Business Today

Airlines renew debate over low-cost model

After five years of chasing low-fare passengers and having worsened their financial conditions, a section of the airline industry is getting back to full service model to achieve viability and to stay in business.

Lalatendu Mishra   Mumbai     Last Updated: October 7, 2011  | 10:45 IST

An unfair price war among all of India's airlines to grab market share irrespective of financial outcome has now caused a great divide.

After five years of chasing low-fare passengers and having worsened their financial conditions, a section of the airline industry is getting back to full service model to achieve viability and to stay in business.

It will now be full service versus low-cost carriers, both chasing a different class of passengers.

Hard times for Kingfisher

Having lost tonnes of money and realising its mistake, liquor and aviation baron Vijay Mallya's Kingfisher Airlines recently decided to shut down his low-cost arm Kingfisher Red that has contributed more to its mounting losses.

From early 2012, Kingfisher will offer only full service flights with business and economy class seats to achieve higher yields. It is increasing 10 per cent seats. No more no-frills service from the " King of Good Times". "We believe that the competition will be far more intense in the low fare space than in the full service space," said Sanjay Aggarwal, CEO, Kingfisher Airlines in a statement while justifying the airline's move to get out of the low-cost business.

"Operating costs of low-cost carriers and full service carriers in terms of fuel, airport charges, engineering and maintenance and crew costs are similar. Full service carriers incur additional costs, which are more than recovered through higher yields," Aggarwal said.

He said in addition to large aircraft orders placed earlier, Indian LCCs have placed orders for over 250 aircraft in the recent months.

"In the last two years, capacity induction of the LCCs has outpaced the growth of demand in the domestic market. The induction of so many additional aircraft in the low-cost segment will potentially lead to substantial over capacity and a price war with declining yields," the Kingfisher CEO said.

"With continuing economic growth, business related travel is increasing significantly. Businessmen and executives are willing to pay extra and this segment is not as price sensitive as the classic low-cost segment," he said.

He said a detailed study has clearly demonstrated that Kingfisher's full service product had generated higher yields and load factors, which reinforces the view that the business travel segment is more sustainable than the extremely price sensitive low fare segment.

"While there are currently five airlines ( IndiGo, SpiceJet, GoAir, JetLite, Kingfisher Red) participating in the low-cost segment, there are only three full service carriers namely Air India, Jet Airways and Kingfisher Airlines. While competition certainly exists in this full service segment, such competition is tempered because of the frequent flyer loyalty programmes," Aggarwal said.

Air India has been resisting the lure of low-cost segment and despite being the only airline offering full service it is even aggressively competing with low-cost carriers by selling tickets at 20 per cent discount.

It is another matter that Air India is financially supported by the government and its determination to stay completely full service may now pay off because it will have company in the form of Kingfisher and Jet Airways, which is mulling to transfer its lowcost Jet Airways Konnect service to JetLite.

Courtesy: Mail Today 


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