Flying High with Low Frills …

© Rahul Mirchandani

Case Objectives

• To analyse the low cost, no frills airline industry, with specific reference to India, after making
global comparisons.
• To assess the factors that have contributed to the successful growth and consistent
profitability of airline companies following this business model.
• To analyse the strategies of Air Deccan, India’s first no frills carrier.

Background
Air travel is one of the world’s largest
industries having generated over $300
billion in revenues in 2003 alone.
A low-cost carrier (also known as a no-
frills or discount carrier) is an airline that
offers low fares but eliminates all “non-
essential” services.
The typical low-cost carrier business model
is based on:
The first successful low-cost carrier is
generally acknowledged to be Southwest
Airlines in the United States, which
pioneered the concept when founded in
1971 and has been profitable every year
since 1973.
With the advent of aviation deregulation
the model spread to Europe as well, the
most notable success being the Irish
Ryanair, founded in 1985.

• a single passenger class As of 2004, low cost carriers are now

• a single type of airplane (reducing edging into Asia, lead by operators such as
training and servicing costs) Malaysia's Air Asia. August 2003 saw the
• a simple fare scheme (typically fares launch of Air Deccan as India’s first low
increase as the plane fills up, which cost carrier.
rewards early reservations)
• free seating (which encourages For the past five years, low-cost airlines
passengers to board early) have been growing at more than 40 per
• direct, point to point flights with no cent a year, while the full-service airlines
transfers are yet to recover from the crisis that hit
• flying to cheaper, less congested them post 9/11. Many of these low-cost
secondary airports airlines, be it Southwest Airlines, easyJet,
• short flights and fast turnaround times Ryanair or even AirAsia, have had a great
(allowing maximum utilization of run.
planes)
And the CEOs of these low-cost airlines
• "Free" in-flight catering and other
now see themselves as a tightly-bound
"complimentary" services are
community of evangelists who have an
eliminated, and replaced by optional
avowed mission: to make air travel
paid-for in-flight food and drink.
accessible to more and more people.
 Case Brief
On August 27, 2003, the Indian traveler
heaved a sigh of relief. The newspaper
headlines screamed “Now every Indian can
fly”. Overnight, the Indian civil aviation
scene had changed radically with the launch
of low cost regional services by India’s first
no-frills airline, Air Deccan. However, not
many in the aviation industry had taken Air
Deccan seriously. Not surprising, given that
Air Deccan was operating with just seven
French-made, 48-seater ATRs, largely in the
South, on routes that the bigger
competitors wouldn't care about.
Besides, not too many people in the top
management of Air Deccan had any real
experience in the aviation business. The
CEO, Capt G R Gopinath himself would
seem like a bit of a rolling stone, having
dabbled in many things, including the army,
multi-crop farming, sericulture, agri-
consultancy and then a helicopter charter
service. Not quite the combination that
would inspire confidence.
One year later, on August 25, 2004, the
Goliaths of Indian aviation—Jet Airways, Air
Sahara and Indian Airlines —got a taste of
future. Air Deccan offered India an
opportunity to buy an air ticket to any
destination on its network, including metros,
starting at mere Rs 500 + taxes!
Whatever be the future for this youngest
airline in India, Air Deccan’s CEO, Capt
Gopinath will most certainly go down in the
annals of history as the man who changed
the civil aviation dynamics in India forever.
Capt G.R. Gopinath, said, “Our motto is to
cut costs and pass on the advantage to the
people. We want people who had never
boarded a plane or dreamt of flying to fly
with us.”
India’s Civil Aviation Sector
Airlines
The Indian skies presently have seven
scheduled domestic carriers. These include
Air-India, Indian Airlines, Alliance Air, Jet
Airways, Air Sahara, Air Deccan and Blue
Dart Aviation (in scheduled cargo services).
Both A-I and IA also fly abroad. Pawan
Hans, Bharat Hotels, Escorts, EIH (The
Oberoi group), Taj Air, Jagson, Mesco, Tata
Tea, UB Air and United Helicharters are
amongst 37 non-scheduled airlines in the
country.
One significant policy development by the
previous NDA government was allowing
private domestic air carriers to operate
international flights. It is now slowly taking
wings. The government permitted Jet and
Sahara to start operations in Sri Lanka,
Nepal and Dhaka. In March 2004, the status
of both Jet and Sahara changed from being
domestic airlines to international airlines.
Airports
The findings of the Naresh Chandra
Committee report, A Roadmap for the Civil
Aviation Sector, paints a dismal picture of
airport infrastructure. In all, there are 122
airports which are managed by the Airport
Authority of India (AAI). Of these 94 are
civil airports (including 11 international)
and 28 are civil enclaves at defence airfields.
Out of the 400-odd airstrips and airfields in
the country, only 62 are in use. Dispersal of
traffic simply hasn't happened, with over 40
per cent of traffic being between Mumbai
and Delhi. The four gateway airports
account for 42 per cent of revenue. Only 10
airports made a profit in 2001. Finally,
airport charges are almost 78 per cent
higher than the international average. Says
the report: "Barring a few airports,
