Scoot airlines

Singapore airlines launched a low cost medium and long haul airline Scoot today. Scoot will be initially operating to Sydney and a couple of other holiday destinations. It is believed that Scoot will compete with Air Aisa X and JetStar in the APAC long haul low cost market.

Scoot starts with four 777-200 aircraft inherited from its parent, Singapore Airlines. Scoot will use the same airport as SIA and will fly to main airports in destination. All the 777 flights operate in a two class structure.

Now, what is the difference between Singapore Airlines and Scoot? Both use the same airport and similar aircraft for its operation. Labour market is quite flexible and productive in Singapore already and hence Scoot may not be able to make further savings from the labour market. One of the major differences is the way Scoot is marketed. The official colours and the cool nature of the official adverts are refreshing. Also, Scoot, like any other low cost airline, has debundled its entire product. Customers without hold baggage and those who are ready to starve for the duration of the flight are rewarded with lesser priced ticket.

The two class configuration also allows to carry 15% extra customers in each flight. Will these minor differences entyce travellers to take Scoot? At the moment, Scoot is targeting leisure travellers. These kind of travellers do have check-in baggage and hence have to pay for it and most people would prefer to have something to eat during long flights. Therefore most of the passengers would use the full service, that is, seat bag and food.

Even after paying for bags and food, if the fare is cheaper than Singapore Airlines, will it attract regular Singapore Airlines customers? In such a case wont Scoot cannibalise its parent company's revenues?

During economic downturns, people generally cut back on their holiday expenditures, especially on the long haul holidays. Scoot is positioning themselves to cater for a segment which is diminishing. On top of this, as long as Scoot competes with JetStar and Air Asia X, it will be a healthy competition. But, if it starts eating SIA's market share, it will pose an interesting dilemma for its parent company.

Will the idea of Scoot take off? Even if it does, will it cannibalise SIA? Only time will tell.

Improving air travel efficiency in India

Most of the airports in India operate on single runway. Even Mumbai airport, which has two operational runways, operate on one runway most of the times. Two operational runways, when used simultaneously, supports more aircraft movements as one runway can be dedicated to take offs and one for landing. However, the secondary runways in Indian airports, if present, are either small to handle all kinds of aircraft or intersects with the main runway thereby restricting its size for usage (like the one in Mumbai).

Hence, it is important to think of achieving operational efficiency using a single runway. To put it crudely, the Indian airports must think about ways to reduce the time the aircraft uses the runway for take off and landing. By some means, if the time taken by an aircraft in a runway be reduced, more number of aircrafts can be handled per given time. This, of course, must consider all the safety and separation standards.

Gatwick airport, based in London, is the busiest single runway airport in the world. It handles 52 aircrafts (take offs plus landings) per hour at peak time. Even though the mumbai airport is running on 100% capacity, it only handles 36 aircrafts per hour and Chennai airport can only manage 27 per hour. It clearly means that the runways in India can be utilised even further without making major changes to the existing physical infrastructure. In Gatwick, take offs and landings occur one after the other in a pre-decided sequence. One aircraft lands and exits the runway and while the next aircraft approaches the runway, another aircraft would use the runway for take off inbetween. This operation is deemed to be safe and is well within the rules of operation.

This mode of operation is viable in Gatwick mainly because of two factors. The technology they use to schedule the aircraft arrivals and departures and the rapid exit taxiways. The technology is provided by a company named NATS, which manages the air traffic control for the airport. The software can schedule the aircraft well in advance so that it allows the controller to control the take offs and landings from the single runway. Enormous amount of fuel is wasted when the aircraft is sent to holding patterns before getting a slot to land. NATS software would enable to controller to delay the aircraft from the origin rather than sending it in holding pattern.

Another feature of Gatwick airport is the rapid exit taxiways. With these exits, the aircraft don't have to slow down completely before leaving the runway. In most of the Indian airports, rapid exit taxiways do not exist. Hence the aircrafts have to completely slow down before exiting. This, in turn, means that the aircraft had to spend more time than required on the runway. Indian airports should explore the options of creating rapid exit taxiways to improve their runway efficiency.

