Situation It’s a chilly winter evening in Bangalore and Vijay Mallya looks out of the window with a Kingfisher Beer pint in his hand. He looks out at the reddish horizon and contemplates the future of his airlines – The Kingfisher Airlines. He has recently bought the first low cost carrier in India, Air Deccan. With the sale of Air Deccan, the industry has seen a correction of sorts, in terms of the cost of travel. With increasing oil rates and the turmoil that the airlines’ industry is currently in, Mallya needs to come up with a strategy to make best of the low cost carrier.
He also needs to pull out the airlines of the losses it has been making since the past few years. Objective The objective is to study the current scenario in the Airlines Industry in India and to analyse the possible strategies that Kingfisher Airlines can adopt to increase the market share of Kingfisher Red to be the market leader in the low cost airlines segment. Company Background: Kingfisher Red, known formerly as Simpli-fly Deccan and prior to that as Air Deccan, is a low-cost airline run by Kingfisher Airlines. It is headquartered in Mumbai, India.Formerly known as Air Deccan, the airline was previously operated by Deccan Aviation. It was started by Captain G. R. Gopinath.
Less than expected growth in the Indian aviation sector coupled with overcrowding and the resultant severe competition between airlines resulted in almost all the Indian carriers, including Air Deccan, running into heavy losses. After initially trying to get in fresh capital for running the airline, Captain Gopinath eventually succumbed to pressures for consolidation. On 19 December 2007, it was announced that Air Deccan would merge with Kingfisher Airlines.
Since Indian aviation regulations prohibited domestic airlines from flying on international routes until they had operated in the domestic market for five years, it was decided to instead merge Kingfisher Airlines into Deccan Aviation, following which Deccan Aviation would be renamed Kingfisher Airlines. In its present avatar as Kingfisher Red, the airline faces stiff competition from SpiceJet, IndiGo Airlines, Jet Lite and GoAir. Kingfisher Airlines posted a net loss of Rs 1,608. 82 crore for fiscal 2009. Airlines Industry in IndiaIndian aviation industry ranks 4th in the world after USA, China, and Japan in terms of domestic passenger volume, with a domestic passenger base of 43. 29 million. The Indian aviation industry is among one of the fastest growing industries.
The number of scheduled passenger airline operator has grown to 15 and the number of aircraft in their fleet has risen to more than 400. India now has 82 operational airports against 50 in 2000. International flights have increased to 706 flights per week.
Due to enhanced opportunities for international connectivity, 69 foreign airlines from 49 countries are flying into India.The government’s open sky policy has lead to many overseas players entering the market and the industry has been growing both in terms of players and number of aircrafts. With the liberalization of the Indian aviation sector, the aviation industry in India has under gone a rapid transformation.
From being primarily a government-owned industry, the Indian aviation industry is now dominated by privately owned full-service airlines and low-cost carriers. Private airlines account for around 80-85 per cent share of the domestic aviation market.Earlier, air travel was a privilege only a few could afford, but today air travel has become much cheaper and can be afforded by a large number of people. According to Director General of Civil Aviation(DGCA) passenger data, passenger carried by domestic airline operators have grown to 33. 9 million during January-August 2010 as against 28. 4 million over the same period a year ago.
The share of private airlines constitutes around 82% of the sector of domestic aviation market. Jet Airways along with its budget arm Jet Lite captures the highest 27% market share.Kingfisher airlines ranks second with 20% market share. NACIL (National Aviation Company Limited) which, was formed in 2007 with the merger of two national carriers Air India and Indian Airlines, captures 18. 3% share. The airline with the largest fleet in the domestic market is Air India, but its market share of the number of passengers is low, and therefore results in a low fleet hare to passenger share ratio of 0.
62. Kingfisher leads the full service carrier segment with a fleet to market share ratio of 0. 95, but this also includes figures from their low cost Kingfisher Red service.Passenger market share leader Jet Airways is at 0. 82 and this includes their low fare service Jet Konnect. For a better comparison between Jet and Kingfisher, if we add-up the numbers of Jet’s other low fare subsidiary JetLite, the total group ratio of Jet at 0.
865 still remains well behind Kingfisher’s 0. 95, suggesting a far more aggressive fleet utilisation strategy by Kingfisher. Expectedly, the low fare carrier side shows much higher ratios, due to their higher usage of aircraft and also the higher number of seats offered per flight due to an all-economy configuration.The laggard is JetLite with a ratio of 1 while SpiceJet and IndiGo are neck and neck at 1.
75 and 1. 76. However, GoAir, has an industry leading, fleet to passenger share ratio of 2. 04. Clearly the airline has shaken off the demons of the past and is aggressive in their fleet utilisation. The civil aviation sector witnessed a slowdown in passenger traffic during 2008 due to a sharp rise in fuel prices coupled with global economic slowdown.
