The Hindu Business Line : Why the Maharaja's choice may save his life

NOT MANY might see at first glance that the decision of Air India to buy all aircraft from one manufacturer rather than split the order between two manufacturers is in itself a sensible one.

Never mind which company was chosen and what political pulls finally worked in its favour, but this step is important enough to save the Maharaja's life some day.

Consider the following. By buying from one supplier, one can of course negotiate better prices and payment terms. Maintaining of expensive stock of spares also improves operating economics.

Repairs and maintenance of aircraft is usually a significant cost, often a higher ratio of turnover than net profit itself, and thus can make a huge difference to the bottomline.

Training of crew too costs less. As people get used to one style of functioning, turnaround times between landings and take-offs are faster, building up to greater capacity utilisation and customer-friendlier scheduling.

Replacements and substitutions are easier, and over the long haul, professionals will learn the peculiarities of saving fuel and maximising mileage on one type of aircraft, which again will affect margins dramatically.

As the famous example of Southwest Airlines, an outstandingly successful, short-haul, low-cost operator in the US has shown (in a series of Harvard Business School cases), working with one model of airplane directly results in better operating margins and sustained long-term profitability.

True, the total case history is a far more complex one including several factors: The unusually low pricing strategy (copied in this country now by Deccan Airlines); the targeting of the private car user as the potential user for under-one-hour short-hauls; the use of smaller mid-town airports; the work culture; the leadership, and the values.

Nonetheless, this one decision of having an all-Boeing 737 fleet contributed largely to making SWA the only airline in the US to declare profits every quarter for many years — while many others have actually had to file for bankruptcy or seek emergency financial rescue measures.

Dallas-based Southwest, now in its 33rd year of operation, has reported 31 consecutive years of profitability. It is the largest carrier in terms of domestic passengers (third quarter of 2004) and serves 60 airports in 59 cities, operates 2,900 flights a day, has 31,000 employees, and runs a fleet of 424 Boeing 737s.

As The Economist said in 2003, "airlines have long been a laughably unprofitable industry. In America, one successful medium-sized airline, Southwest, is worth more than the rest of the industry put together — not surprising, since most of its competitors are massively loss-making".

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