available infrastructure is under-utilised.
There are a large number of airports where
full infrastructure is available, but only
operate one to two flights a day."
More Airlines
At last count, at least four companies were
in the process of starting up new no-frills
airlines in India. There is Royal Airlines, the
new avatar of ModiLuft, and AirOne and
Visa, both of which are promoted by former
Indian Airlines employees. Then there is
Vijay Mallya's UB Group, which is gearing
up to launch its Kingfisher Airline.
Air Deccan - Reshaping an Industry
Inside Out
Air Deccan has turned conventional wisdom
on its head. Explaining the business model
of Air Deccan, its managing director G R
Gopinath says: “Our business model helps
us cut operation costs by about 50 per cent
compared to regular airlines.”
Key elements of this unique business model
are summarized below.
Lean Product
Air Deccan’s product is basic – minus hot
meals, frequent flyer programmes, decent
legroom, and a full complement of air-
hostesses.
No meals on board means Air Deccan does
not need the extra space for storage.
Instead, Air Deccan has added seats.
In the typical Jet and Indian Airlines layouts,
one could increase the seat factor by as
much as 20 per cent by pulling out the
business class, reducing the seat pitch (how
far the seat can incline), and throwing out a
couple of galleys. "Now, if you can put in
three extra rows, then you get (6x3) 18
seats more. In a 120-seater aircraft, if you
get 18 seats more, you are up by 15 per
cent," says Cyrus Guzder, CEO, Airfreight
Ltd, and a well-known aviation expert.
Besides, there's no time wasted on cleaning
the aircraft. The result: quicker turnarounds
at the airports. Also, there's no need for a
crew of more than six, or even four,
members.
While most full-service airlines like Jet take
at least an hour to leave an airport after
landing there, Deccan does it in 15-20
minutes for ATRs (and about 30 minutes for
its new A320 service.) So, if Deccan does
six sectors a day, it can fly one additional
sector a day. This allows it to fly 20-30 per
cent more than a full-service airline. On an
average, the conventional airlines fly their
aircraft for 8-9 hours a day, while a low-
cost carrier is able to keep its planes
airborne for 11 hours a day. "It is only by
more hours of flying that you can give a
lower price," says Gopinath. In fact, it is
able to make the same revenue with fewer
aircraft.
Now, squeezing out more from the capital
asset simply lowers the fixed costs. Even
other costs, like costs of the crew,
hangerage or even finance costs are
somewhat lower. All this tots up to close to
40-45 per cent less depending, of course,
on how much extra the airline can fly.
Unique Pricing
Air Deccan has already pitched its fares
slightly higher than AC II-class fares, but
lower than AC I-class fares. In the past few
years, rail fares, especially in the higher
classes, have gone up. Despite that, a
quarter of a million passengers travel on AC
trains every day. So if the differential isn't
much, there's a possibility that a large
number of them could well upgrade to air
travel.
Air Deccan uses a simple yield management
model while pricing its inventory of seats on
each sector.
Ms Vijaya Menon, Air Deccan’s Manager
Corporate Communication, explains : “The
broad rule of the thumb for the pricing is 25
per cent of the inventory will be available at
Rs 500 to Rs 4500, 50 per cent at Rs 4500
and the balance at Rs 4500 to Rs 6250. 3
seats will be sold at Rs 500 per flight. This
is an instance of the Delhi-Guwahati flight
where other carriers charge around Rs 9000
for regular one-way fare.”
Economies of Scale
Air Deccan uses the same type of aircraft in
its fleet. This way it can move pilots and
cabin crews around, and won't have to
worry about carrying spares for three
different kinds of aircraft. That generates
economies of scale.
E-distribution
Air Deccan tries to save on distribution
costs, which can be 11-15 per cent in a
conventional airline. They do this by not
going through the travel agents and the
existing central reservation systems like
Amadeus and Galileo. Instead, they sell
through the Internet and call centres. Air
Deccan does not issue a ticket, as it costs to
print, mail and process tickets. What
passengers get instead is a booking number
when they make a reservation. Passengers
have to quote this number at airport check-
ins, and present their photograph ID to
collect their boarding pass.
Funding
The high mortality rates and wafer-thin
margins in the airlines business make it
hard for entrepreneurs to raise money. So
far, Air Deccan has been funded through
contribution by directors and cash accruals.
Gopinath and his close aide and executive
director K.J. Samuel hold 26 per cent each,
while Vishnu Rawal, an old Hong Kong-
based friend of Gopinath, owns 8 per cent.
Golden Ventures, promoted by an NRI
Group, holds another 20 per cent. Then,
Bangalore-based Brindavan Beverages has
taken up an 18 per cent stake. Deccan has
raised funds from investors (equity: Rs 30
crore) and taken a debt of Rs 70 crore from
Bank of Baroda. That adds up to Rs 100
crore. Captain Gopinath has mandated N.M.
Rothschilds & Sons to raise $60 million-70
million to fund expansion. He has been
jetting around the globe, presenting a
business case to private equity funds like
Warburg Pincus and CDC, which have
shown an interest in funding Air Deccan. If
Gopinath is able to get funding, it will be
the first instance of private equity in an
airline in India.
Global Ambitions