Situation started improving in the second half of 2009. In 2009-10, the passenger traffic increased to 123. 73 million passengers from 108. 88 million in 2008-09.For the first time, in 2009 -10 the passenger traffic crossed 120 million mark and has recorded 123.
73 million (34. 37 million international and 89. 36 million domestic passengers) passengers. Passenger traffic (million) Source : AAI Traffic News June 2010 According to Director General of Civil Aviation passenger data, passenger carried by domestic airline operators have grown to 33.
9 million during January-August 2010 as against 28. 4 million over the same period a year ago. Recent Trend According to Airport Authority of India (AAI), the total aircraft movement increased by 3. 3% from 329. 84 thousand to 340. 9 thousand during Apr-Jun 2010 as compared to Apr- Jun 2009. The international aircraft movements have shown an increase of 7.
1% during Apr-Jun 2010. The higher growth in traffic has witnessed in Kolkata, Trivandrum, Amritsar and Delhi airport due to increase in frequency by the existing airlines. The civil aviation traffic with respect to passenger and aircraft movements is growing from past few years. The total passenger traffic handled during Apr-Jun 2010 raised by 20% to 35. 29 million from 29. 35 million over the same period previous year. During the first six months of 2010, world passenger traffic increased by 5. % with international traffic increased by 6.
7% and domestic passenger traffic increased by 5. 3%. The highest passenger traffic growth has reported in the Asia Pacific region.
Demand Drivers Air traffic in the country has grown substantially over the past few years with a boom in the tourism industry as well as the introduction of low-cost airlines. The air transportation helps growth of interior regions which in turn helps industry / business sector to produce products at lower costs enabling competitiveness in the global market. India is one of the fastest growing economies in the world.Its share in the international trade and tourism is increasing gradually. Increase in income level (especially disposable income) along with introduction of low cost airlines has made air travelling affordable for the middle-class people. This results in growing demand for new airports in India.
The Marketing Triangle One can better understand the workings of airlines by looking at its marketing triangle. There are three entities in the entire transaction: * Customer: He is the person who wishes to satisfy his need i. e. of transportation from one destination to another.
Company: This is both the dreamer and the offerer. It is the various airlines, which offer its aviation services to satisfy the customers demand for transportation from one destination to another. For e.
g. : The Indian airlines * Provider: these are finally the people who interact with the customers. They are the ones who carry out the final transaction.
The customers actually come in contact with the service provider and not the company. For e. g.
: The Airhostess and the crew. The interaction between these three parties while providing the service takes place in the following manner: The Company is established with the basic objective of providing the specific transport service. Thus the airline industry with players like Indian airlines, jet airways, Sahara airways etc came into being.
* The air service provider that is the company communicates with the customer and makes him aware of the services. It makes promises to the customer through advertising through various media. For e. g. : the TV ad of Indian airlines advertising its new sleep in seats. * The customer who gathers knowledge about the service approaches the company for availing his service in order to satisfy his need.
This interface of the customer with the company is through the customer’s interaction with the providers of the company. The company enables its promises to the customers through setting up facilities to deliver the promises that is by setting up ticket and enquiry counters. The outcome of the “to be transaction” is determined by the interaction between the provider and the customer.
Hence the company aims at offering its providers with the required infrastructure and training to optimize the quality of the transaction.For eg: Yearly employee training programs and performance appraisals done by Sahara airlines. The three strategic points where the provider and the customer interact are: * Ticket purchase at the airline counter or the ticket agency. * Checking in. * During boarding. * During disembarkation Kingfisher Airlines * Kingfisher Airlines is an airline group based in India. Its head office is Kingfisher House in Vile Parle (East), Mumbai. Kingfisher Airlines, through its parent company United Breweries Group, has a 50% stake in low-cost carrier Kingfisher Red.
Kingfisher Airlines is one of six airlines in the world to have a 5-star rating from Skytrax, along with Asiana Airlines, Cathay Pacific, Malaysia Airlines, Qatar Airways and Singapore Airlines. Kingfisher operates more than 375 daily flights to 71 destinations, with regional and long-haul international services. In May 2009, Kingfisher Airlines carried more than a million passengers, giving it the highest market share among airlines in India. * Kingfisher Airlines is also the sponsor of F1 racing outfit, Force India, in which Vijay Mallya also owns a stake. Kingfisher Airlines was established in 2003. It is owned by the Bangalore based United Breweries Group.
The airline started commercial operations in 9 May 2005 with a fleet of four new Airbus A320-200s operating a flight from Mumbai to Delhi. It started its international operations on 3 September 2008 by connecting Bangalore with London. * On 7 June 2010 Kingfisher became a member elect of the Oneworld airline alliance when it signed a formal membership agreement. A firm date to join the alliance will be announced once the implementation process is underway; it possibly may take 18 to 24 months. Kingfisher Red * Kingfisher Red, known formerly as Simplifly Deccan and prior to that as Air Deccan, is a low-cost brand run by Kingfisher Airlines. It is headquartered in Mumbai, India. * Formerly known as Air Deccan, the airline was previously operated by Deccan Aviation. It was started by Captain G.
