Tuesday, August 22, 2006

The Future of Indian Low Cost Airlines

and how it could take down the Indian Airlines Industry!

The problem is that the market is growing at less than 10 per cent per year. As more seats keep getting added to the kitty, the players - notably Jet, Sahara and Kingfisher - find themselves unable to extricate themselves from the low-fare game.

Earlier only 10 per cent of seats would be offered on lower fares, now it's perhaps twice as much. At the least. Full-service airlines are in an unusual situation. Their loads could not have been better and their yields worse - so they would rather fly at 70 per cent average passenger load with higher fares rather than the other way round.

The no-frills are caught in their own spiral. Because they are low-fare airlines, not low-cost, as is often pointed out. The cost of fuel, spares, airport infrastructure and crew does not change much. A full-service airline man alleges pilot salaries at some "low-cost" airlines are higher than his. Nothing wrong with that, except that margins for the latter will suffer.

What does this add up to? One industry watcher estimates that this will blow a neat $400 million (Rs 1,800 crore) hole in airlines' balance sheets by the end of next year. Most seem prepared for this but how they will survive this is anybody's guess. Older ones like Jet will hang on, newer ones like Kingfisher will have the advantage of group backing. It's the rest that will face the most pain.

Flying international will help some. Jet, Sahara, and Kingfisher are expanding or trying to. Long-haul revenues, both from passengers and cargo, are good. But going West without being able to fly onto the US is a handicap, as Jet discovered. Nor did it expect British Airways to respond so swiftly with additional London flights. The East is more remunerative, but only comparatively. Not surprisingly, Jet hopes that 50 per cent of its revenues (and presumably more profits) in four to five years will come from international flights.[source]

Yes the market can grow, and you may have noticed that Air Travel no longer is restricted to the rich or upper Middle class, but There never were any frills to cut any more frills. Read this excellent back of the envelop calculation,"Math of Low Cost Flying" by K. Yes, the most profitable Airlines are Low fare Airlines, but we should remember the Red Trails of the US Airlines Industry of the 80's when Accumulated losses wiped out all the profits made by airlines till then. Similarly, in a market where retail margin is lower than 10%, how would low cost retailer survive?

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