Also, after exiting the runway, only a limited number of gates are present in some of the airports in India. Baring the newly constructed airports, almost all the older ones only have a handful of boarding gates. Hence boarding is forced into stands. This is an inefficient way of boarding passengers as the airliner have to use buses or other modes of transportation to board and de-board passengers from/to the terminal. For the airlines, this is time consuming and not cost effective. Some of the major airport terminals are being refurbished and so this problem should disappear in near future. However, this is an important factor for damaging the efficiency of an airport.

On top of all these, to sustain the growth levels that are seen in the past decade, airlines must reach out more to its customers. One of the reasons for the airlines' growth story is the number of lower income group migrating into middle class in India. These are the future customers for the industry. Airlines must do whatever they can to lure these middle income group to take the air mode of transport. It is true that the airlines are luring this section of people with low fares. That is not enough. Airlines could possibly think of using a road transport service, like easy bus in Europe, to transport customers near their home at a low cost. Sometimes, it takes more than 50% of the air fare to travel to the airport. That has to change. Air travel should be made swifter and easier for the masses because air travel is not just for the elite. We are entering an era in India where air travel will be for everyone. The airlines and the airport authorities must start preparing now.

Propping up Air India

The Indian civil aviation ministry has announced a plan to save the ailing national carrier Air India, by injecting 5.7 billion dollars of tax payers' money through 2020. This will enusre that AI's commitments with boeing for 27 787s will be paid for. Also, the ministry is injecting 1.3 billion dollars now to pay for its working capital and also to pay the dues to its employees and to its suppliers. The ministry has also decided to postpone the decision on letting foregin carriers to invest on Indian airlines.

The decision is a huge blow for Kingfisher, one of the privately held airlines in India. Kingfisher is struggling to pay for its operation and is only operating less than one fourth of its normal schedule currently. It has also suspended almost all of its international operations. Kingfisher is banking on much needed foreign capital investment for survival and this news should be a huge blow for its survival. (Though it is hard to see who would invest on an airline which was losing money even during the boom years)

In a model where state owned airlines are operating alongside privately held airlines, there must be a level playing field to ensure fair competition. Air India is a less productive organisation than most of the private airlines in India. Injecting money into it without a proper roadmap to repair the structural inefficiencies is a huge mistake. Without proper structural changes, it will only be a matter of time before Air India needs another bail out.

On top of all this, the civil aviation ministry is unfair to private business by denying a bail out to Kingfisher and now bailing out Air India. The private airlines has to mandatorily serve a proportion of its flights to poorly connected patrs of the country. With the number of privately held airlines and the connectivity they provide and that too with better efficiency and productivity, Air India found it very difficult to survive. AI is an organisation that lived most of its life as a monopoly and hence letting inefficiency as a part of its business.

Air India is not too big to fail. If Air India fails, it is not going to create a major catostrophy in India. Privetely hald airlines have enough capacity and coverage to fill up the void. The civil aviation ministry should have tried to make Air India lean and efficient by cutting capacity on unprofitable routes and by cutting inefficient jobs and by outsourcing non core part of the business. Instead, the ministry is buying time by injecting more tax payers' money into a failing organisation without a proper road map. That is a mistake!

Problems facing Indian carriers

The aviation industry in India is facing a very difficult time at the moment. Air India has received government support whereas Kingfisher is struggling to even pay their day to day bills. All other airlines face some difficulty in an extremely uncertain environment due to higher oil prices, euro zone crisis and a near stall in global economic recovery.

Are the uncertain environments the only problem for the Indian aviation industry at the moment? On a closer inspection, it looks like there are few other factors that could influence the profits of the airlines. Here are a few

Fuel taxes:
If an airline purchases fuel in India, then it has to pay central and state fuel taxes. The central excise duty on aviation turbine fuel is 16% according to the Central excise website. This is significantly more than any of the developed nations. Hence, if an airline is operating an international route, they are at a competitive disadvantage with all foreign carriers on its operating cost to begin with. Hence, the Indian Government has failed to ensure a level playing field for Indian carriers.

On top of this, all domestic flights within India have to pay state fuel duties. Some states charge upto 30% tax on the fuel purchased in their state. The success of the Indian aviation is largely based on luring first class train passengers to take the air for a small premium. For this model to sustain, the higher fuel duties are not helping. It could be one of the reasons for airlines to be squeezed for profits.