R. Gopinath and its first flight took off on 23 August 2003 from Hyderabad to Vijaywada. It was known popularly as the common man’s airline, with is logo showing two palms joined together to signify a bird flying.The tagline of the airline was “Simpli-fly,” signifying that it was now possible for the common man to fly. The dream of Captain Gopinath was to enable “every Indian to fly at least once in his lifetime. ” Air Deccan was the first airline in India to fly to second tier cities like Hubballi, Mangalore, Madurai and Visakhapatnam from metropolitan areas like Bangalore and Chennai.
* On 25 January 2006, Deccan went public by filing a red herring prospectus with the Securities and Exchange Board of India. Deccan planned to offload 25 percent of its stake in the initial public offering (IPO) that opened on 18 May.However, due to the stock market downturn at that time, Air Deccan’s IPO barely managed to scrape through, even after extending the issue closing date and reducing the price band. * Less than expected growth in the Indian aviation sector coupled with overcrowding and the resultant severe competition between airlines resulted in almost all the Indian carriers, including Air Deccan, running into heavy losses.
After initially trying to get in fresh capital for running the airline, Captain Gopinath eventually succumbed to pressures for consolidation. On 19 December 2007, it was announced that Air Deccan would merge with Kingfisher Airlines.Since Indian aviation regulations prohibited domestic airlines from flying on international routes until they had operated in the domestic market for five years, it was decided to instead merge Kingfisher Airlines into Deccan Aviation, following which Deccan Aviation would be renamed Kingfisher Airlines. This was because Air Deccan was the older of the two airlines, and therefore would be the first to qualify for flying on international routes. The merger became effective April 2008, with Vijay Mallya becoming the Chairman and CEO of the new company, while G. R.
Gopinath became its Vice-Chairman. competitors * SPICEJET * SpiceJet, India’s leading low cost airline, is a reincarnation of ModiLuft. It is promoted by Ajay Singh and the Kansagra family. SpiceJet marked its entry in the Indian skies with Rs. 99 fares for the first 99 days, with 9,000 seats available at this rate. * This deal was followed it up with a Rs.
999 promotional scheme on select routes. Their marketing theme was “offering low ‘everyday spicy fares’ and great guest services to price conscious travellers”. Their aim is to compete with the Indian Railways passengers travelling in air conditioned coaches. Today, Spicejet operates 21 Boeing 737-800/900ER aircraft across 19 destinations and has a 12% share of the Indian market. * INDIGO * IndiGo Air or IndiGo Airlines sports the deep colour of IndiGo as its signature colour. It is a privately owned low-cost domestic airline based in Gurgaon with Indira Gandhi International Airport as its main base. IndiGo Airlines started operations on 4th August 2006 and is owned by InterGlobe Enterprises and Mr.
Rakesh Gangwal. This airline is amongst the best, offering professional services, economical prices with great deals and discounted airfares. It operates to all the major cities of India.IndiGo air tickets can be booked online and the services provided are user friendly while at the same time, extremely comprehensive. IndiGo Airline provides what no other airline can. * JET LITE * JetLite, formerly Air Sahara, is an airline based in Mumbai, India owned by Jet Airways, the airline operates scheduled services connecting metropolitan centres in India, it operates 110 flights daily. The airline also provides helicopters which are available for charter services and aerial photography. * The airline was established on 20 September 1991 and began operations on 3 December 1993 with two Boeing 737-200 aircraft as Sahara Airlines.
Initially services were primarily concentrated in the northern sectors of India, keeping Delhi as its base, and then operations were extended to cover all the country. Sahara Airlines was rebranded as Air Sahara on 2 October 2000, although Sahara Airlines remains the carrier’s registered name. On 22 March 2004 it became an international carrier with the start of flights from Chennai to Colombo. It is part of the major Sahara India Pariwar business conglomerate. The uncertainty over the airline’s fate has caused its share of the domestic Indian air transport market go down from approximately 11% in January 2006 to a reported 8. % in April.
* Jet Airways announced its first takeover attempt on 19 January 2006, offering US$500 million (2000 crore rupees) in cash for the airline.  Market reaction to the deal was mixed, with many analysts suggesting that Jet Airways was paying too much for Air Sahara. The Indian Civil Aviation Ministry gave approval in principle, but the deal was eventually called off over disagreements over price and the appointment of Jet chairman Naresh Goyal to the Air Sahara board. Following the failure of the deal, the companies filed lawsuits seeking damages from each other. A second, eventually successful attempt was made on 12 April 2007 with Jet Airways agreeing to pay Rs. 1,450 crore ($340 million). The deal gave Jet a combined domestic market share of about 32%.
