More for less. That is what the Indian travelling public has been demanding. Now, with foreign destinations beckoning Indian carriers and regulations permitting flights, the low-cost long-haul business model is attracting interest from Indian LCCs, writes C Santosh.
Low Cost Carriers (LCCS) today dominate the Indian domestic aviation sector, which as per the Directorate General of Civil Aviation (DGCA) grew at 17.31 per cent during January-December 2017 (1171.76 lakh passengers), as compared to the same period last year, when 998.88 lakh passengers flew on Indian domestic flights. Stifled by decades of inertia and dominated by state-owned airlines with little incentive to improve their services, India’s domestic aviation sector until the nineties was far behind global industry benchmarks. The last decade and a half however, has seen the emergence of Indian LCCs who have made air travel affordable to larger sections of the population than ever before. Indian carriers have benefited from surging domestic passenger demand and according to the DGCA, air passenger traffic in the country witnessed a growth of 18.3 per cent (Domestic 21.5 per cent and International 8.5 per cent) in 2016-17 as compared to 2015-16.
The dominance of the LCCs can be gauged from their passenger load factors (January 2018); SpiceJet, GoAir and IndiGo respectively, reported 95 per cent, 90 per cent and 89.7 per cent load factors in January and Jet Lite was at 89.7 per cent. The legacy Indian full-service carriers along with the Vistara and Air India reported load factors in the mid to high 80 percentile range. Indian LCCs now have more than 64 per cent market share of the Indian domestic aviation sector across IndiGo (39.7 per cent), GoAir (9.6 per cent), SpiceJet (12.6 per cent) and Jet Lite (2.3 per cent). Importantly, these LCCs have earned a reputation for efficient service and on-time performance, in addition to matching or exceeding their peers in Southeast Asia in terms of operational efficiency and customer service. It is this reputation for safe travel, on-time performance and access to a modern fleet (IndiGo was the first Asian operator of the A320neo), that will have customers queuing up for long-haul LCC flights.
The emergence of low-cost carriers (LCC) and ultra-low-cost carriers (ULCC) has brought about a reduction in airfares worldwide, over the last 10 years, which has resulted in a reduction of average airfares by 0.9% per year. 10 out of 30 largest airlines now have an LCC in their group. LCCs are hardly a new concept having first emerged in the 70’s, Asian LCCs however, came into prominence post 2000. “In Asia, rapid expansion of LCCs has been a key driver of overall growth in the short-haul market since the early 2000s. As a result, the LCC penetration rate in some Asian regions is now more than 50 per cent of their home markets,” says Boeing’s Current Market Outlook (CMO) 2017-2036.
The global aviation sector itself has grown dramatically from 100 million passengers in 1960, to 3.7 billion passengers in 2016. With larger number of travellers taking to the air from India, China and Southeast Asia, air travel is expected to reach four billion passengers in an even shorter time. India is expected to become the third largest commercial aviation market by the early 2020s and this growth will also mean greater numbers of India’s fast growing middle class taking up tourism and travel like never before. With a growing market guaranteed, Indian LCCs have begun actively pursuing the long-haul international flight business model. This sector is expected to offer potentially higher margins as the domestic LCC market becomes more competitive.
The imminent entry of LCCs into the long-haul segment has also spurred traditional full-service airlines such as Air India and Jet Airways into offering better connections and services in order to safeguard lucrative international sectors from marauding LCCs.
In terms of aircraft fleet sizes, 2018 will also see IndiGo overtake Air India in terms of fleet size. This will certainly be a milestone event in Indian aviation history. Cumulatively, according to Ministry of Civil Aviation (MoCA) figures, the major Indian airlines are slated to introduce 894 new airplanes into service by 2024-2025. Presently approximately 550 airplanes are operated by airlines in the country. According to figures released by the MoCA, Air India’s aircraft fleet comprises of 158 aircraft and it will induct 3 B777-300ER and 16 A320s by March 2019. From the 65 aircraft ordered from Boeing as part of a 2005 Air India order, delivery has been completed of 27 B787s, 12 B777-300 ERs, 8 B777-200LRs and 18 B737s. Air India is in the midst of inducting 27 A320Neo aircraft acquired on dry lease and 11 are already in service. IndiGo took delivery of its 150th Airbus A320 in December 2017 and is slated to take delivery of 399 A320 Family airplanes and 47 ATR72-600s over the next seven to eight years. SpiceJet today has a total fleet of 60 airplanes (38 B737s and 22 Q400s) and will add 107 B737-800s/737 MAX Family aircraft starting this year till 2023. GoAir which has a fleet of 32 A320 Family aircraft (ceo and neo) will add 119 A320 Family aircraft from this year till 2022. Jet Airways has an existing fleet of 119 and will complete induction of five more B737-800s this year. The airline will also introduce into service its first B737 MAX8 in June. Jet Airways will add 81 more 737MAX Family aeroplanes by 2024. Air Asia is also on the growth path with regards to its India operations and the LCC will induct 60 A320 Family jetliners over the next five years to add to its current fleet of 13 A320s. Vistara, which currently has 17 A320s will add only five aircraft this year as it continues its measured growth in India. The new generation commercial aircraft being acquired by Indian LCC and full-service carriers will serve to stimulate passenger travel and provide a real opportunity for Indian carriers to handle the bulk of India’s outbound air travel. It will also help that more and more India’s are now keen to travel abroad.