Air Deccan is also keen on introducing
international flights, but they can do so only
after having three years experience as
scheduled domestic airlines.
The Battle for Indian Skies
Airline Current +/- from
Market previous
Share year
Air Deccan 1% Nil
Indian Airlines 41.8% 39.3%
Jet Airways 46.7% 48.4%
Air Sahara 13% 13%
Total domestic passengers flown during
August 2004 estimated at 14.78 million.
The Indian skies are witnessing a bloody
battle for market shares. A much
anticipated farewar has broken out. A little
before Rono Dutta announced the Air
Sahara 'surprice' package, Indian Airlines
(IA) extended a host of promotional fares
and Air Deccan came up with its most
fantastic offer: the Rs 500 Mumbai-Delhi
ticket.
The Air Sahara surprice is a 30-day advance
return fare that's 36 per cent less than the
30-day advance apex fare. IA's 'metro non-
metro Scheme' lets travellers pay Rs 1,000
for the non-metro leg of a flight, if it
includes a metro leg. Air Deccan will shift to
dynamic pricing next week where, the
earlier you book a ticket, the cheaper the
fare (Rs 500- 8,000 for a Bangalore-Delhi
ticket).
In fact, in the last few months, IA has
quietly introduced discounts under various
heads: round-trip fares, weekend fares,
special fares, etc. And though, after the
recent 10 per cent fare hike in June, its
one-way Mumbai-Delhi fare is up from Rs
6,575 to Rs 7,215, it has a promotional fare
of Rs 6,445 till 30 September. (Jet has a
similar offer.)
All domestic full service airlines continue to
offer Advance Purchase (Apex) fares that
reward passengers for booking tickets
30/15/7 days in advance, with fare levels
increasing as the date of travel approaches.
These fares are significantly cheaper than
economy class fares. Though apex fares
form a small percentage of the overall
seating capacity — at 10% or even less —
they have ushered in an era of cheap travel,
which consumers find within their reach.
What is most significant is that at their
lowest level (Super Apex 30 days advance
purchase) these fares are lower than AC
class train fares and even lower than the
full fares of Air Deccan.
Some experts say the price cuts are a
reaction to a normal, seasonal fall in
passenger traffic (schools reopening,
monsoons, etc.). In fact, demand can drop
by 15 per cent in July and August. "Even if
we sell 8-10 seats for Rs 1,000, it adds
straight to our bottomline,'' says an IA
director.
But others say the fall is due to competitive
pressure. The battle has just begun.
Constraints in India
Government Controls
Around 35-40 per cent airline costs in India at
present are government imposed. Internationally,
this figure is around 15-20 per cent. Take the
recent tax on leasing. Depending on where you
lease from, this will hike costs by 15-40 per cent.
If the government forces Indian carriers to go to
certain countries, leasing costs will go up.
Suddenly, that country will be deluged with
requests from Indian airlines to lease planes.
Moreover, airport charges, aviation turbine fuel
(ATF) cost and other operational costs (all
government controlled) are the same for all airlines,
whether it is a low cost airline or not.
Poor Airport Infrastructure
The problem wth airports was clearly summarized
by Rono Dutta, CEO, Air Sahara, in an interview.
He said: “We can buy more airplanes and put them
in the air. How do you take all these people
through the terminals? Not enough gates, not
enough counter space, not enough parking bays.”
Lack of secondary airport infrastructure
In Europe as well as the US, low-cost airlines have
one more way to shave off costs - but one that
Deccan or its followers will not have in India for
some time to come. These airlines avoid flying into
mainland airports and, therefore, don't incur high
parking and landing fees. So, instead of Heathrow
in London, a low-fare airline would use Luton or
Stansted. India doesn't have too many secondary
airports, and this is considered a major constraint.
The Naresh Chandra Committee, however, has
suggested a compromise - lower landing and
parking charges for low-cost airlines.
Lessons from the West
The world over, low-cost airlines have begun to
radically change the rules of the business. In
market after market - be it in the US, Europe and,
now, Australia and South-east Asia - the low-cost
model has expanded the market, and gained
significant share. Full-service airlines have
responded in one of three ways: restructure their
operations, launch their own low-cost airline, or
simply get crippled.
Part of the industry’s problem is the very nature of
the product it offers. An airline seat is a fixed-cost
perishable product. The incentive to fill empty
seats and fly underutilized aircraft is tremendous.
Idle capacity inevitably comes back on the market
as start-ups buy the aircraft or established airlines
increase the utilization of expensive assets.
Meanwhile, manufacturers continue to build and
deliver new aircraft, adding new capacity. Pricing
and overcapacity pressures, however, pale in
comparison to the impending impact of the cost
gap that exists in the airline industry.
By cost gap, we refer to the 2:1 differential that
exists between traditional full-service airlines’ unit
The table below provides a snapshot of the global trends related to low cost carriers :
costs and that of low-cost carriers for a given stage
length (route distance in miles).
Low cost carriers, such as Southwest and Ryanair,
don’t operate on the low end of the airline cost
curve; they occupy an entirely different cost curve.
(see exhibit below)
Europe