* On 16 April Jet Airways announced that Air Sahara will be renamed as JetLite. The takeover was officially completed on 20 April, when Jet Airways paid Rs. 400 crore. * Jetlite has been repositioned as a value carrier offering attractive low fares. It stopped offering complimentary food on board and now offers it for purchase separately.
Jet Airways has withdrawn from many of its routes and has replaced it with Jetlite operations to compete with full service carriers operating on those sectors. Market Share Reference: Directorate General of Civil Aviation Load Factor Trend Reference: Directorate General of Civil Aviation Cancellation Data Reference: Directorate General of Civil Aviation Airline Industry- Life Cycle From the mid-1990s to the beginning of the new millennium, the aviation industry faced one of the biggest booms in its history.Worldwide increases in GDP, riding on the wave of the new economy, and a greater demand for travel resulting from globalization stimulated the airlines to healthy growth of around 4-6 percent per year. At the beginning of 2000, economic slowdown brought an end to the growth phase, and the terrorist attacks of 11 Sep 2001 and the SARS virus in 2003 exacerbated the situation. There has always been a fundamentally precarious balance within the industry profit generation and loss. One of the biggest exceptions to this rule occurred during the 1990’s, when the global economic upturn boosted travel demand.
Furthermore the major airlines gained from the new economy in terms of computer technology progress, which enables new business processes such as ‘network management’ or ‘yield management’, e-commerce and e-services to be supported. Quantitative analyses permitted the improvement of demand forecasting and the optimization of seats supplied in the network. Nevertheless, during these years, a group of airlines, knows as low-cost carriers, were able to generate profits and positive growth by generating a cost advantage, no frills, and a point to point network business model, in contrast to the traditional hub and spoke national flag carriers.Nowadays, the LCC business model is quite popular and is advocated as an alternative, or sometimes as a complement, for the traditional airline business model, which, on the contrary, aims to cover all market segments and city-pairs. Airline’s is a typical industry where the net margins are very low. This could be attributed mainly due to the high fuel costs, Govt. Taxes and force from people to get the cheapest travel.
So if we look at the below figure we understand there is a continuous crest and trough’s in the industry life cycle. Every time the industry goes down in margins the major players try to renew it with various offerings.In the last quarter of 2000, the fundamentally precarious balance between revenue and cost turned negative. The crisis initially started as demand slowdown followed by the cost impact of overcapacity from the supply side. Different from the situation for airlines during the Iraq war in 1991, some other additional factors turned the crisis into a perfect storm for global aviation: 1) The crisis of 2000 started at the time of a positive peak just before an economic downturn 2) The terrorist attacks of September 11 generated fear of air travel and constituted an exogenous demand shock.
) The 2003 Iraq war, together with the SARS epidemic, caused a second exogenous demand shock. 4) The full-service carriers were making few business innovations compared with the network and yield management practices developed in the 1990s The low cost business model was developed in the early 1970’s in the US but it was after more than 2 decades that it came to India. It was initially perceived a regional phenomenon, limited to a niche market which was willing to pay only less and connecting secondary city-pairs.The competitive pressure associated with the evolution of low cost models affected the traditional airlines models. Their reactions was to tend to adopt cost cutting strategies as they were driven to adopt some of the characteristics of the low-cost airlines in an attempt to survive.
Challenges faced by Aviation Industry The growth in the aviation sector and capacity expansion by carriers have posed challenges to aviation industry on several fronts. These include shortage of workers and professionals, safety concerns, declining returns and the lack of accompanying capacity and infrastructure.Moreover, stiff competition and rising fuel costs are also negatively impacting the industry. 1.
Employee shortage: There is clearly a shortage of trained and skilled manpower in the aviation sector as a consequence of which there is cut-throat competition for employees which, in turn, is driving wages to unsustainable levels. Moreover, the industry is unable to retain talented employees. 2. Regional connectivity: One of the biggest challenges facing the aviation sector in India is to be able to provide regional connectivity.What is hampering the growth of regional connectivity is the lack of airports. 3. Rising fuel prices: As fuel prices have climbed, the inverse relationship between fuel prices and airline stock prices has been demonstrated.
Moreover, the rising fuel prices have led to increase in the air fares. 4. Declining yields: LCCs and other entrants together now command a market share of around 46%.
Legacy carriers are being forced to match LCC fares, during a time of escalating costs. Increasing growth prospects have attracted & are likely to attract more players, which will lead to more competition.All this has resulted in lower returns for all operators. 5. Gaps in infrastructure: Airport and air traffic control (ATC) infrastructure is inadequate to support growth.