When the cost of fuel is more, it implies that the airlines have to maintain a higher load factor to break even. If the load is weaker, it implies that the airline is bleeding money quickly.

Infrastructure:
India has seen a phenomenal growth in the last decade. However, the same level of growth has not happened in the airline infrastructure such as airports and runways. A new airport was constructed in Hyderabad and a new terminal in New Delhi, but this level of growth in Infrastructure is not enough to sustain the level of growth the airlines enjoyed.

The country's busiest airport in Mumbai is running on near full capacity. Also all other airports in the Metros are over utilised. It means that the aircrafts have to make a longer wait for take off and landing. This increases the fuel consumption, which adds heavily to the operating cost, and had to wait for the gates and other facilities provided by the airport. For example, the international terminal in Chennai airport (4th largest city in India) has only 6 gates. Hence, the turnaround time is naturally longer. As a result of this, the aircraft utilisation is lesser.

The Government of India should have planned airport expansions that keeps up with the pace of growth and should have thought about creating secondary airports for the low cost aviation market to flourish. In most of the airports, even the public transportation is not good enough.

Airport charges:
As a result of the squeeze on the airport infrastructure, the prices of using the facilities has gone up. Due to higher demand for the airport services such as usage of runways for take off and landing has increased over the years. These charges may not be completely transferred to the customers as the higher charges may put of millions of price savvy customers from not taking the air for travel.

Hence, the airport charges, along with higher fuel cost has put an upward pressure on the operating cost. To offset these costs, the airlines sometimes have to keep the fares artificially low to fill up the seats. With these low fares, they make losses, but without the low fares, they would have made even more losses. Again, the policies of Government of India is not helping the airline industry to thrive.

Preferential treatment:
Air India would have gone bust if not for Government's bail out every now and then. Air India should have been allowed to fail. If a state organisation is not making profits - especially due to structural deficiencies - then the organisation should be allowed to fail instead of using tax money to prop it up artificially. While Kingfisher is currently having the same problem, it does not get any help from the Government. This preferential treatment from the Government is not creating a level playing field for all the carriers. In a free market environment, all airlines must be treated the same way.

Mandatory routes:
All Indian carries must operate to the remote North Eastern states to ensure connectivity. Even though the demand is less from this part of the country, all carriers are forced to run a certain percentage of their flights to remote places in India. This is a 'Red tape' imposed on airlines that are already struggling to make any money. While the intention of the Government is correct in a way, its policies should ensure that these airlines don’t lose a lot of money by taking these unfavoured routes in its schedule.

Foreign ownership:
Foreign organisations can invest 49% in Indian airlines. However, foreign airlines are not allowed to invest in Indian airlines. Most of the Indian carries are relatively new to the business and need the in-depth knowledge of the established carries of the west. Indian carries need the IT systems that western carriers use to minimise costs. Also, foreign carriers can infuse money to expand the operations to realise the economies of scale. However, in the current climate, nobody is sure on how keen the foreign carriers would be to invest in India.

Still, the restriction on foreign ownership is blocking the Indian airlines form the technology and business experiences of the established airlines of the west.

Kingfisher airlines’ misery is partly due to the policies of the Government of India. However, when other airlines are keeping their head above water, Kingfisher's track record since the year it was founded is poor. By not making a profit for six consecutive years - which coincided with the biggest boom years in Indian aviation history - Kingfisher has let itself down.

India has a huge potential for aviation business. Statistically, on average even if Indians travel 15% of how much Americans travel, it would create a market that would be half as big as America. For that to happen, the Government of India should get its policies correct and should invest heavily on the infrastructure development. Until then, the sustainability of all Indian airlines is in danger.

The multi brand retailing story

The scene at the Indian parliament was very chaotic - even by its own standards - in the first nine days of winter session last year. The reason was to block one of the far reaching reforms; allowing 51% FDI investment in multi brand retailing. The government had to give up this proposal due to vociferous demonstration by the opposition in the parliament. It was hard to believe the same BJP led NDA government, that opposes the current reform, accelerated the pace of economic liberalisation between 1998 and 2004. It looked as though the opposition would oppose anything that comes to debate.

Some of the comments and observations were absolutely stupid. Some parties claimed that it would accelerate farmer suicide. Anna Haraze compared these international companies such as Wal-Mart and Tesco to the East India Company. He also spoke about how they would rule our country if we let them in.