A Change in Business Model
It is not a matter of simply adapting the LCC short haul model but coming up with a new model that caters for the greater operational complexity of long-haul international flights and ensuring regulatory compliance over an international network. Since LCCs do not offer customer loyalty programmes, they will need to retain the affection of the customer over a solid foundation of safe, efficient service and of course attractive fares. A well thought out choice of international sectors that can make use of the existing domestic network as a feeder service will also be vital. There is also the matter of higher aircraft utilisation and quick turnaround time which is the cornerstone of the LCC model (along with ideally a single aircraft type). This is simply not possible on long-haul flights due to the longer stage length which reduces the cost advantage. While it is uncertain as yet if Indian LCCs will offer an all Economy Class layout for international sectors or offer the more common approach of providing some premium seats as well. This however, will reduce overall seating capacity and introduce complexity into the booking process, hence raising costs. What is certain, however, is that the Indian traveller, who has an unmatched sense of value will quickly latch on to the LCC which offers the best combination of price, value and features on low-cost long-haul flights. The airlines, however, will need to compete with not only regional longhaul low cost carriers, but also with International network carriers who have now also joined the fray with their own low-cost, no-frills subsidiary airlines.
Leading India’s LongHaul Low Cost Charge
India’s leading LCC, IndiGo, is bullish on prospects for domestic and long-haul low cost international travel out of India. IndiGo appointed India veteran Wolfgang Prock-Schauer as Chief Operating Officer (CEO) in January. Prock-Schauer had previously worked with GoAir and Jet Airways. IndiGo now operates flights to eight international destinations with Colombo in Sri Lanka being the newest. “We just look at our international flights as pretty much accidently crossing an international border. It is the same flight, the same airplane and a similar product. So, yes, you see some more international, but you will see lot more domestic. We will go and chase where the opportunity is, so, it is not that we have either tied down to one or the other,” said Aditya Ghosh, President and Whole Time Director, IndiGo. The induction of the A321neos later in the year, with 234 seats vs 186 seat A320neos, will allow the airline to further target lucrative export routes. However, there remains concern that performance issues related to the Pratt & Whitney Geared Turbofan (GTF) engines which were to have been resolved by late 2018/early 2019, could continue longer than anticipated. In the latest episode, IndiGo announced that it had grounded 3 aircraft powered by PW1100G-JM engines. Speaking of IndiGo’s long-haul plans and Air India, Ghosh says “While the government has made certain announcements relating to the privatisation of Air India, we are still awaiting details of the process. We remain interested in acquiring the international operations of Air India but as we have said previously, we will explore the long-haul opportunity with or without Air India. In that context, we will start seeking route rights and other necessary regulatory approvals as may be required to operate long haul flights.” IndiGo founders Rahul Bhatia and Rakesh Gangwal had first indicated in July 2017, that they were interested in commencing long-haul international flights from India and their specific interest in acquiring the international operations of Air India. The LCC believes that a significant opportunity exists in longhaul international travel out of India as a result of a large number of passengers who arrive or depart from India on connecting international flights due to the lack of non-stop flights into and out of India. The availability of direct flights from India at lower fares would be an attractive value proposition for potential customers. IndiGo has built up a significant domestic presence over the last 10 years and with almost 40 per cent domestic market share, it has the passenger base to feed its international operations and the ability to build meaningful operations at all large metropolitan cities of India. This large domestic feed network is key to the airline’s plans to build a successful longhaul low cost business. It is perhaps with an eye towards proposed longhaul low cost operations, that IndiGo is looking to change the sale and leaseback model, which the airline has historically used to finance its aircraft. Gangwal announced in July, that IndiGo would change its short-term, sale and lease back model and gradually begin the process of owning aircraft with internal funds and some amount of debt if required. IndiGo had adopted the short term, six-year, sale and lease back model to ensure that it was not stuck with a large fleet of A320 Classic’s but prepare instead for a fleet of new generation A320/321neos. It is expected to start purchasing A320neos without sale and leaseback from later this year. Owning an aircraft tends to have a lower overall ownership cost than leased airplanes over the long term and the shift in IndiGo’s fleet acquisition strategy will allow the airline to reduce its operating costs which will result in higher profitability. Large low-cost carriers such as Southwest and Ryan Air as an example maintain a substantial number of owned aircraft in their fleets. IndiGo’s choice of aircraft for its longhaul low cost operations will be interesting, many expect it to stick to being an all Airbus operator.
