INTRODUCTION

Brief Introduction

It is a very well known fact that aviation sector not only brings immense benefits to communities and economies around the globe, but also is a key catalyst of economic growth, social development and tourism. It facilitates connectivity and access to international markets. Air transport currently supports 56.6 million jobs and accounts for over US$ 2.2 trillion of the global gross domestic product (GDP).

Air passenger traffic in India is increasing on a tremendous pace. The sub-continent’s airport infrastructure is undergoing modernisation with the induction of most advanced facilities. It includes setting up of new Greenfield airports and installation of security, surveillance and air traffic navigation systems.

A country‘s transportation sector plays an integral role in the growth and development of an economy. According to the ―Indian Aerospace Industry Analysis‖ report,2 in terms of passenger traffic, India is currently the ninth largest aviation market in the world. With regards to air cargo tonnage, India leads the South Asian region -consisting of Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka.3 Currently, India has 128 airports – including 15 international airports.

India is currently the 9th largest aviation market handling 121 million domestic and 41 million international passengers. Today, more than 85 international airlines operate to India and 5 Indian carriers connect over 40 countries.

Market Size

Total domestic passengers carried by the scheduled domestic airlines between January and May 2013 were 25.998 million, as against 25.808 million during the corresponding period of previous year thereby registering a growth of 0.74 per cent, revealed the statistics from Directorate General of Civil Aviation (DGCA).

No-frill carrier IndiGo lead in terms of market share with 29.7 per cent of the pie, followed by Jet Airways-Jet Lite combine at 25.3 per cent, Air India Domestic at 19.2 per cent, Spice Jet at 17.5 per cent, and Go Air at 8.3 per cent for the month of July 2013.

The air transport (including air freight) in India has attractedforeign direct investment (FDI) worth US$ 456.84 million from April 2000 to July 2013, as per the data released by Department of Industrial Policy and Promotion (DIPP).

Key Developments and Investments

Jet has become the first Indian airline to place an order of fuel-efficient 737 Max aircraft with the plane-maker Boeing. Boeing and Jet have recently inked a purchase agreement wherein Jet has agreed to buy 50 such planes at a cost of around US$ 5 billion. The agreement is still under negotiation (for discounts). 

The service of 737-Max is expected to commence by 2017. India's first ever aviation university, the Rajiv Gandhi National Aviation University at Rae

Bareli in Uttar Pradesh, will start imparting training to aspiring pilots, aircraft engineers and cabin crew in September 2014. The educational entity is a Government organisation that has been developed to acknowledge the industry's chronic talent shortage. 

The university will induct 1, 000 students by 2018 and eventually, all flying schools in India will get affiliated to this university.

The Government of Haryana plans to establish a cargo airport in the state by taking up Public Private Partnership (PPP) mode for the green-field project at Meham in Rohtak. The Haryana State Industrial and Infrastructure Development Corporation (HSIIDC) will be the equity partner for bearing the cost of land acquisition for the project.

India's first indigenous aircraft carrier (IAC), being developed at the Cochin Shipyard, has been launched in August 2013. The 40, 000 tonne-warship machinery is expected to be operational by 2018. It is done with major fittings and underwater work. Now the superstructure, the upper decks and out-fittings are to be worked upon.

Government Initiatives

The Indian Government is intensely dedicated for the development of the Indian aviation industry and has introduced several policies and regulatory reforms to boost private participation and investments in the same. Recently, the Government allowed 49 per cent FDI by foreign airlines in the sector.

The Government has finally given its nod to the US$ 900 million-Jet-Etihad deal, embarking on the biggest FDI in Indian aviation sector. The Foreign Investment Promotion Board (FIPB) has asked for certain amendments in the deal though. Once the modified deal is approved by the Cabinet Committee on Economic Affairs, Etihad would be eligible to become the owner of 24 per cent stake in Jet for US$ 379 million.

Not only that, Jet Airways has also been allowed to go for code-sharing with five airlines — American Airlines, Malaysian, Garuda of Indonesia, Vietnam Airlines and Kenya Airways – by the aviation ministry. The nod would enable Jet expand its global footprint and become the biggest Indian carrier in terms of network.

