lesser than that of point to point fares. In order to accommodate multi segment fares, the airline has to sacrifice some low cost point to point fares and hence is at the risk of not luring a price savvy customer who might opt other modes of transportation instead. This may not be a bad strategy as the load factor could be better in some regions by issuing multi segment fares rather then by issuing simple point to point fares. This calls for extreme proactiveness from the airline to dynamically change its fare structure based on the demand.
The growth potential for the airlines industry is enormous in India. Low cost airlines grow more than full service airlines in terms of passengers transported year on year. However, the cost saving potential of low cost carriers in India is limited as they share the same highly congested ageing infrastructure with full service airlines and are not as innovative as its western peers. Building the infrastructure takes years; so low cost airlines need to innovate more to compete among each other and with the full service airlines.
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