Learning to fly

Sure, growth, at 25 per cent levels, has been great over the past few years, but in an infrastructure-constrained country, things are soon going to get rough. 8220;Growth rates are going to slow down. Sub-10 per cent could happen as early as 2007,8221; warns Jayesh Desai, director, Ernst 038; Young, who advised Air Sahara on the deal with Jet.

Try telling that to the slew of airlines getting in, thanks to relatively-low entry costs, easy access to funds, and balance sheets that are not awash in red 8212; yet. 8220;It8217;s a matter of concern that there is so much capacity being generated in the Indian market even though the flying population is limited. We are concerned over the quality of orders we are getting,8221; says Dinesh Keskar, senior vice-president sales, Boeing.

The problem is that even though the key players have carved out niches for themselves 8212; pushing for scale, Jet-Sahara 46 per cent market share has a premium tag; state-run Indian 25 per cent is hoping to grab operational synergies by merging with Air-India; and Deccan 13 per cent has occupied the low-cost carrier mindspace 8212; managing the bottomline is not that easy.

For one, airlines are basing their average rate of return on a 70 per cent load factor. While most airlines say they are doing 60-70 per cent 8212; profitability comes at 65 per cent 8212; industry watchers say only a few are actually getting there. And, of course, dynamic pricing shaves off a good 5 percentage points of this load factor.

That brings us to pricing. While there have been successful examples of low-cost carriers globally 8212; Southwest, JetBlue, Ryan Air 8212; the cost dynamics of the Indian market are quite different, and don8217;t leave much room to manoeuvre. For instance, salaries are much lower in India than, say, in the US. With fuel and lease rentals making up the bulk of costs, that leaves the fringes, like administration and maintenance costs, to play with.

8220;I don8217;t see how long these new airlines can keep lowering fares when costs all around are rising,8221; says Boeing8217;s Keskar. Also, operationally, state-of-the-art pricing systems can solve matters for an airline, not necessarily a low-cost one, by ensuring that its seats go for a competitive price. But then, low-cost carriers are also about branding 8212; Air Deccan is a prime example 8212; that helps draw first-time flyers into the net.

But notwithstanding the strong counter-attack by the Railways, there is agreement across the aviation

industry that fares can8217;t keep going down. 8220;Even though consolidation will reduce costs, there isn8217;t any room left to cut fares. Fares have to stabilise if airlines want to stabilise,8221; says aviation analyst Kapil Kaul.

While some airlines have realised the importance of symbiotic relationships, industry watchers remain sceptical. Air Deccan, for instance, is clamouring for a strategic tie-up with Jet Airways, while GoAir and the soon-to-be-launched IndiGo are calling for the setting up of a low cost carriers LCC association to minimise competition.

8220;I think the present market dynamics present a good opportunity for all the airlines to cooperate and synergise their efforts, which will help almost all of them to lower their operating costs,8221; says Air Deccan managing director Captain Gopinath. However, industry analysts say cartelisation has never worked in general, and, in any case, the presence of state-run Indian puts paid to this tack.

This is not to say there aren8217;t operational synergies that airlines can draw from each other. For instance, airlines could consolidate their maintenance operations and cut costs. There8217;s also space for cooperation in inventory management, and the near future could see airlines combining to set up joint facilities in India.

GoAir managing director Jeh Wadia agrees, pointing to areas like cost management and ground operations. 8220;Due to factors like cost structure and price war, such consolidations were expected. Mergers do increase market share, but it8217;s a short-term growth benefit.8221;

Indeed, the current wave is one of necessity. Jet8217;s buyout of Air Sahara is fuelled by the need to grab market share and planes. And the merger between Indian and Air India is a survival strategy. 8220;The nature of co-operation among airlines is bound to grow. High oil prices in this cost-intensive industry are bound to fuel this. Globally, that8217;s the trend and it will continue in India also,8221; says Air India CMD V. Thulasidas.

Indian, for one, will gain more from a merger than Air-India, which is losing market share in a tough global market. But as the key lies in efficient operational management, experts remain sceptical of a dramatic improvement in fortunes.

As for the rest, 2008 is predicted as the year of true consolidation. By then, airlines won8217;t be able to ignore the red on their balance sheets. That8217;s why the government is looking at new laws 8212; like increasing the working capital for LCCs 8212; to ensure there8217;s no repeat of the early 1990s bust.

So, what then is the right formula to keep flying high? For all its complexities, the business has a basic tenet: prime the best slots, sell as many seats at the highest value. And run a tight, well, plane. In other words, systems, systems, systems. There are huge, hidden benefits from maintenance, baggage handling, ground operations, customer service that airlines need to tap.

And airlines that pick up a hub, and 8216;own8217; it, stand a better chance of survival because they command significant market share. Jet, for instance, is working towards this model in the domestic space by developing Mumbai and Kingfisher is targeting Bangalore. Delhi is up for grabs. And there are another 10 key airports waiting for the wings.

With Zeeshan Shaikh