A code-share enables two or more airlines share the same flight. Passengers will buy ticket from one airline and take a flight operated by another airline, allowing partners to enhance their reach across the global sky.

Furthermore, Mr K.C. Venugopal, Minister of State for Civil Aviation, has recently informed Rajya Sabha that 17 new airports have been proposed for construction during the 12th Five Year Plan. 

The details of the proposals have not been disclosed yet. The Indian Government has also been visionary in terms of the talent requirement for the

flourishing aviation industry in future. In order to address the shortage of skilled, managerial and operational personnel in aviation, the bill to establish the aviation university (which has been already discussed above), has been forwarded to the Lok Sabha Secretariat. The university will offer and endorse aviation studies, teaching, training, research and extension work with focus on emerging areas of studies such as aviation management, aviation regulation and policy, aviationscience and engineering, transportation of dangerous goods and other related fields, according to the proposal. The Indian Government has calculated the project outlay of Rs 202 crore (US$ 31.92 million) for the institution until 2019.

Road Ahead

Indian aviation market is poised to become the third largest across the globe by 2020, according to industry estimates. The sector is expected to handle 336 million domestic and 85 million international passengers with projected investment to the tune of US$ 120 billion. Indian Aviation Industry that currently accounts for 1.5 per cent of the GDP, has been instrumental in the overall economic development of the country, said Mr Ajit Singh the Minister for Civil Aviation. He further stated that given the huge gap between potential and current air travel penetration in India, the prospects and possibilities of growth of Indian aviation market are enormous.

ABOUT

India‘s civil aviation sector has evolved over time. On February 18, 1911 India‘s first commercial airplane flew between Allahabad and Nainital. In 1912, India‘s first commercial international flight operated by the erstwhile Imperial Airways took place and connected Delhi to Karachi and beyond. In 1932, J.R.D. Tata flew an air mail service airplane, after which Tata Airlines ventured into scheduled10 air transport services. At the time of India‘s independence in 1947, nine air transport companies, carrying both air cargo and passengers, operated in the country.To further strengthen the national aviation sector, the Government of India and Air India - Tata Airlines was renamed Air India in 1946 - set up a joint sector company, Air India International Ltd. In order to address the deteriorating financial health of India‘s civil aviation sector, the Government of India passed the Air Corporations Act of 1953, which nationalized all carriers providing services within India‘s civil aviation industry. Up until the late 1980s, India‘s civil aviation sector remained monopolized by India‘s government owned airlines. However in 1986, the Indian government once again granted permission to private sector companies to provide air taxi service. Additionally, India‘s Open Sky Policy of 1990 and the Air Corporations (Transfer of Undertakings and Repeal) Act of 1994 further freed up India‘s civil aviation industry and eradicated the government carrier monopoly. While these policy changes led to a dramatic increase in the number of private airline carriers; due to viability issues, by the end of the 20th century all private air carriers, except Jet Airlines and Air Sahara, exited the market. in 2003 the introduction of a new type of airline called low cost carriers- LCCs or no frills air service- by Air Deccan reinvigorated India’s Civil aviation sector. By bringing competition into the Jet Airlines-Air Sahara duopoly, Air Deccan brought a new competitive spirit to India‘s civil aviation. Furthermore, introduction of low cost airlines also changed the perception that air travel was reserved only for the elites. By 2007 mergers and acquisitions became common in India‘s civil aviation sector. Within a span of two years Air India and Indian Airlines merged, as did Jet Airways and Air Sahara, and Kingfisher Airlines and Air Deccan.

Currently, India maintains bilateral Air Service Agreements (ASAs) with 108 countries. While 72 foreign airlines fly in and out of India,16 four private domestic carriers – Jet Air, IndiGo, SpiceJet and Kingfisher – fly to 35 destinations in 25 countries. Air India, the national carrier maintains a number of international routes: seven destinations in North America, nine destinations in Europe, 12 destinations in the Gulf, two destinations in the Middle East, two destinations in Africa, and 13 destinations in West and East Asia.

