High-flying low-fare carriers

By Jeh Wadia
MD, GoAir

In recent years, one of the most significant developments in the aviation industry has been in the low-fare carrier (LFC) segment. It operates on the concept of point-to-point travel without the frills of a full-service carrier (FSC), but focusing on customer service and convenience. The LFC challenged to redefine the then-existing paradigm of air travel in India and the resulting impact was phenomenal. The Indian aviation sector which never grew more than six per cent, has grown in excess of 50 per cent since the Indian aviation explosion by LFCs in 2003.

In the last three years, the Indian aviation industry witnessed the entry of four domestic low-cost carriers. The huge success of LFCs is directly related to their ability to service a combination of metro and non-metro destinations, at prices that are marginally higher than AC II-tier railway fares. Now, there are only three key players in the LFC segment connecting Indians through a network of 449 airports/airstrips.

I am sure that passengers often wonder how LFCs are able to offer such low fares. This is the result of a strategy aimed at achieving highest cost efficiencies whose value benefits are directly transferred to the passengers in terms of 'low fares'. The most important aspect of low fares is to book early. The golden rule in low-fare airlines is 'the fare is never cheaper tomorrow'. By achieving early bookings at low fares we are able to ensure we fill the aircraft to a load factor of 95 per cent in comparison to a full-service carrier that would only fill its aircraft 65 to 70 per cent. The reason being low-fare carriers have a strategy of high volumes and low margins, whereas, full-service carriers have a completely opposite strategy of low volumes and high margins. That's the primary reason why the Indian aviation sector never grew beyond six per cent before the low-fare airlines entered the scenario.

This strategy combines various operational guidelines like single passenger class, single type of aircraft (commonly the Airbus A320), reducing training and servicing costs, elimination of 'free' in-flight catering and other 'complimentary' services (that are optional and paid-for in LFC flights), flying during non-peak hours to avoid air traffic delays, deriving benefits of lower landing fees, faster turnaround times resulting in maximum utilisation of aircraft, simplified routes, emphasis on point-to-point transit instead of transfers at hubs which reduces disruptions due to delayed passengers or problems like luggage missing on connecting flights, emphasis on direct sales of tickets through internet thereby avoiding fees and commissions paid to travel agents and computer reservations systems, multi-tasking HR policies thus limiting personnel costs and aggressive fuel hedging programmes.

These operational guidelines have helped LFCs keep the cost of travel lower by almost 35 per cent to 40 per cent as compared to the costs of travel incurred when travelling on a FSC. The low fares are not promotional gimmicks, but a sincere effort to turn a common man's dream to fly into a reality. By achieving better operational efficiencies LFCs have been able to work out best fares for customers. Thus, low-fare airlines ensure that we empower passengers by giving them the lowest fare seat with the option to buy the rest if they choose to. A full-service carrier gives you an expensive seat with meals. Even if you don't eat, you are still paying for it.

Another misconception amongst people is that there is difference in the maintenance and safety standards followed by LFCs and FSCs. It is necessary to clear this myth. All airlines have to adhere to the maintenance standards as prescribed by DGCA. These rules are applicable to all airlines. This is the reason, GoAir has tied up with Singapore Airline Engineering, which is one of the best airline maintenance companies in the world, to maintain and service our aircraft. The low fare is not a result of poor service or safety standard but a smart business model adopted by LFCs.

Other key impediments to running low-fare airline in India are the high tax structures - sales tax on ATF, infrastructure not being able to keep up with the passenger capacity in-flow resulting in continued bottlenecks in air and on ground, outdated policies and expensive landing and navigation fees as well as other airport charges. Government's action towards reducing the existing taxation burden on the Indian aviation sector by changing current tax structures and government policies will go a long way in fuelling future growth of this sector and make low-fare models more profitable in India enabling them to offer lower fares than what they are at present.

It should also be noted the honourable minister of civil aviation is doing an outstanding job in improving the infrastructure and policies and the impact of these improvements can already be seen. Unfortunately, infrastructure development cannot happen overnight and therefore we have to be patient and ensure that we have a growth plan linked to the realities of infrastructure development. If these growth plans are not linked to infrastructure development and the introduction of aircraft is far more aggressive than the enablers changing, you will end up with a chain of business tribulations.

Despite all odds, it is commendable to note that LFCs are focused on offering on-time service at consumer-friendly fares without compromising on quality or safety. These airlines generally fly aircraft like Airbus A320 or Boeing 737 which result in huge savings on training and servicing. Moreover, experienced pilots are hired to fly these aircraft.

Interestingly, aggressive marketing strategies adopted by the LFCs have driven the growth of the domestic aviation industry. Market research shows that full-service carrier are losing market share every month to LFCs. So to say the least, in India, low-cost carriers are creating value by adopting smarter business models that has resulted in the creation of a new generation of air travellers in the sub-continent.