Growth of budget airlines in India results in capacity conundrum

India budget airlines

India has been a growing aviation market for some time, but as domestic regulations change and international ambitions grow, there is need for cautious optimism, as Neelam Mathews finds.

The growth in Indian leisure and corporate travel markets in the past two years reflects the exponential expansion of budget airlines in India.

The escalation of deliveries and an increase in fleet capacity of budget airlines makes India the fastest growing globally in the segment. Now, having already announced plans to start medium haul operations, some of these carriers will widen their horizons.

As the lines between full-service and budget carriers get increasingly gray, India leads the rise as the fastest-growing major global LCC market this year, according to aviation analysts at OAG.

According to a Boeing India Country Market Outlook last year, LCCs in India comprise 60 per cent of the air traffic.

“Three out of four people in India fly on LCCs,” said Dinesh Keskar, senior vice president for Asia-Pacific and India at Boeing. “At the end of the day, what matters is the exchange rate times the price of the oil in dollars, because that multiplier is what the domestic price becomes,” he explained.

Competition holds no bounds

With gain comes pain. The aviation sector – including the full-service airlines forced to keep in step with LCCs – are financially haemorrhaging.

As a copious number of passengers’ travel, airlines are being weighed down by jettisoning fuel prices, rupee depreciation, airport infrastructural constraints, and most of all, a fierce aggressive and competitive environment that shows no signs of abating, impacting even the most successful and largest India budget airline IndiGo.

Operated by InterGlobe Aviation, IndiGo, following ten consecutive years of profitable operations, announced at its recent second quarterly meet, its first loss of $98 million.

IndiGo’s loss comes in the background of India’s domestic market seeing high growth with an unsustainable level of low fares. Though a strong balance sheet continues to be advantageous, IndiGo co-founder and interim CEO Rahul Bhatia explained: “Regardless of this troublesome setting, IndiGo stays nicely positioned because of our low value construction and robust steadiness sheet.”

Fuel constitutes over 40 per cent of total costs in India, and about 50 per cent excluding fuel is denominated in foreign currency, said Bhatia. “Typically in the airline industry, you would expect to see higher fares to cover the increased costs. However, that has not happened here.”

“In the past, we made this mistake where we didn’t match the fares that competition was offering. We have clearly indicated we will not make that mistake again,” said Rohit Philip, chief financial officer, IndiGo.

India budget airlines: SpiceJet
The induction of the MAX is a huge milestone, says Singh

Profitability irony

“India, as the fastest-growing market, has the worst profitability. This relentless growth [has led] to Air India losing money, IndiGo is squeezed, and Jet Airways is feeling the pinch towards cash flow, and analysts see that consolidation in the market is almost inevitable.

It is a paradox that the fastest-growing market is losing the most,” Andrew Herdman, director-general, Association of Asia Pacific Airlines (AAPA) said at a summit in Jeju Island, South Korea.

Indigo, aware that low pricing is hurting, ‘is not leading the charge of low air fares’ according to Bhatia during the earnings call. He added a fuel surcharge implemented in May by IndiGo had to be withdrawn, as competition continued with ruthless fares.

“Our focus is on optimisation and on Revenue Earning Passenger Kilometer (RPSK),” said William Boulter, the recently inducted chief commercial officer at IndiGo.

Facing a liquidity crunch like most carriers, recently budget operator SpiceJet sought a three-month extension from a leasing company for making payments on aircraft leases, its bank facilities were downgraded by rating agency Crisil.

The carrier referred to this as an ‘industry phenomenon, and we continue to outperform the industry on financial metrics’ it said in a statement. Like IndiGo, it is not reducing any deliveries.

SpiceJet received its first 189-seater Boeing 737-8 MAX as part of a $22 billion deal with Boeing for up to 205 aircraft in 2017. SpiceJet chairman and managing director Ajay Singh said at the delivery: “The induction of our first MAX is a huge milestone. These new aircraft will enable us to open new routes, while reducing fuel and engineering costs, as well as emissions.”

Full belly

As India’s GDP hits a high of 8.2 per cent, and airline cargo belly space starts to exceed demand, SpiceJet has become the first commercial airline to launch a dedicated domestic and international cargo airline, SpiceXpress.

The B-737 being deployed for the service was converted by Israel Aerospace Industries (IAI) Bedek Aviation Group, and acquired on an operating lease from Austin, TX-based Spectre Air Capital, the first deal the company has done with India, Kevin Casey, president, Spectre Cargo Solutions said.

“The enterprise is an extension of SpiceJet’s belly space service to a ‘dedicated freighter’ with Boeing 737 aircraft,” Ajay Singh tells Low Cost & Regional Airline Business.

The growing online retail business that includes Amazon India and Flipkart, are propelling growth in particular, to – until recently – poorly air-connected remote regions like the mountainous northeast.

Casey adds: “There is a need to get those deliveries to the customer as fast as possible, hence the surging demand for time-definite delivery capability via dedicated main deck freighter aircraft.

A prime example is the 737 freighter, a mainstay of hub and spoke freighter operations around the world, and for which demand is still ‘super strong.’”

India budget airlines
There is significant growth in Indian leisure and corporate travel

International medium haul

SpiceJet made a turnaround after being on the verge of collapse in 2014.

