Will they fare well with low-cost model?

In times of crisis, organisations try out various strategies to survive.

Airlines that are full-service carriers (FSCs), facing an uncertain future, are doing exactly that: trying to experiment with the low-fare model by quietly introducing several new options that allow passengers to choose lower fares minus the add-ons, like free food and other amenities.

Jet Airways, which has been offering fare options since 2016, has gone further down the road by introducing newer low-fare categories with the flexibility of choosing seats with flight+meal or flight only. (Jet has posted a net loss of ₹1,261 crore on a consolidated basis for the quarter ended September 30.)

In August this year, Vistara, another full-service carrier, allowed its passengers the benefit of a bundle of features, claiming that it offers “freedom to choose from thoughtfully designed bundles of features and services at different price points for their preferred flight and class of service or select them à la carte .”

In comparison, state-owned Air India, which is also a full-service airline, does not offer passengers the option of paying less to fly if they buy a ticket without free food.

According to industry watchers, this is perhaps one way of dealing with the current aviation scenario in the country. Crisil Rating points out that the current fleet size in the industry is about 600 aircraft. It expects an annual addition of 120 aircraft in fiscals 2019 and 2020 alone. Further, operating cost is increasing due to the depreciation of the rupee, oil prices are increasing, the input costs are high and there are fears that any attempt to allow fares to move northward could see the passenger carriage fall. This is leaving full-service airlines with little choice but to look at new methods to ensure that they remain relevant in the domestic market.

On select routes, seasons?

But does it make sense for the full-service carriers to go in for a partial low-cost carrier (LCC) model? According toSharat Dhall, Chief Operating Officer (B2C), Yatra.com, “ Ideally it should help them offer lower fares and hence attract customers from LCCs. However, considering they have high load factors, it might only result in lower revenue and hence probably needs to be done on select routes and seasons.”

Yatra’s data shows that for a particular day, November 12, between Delhi and Hyderabad, IndiGo was charging ₹7,515 while a Jet Airways ticket was priced at ₹11,349 or 51 per cent higher. Between Chennai and Mumbai, IndiGo was charging ₹4,507 or 39 per cent lower than ₹6,283, which a ticket on Jet Airways costs.Using these fares as an example, Dhall says, “Clearly, if loads are low on some flights where Jet Airways and Vistara are more expensive than IndiGo, then there is an opportunity for them to offer a lower price, no-frill, product.”

However, both Jet and Vistara have not yet embraced the low-fare model completely. Penalties for making changes after one buys a ticket under the low-fare category are steep. In the case of Jet Airways, the cancellation fee as well as for changing the date of travel can sometimes be more than 50 per cent of the ticket fare while Vistara does away with that option altogether. For example, for a flight between Bengaluru and Delhi for February 15, 2019, an economy seat fare is ₹3,160. But the cancellation fee is ₹4,200 and for a change of date of travel, it is ₹3,900.

Will this model work now?

At another level, questions can also be raised about the LCC model’s efficacy. LCCs IndiGo and SpiceJet are facing their own financial problems. Further, when the LCCs came on the scene, aviation turbine fuel (ATF) prices were low and they could afford to sell seats at lower costs. Today, however, ATF prices are up again.

Even a year ago, ATF prices were 30 per cent cheaper but during the last six months, they have increased by 25 per cent. In Delhi, on October 1, domestic airlines were being charged ₹74,567 per kilolitre as against ₹61,450 per kilolitre that they paid at the beginning of April this year (an increase of 21.6 per cent).

Similarly, in Mumbai, domestic airlines were paying ₹74,177 at the beginning of October as against ₹61,025 charged for a kilolitre of ATF at the beginning of April, which is an increase of 21 per cent.

As jet fuel accounts for about 45 per cent of the cost of operations, the fares should actually go up by 15 per cent but no airline can dare to do so as both the LCCs and FSCs now believe that selling more tickets or seats at lower fares is better than having more empty seats in an aircraft.

The spokespersons of both the airlines tried to defend the new fare categories claiming that such an option had been in the works for some time now and that they have nothing to do with the LCC and FSC debate.

Some others are of the view that Jet, in particular, needs a new business model to tide over its current financial situation. Says the pioneer of low-cost airlines in India, Capt G R Gopinath, “If the promoter does not have an open mind and is not willing to reinvent his original business model, which may be inherently flawed with the change of technologies and new players changing the rules of the game, there isn’t much one can do to save the airline.”

According to D Sudhakara Reddy, president of the Air Passengers’ Association of India, while Vistara may manage to tide over the current crisis, Jet Airways may not be that successful. “The airline just doesn’t have the financial power to wade through the crisis. It has been losing ₹14 crore per day, has deferred salaries to its pilots, which is a dangerous thing to do. If it doesn’t reduce fares, its yields will suffer further. It could go into a tailspin soon,” warns Reddy.

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