To understand economic liberalisation, we must go back to 1991. Preceding this period, brands like Nike, Pepsi, and Sony etc were unheard of. On a normal weekend, an average Indian living in cities would watch a regional movie on a Doordarshan channel in a Solidaire TV sipping a bottle of gold spot purchased from local kirana shop. Maruti 800 was considered a luxury car. The richest had telephone. However, the usage is limited as not a lot had telephones at their homes.

Fast forward to current times. An average Indian living in cities goes to a mall, watches ESPN on a Sony television, sipping a Coke and talking on a Samsung mobile using Vodafone spectrum. Such is the quantum of change due to the liberalisation. Some people still say that the pace of liberalisation is too slow and more reforms need to be done to maintain or enhance the growth rate.

In the late eighties, there was a severe strain in the Indian balance of payments. India almost went bankrupt and was expecting IMF to bail out by providing soft loans. India had to pledge several tonnes of gold. IMF also enforced some economic reforms in exchange for the bail out. Indian politicians were so reluctant to make changes to the economic policies until this time. A lot of people in India believe that economic liberalisation is one of the biggest achievements of the congress government. That is not true. The changes were enforced on India in exchange for money. Indian politicians never had the will to reform in a large scale until a deep crisis hit normal life.

The fruits of liberalisation is still can be seen in India. The average GDP growth rate more than doubled and almost 300 million Indians (More than the population of USA) came out of deep poverty. However, one big problem remains. Managing food supply chain. For the most part of previous year the food inflation was well into double figures. India has a few inherent problems in terms of infrastructure and technology. More than 20% of fruits and vegetables rot before it even reaches the market, which puts a lot of pressure on the supply side of economics.

The retailers and middlemen that serve India do not have the money to invest in technologies and infrastructure to move fruits and vegetables to market before it rots. Food value chain in India is one of the worst in the world. From farmland to household, the value chain is long. In such a scenario, the farmer is unable to sell the products directly to the market and hence was paid lesser by one of the bigger middlemen who are a part of the value chain. Almost all the middlemen in the value chain do not add any value to the product. These middlemen do not have the expertise and technology to preserve the food items from rotting. Most of the food inflation in India is due to these structural inefficiencies. Without addressing these inefficiencies, manipulating supply and demand would only give temporary relief. For most of last year, RBI was using monetary policy tools to contain inflation rather than reform the food value chain structure.

This is exactly why the entry of multi brand retailer is essential. They have the money to create infrastructure and the technical expertise to preserve the food until it reaches the market. Multi brand retailers deal directly with the farmers and hence time to market reduces and structural efficiency increases. Therefore, the accessibility of food items to common man at affordable prices increase.

In rich countries, such as UK and EU, multi brand retailers play a crucial role. Also, many small retailers also co-exist. Hence the fear of Wal-Mart and Tesco trashing all small retailers is not true. Multi brand retailers increase the efficiency of food value chain, provide more jobs, provides technology and better price for farmers, and most importantly reduce the cost to end customers. The only people to lose out is the middlemen who made a lot of money without adding any value.

The government of India must decide whether they support shoppers and farmers or they support the middlemen who have served the country and its people poorly over the past decades. Or, they should wait for another deep crisis to push more reforms.

The EU and aviation emission

Aviation business was brought into the EU Emission trading scheme (EU ETS) from the New Year. This essentially puts a cap on the amount of fuel the airlines can burn in a given time and if they want to burn more fuel, then the airlines have to buy carbon credit from other companies that managed to save from their carbon emission limits. While there are certain questions still being asked about emissions allocation and carbon pricing volatility in the past years, the inclusion of aviation industry was largely debated in the courts of law and was finally given an approval.

Even though, aviation accounts for less than 2% of world carbon emission, the economics of this emission is little different to that of others. Carriers from other continents that are forced to pay for carbon emission within EU are not happy about this extra cost for their operation. But, for this writing I would like to argue for the case of EU carriers only.