Recently, India‘s Ministry of Civil Aviation hosted 65 International Civil Aviation member nations (ICAO) at the 4th International Civil Aviation Negotiation Conference (ICAN 2011) during the week of 17 October 2011. The conference provided a forum for nations to amend and modernize existing ASAs. While India‘s international carriers lobbied the Indian government to allow them to run more flights to Oman, Saudi Arabia and Hong Kong, representatives from the Persian Gulf lobbied the Indian government for additional seats.

As India‘s civil aviation sector developed and evolved over time, in order to guide market participants the Ministry of Civil Aviation and Government of India periodically responded to new industry challenges by setting up and amending existing regulatory frameworks. Until 1994 the Directorate General of Civil Aviation (DGCA) controlled every aspect of flying including the licensing of pilots, certifying aircraft and issuing all rules and procedures governing Indian airports and airspace. However, in 1994 an Act of Parliament established the Airports Authority of India (AAI). This Act gave the AAI the power to manage all national and international airports and administer every aspect of air transport operation through the air traffic control.

In 2008, the Airports Economic Regulatory Authority of India Act established the Airports Economic Regulatory Authority (AERA) of India. AERA regulates tariffs and other aeronautical charges, as well as monitors airports‘ performance standards. Within the Indian context of airport regulation, AERA takes the following things into consideration: airports are natural monopolies; airports are public goods, both in the case of Brownfield and Greenfield airports the Government of India has made land available for acquisition, often under the Land Acquisition Act, to airport developers at a very low cost. Lastly, the same Act established the Appellate Tribunal which handles appeals from service providers and consumer groups.

LOW COST AIRLINES

Today everywhere in India we can see people discussing about low cost airline. People often confuse low cost airlines with regional airlines or with full service airlines

with reduced travel fare, etc. but actually low cost carrier is nothing but an airline which has reduced fare or lower prices in comparison with other airlines.

These airlines have a different operational strategy. There operational structure is totally different in regard to full service airlines. They make up their revenue by charging various other facilities which are generally accompanied with an air ticket if you travel in full service airline. In India there are various low cost airlines like Air-India Express, Go Air, JetLite, Kingfisher Red etc.

The low cost airlines are also known as LCC i.e. low cost carrier or Budget airlines. These flights charge additional amount for food and beverages. They also charge for extra baggage. They give preference to those passengers who pay for priority check-in, baggage clearance, etc. the airlines have designed their strategy basically for travelers who don’t want to pay much and are ready to bear certain limitations.

These airlines are really good for domestic travelers as they can adjust for 2-3 hours but if they are travelling long distances then they will have to pay for additional services. It’s not that these flights have poor service or technically not sound but instead they cut on the facilities and earn revenue.

Another thing which should be taken care is that the cancellation or re-booking is really cumbersome. Different airlines follow different policy. Some low cost carriers do cancellation of ticket after charging of nominal fees and some deny doing it. It totally depends on the discretion of the airline companies.

These Budget airlines are getting more popular day-by-day. People really look forward to save their money and prefer travel in these airlines. Those who are not very much financially strong can also travel fast without spending much money.

Low Cost Carriers in IndiaIndia’s booming economy, and the deregulation of the aviation industry, has

brought about a huge increase in the number of domestic airlines in India in recent years. Passengers can now choose from one Government owned full service Airline, three privately owned full service Airlines, and five privately owned Low Cost Carriers. Brief outlines of India’s Low Cost Carriers are as follows;

IndiGo AirlinesIndigo Airlines is based in Delhi and flies to around 15 destinations all over

India. This privately owned airline started operating in mid 2006, and has a market share of almost 11%. It’s considered to be India’s best low cost carrier.

Its airplanes are new and clean, and despite keeping fares low, the airline hasn’t compromised on punctuality, connectivity of flights, safety or customer service. Of course, don’t expect any frills, but the amount of leg room is decent. If a passenger looking to fly with a low cost airline, Indigo offers good value for money. The limit for check-in baggage is 20 kilograms.

Spice JetSpice Jet is another decent, privately owned, low cost carrier. The airline, which

is based in Delhi, started operating in mid 2005. It has just over 10% share of the market, and services most capital cities in India.