While a start has been made to upgrade the infrastructure, the results will be visible only after 2 – 3 years. 6. Trunk routes: It is also a matter of concern that the trunk routes, at present, are not fully exploited. One of the reasons for inability to realize the full potential of the trunk routes is the lack of genuine competition.
The entry of new players would ensure that air fares are brought to realistic levels, as it will lead to better cost and revenue management, increased productivity and better services. This in turn would stimulate demand and lead to growth. 7. High input costs: Apart from the above-mentioned factors, the input costs are also high. Some of the reasons for high input costs are: Withholding tax on interest repayments on foreign currency loans for aircraft acquisition. Increasing manpower costs due to shortage of technical personnel. . Seasonal Business: Airline is an industry that’s seasonal, having peak season during april may, holidays etc.
But the trend in slightly shifting as the number of people has been increasing. 9. Exogenous events can suddenly affect demand- As said earlier in the life cycle, any exogenous events could have a huge negative impact in occupancy rate. In the near future, Kingfisher Red may have to face significant challenges such as: * Realigning their competitive strategies to become profitable. More Players entering the Low cost carrier segment.
* Pursuing aggressive cost reduction. * Constraints due to poor infrastructure for aviation in India. EMERGENCE OF LOW-COST AIRLINES IN INDIA For the first 15 years of deregulation the demand for scheduled passenger air transportation was driven by the constraints and confines of its providers – principally, the network carriers.
Network carriers were able to avoid cost-side pressures by focusing on revenue side strategies – largely centered on the high – yield business traveller.The focus led to innovations like sophisticated global distribution system, revenue management, and frequent flyer programs that helped the airlines segment demand. You are – or we were – the linchpin in that strategy, as business and other time–sensitive travellers accounted for only 20% of the airline traffic, but for 80% of network airline. This strategy worked because the business traveller grew accustomed to paying high fares and often did not have an attractive alternative to the high fare, and also because the airlines enjoyed a greater ability to control the number of seats available to discretionary travellers.In short, in the post-regulation world travellers – particularly business traveller – did have the greater option than before, but, even with the impact of the occasional low-fare carrier, they were often at the mercy of major carriers when it came to price.
In effect, demand for passenger service was driven, even controlled, by the supply that network carriers were willing to deploy in the market. The above reasons and the price transparency that the internet has created for all types of passengers have led to the emergence of a new breed of low-cost carriers.These developments have seriously compromised the ability of legacy carriers to charge higher prices to travellers on the routes where they overlap with the low-cost carriers.
At the end of 2000 the demand for the business class and other high-end products fell dramatically, as the corporate travel managers became more cost-conscious. Customers continue to fall into segments with regard to demand for products on offer. Not every airline will be able to satisfy every customer but the entrance of low cost airlines has pushed customer segmentation.There is a sharper focus for the shorter routes and the target is the price conscious and quality conscious customer. This has led to stiffer competition for the non–business passenger and price conscious business passenger. Low Cost Carriers The entry of these low cost carriers has several far reaching implications on the aviation sector in India. Now low cost airlines have proliferated and offer real, lasting competition to their network rivals. This generation of low cost carriers has newer fleets, a better on-time performance and completion factors than the first wave of post-deregulation start-ups.
The fare transparency delivered by the internet and the expansion of low cost carriers has increased the price-sensitivity even of business passenger. The demand for more affordable air travel is quite robust. Increasing numbers of business travellers use low fare airlines as a matter of corporate travel policy whichever country they have been launched in. It has to a very large extent influenced the mass transportation and domestic tourism.
Typical low-cost carrier business model practices include: 1. A single passenger class 2.A single type of airplane (commonly the Airbus A320 or Boeing 737), reducing training and servicing costs). 3. A simple fare scheme (typically fares increase as the plane fills up, which rewards early reservations) 4. Unreserved seating (encouraging passengers to board early and quickly) 5. Flying to cheaper, less congested secondary airports and flying early in the morning or late in the evening to avoid air traffic delays and take advantage of lower landing fees 6. Short flights and fast turnaround times (allowing maximum utilization of aircraft) 7.
Simplified routes, emphasizing point-to-point transit instead of transfers at hubs(again enhancing aircraft utilization and eliminating disruption due to delayed passengers or luggage missing connecting flights) 8. Emphasis on direct sales of tickets, especially over the Internet (avoiding fees and commissions paid to travel agents and Computer Reservations Systems) 9. Encouraged use and issuance of the electronic ticket 10. Employees working in multiple roles, for instance flight attendants also cleaning the aircraft or working as gate agents (limiting personnel costs) 11. Free” in-flight catering and other “complimentary” services are eliminated, and replaced by optional paid-for in-flight food and drink (which represent an additional profit source for the airline). 12. Aggressive fuel hedging programs. 13.
