Why some airlines are more profitable

Flying lighter aircraft, operating several flights between fewer cities and keeping a tighter rein on costs could probably explain why the low-cost carriers (LCCs) in India are able to report better financials than full-service carriers, despite having to work in the same operating environment of high fuel costs and airport charges.

Consider the figures: The two low-cost airlines IndiGo and SpiceJet reported profits of Rs 550 crore and Rs 61 crore in 2009-10. On the other hand, Kingfisher Airlines reported a loss of Rs 1,647 crore and Jet Airways reported a loss of Rs 420 crore. Again, in 2010-11, while Jet and Kingfisher posted losses, SpiceJet and IndiGo remained profitable.

Tighter ship

Industry analysts believe that LCCs run tighter ships and thus are more profitable. Take, for example, the no-frills model of a low-cost airline. Since it does not provide a hot meal service, the aircraft has none of the equipment required to keep the food hot. It also does not carry any cutlery. All this lightens the aircraft, which in turn leads to less fuel burn. And given that fuel in India is at least 50 per cent more expensive than globally and one of the biggest expenses, these measures help.

LCCs also keep their aircraft utilisation rates high, by cutting turnaround times and using their space better. On an average a low cost airline can seat between 160-190 passengers as compared to about 150 by a full service aircraft. The pure low-cost model also requires lower staffing.

Lower staff costs

An airline like IndiGo, which has 46 aircraft employs less than 4,500 people and connects just about 30 cities. As compared to this, Jet Airways (with JetLite and Jet Konnect) employs about 14,500 people with a fleet strength of 117 aircraft. The composition of the fleet and limited routes plied can also reduce cost structures. Despite these measures, with crude oil prices rising sharply, all the listed airlines have reported losses in the past two quarters. Kingfisher has pointed to high fuel costs as one of the key reasons for its losses in the latest September quarter, but a comparison with the other listed airlines suggests other factors at work too.

Other factors

Kingfisher's interest costs as a proportion of sales were as high as 22 per cent in the latest September quarter, compared to 6.9 per cent for Jet Airways and a negligible 1.2 per cent for low cost carrier SpiceJet. Costs other than interest payouts and fuel also seem to have had a role in Kingfisher's poor performance.

The airlines' cost per available seat kilometre (CASK), a key metric used to assess how competitive an airline is, was Rs 4.31 in the September quarter. This was much higher than the Rs 3.31 reported by Jet Airways. Of this number, Kingfisher incurred as much as Rs 2.46/SKM on costs other than fuel, 45 per cent higher than the Rs 1.69 for Jet Airways.

Incidentally, fuel cost, which is often painted as the biggest villain of the piece accounted for 54 per cent of sales for Kingfisher, compared with the 48 per cent for Jet Airways and 63 per cent for SpiceJet.

Fare factor

There is unanimity in the industry that for airlines to survive there is a need to further increase fares.

The Chief Executive Officer, SpiceJet, Mr Neil Mills, feels that air fares in India are irrational. “The fares are probably about 20 per cent below what they need to be,” he said. This from an airline which claims to have the lowest ASK cost in India.

Incidentally this is something which the Federation of Indian Airlines (FIA) also agrees with. The fares in India have been the lowest in the world when compared to other mature markets. Domestic fares in India are currently as low as one-third of what airlines charge in other countries over similar distances, FIA said in a communication to Secretary Civil Aviation.

COMMENT NOW