Spice Jet has new and clean planes. However, punctuality in some routes is an issue. Seats on the older planes can be a bit uncomfortable. Also the limit of check-in baggage is 20 kilograms, as opposed to 25 kilograms on some other airlines. Definitely give it a try if passengers are on a budget though!

Kingfisher RedKingfisher Red, originally called Air Deccan, is a privately owned low cost

airline based in Bangalore. It started operating in mid 2003 and was India’s first low cost carrier. Kingfisher Airlines took over the airline, which has captured just under 15% of the market, in early 2008. The average age of its airplanes is four and half years.

Kingfisher Red has improved a lot since its merger with Kingfisher Airlines. It now accepts international credit cards for booking, seat numbers are allocated, and staffs are more committed and friendly. There is a 25 kilogram limit for checked in baggage, and hot snacks are served on board. However there is not much leg room and flights are still often delayed.

JetLiteJetLite used to be Air Sahara until Jet Airways successfully took the company

over in mid 2007. The low cost airline focuses on providing flights that connect India’s capital cities, and it has a 7% share of the market. In addition to its headquarters in Delhi, it also has bases in Mumbai and Hyderabad.

Unfortunately, what JetLite has in common with its parent airline stops with its brand name. Many passengers report poor service and baggage handling. Its older aircraft also have very cramped seating that allows hardily any leg room. The limit for check-in baggage is 25 kilograms.

Go AirGo Air is a small privately owned, low cost airline that started operating in late

2005. It has almost a 5% market share and operates a fleet of brightly colored airplanes to twelve cities in India. Its remote destinations include Jammu, Srinagar, and Guwahati. Go Air now has the youngest fleet of aircraft in India, with the average age of its eight A320 Airbus airplanes being approximately seven months

Go Air has some of the cheapest domestic fares available in India. However, punctuality has been a common complaint about this airline in the past. These days, it seems to have greatly improved. The limit for checked-in baggage is 25 kilograms and 40 kilograms for international passengers flying within 24 hours of arrival in India.

Strategies of Low Cost Airlines in IndiaIndian Low Cost Carriers needs strategies for their survival. Some of Indian

Low Cost Airlines followed some strategies they are as follows;

Spice JetSpice Jet is a low cost airline based in New Delhi, India. To improve their

business they followed some strategies.Cost ControlSpice Jet is focused on twin pillars of cost control and growing its ancillary

revenue. It follows the classical ‘low-cost’ airline model of very competitive fares, a

single type of aircraft and a single class of service, point-to-point operations, and quick turnarounds, no frills, and internet-based ticketing. But unlike other low cost airlines, water and snacks served on board Spice Jet Aircraft is free.

Pricing StrategiesThe airline marked its entry in service with Rs. 99 fares for the first 99 days,

with 9000 seats available at this rate. This deal was followed by a Rs.999 promotional scheme on select routes. Their marketing theme is offering low everyday spicy fares and great guest services to price conscious travelers. Their aim is to compete with the Indian Railways passengers travelling in AC coaches.

Value-addition to customersSpice Jet has introduced online travel insurance in partnership with TATA AIG

with which they have maintained a consistent rate of 28% of sales since the introduction of the product. It provides value -adds to clients by having internet banking for customers, wherein they can select any bank with which they have an account and can use their own login credentials, which is essentially for customers not owning a credit card or not inclined to using one, are among the other major initiatives.

Operational EfficiencySpice Jet Airlines has started partnership with Navitaire, the world’s renowned

low cost support system for reservations and revenue management. E-booking and E-ticketing are available in Spice Jet. It made significant investments in information technology to provide a backbone for operational effectiveness.

Marketing StrategiesSpice Jet has a unique marketing strategy that focuses on word-of-mouth

marketing supported by print and internet media initiatives. To build further on its branding value, Spice Jet has introduced on-board merchandise sales such as goggles, airplane models, perfumes, caps and watches. Sales of branded merchandise will also be available through the company’s website.