Aviation business is unique in a few ways from other business as it is very high fixed cost intensive and fuel is the biggest cost for running the business. Also, the type of fuel required for running the business is one of the most expensive ones. Hence, whether EU laws are in place or not, airlines must control their fuel cost to stay competitive. A thermal power station can control the coal input to create electricity based on the forecasted demand. In other words they can convert all their fuel into money. However, in aviation, no matter whether the flight is full or almost empty, the fuel cost remains almost the same. Hence, the amount of fuel burnt is not tightly coupled with the revenue made from the flight. This may not be true in other participating industries in the EU emission trading scheme. Hence, this gives added incentives to airline industry to reduce their carbon emission naturally without any EU emission laws.

The cost of creating one ton of carbon from aviation fuel is far greater than cost of creating one ton of carbon from coal powered business. Also, the revenue earned by burning one kilo of aviation fuel is different to that of revenue earned by burning one kilo of other fossil fuels. In such a scenario, how can a single price for carbon across all industries using different fossil fuels work? Surely, the emission trading scheme would favour one industry over other.

Also, the basis of carbon allocation for industries is flawed. All emitters are given same amount of carbon emitting licenses that they emitted in the previous years. This favours large emitters and cripples small emitters from expanding. When the same is applied to the aviation industry, it would surely cripple small airlines from expanding due to high emission costs. The emission trading scheme should stop this 'Cap and Giveaway' scheme and should study the carbon reduction potential of each industry and also the carbon reduction potential of each fuel type. With a single code across the continent, the business landscape would be tilted with aviation industry in the wrong side of it.

Another flaw from the previous years was the over allocation of the carbon credits. However, EU claims that the carbon allocation problem is sorted from the 2012 period; there are two possible scenarios. If the carbon were priced lower in the market due to over allocation, then the industry would prefer paying lower for carbon emission instead of investing in carbon reduction. If the carbon were priced higher in the market due to under allocation, then the companies which wants to invest in carbon reduction would find it difficult to fund it. In either ways, the emission trading scheme is not encouraging companies to invest in carbon free technologies. Instead of paying for carbon emission, the airline industry could do better by investing in low emission aircrafts and technologies. It is inevitable for the airlines to move in that direction due to the cost of fuel and prevailing competition. EU ETS is a major distraction for the airline industry.

On top of all this, there is another severe danger. The danger of moving quickly towards bio fuel. Bio fuel emits very less carbon than the kerosene based aviation fuel. However, it has many other consequences. The population of the world has reached 7 billion last year. We do not have enough land and fresh water resources to feed all people three times a day. If Bio fuel picks up, then farmers might be forced to use their farming land to create bio fuels. This will cripple the health and safety of people, especially to those living in poor countries. The cost of malnutrition and other human costs should also be factored into, in the pricing of bio fuels. Again, EU ETS is a major distraction. It encourages the usage of bio fuels, instead of encouraging investing in genuine technologies that reduces carbon footprint.

Investment in renewable energy such as wind and solar is the way forward for most of the industries. It is a very long distant dream as far as aviation industry is concerned. Aviation industry should invest in technologies and aircrafts that reduces carbon emission. Any other laws or treaties such as EU ETS is a distraction towards that path.

The 'Mid-life' crisis

The growth of Indian software industry is phenomenal. Companies are growing at an alarming rate of more than 30% an year on average for the past ten years. The industry has provided big job opportunities as every big company on average hires around 20,000 net employees per Annam. It is not just the growth rate that looks enviable, but the profit margin is one of the biggest in the world. IT majors such as TCS and Infosys have managed to achieve more than 25% operating margin consistently. That is 25 dollars profit after all expenditures on a 100 dollar revenue.

Most of the IT companies in India focus on low end consulting or the bottom of the pyramid. If a designed architecture is provided, these companies are very good in implementing high level designed applications that fits to the architecture using the standard and existing processes. The business models adopted by the IT majors enables them to cut cost for its customers and at the same time provides a bit of value. Also, the difference in productivity by employees of Indian companies are generally more than that of their customers. This allows customers to save money on routine tasks such as maintenance of code and support of critical applications. This market is so huge that most IT companies in India fight for it at cut throat price.

Some companies are trying to break away from the bottom of the pyramid strategy. IT global majors such as IBM and Accenture are well established at the top of the pyramid as they provide high end consulting services to its customers. Although the revenue from high end consulting for TCS is only around 2.5% of its overall revenue, it is growing at around 50% per annum. As the growth was enormous at the bottom, most companies settle down comfortably there. It requires a cultural and attitude shift to move upwards in the pyramid. The cultural shift should start right at the top and proliferate till the bottom of the organisation.