“Unbundling” of ancillary charges (showing airport fees, taxes as separate charges rather than as part of the advertised fare) to make the “headline fare” appear lower. Strategies of LCC: Cost advantage: Low cost airlines provide air service at costs 25-50% lower than a full service airline.The cost structure of a full service Indian airline is given in the figure below: An Illustration of the Cost structure of Full Service Airlines as a % of Operating Expense: (Source: ICRA report, Civil Aviation, April 2005) Breakdown of Cost savings (Source: www. indiastats. com) The cost advantage of the low cost carrier is a result of savings on various factors given below: Full service airlines provide their passenger with many attendant services like hot meals, frequent flyer programmes, spacious legroom etc.
While low cost carriers do not provide frills like hot meals and frequent flyer programmes and work with the minimum number of air hostesses on the flight. Removing business class, storage space for the meals and limited seat pitch (maximum inclination of the seat) makes space for additional seats which can increase the seat capacity of the plane by 20%. Low cost carrier aircrafts take less time to leave the airport after landing which increases their flight time by 20-25% as compare to the full service carrier aircrafts.These airlines do not issue tickets to passengers to save costs on printing, mailing and processing tickets.
Passengers are issued a booking number, which they quote at airport check-in, and present their photograph to collect their boarding pass. They also save on distribution costs by disinter mediating travel agents and central reservation systems and selling through internet and call centre. They also try to minimize capital costs and costs of the crew and hangerage. In Europe and the U. S. low cost airlines avoid flying into the mainland airports and save on high parking and landing fees.India has very few secondary airports, because of which the airport charges constitute a sizeable portion of the cost structure that could be reduced considerably. The LCC Phenomenon in India Southwest Airlines, now a major carrier in the U.
S. , operating local routes in Texas in the 1970s pioneered the low cost carrier business model. In India, the model was introduced in 2003 by Air Deccan. However, the same descriptive label masks the significant differences in ways the model has worked in India vs. U.
S. First, in terms of market share, LCCs accounted for almost 30% of all domestic passengers carried in 2006.As of November 2006, it rose to 35%. This rate of market penetration of LCCs is remarkable given that the market share was zero in August 2003. Low cost carrier operations account for 44% of all flights within India compared to 19% in the U. S.
. The second significant difference has to do with the relationship between low cost and low fare. In U. S. , the LCCs offering low fares are also truly low cost operations.
In India, the airlines that offer low fares are in reality not low cost operations. They are LCCs only in name. Among the LCCs in India, Spice Jet has the lowest unit cost at 6. cents per ASK, which is comparable with Southwest, Easy Jet, and Jet Blue. But this is more than twice that of the best performer, Air Asia with unit cost of slightly over 3 cents per ASK.. This flies in the face of what LCCs outside India like Ryanair have done when they were in a similar stage of their growth. Ryanair focused on lowering costs while finding ways to enhance revenues by selling food and drinks during flight to captive passengers and selling services such as insurance, hotel reservations, and rental cars on its website.
Deccan seemed to have followed similar strategy in terms of charging for baggage (by offering limited baggage allowance) and food, and expanding capacity but with a crucial difference that it did not share the obsession of Ryanair and Air Asia to reduce costs. Competitive analysis 1. REPOSITIONING TO “VALUE CARRIER” AIRLINES Owing to the rising ATF prices and increasing losses and massive cash crunches, intense competition and weak growth in price-sensitive demand India’s domestic LCC market appears to be shrinking.Three main players have employed the “value carrier” model which give higher benefits such as priority check ins, in flight F;amp;Bs, Better leg space, Comfort seating, Priority check ins, Rescheduling of travel plans at no extra cost etc. the priced is placed between low cost airlines and the high value ones. The players that adopted this strategy are: * ‘Kingfisher Red'(with former LCC Deccan’s recent absorption and rebranding by parent Kingfisher, it targets higher yielding passengers).
JetLite (the former Air Sahara) has also been re-branded as a value carrier. * GoAir with its newly launched GoComfort carrier Pure domestic LCC models left remaining are SpiceJet and IndiGo 2. FLEET OF AIRCRAFTS UTILIZED AIRLINE| TYPES OF AIRCRAFTS| JetLite| Boeing 737 series and Canadian Regional Jets 200 Series. | GoAir| Airbus A320s (leased and purchased)| SpiceJet| Boeing 737-800Boeing 737-900| Indigo| Airbus A320| AirDeccan/Kingfisher Red| 48 and 72 seater ATRs on the regional routes and the 180-seater A320 on the trunk routes. It is evident from the above table that the airlines flowing the point to point model tend to employ 1 or maximum two types of aircrafts in its fleet in order to save costs, but those following a hub and spoke utilize more in order to use smaller aircrafts for the short haul distances and the large ones for long haul distances. 3. MODELS ADOPTED AIRLINE| MODEL ADOPTED| JetLite| Point to point between metros, hub-n-spoke for non-metros to metros and vice-versa or between non-metros| GoAir| Hub/Point-to-point model| SpiceJet| Point-to-point, and regional hub-n-spoke | Indigo| Point-to-point model| AirDeccan/Kingfisher Red| Hub-n-spoke model|The airlines connecting only between metros and tier-2 cities follow the point-to-point model in order to increase frequency and concentrate on specific hubs in order to optimize costs, and the ones connecting metros to non-metros follow the hub-n-spoke model in order to connect all non-metros through one major hub.