IndiGo AirlinesIndigo Airlines has been one of the airlines which has been eating away market

share from its competitors. The airline has been one of the airlines which has been eating away market share from its competitors. The airline has been taking radical steps to cut down on costs. They have set a record for using the lightest passenger seats in India which weigh only 12.8 kilograms. They have started using paint which overall weights 50 kilograms less. Such weight savings are negligible on their own but collectively, it has been helping Indigo to cut on costs and function as a “low cost airline”. The airline has trained its crews to de-plane the passengers in 6 minutes and unload the baggage in 10 minutes. It regularly achieves Turnaround times of around 22-25 minutes (Industry Average being much more than 30 minutes). The lesser the time taken at the airports, the more the airplane can fly and earn more revenues.

IndiGo’s Strategy for Sustenance Indigo has adopted strategy to sustain in the current difficult environment. It

tries to keep its cost lowest amongst the low cost airlines, provide passengers with best on time performance, clean aircraft, and high reliability; and finally grow cautiously without tinkering with its business model.

Go Air

Go Air was established in June 2004, and it started operations on 4 November 2005. Strategies followed by the Go Air as follows;

Go Air’s objective is to offer its passengers a consistent, quality-assured and efficient performance at affordable fares.Go Air focuses on providing quality service,Best on-time performance,Quick turnaround of aircraft that average around 25 minutes,Delivering value to customers,Ease in booking: the passengers who may not have a credit or debit card or access to a computer need not travel long distances to book their Go Air tickets, but can book them from any of the distribution mediums, which include Go Travel agents, Go Tata Indicom Outlets, Go Inlott outlets, Go Cyber café and GoPCOs.Web bookings of tickets: Ticket bookings without Passenger Service Fee (PSF) and any applicable fuel surcharge.

Red Eye Operations of Go AirThese are the early morning and late night flights. The flight gets their name

from the fatigue symptom of having red eyes. This concept is also a replication of the strategies of airlines abroad. These flights usually operate during the period from 9 p.m. to 5 a.m. local time. Through that Go Air can reduce traffic congestion, and helps to reduce infrastructural problems, gives benefits of lower fares to passengers.

Slow Fleet Expansion ProgrammeEven though Go Air follows a slow fleet expansion programme, it does not

believe in aggressive expansion as it may create problems in periods of slack demands and put pressure on costs. Hence this is another one of its strategies to compliment the low cost model and bring synergy in its costs and prices.

Frequency Enhancement Programme Another strategy followed by Go Air is that of increasing the frequency of its

flights. It is able to do so due to its hub model which concentrates on enhancing presence around a particular hub which are essentially Tier2 cities or metros where the occupancy rates are higher and demand is higher, hence creating need for higher frequencies.

Flexi-FareThis plan was initiated as an effort to gain a competitive advantage by catering

to a unique customer need of a niche customer segment thereby increasing brand loyalty.

JetLiteSome of the strategies adopted by JetLite are as follows;No frillsJetLite follows a no frills policy to keep its costs to bare minimum. This means

that it does not offer any complimentary services offered by other full service airlines. Complimentary services include multi-cuisine food, airport lounges, magazines, entertainment, etc.

Online booking and IVR ticketingJetLite allows passengers to book tickets both airline and by an Interactive Voice

Response (IVR) system. This eliminates the need for commissions payable to

middlemen. Internet booking also obviates the need of ticketing agents and additional workers, thus cutting down the wage bill.

Dynamic PricingJetLite tries to sell maximum number of tickets through dynamic pricing. The

tickets are priced according to the availability and demand of tickets. In airline industry, the marginal cost of flying an additional customer is very low. Thus JetLite tries to maximize its revenue by selling the maximum number of tickets possible. It earns its revenues not only from the sale of tickets but also from the sale of food items and any other service for which it charges over and above the price of the ticket.

Advertising RevenuesJetLite is looking forward to enhancing its ancillary revenues by opening itself up to advertising. The airline plans to offer the fuselage, the exterior of the aircraft body, and in-flight space for advertising. It is expected to generate revenues worth Rs 50-60 lack a month from the move.

The structure of India’s airline market is expected to change significantly in coming months as carriers revisit their business models in order to restore industry viability. Nearly two thirds of the seats flying on domestic routes are on LCCs, one of the highest proportions in the world.