The Other Contender
SpiceJet is likely to be the only Indian LCC that will try and match IndiGo’s long-haul low cost operations. The airline plans to add 12-15 Boeing 737 aircraft and 6-9 Bombardier Q400 aircraft to its existing fleet of 38 Boeing and 22 Bombardier Q400 aircraft by December. SpiceJet placed an additional order in June for 20 737 MAX 10 planes worth USD 4.7 billion and 20 conversions. “The 737 Max will be a game-changer,” says Singh and the airline will receive its first aircraft, a 737MAX8 in 2018. An operating cost reduction of 8-9% is expected on each 737 MAX, whose deliveries start in August. The airline has approximately 140 737 MAX airplanes on order and a total of 205 Boeing airplanes on order (firm and options) valued at up to USD 22 billion (at list prices). As an all Boeing operator, the 737 MAX10 would be the ideal aircraft for longhaul low cost operations, however, mention of the 787 has also been made as an aircraft SpiceJet would consider for international operators. Airbus is also in the fray for this requirement with the A350-1000.
Protecting its Turf
Jet Airways will fight tooth and nail to combat the challenge from LCCs seeking to encroach on its profitable long-haul routes. The airline is now in the final year of a transformation phase that began in FY 2015, with measures taken to enhance the Jet Airways brand, network diversification, increase asset utilisation, and stemming losses. From FY2019 and beyond, the airline will maintain a continuous focus on cost reduction and take additional measures to reinvigorate the brand. Towards this, the airline has focussed on the Jet Airways brand with a full service offering across its network and enhanced service standards to passengers.Fleetwide utilisation of its Boeing 737s has now increased to 13.45 hours from 11.4 hours. This will unlock capacity equivalent to 36 B737s from March 2015 to March 2018. The carrier is also undertaking a maintenance cost reduction drive this year. Jet Airways will no doubt benefit from the introduction of its B737 MAX 8 airplanes from June2018, which will offer 15 per cent improved fuel efficiency. It is estimated that 25 B737 MAX 8 are to be delivered by March 2020. The chosen configuration by the airline is 174 seats (12 Business Class and 162 Economy Class). The airline will also increase the seats on its B777 wide bodies from 346 to closer to 400 seats from 2019. Jet Airways announced in February that it had completed refurbishment of its Boeing 777 interiors. Jet Airways operates 18 wide-body aircraft on its long-haul routes with ten B777s and the eight A-330s.
Aircraft assets have also been redeployed to optimise the carrier’s domestic network with an approximately 30 per cent increase in domestic capacity having been achieved over the last three years. The European gateway has also been repositioned to Amsterdam and enhanced partnership with Jet Airways’ international partners has led to them contributing to 15 per cent of total passenger feed. Etihad alone contributed more than 40 per cent of the Jet Airways’ overall partnership traffic. Jet Airways plans to realise a 12-15 per cent reduction in non-fuel CASK over the next 8-10 quarters and has been helped by low fuel prices. “The weak demand in the Gulf continues, whilst low fares as well as yields in the domestic market have limited the ability to offset the increase in fuel prices. In line with our commitment to offer guests a superior experience, we continue to grow our domestic presence while keeping a tight control on costs, reflecting in the reduction in non-fuel CASK,” said Vinay Dube, Chief Executive Officer, Jet Airways.