But there are still others following a mixture of the two , i. e. they follow the point-to-point model for metros and the hub-n-spoke in regional areas. This helps the airlines operate between multiple locations and follow different strategies for different types of places in order to save costs. Present ScenarioLow cost v/s low fare In India, the airlines that offer low fares are in reality not low cost operations. They are Low cost carriers (LCCs) in name only.
Among the LCCs in India, Spice Jet has the lowest unit cost at 6. 2 cents per ASK, which is comparable with Southwest, Easy Jet, and Jet Blue. But this is more than twice that of the best performer, Air Asia with unit cost of slightly over 3 cents per ASK. There were operating losses for Air Deccan in 2007-08. Typically, LCCs provide point-to-point service avoiding connecting flights and baggage transfers while FSCs base their operation on a hub-and-spoke system.Air Deccan has deviated from the LCC business model in the sense that it has a hub-and-spoke type operation to connect metros with smaller towns.
It also provides point-to-point service between metros and large cities. Industry analysts have pointed out that this has increased the costs for Air Deccan. There are serious doubts about whether LCCs (as we know them elsewhere in the world) exist in India. According to Bill Franke, the Managing Director of leading airline investment firm Indigo Partners, “There is not a single airline in India that operates a true low cost structure, only low-fare and low-margin. Is the Low-Cost Carriers’ Business Model in India sustainable? Low-fare airlines outside India have many features in common – a single type of aircraft to facilitate pilot training, maintenance and aircraft utilization; no free food service to save costs and reduce turnaround times; no inter-line transfer of baggage; direct selling to avoid commissions to travel agents, etc. These features are easy to replicate and are an integral part of the low cost airlines in India. As a result of their replicability, they do not, by themselves, offer a sustainable competitive advantage.The dynamics of a low-cost airline are equally important.
Typically, a successful low-fare airline chooses routes that are not already operated by other low-fare airlines. It increases demand for air traffic by cutting fares, and provides frequent services to saturate the route. In contrast, head-on competition between two low-fare carriers on the same route often results in a price war that benefits consumers but is not profitable to the airlines themselves. The low cost airlines in India are not targeting distinctive routes. Instead, they seem to be moving towards creating huge capacities on the trunk routes.Since short haul services impose other cost disadvantages on an airline, quick turnarounds to achieve high utilization become critical. Clearly, on-time passage is an important value proposition for this type of service and delays are extremely annoying to passengers.
Running a low-fare airline is a major managerial challenge. In addition, the government will need to improve airport infrastructure quickly if this model is to succeed. The increase in air traffic is not matched with the increase in the infrastructure at the airports.The airlines prefer to halt and ply between only metros and airports which have sufficient landing and parking place, this leads to long halts and waiting of these planes at metros and also traffic congestion and delays besides loss of precious air fuel. In India, 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.
The under-developed commodity hedging market also puts a stumbling block on these companies to hedge against fluctuating prices of air fuel.The cost of procuring new fleet also needs consideration because; they should be able to have at least 80% occupancy of seats to be viable in long run. Now if most of the flights operate on the popular routes chosen due to above reasons, there would surely be a saturation of market sooner or later.
Therefore, these airlines must think of exploring low-cost routes, less time taking routes, rather than hauling on the same popular routes, if they wish to remain viable in long run. For example the north-east region of our country completely remains outside the gamut of competition from these LCC’s.The requirement 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 hike by these commanders; this may also lead to increasing cost and defeating the entire spirit of operating a LCC. 7 P’s of Services Product: Kingfisher Red, formerly known as Simplifly Deccan and previously as Air Deccan, is an airline based in Bangalore, India. It is India’s first low-cost carrier and is a subsidiary of Kingfisher Airlines.
The Bengaluru International Airport serves as the airline’s primary hub.Kingfisher Airlines’ fleet currently consists of ATR 42, ATR 72 and Airbus A320 family aircraft for domestic and short haul services and Airbus A330-200sfor international long-haul services. The average age of its fleet as of January 2009 was 2. 3 years. All ATR’s and a few aircraft from the A320 family are used for Kingfisher Red service.