In this highly competitive system the six scheduled airlines have largely converged in terms of pricing and product. But given their significantly different cost structures, this situation is unsustainable for some, while presenting opportunities for others.Over time the competing airlines will inevitably attempt to carve out more clearly differentiated market propositions, ranging from ultra-low cost to hybrid and premium full service. While that is high on the agenda, at the same time the merry-go-round of partnerships is starting to accelerate. All in all, a spicy cocktail.

 

India’s domestic aviation has shifted to an almost 100% low fares market

While India's low cost carriers (LCCs) have a domestic market share of 63%, passengers flying on full service airlines (Air India and Jet Airways) pay close to LCC fares in economy class. As a result India is virtually a 100% low fares market. As, in reality, the operating environment makes it very difficult to be genuinely low cost this poses a significant challenge to industry viability.

In 1Q14 the average fares for LCCs IndiGo and GoAir were in the range of INR5000-5200, with SpiceJet close to INR5000. Jet Airways’ average fare was INR5632, but this includes the contribution of the premium cabin, suggesting that its average economy class fare was closer to that of the LCCs. GoAir in fact had some of the highest fares in the market in 1Q14, while the regulator also identified a number of routes where FSCfares were below LCCs. The margin between FSC internet-only and LCC fares has narrowed significantly, but in the last 12-18 months even the more flexible GDS fares in higher buckets are only marginally higher. Overall there is very little difference between LCC and FSC economy class fares.

There is little to distinguish between LCCs and FSC economy class productsIn the Indian market LCCs and FSCs both operate from the same airports with new aircraft, offering high frequencies on key markets. LCC reliability, on-time performance, consistency, ground product and cabin crew service standards, particularly on IndiGo, are comparable with or even better than FSCs. Baggage allowance on discount fares is the same on all carriers.

...from the Indian passenger’s perspective there is little to distinguish between an LCC and an FSC

in economy class...

As a result, from the Indian passenger’s perspective there is little to distinguish between an LCC and an FSC in economy class, other than the fact that the latter offers a complimentary onboard meal, but this too is being rationalised. And as a larger proportion of seats are being sold in lower fare buckets even the accumulation of frequent flyer points has diminished on FSCs.

Air India and Jet Airways continue to offer a premium cabin but the business case for such an offering is limited to certain key routes, such as the Delhi-Mumbai-Bangalore corridors and that too primarily during peak hours. In light of the weak economic conditions, which are likely to continue for the next 12-18 month, a negative impact on business class traffic is inevitable in the short term. Currently business class load factors average around 50%.

As the economy strengthens in due course there will be absolute growth in demand for full service operations but this is likely to represent a declining share of the total market, especially as LCCs offer a high quality product.

The shift to LCCs is expected to increase, particularly among corporate travellers

Today FSCs are capturing some of their traffic because they are pricing below cost, but this is not sustainable. As and when FSCs increase their fares to reflect their cost base and charge a premium above LCCs, which at some point will become necessary, we can expect to see passengers increasingly shifting to low cost.

LCCs will also continue to grow their share in part because most of the fleet expansion is occurring in this segment. In the second half of FY14 LCCs are expected to induct an additional 20 aircraft on domestic routes, whereas little or no additional fleet deployment is likely by Air India on domestic sectors.

Scheduled Deliveries of Narrow body Aircraft (domestic and international) to Indian LCCs and FSCs to 2020

 Source: CAPA Fleets

New aircraft scheduled for induction by Jet Airways are mostly to be used for replacement, however Jet's current modest expansion strategy could change following the formalisation of the partnership with Etihad.

Furthermore, the convergence of LCC and FSC products in India has resulted in a growing acceptance of low cost carriers, even among corporate travellers. Mumbai, the largest corporate market, was until recently an exception to this as Jet Airways had a very strong and long-established position at this slot-constrained airport.

Jet Airways and Jet Konnect continue to have the largest share of capacity at Mumbai (30.4% compared with their all-India share of 23.9%), but during the last 12 months IndiGo has overtaken Jet Airways as the largest single domestic carrier.

The rise of LCCs at Mumbai was facilitated by Kingfisher’s exit which released some slots. Capacity will be further increased with the opening of the new Terminal 2 towards the end of 2013. The congested Bangalore airport will also see the completion of the extension to Terminal 1 completed later this year, and new, modern terminals opened at Chennai and Kolkata earlier in 2013.