Here, the gravy train is turning into a graveyard. After a decade of phenomenal growth,
Europe's low-cost airlines are struggling. There are too many seats available on too many
aircraft for rock-bottom prices which are simply too low to be profitable.

The following table makes a comparison of European Low-Cost Airlines based on the degree to
which the low-cost concept has been implemented can be shown using the predefined
strategic success factors.

However LCCs (like Ryanair) with their
superior business design for inexpensive
direct flights, will expand their European
market share from the present 5 percent to
25 percent by 2010, thereby establishing
themselves on a long-term basis.
Given the attractiveness of this market,
new airlines are bound to be founded.
However, only purely “low-cost” business
designs will be successful. In the long run,
only two to three low-cost airlines will
survive as major players on the intra-
European market.
The aviation market in Europe has split in
two major customer segments. Customers
will choose different airlines for different
purposes: flexible holiday and private
travelers and price-conscious business
passengers prefer low-cost airlines for short
routes (upto a maximum of 4 hours), while
the big network carriers focus on intra-
European and inter-continental business
passengers.
Low-cost airlines also compete with
European railways, especially on the
lucrative, heavily used long-distance routes
(roughly 400 to 700 km).
Some airports, especially regional airports
and former military bases (e.g. Frankfurt-
Hahn), offer low-cost airlines remarkable
opportunities for growth.
United States of America
A generation after deregulation of America's
airlines in 1978, low-cost carriers have
seized control of the US domestic market.
Low-cost airlines may now be mature as a
concept in America, but the market remains
in flux. Since September 11th 2001, the six
largest network carriers have slashed costs
and reduced capacity by one-fifth as they
have struggled to stay financially solvent.
Even before the terrorist attacks, however,
budget airlines were on a roll. Since 2000
they have expanded capacity by 44%. Low-
cost carriers currently have 400 orders out
for new planes, whereas the old network
carriers have only 150 planes on order.
Most of the expansion has come from
JetBlue, Frontier and AirTran; Southwest,
which accounts for nearly half the sector,
has been obliged by the wider air-travel
recession to check its expansion, although it
is now returning to its former growth path
of 10% a year. Southwest is the fourth-
largest American airline by passenger
numbers.
Behind the current recovery there lies a
bitter truth for network carriers. Though
their passenger numbers are rising,
revenues remain flat because they cannot
raise prices. As the cost of jet fuel soared in
the spring, some network carriers tried to
compensate by raising ticket prices, only to
give up within days. Budget airlines control
pricing in the market.
A look at the comparisons made in the table that follows highlight the wide differences in
operational costs:
Parameter
No. of employees per aircraft
Ticket Sales through travel agents
Passengers guaranteed connections
No. of US cities serviced
No.of foreign countries serviced
Average Pilot salary
Seniority of captains
No. of downtown ticket offices
Types of planes operated
The financial performance of U.S. airlines
since 2000 has followed two very different
paths. Despite significant cost-saving
initiatives and industry-wide traffic volumes
approaching pre-September 11th levels,
legacy airlines continue to lose money.
Legacy airlines’ unit costs (cost to fly one
seat 1 mile) have increased since 2000
while fares have declined; as a result, these
airlines have yet to regain profitability.
Meanwhile, low-cost airlines continue to
expand market share, enjoy a greater unit
cost advantage over legacy airlines than
they did in 2000, and in all but one quarter
have collectively earned a profit. The weak
performance of the legacy airlines over the
last 3 years has significantly diminished
their financial condition; as a result, some
of these airlines are vulnerable to
bankruptcy, especially if there are
additional shocks to the industry.
Unit cost competitiveness is the key to
profitability of airlines because airlines have
found it extremely difficult to increase their
revenues in the current environment. While
legacy carriers reduced their overall
operating expenses over the last three
years, these cuts largely paralleled legacy
airlines’ capacity reductions. Conversely,
low-cost airlines have been able to reduce
their unit costs through expansion. Low-
cost airlines’ ability to maintain lower labor
costs and lower asset-related costs
accounts for the majority of the unit cost
differences between low-cost airlines and
legacy airlines.
The cost advantages enjoyed by low-cost
carriers are striking.
Low cost US Full service US
carrier Legacy carrier
84.6 (Southwest) 116 (United)
2% (JetBlue) 61.2% (USAirways)
10% (Southwest) 40% (American
Airlines)
23 (JetBlue) 109 (United)
0 23 (United)
$ 135,000 (AirTran) $ 215,000 (Delta)
< 10 years (AirTran) 5 to 35 years (Delta)
0 (SouthWest) 13 (USAirways)
1 (JetBlue) 16 (Delta)
 Parameter Low cost US Full service US
carrier Legacy carrier
Employee Benefits No defined-benefit Avg. $ 9.99 an hour
traditional plans (Delta)
Average Base pay $ 8.25 an hour $ 21 an hour
(JetBlue) (USAirways)
Weeks of training required before NA 8 weeks (Delta)
moving pilots to different aircraft
categories

The following diagram illustrates the overall impact of the widening unit cost differential gap
between the low cost and legacy carriers in the USA over the years:

Wall Street analysts suggest that one of the
best measures for examining airline unit
cost performance is to relate airlines’ unit
costs to the stage length (distance) flown.
The gap between legacy and low-cost airline
unit costs has widened across all route
distances. For example, in 2000, at a
1,000-mile Route distance, legacy airlines’
unit costs were 45 percent higher than low
cost airlines; by 2003, legacy airlines’ unit
costs were 67 percent higher.
The cost advantages in the low cost airline
business model have ensured that the no-
frills segment has never faced operating
losses in the USA.
Overall, industry-wide demand in the USA
has nearly returned to pre-September 11th
levels, but fares have not. Although nearly
as many passengers are flying as before
September 11th, they are paying less to do
so.
In addition, legacy airlines are losing
market share to the low-cost airlines.
Demand, as measured in the number of
miles paying passengers were transported,
is down over 10 percent for the legacy
airlines since 2000; demand for low-cost
airlines has risen nearly 40 percent. Not
only are legacy airlines collecting less fare
revenue from the passengers they fly, they
are also flying fewer passengers than they
used to. Low-cost airlines are flying more
passengers at lower prices.
External Challenges
A series of significant changes and
unforeseen events during the last several
years has presented the global airline
industry with its most significant challenges
since it was deregulated. These challenges
have come from within the industry as well
as from external factors affecting the
demand for air travel.
Demand for air travel began weakening in
2000, well before the September 11th
terrorist attacks. An economic downturn
that began in 2000 depressed airline
revenues, and the terrorist attacks of
September 11th, the Iraq war, and the
outbreak of Severe Acute Respiratory
Syndrome (SARS) have compounded this
trend. These events have contributed to a
change in the demand for air travel that is
likely to suppress revenues for the
foreseeable future, including the inability of
airlines to charge premium business fares.
Although it is impossible to isolate the effect
of various events, demand as measured by
revenue passenger miles (RPMs), was down
6.5 percent and 11.4 percent for 2001 and
2002, respectively, from the US Federal
Aviation Administration’s (FAA) June of
2001 forecasts.
Looking ahead
The entry of these low-cost carriers will
have several far-reaching implications for
the aviation sector in India and, to a wider
extent, on the mass transportation industry
and domestic tourism. In a country of a
billion people, the Indian aviation industry
is puny. We have 12 million people who
travel by air every year against 3 million
passengers who fly everyday in the US,
even though its population is one-fourth
that of India. The number of daily flights in
India averages just about 400 a day, as
against 40,000 flights a day in the US.
Ryanair, among the low-cost pioneers in
Europe, flies 25 million people in a year and
still has less than 5 per cent market share.
Closer home, in Malaysia, there are 12
million people who travel by air yearly. Look
at it another way: India's 200-million
middle-class population is equal to that of
the whole of Europe. Even if we assumed
that only one-fourth of that large middle-
class could afford and would be willing to
travel by air, it would call for at least a 5-6-
fold increase in capacity.
Aviation experts are betting that Jet and
Sahara could start a debilitating price war
to push the fledgling no frills airlines off the
tarmac - permanently. Almost as a
precursor to the impending battle, intense
lobbying with the civil aviation ministry has
begun. Last week, Praful Patel, the new
minister of civil aviation, met the heads of
all the domestic airlines in the capital. At
