Business Today

Low cost, high share

LCCs have grabbed 40 per cent of the market.

Print Edition: February 24, 2008

IndiGo’s Ashby: Making money is tough
Bruce Ashby
When the Kingfisher Deccan deal was completed in late 2007, it was estimated the three large airline groups, that is Air India-Indian, Jet-JetLite and Kingfisher-Deccan, controlled about 85 per cent of the market. However, the latest figures released by the Directorate General of Civil Aviation (DGCA) are an eye-opener: The large independent airlines, particularly SpiceJet and IndiGo, have cornered 22 per cent of the market.

These two airlines have no plans of slowing down, as low-cost carriers (LCCs) are grabbing an increasing share of the market. Along with SpiceJet and IndiGo, GoAir, Deccan and JetLite grabbed over 40 per cent of the market, which grew a massive 32.5 per cent to 42.3 million domestic passengers in 2007. With Deccan and JetLite putting brakes on their growth and GoAir with still a relatively small fleet, SpiceJet and IndiGo are poised to grab a higher share of the market. SpiceJet cornered 9 per cent of the market and IndiGo, which started operations in mid-2006, managed a share of 7.6 per cent barely 18 months after starting out.

That said, SpiceJet, which is a listed company, declared a smaller than expected net profit of Rs 9.3 crore for the quarter ended December 2007, even though the company’s operating profit was a meagre Rs 4 lakh on operating revenues of Rs 438 crore. During the same period Jet Airways lost Rs 90 crore and Deccan Rs 190 crore.

With fuel prices rising, and the current economic scenario leaving people with less disposable income, is there concern for the coming year? “No”, says Samyukth Sridharan, Chief Commercial Officer, SpiceJet, “There might well be a slowdown in growth, but growth should still top 20-25 per cent this year.” SpiceJet is expected to grow its fleet from the current 18 aircraft to 25 aircraft by the end of the year and the company’s board recently approved a further order of 10 Boeing 737 aircraft.

At IndiGo, Chief Executive Officer Bruce Ashby is also highly optimistic, but admits that making money is a challenge. “There needs to be some amount of rationalisation of fuel prices, because fuel contributes over 45 per cent to our costs right now, and that is very high,” he says. The problem, as he points out, is that often a few hundred rupees difference in average fares, “can make the difference between a full and a half-full plane”. IndiGo recently received its 16th aircraft and is expected to take delivery of seven more this year.

Brand building is going to be a major challenge for both airlines. “You cannot grow on low fares alone, and that is what has driven growth so far. We have to become a carrier of choice and while offering competitive fares we should also have pricing power,” Sridharan says.

“I think there is space in this country for two highly-focussed, purely low-cost carriers to survive,” says Sridharan, a thought echoed almost verbatim by Ashby. 2007 has been a vintage year, but the challenges of 2008 might lead to some serious turbulence.

— Kushan Mitra

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