The non existence of this cultural shift can be explained in terms of productivity achieved per person in an organisation. There is more money to be made as one moves up the pyramid. I have taken previous four years of financial data from TCS and Infosys (listed in BSE) and Cognizant technology solutions (listed in NASDAQ but operates from India) for the analysis. After analysing the revenue per person per financial year, it was found that TCS scores the lowest whereas Infosys was able to earn more revenue per person for the same period. As companies recruit in thousands every year, i have only counted half the new additions for the years for the productivity per person calculation to consider induction time for the employee into the company.


From the graph above, two points for discussion emerge. First, for all three companies, the productivity per person stays almost stagnant which confirms that the earnings from every employee on average remained stagnant. Secondly, how does infosys manage to extract more out of its employees than its competitors? This is an important question as the business model, employee utilization and most other parameters fairly remain the same as its competitors over a five year period.

For any company, if the productivity of an employee increases, it is equivalent to adding new employee at little or no additional cost and it in turn means earning more revenue with existing resources. In most of the big offshore development centers of IT majors in India, employees work extended hours to meet the deadline. However, the difference between touching in and touching out is not an ideal parameter for measuring the productivity of an employee. If an employee is capable of writing 100 lines of code or solving 5 tickets per day in a production system on average, then if the same employee can write 120 lines of code or solve 7 tickets on average in a day on average in the next year, that is the real definition of getting more out of an employee.

Some of the big problems with big offshore development centers are its distance from the city (which means longer hours of travel everyday), crowded atmosphere and some admin policies that eat productivity. For example, if an employee takes a tea break, say at 11 AM in the morning, one has to share the crowded infrastructure to take a meaningful break and get back to work. This takes around 30 to 45 minutes of the morning time. Most of this time can be avoided if coffee machines are installed as close as possible to the work desk and allowing employees to take coffee and snacks to the desk. Also, at least 30% of the employees smoke 3 cigarettes a day on average. In big development centers, the smokers have to get out of the building for a smoke. This again takes an hour on average from an employee's productivity. The same applies for the overcrowded canteens during lunch. If the infrastructure and admin rules are employee friendly, then it allows the employee to stay at the desk for a longer period of time thereby increasing the chance of producing more in the same amount of time as before. In a typical offshore development center where around 10,000 employees work, these simple measures could save at least 8000 person hours worth lost productivity every day. This is only a conservative estimate. It is true that these 8000 person hours are performed after working hours. But, that is an additional cost to the company in terms of additional electricity, security, transportation and mental fatigue if this persists every day.

Employees should be given more choice on how they want to work and still can completely follow the code of conduct and all security rules and guidelines. It can even go to an extent of using the time in the office bus in the morning for performing some activities that do not require network connectivity. This ensures human capital empowerment, which is the most important assets of these organisations.

The problem with productivity is not even talked about in the industry till now. This is because Indian IT majors are able to grow at mouth watering rates with an enviable operating margin. But, this operating margin is achieved due to the large addition from the elastic pool of college graduates every year, who work for less money. But, the simple fact is inflation is India is around 10% over the last few years whereas inflation in the western developed nations from where Indian IT companies get business is around 2%. There is an 8% gap in the value of what we earn every year. The productivity has to increase by 8% every year to stay where we are in real terms. This gap in real terms is adjusted partly due to the addition of low wage collage graduates in thousands every year.

At the moment, Indian IT companies are just a blip in the radar for companies like IBM and Accenture in premium consulting services market. IBM and accenture are aggressive in entering into non premium services while the Indian majors are trying to move up the ladder. When they meet, the IBMs and the Accentures will be in a better position. So, if the top line growth for Indian IT company stalls, which might happen sooner than we think due to the debt crisis in Europe which threatens to take the work economy into a double dip recession, then there will be enormous pressure on operating margin. This could lead to the organisation getting middle heavy and in worst cases, this could lead to job losses as well. To stop this from happening, the IT majors have to think about increasing productivity both by entering into premium services and by finding ways to get more out of existing resources.

Productivity increase could be the difference between sustained growth and a "Mid-life crisis" for Indian IT companies.