that meeting, the representatives from Jet
and Sahara sprung a surprise by arguing for
a new level-playing field. They wanted the
government to increase the minimum
equity needed to start an airline from Rs 30
crore to Rs 250 crore-300 crore. Also, fleet
sizes ought to be at least 7-10 planes, not
five, they argued.
While both Jet and Sahara were unwilling to
comment on this, aviation experts say the
two operators of what the industry calls full-
service airlines, are trying to erect entry
barriers. After all, it could well be a matter
of their survival.
So, what are the possible future scenarios?
Over the next few years, one can expect to
see a complex system of low-cost airlines.
Depending on the amount of capital they
are able to raise and the business plan they
formulate, some will ply on the trunk routes,
others on the Class A and B towns and then,
some will operate purely as air taxis.
As for Deccan, Gopinath is committed to
being a serious player in the high
sweepstakes game. "We don't want to be a
regional airline. We want to be a known as
a national airline, going to the regions. If
you want to be a major player, you have to
be a national player," he says.
For the moment though, Deccan remains a
small player, flying just about 1,600-1,700
passengers a day and expects to achieve a
turnover of Rs 450 crore by end of March
2005. Jet, on the other hand, had an
operating revenue of Rs 2,876 crore in
2002-03 with a fleet size of 41. So the
critical question is: does Deccan have the
deep pockets needed to withstand a price
war?
Much will depend on how the competition
will react. Fortunately, a low-cost airline has
the advantage of being a model that throws
up cash much faster than its full-service
counterparts. So, if Deccan can survive the
price war for the first year or so and scale
up, it will soon reach a size where Jet and
the rest cannot undercut without losing
massively in the bargain. "It is always
simpler to drop prices if you are trying to
take on a company with just three planes.
If, Air Deccan, however, scales up fast to
100 planes or so, the others cannot
undercut it without maiming themselves,"
says Kaul.
Even if it does scale up, there's another
possibility: success will soon attract
imitators. The pending applications in the
Civil Aviation Ministry for new start-ups, all
of whom want to be low cost carriers, is a
clear signal that a massive influx of new
entrants is on the cards.
In Europe, the original pioneers, Ryanair
and easyJet, are suddenly faced with too
many new competitors in the same low-
price segment, sparking off an intense price
war. "To attract customers, they are cutting
prices to unreasonable levels, impacting the
profitability of the entire sector," says
Nirmalya Kumar, professor of marketing
and director of the Aditya Birla India Centre
at the London Business School. Kumar, who
wrote a prize-winning paper on easyJet,
says some low-cost airlines also lose their
bearing and begin adding frills like assigned
seatings, hot meals and in-flight
entertainment to attract some of the more
comfort-seeking customers. But that leaves
them exposed to being undercut by a new
competitor who focusses exclusively on
price. "Anything (like frills) that adds costs
and reduces price competitiveness is a bad
trade-off. After all, if you get them on price,
you could lose them on price too," says
Kumar.
In the low-price sector, only those with the
lowest costs survive in the long run, and
scale does matter in delivering the lower
costs. "In the short run, all sorts of
dislocations happen until the newcomers
start running out of money," says Kumar.
Captain Gopinath will be hoping that he can
steer his company through the turbulence -
and stay on course to be India's first
successful low-cost airline.
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