LCCs are best-positioned to to utilise this expanded airport capacity. We expect to see particularly strong growth in LCC market shares on intra-metro routes.

With 50% higher costs than LCCs and similar fares, FSCs must restructure to restore domestic viability

As long as Air India and Jet Airways continue to operate with a full service cost structure but offer LCC fares, their domestic operations will continue to lose money. Comparing the two listed carriers in 1Q14, SpiceJet’s CASK was INR3.62 (the other LCCs are estimated to be in the range of INR3.6-3.7) while

Jet’s was INR5.44. By Sep-13 costs are estimated to have increased to INR4.30 and INR6.50 respectively, and perhaps higher, as a result of the impact of the depreciation of the Rupee and higher fuel prices.

The market is characterised by a situation in which FSCs, which have a cost structure that is around 50% higher than LCCs, have chosen to compete by matching fares rather than reducing costs. And their load factors remain below those of LCCs. Although the impact of lower loads in business class and on regional aircraft may account for some of this, the differential is significant.

A majority of Air India’s active domestic fleet consists of A319s. The single class configured versions have just 144 seats compared with the 180-189 seats on the narrow bodies operated by the LCCs. If Air India was operating larger aircraft it is possible that given its current commercial structure its load factors would be lower still.

Domestic Passenger Load Factors in 1Q14

Carrier Load Factor

Air India*  71.4%

Jet Airways#

 71.7%

JetKonnect  73.5%

SpiceJet^  76.5%

GoAir  80.5%

IndiGo  84.9%Source: CAPA - Centre for Aviation, DGCA * Air India load factors are for economy and business class combined. CAPA estimates that the economy class load factor is 1.0-1.5 ppts higher than the overall reported figure. # Jet Airways load factors are for economy and business class combined. CAPA estimates that the economy class load factor is 0.5-1.0 ppts higher than the overall reported figure. Data is for narrow body and regional aircraft combined, however the narrow body loads may be slightly higher than the average reported. ^ SpiceJet data is for narrow body and regional aircraft combined, however the narrow body loads may be slightly higher than the average reported.

This state of affairs is clearly reflected in the financials. CAPA estimates that FSCs lost USD200-225 million in 1Q14 compared with an estimated profit of USD60 million for the LCCs. All three independent LCCs were profitable during the quarter.

Estimated Profitability of Indian LCCs and FSCs in 1Q14

  Source: CAPA Estimates and airline quarterly reports in the case of Jet Airways and SpiceJet

Given the results the current domestic operating model for full service carriers in India appears to be broken. That is not to say that all LCCs are turning in stellar returns, some of them it has to be said are also struggling in the current challenging environment, but relative to FSCs they are performing much better.

India’s full service carriers lack a clear strategy for their domestic business models

Neither Air India nor Jet Airways has a clear domestic strategy and both of them have been reluctant to decisively move away from their legacy model. Jet confused the market with a half-hearted approach to low cost in which the carrier operated two LCC brands, with an unclear and changing passenger proposition.

Air India has hesitated to introduce a domestic low cost subsidiary for fear of cannibalising itself and due to concerns about being able to achieve the labour productivity levels required of an LCC. However, many legacy carriers - particularly in high growth Asia - have increasingly come to the conclusion that it is better to risk self-cannibalisation than allow your competitor to do it to you.

Air India continues to be able to survive because it faces less commercial accountability...

Air India has also struggled to achieve a competitive cost base because 60% of its active domestic fleet consists of A319s with a higher unit cost than the larger A320 and 737 aircraft operated by its competitors. Nevertheless Air India continues to be able to survive because it faces less commercial accountability. Being under less pressure to change, status quo is the most likely outcome - which ultimately will hurt the carrier as it fails to keep pace with the changing market realities.

Kingfisher failed in part because it was forced to compete with LCCs while saddled with a high cost structure. With LCCs continuing to expand aggressively and grow their market share, they will increasingly set the pricing levels in the market - they have the scale, network and product to do so. Air India and Jet will be forced to follow their lead, and given their current cost structures will continue to bleed.