Saurabh Garg on The New New Thing

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In India, we have a couple of famous full service carriers (Jet Airways, Kingfisher Airlines) and a plethora of no frills or low cost operators (Spicejet, Air Deccan, Go Air, Indigo). And all of these players have been in troubled waters for quite some time now.

The industry has been reeling with rising fuel costs, rising manpower costs, airport charges, taxes, consumer awareness and complaints, regulatory hurdles etc. In fact because of all these, none of the operators in India is making money. We have already seen the mergers and buyout games begin.

Of all operators, the low cost carriers are the worst hit. Especially the smaller ones. Simply because they were anyways operating on low margins and revenues from value added services were absent. And since they are not big, they cant extract efficiencies of scale by sharing ground staff and airport or negotiating prices from their vendors etc.

Then there is another industry that has mushroomed in last few years. The online ticketing industry. We have so many players now in the OTA market that even keeping a count is really difficult. So how do these companies make money? They get certain amount of brokerage (if I can take the liberties of using that term) for every ticket they sell. The number varies from operator to operator and airline to airline but its in the range of 1% to 3%. Then they make money by offering hotel bookings, weekend getaways, travel packages etc. But they still make most of their money from commission from airlines on tickets sold. With rising prices, airlines are now pushing these OTAs to the wall and cutting their margins as well. Does this signify slow and eventual death of OTAs? I don’t know and I can’t predict but next few months would be very interesting.

Apart from OTA, the newly privatized airports in the country are also facing the heat. They have pumped in so much money to create huge “world-class” structures that its not even funny. Their sources of revenues are fees from the airlines and other services like parking, restaurants, advertising etc. With drop in number of travelers, revenue from all these value added things would come down. How would these sustain? Traditional economics says that a toll gate owner or a broker would always make money as long as the number of passengers (or transactions) is high. In the long run, airports shouldn’t loose money but again you never know. Its hard to predict.

Coming back to airlines and their problems, they acted like a typical producer in a producer driven economy. They hiked prices of their tickets. So much so that these prices are now comparable to full service operators. A lot of people look at this as a very good move. They argue that with higher fares, the revenues would also increase. I beg to differ.

Lets divert from the debate and try to see a traveler in action. A traveler can choose a low cost carrier, lug all his bags with him, sit in really cramped seats with his legs folded, pay for every thing he uses in the plane (except for the loo - and paid loo can be a good idea :D) and come out of the travel feeling harrowed and hassled. This traveler could alternatively pick a full service carrier, have a valet help him with bags, relax with enough leg room on the aircraft, have a choice of three course meal on the aircraft, pampered by the staff of the airline and get to his destination feeling good about his travel.

Again back to the debate, in my opinion if fares for no frills carriers are comparable to full service carriers, any rational person would opt for service and comfort levels offered by full service operators. And with limited choices, fare hike by low cost operators mean more business for full service operators.

And this is not all. As flying gets out of the reach of the common man, more and more travel would happen for business reasons (leisure and casual air travel would reduce substantially) and these fliers would choose full service operators. This would translate into lesser capacity utilization for low cost operators. And empty seats means more losses for low cost operators.

What about full service carriers? With this hike, they might get better occupancy rates but how can they survive the spiraling costs and dwindling margins?

And for how long can these airlines operate on losses? What about the investors? Air Sahara (acquired by Jet Airways) and Air Deccan (merged with Kingfisher) have already succumbed to their losses and growth costs. Are there more in pipeline? What is in it for existing players?

Airline operators have never ever made money anywhere in the world. Will it be different in India? Can there be solutions? Can they come up with more creative ways of making money (like charging for check-in luggage)?

Whats your take?