Presently, the LCC has a fleet of 37 Boeing 737 MAX and NG jets, and 23 Bombardier Q-400s, which it uses on regional routes including some on the government’s regional connectivity scheme that aims to connect underserved and remote destinations to cities.

In September, Bombardier announced the delivery of its first 90-seat Q400 aircraft to SpiceJet. “We are excited to induct the 90-seat Q400 aircraft into our fleet,” Singh stated at the time.

“The additional seats and performance improvements will result in substantial reduction in unit costs and also we will be able to address our market needs in the regional space.”

SpiceJet plans to use the new 737 MAX to increase its international presence. Delhi-Hong Kong, SpiceJet’s eighth international destination, is to be exclusively serviced by the 737 MAX. The MAX can fly up to 3500 nautical miles – around 19per cent more than the present fleet of 737-800s. “We will pursue all options, including Iran,” says Singh.

He adds that while freebies are a strict no-no for LCCs, change is in the air. “We think there is a business model in providing wifi services free to passengers, and earning revenue from advertisers instead; this will be one differentiating feature of the airline.”

The Boeing 737 MAX can fly non-stop to Singapore, Doha, Kuwait, Abu Dhabi, Riyadh, Kuala Lumpur, Tehran, Salalah, Kunming, Krabi, among other international destinations from various international airports in India.

With a one-stop, the aircraft can easily fly up to Finland, Norway, Morocco, London and Amsterdam, according to SpiceJet.

The tragic news of Indonesia’s Lion Air MAX 8 crash, and the subsequent grounding of the fleet there, seems [at the time of this writing] to have no effect elsewhere, including in India.

Local reports indicate that India’s civil aviation regulators have reviewed the performance of the MAX 8 aircraft with Indian based operators, and found ‘no significant technical issue’ with them.

The long haul low cost model has rapidly progressed from a position where its viability was questioned, to becoming an essential part of the international system, mentioned Peter Harbison, executive chairman, CAPA, Centre for Aviation.

India budget airlines: SpiceJet
SpiceJet has taken delivery of the first 90-seat Q400s

With Airbus 321neos deliveries for IndiGo slated from November [2018], medium haul international points will be added. IndiGo has started bookings for six new international destinations including Hong Kong. However, according to Bhatia, as far as long haul was concerned, using widebody planes was more aspirational.

A trend currently playing out sees interest in the emerging destinations in Southeast Asia, Western/ Northern Europe, Eastern Europe, the Middle East and North Africa and South America.

Even in this segment, analysts believe low cost long haul operators will have a very good value proposition with the reengineered narrowbodies and better value offerings.

Additionally, most of the destinations for leisure do not have direct connectivity. India’s inbound travel market has been relatively weak with CAGR growth of ~6per cent, according to industry data.

Unfortunately, the crowd funded low cost UK airline POP – planned to be launched by a 378-seat Airbus A330-300 to two satellite cities from London Stansted two years ago – never took off due to lack of funding.

However, Indian international air services will get a boost once Iceland’s WOW air starts flying return services with an Airbus A330neo from Delhi to Reykjavík this December, offering passengers from the subcontinent a connection to any of WOW’s several existing destinations in the US and Europe.

Selling promotional one-way tickets starting at $200, WOW has given rise to concerns about a fare war being waged among Indian domestic LCCs that have announced plans to fly medium haul flights to the West this winter.

While low fares draw passengers, domestic airlines in India will have to cope with dizzying high fuel prices to be paid in an environment of an appreciating dollar, and of high taxes, making their operating costs far higher than those of international carriers.

Binit Somaia, director South Asia at aviation analysts CAPA says historically, LCCs achieve higher load factors than full-service carriers because they look to stimulate the market through attractive pricing.

“For a budget carrier like Scoot, connections within the group (like those between Scoot, Singapore Airlines and SilkAir) are quite important at their Singapore hub. In their case it’s easier because they have just a single hub. That’s not the case for Indian LCCs which operate from multiple Indian cities.”

For instance, this winter IndiGo is launching Hong Kong from Bangalore, Muscat from Ahmedabad, Singapore from Vijayawada. As Somaia affirms, “their international network is more fragmented.”

IndiGo’s international plans involve the A320/321 family of aircraft with a focus on new destinations like Kuwait, Abu Dhabi, Hong Kong, and others within six to seven hours flying time, Boulter said.

IndiGo will also be looking to seek opportunities with its voluminous regional/domestic traffic into London via Delhi once it starts its Gatwick flights.

As a point-to-point carrier, IndiGo will have to address WOW’s ability to offer onward connectivity to Europe. This is disputed by an official who explains that IndiGo follows a strict point-to-point model.

“One cannot see it getting into complications that include alliances. It will probably stick to London as a single destination and not compete with WOW’s ability to offer onward connectivity to Europe.

It must be noted that WOW air via Iceland needs no alliances since it has available slots, infrastructure, and its own flights to Europe and Gatwick that could help it in offering lower fares. WOW air also flies to 12 destinations in the US, a Mecca for Indian visitors.”

Having reduced fares to compete with budget airlines on domestic sectors, Tata-SIA owned Vistara might face a similar situation now on international routes. Nevertheless, Vistara expressed confidence in its ability to compete internationally for the long term.

“We have put in great effort to develop our international operations plan, taking into consideration industry dynamics,” said a Vistara spokesperson. “Our expansion roadmap is aligned with the delivery schedule of our new aircraft and product readiness.”

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