Price: As the name Low cost carrier suggests, Kingfisher Red caters to the inexpensive price band. It is important to note that the Kingfisher Red serves complementary meals on board, thereby increasing the perception of ‘More Value for Money’ for the passengers.Place: Kingfisher Red Airlines operates Low cost flights from three major hubs – Bangalore, Mumbai and Delhi. However focus cities also include Chennai, Hyderabad and Ahmedabad.
It covers all the major Tier 1 and Tier 2 cities in India. Kingfisher Red offers the services to 58 destinations Promotion: Various promotional strategies have been adopted by Kingfisher airlines like the following: (a) Kingfisher Airlines is the first airline in India to extend its King Club frequent flyer program to its low-cost carrier as well.Passengers can earn King Miles even when they fly Kingfisher Red, which they can redeem for free tickets to travel on Kingfisher Airlines or partner airlines. (b) Passengers are offered in flight entertainment options and contests like ‘Kingfisher Flying Face of the Month’ and attractive discounts of branded merchandise. (c) Offer in-flight silent auctions for lifestyle products and in-flight sales of dry packaged food and beverages. (d) The marketing department showcased the airlines as ‘The new flying experience’. e) Kingfisher Airlines has announced special fares for all personnel serving in the Indian Armed Forces, the Union Government, State governments, and employees of all public sector units in the country. The immediate families of these personnel are also eligible for these concessions.
(f) The company has launched Kingfisher First, which is a print campaign to promote its first class service. It is a personalized campaign, which has Vijay Mallya, signing off by saying, “I have created a product which is better than what I would have created for myself. People: For any airline brand, its people and staff form the backbone as they form the contact points with customers. Kingfisher is known for the excellently trained On-Board crew and the support staff. Sporting red Uniforms in sync with the brand logo, Kingfisher crew was awarded the Best Cabin Crew in central Asia at Skytrax World Airline Awards 2010 Process: Kingfisher provides Online booking of tickets along with tele booking and also through its outlets at all major airports. Passengers are given complimentary in-flight meals and bottled water.
Physical Evidence: The high quality of service can be found evident from the exclusive Kingfisher Lounge at major airports, Personal valets, Pick up facilities, Gourmet Cuisine, In-Flight entertainment etc. Future Strategies Kingfisher Airline’s soaring debt is a huge worry, but a successful brand differentiation strategy can play a key role in future. Kingfisher Airlines is just short of five years in operation. But the flamboyant Vijay Mallya’s airline has given all its competitors a run for their money as far as mind space is concerned – be it the swelling debt, or the acquisition of Deccan Airlines. The seamless efficiency in the form of good connectivity, wide coverage, pre-boarding service and post-flight service will definitely help Kingfisher Red to create a positive image and capture market share. * Kingfisher Red has to differentiate itself from other LCCs and create a niche market within the low cost segment.
* Kingfisher is now the largest single domestic carrier with a market share of 23 per cent at the end of March, 2010 and operates close to 400 flights a day covering 70 destinations with a fleet size of 66 aircraft.It is all set to expand its presence in the global highly competitive network where it will be taking on mature and established global carriers. This will help Kingfisher Red to stay ahead in the competition. * Kingfisher Airlines’ image as a lifestyle brand didn’t go well for Kingfisher Red, hence the company should distinctly advertise for this segment. Kingfisher provides the same “Five Star” flying experience in both Kingfisher and Kingfisher Red Airlines and hence they have to communicate this message to the target segment.
An interesting business model being tried out is long-haul low cost carrier. Air India and Jet Lite are flying international routes using this model. This model is different from and more complicated than the short-haul LCC model. For instance, 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 LCCs. Kingfisher Red should look into this option to increase their presence.
In April 2010, it announced that it plans to raise Rs. 00 crore of debt in the near future, which will increase its current debt book to around Rs. 7,800 crore — a leverage of almost 25 times. The airline posted a loss of Rs 420 crore in the third quarter ending December 2009 and like all airlines has gone through turbulent weather (paring growth, deferring deliveries of new aircraft etc) in 2009.
The company is sitting on a high leverage which affects its valuation in the short run. However, the current valuation of the airline gets support from its strong brand image in the form of intangibles.The king of good times, as Mallya is known as, is obviously banking on the intangibles. Conclusion The emergence of low cost airlines has brought about a major change in the Indian Airlines Industry .
The rise of Air Deccan and its subsequent sale to Kingfisher and the emergence of the first air freight carrier Deccan 360 shows an interesting shift in the airlines business and the factors that led to it. Hence we decided to study the rise of Low cost aviation and its current trend and its future with respect to the first low cost carrier-Air Deccan (Now Kingfisher Red).References
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cms”>http://economictimes. indiatimes. com/news/news-by-industry/transportation/airlines-/-aviation/Flying-High-Low-cost-carriers-set-out-to-conquer-skies/articleshow/6516190. cms