The Indian Environment
For sure, our regulatory intensive domestic aviation environment is far more rigid, and this will mean that LCCs will have to work very hard to ensure that they are able to maintain a low-cost business model for longhaul flights that maintains profitability. As to what extent the growth of longhaul low cost airlines will be supported in India it remains to be seen. The development of a longhaul LCC hub at one of the major Indian airports is key, however, this may take years to fructify, SE Asia remains the hub of longhaul low cost operations with Malaysia and Singapore being the key players. Keeping this in mind, the of Regional Connectivity Scheme (RCS)-UDAN (Udeh Desh ka Aam Nagrik) which has an approved budgetary provision of `4500 crores for revival of un-served/underserved airports/airstrips in the country, could play a key role in unlocking feed from regional airports to international airports for longhaul low cost operations. Presently, there are 96 operational airports (with and without scheduled flight operations) in the country. In the 1st round of bidding for UDAN, 5 airlines have been selected by the Airports Authority of India (AAI) to operate 128 routes connecting 43 unserved and under-served airports. As per MoCA, the revival of 50 airstrips/airports has been projected. Approval has now been granted “in-principle” for setting up of the 18 Greenfield airports in the country: Mopa in Goa; Navi Mumbai, Shirdi and Sindhudurg in Maharashtra; Bijapur, Gulbarga, Hasan and Shimoga in Karnataka; Kannur in Kerala; Durgapur in West Bengal; Dabra in Madhya Pradesh; Pakyong in Sikkim; Karaikal in Pudducherry; Kushinagar in Uttar Pradesh; Dholera in Gujrat and Dagadarthi Mendal, Nellore Dist., Bhogapuram in Vizianagaram District near Visakhapatnam and Oravakallu in Kurnool District, Andhra Pradesh.
New generation widebody jetliners have contributed to the rise of longhaul low cost carriers, the first of which was Boeing’s 787 Dreamliner. It’s combination of fuel-efficiency and passenger comfort has resulted in airlines using the 787 to open new markets or time-of-day windows that were just not financially viable with older-generation aircraft. The emergence of the 787 alone, resulted in more than 140 new routes opened up in just a few short years. The use of the 787 by airlines was key toopening new nonstop routes, such as the recently announced Perth–London service, San Francisco–Chengdu, and Melbourne– Vancouver, etc. The low Direct Operating Cost (DOC) of new twin-aisle types like the A330neo could make these types attractive to longhaul low cost airlines. attractive the larger long-range single-aisle. The 737 MAX 10 and A321neo jetliners will also be important contenders as they offer high density seating capacity and the range to undertake fights greater than five hours. With regards to LCCs alone, the distances covered by airlines in Asia-Pacific has grown from 950 to 1,150km between 2002 and 2016, an increase of 200 km or 21 per cent.
For some time now however, an overlap has existed between operations of twin-aisle and single-aisle aircraft types. Twin-aisle aircraft are used more often on routes less than 2,000nm, while single-aisle types are used on the routes longer than 2,000nm, according to Airbus. The use of twin-aisle on short-haul operations (routes less than 2,000nm) has increased by 26 per cent in the last six years, as per Airbus info. In the Asia-Pacific region 22 per cent of all short-haul operations are now performed by wide-body types. Capacity needs on these shorter sectors is one of the key drivers for the use of twin–aisle types, however, there is also the matter of airport congestion, where these aircraft prove useful. This trend is also evident with the fact that today, Asian LCCs operate approximately 100 widebody jetliners; merely a decade they had none.
Growth of Long Haul Low Cost Airlines
The growth of longhaul low cost airlines, really began to take off just five years ago, “In mid 2012, Singapore Airlines (SIA) launched Scoot and there have since been another 14 launches of long haul low cost operations including five under full service airline groups. Air Canada, Hainan Airlines, Korean Air, Lufthansa, Qantas, SIA and (most recently) IAG all now have subsidiaries or brands with long haul low cost operations,” a recent CAPA article said. “The fact all three main European airline groups – Air France, IAG and Lufthansa – have now joined the party is the biggest testament yet to the future of a model that until fairly recently seemed questionable,” CAPA says. Australia’s Qantas was the first full service airline group to launch a long haul low cost. It did this in 2006 when it launched international services under its pan Asia Pacific LCC brand Jetstar. AirAsia X was next to commence services in 2007. Since then six full service airline groups started long haul low cost subsidiaries. The latest entrant was International Airlines Group (IAG) which launched its longhaul low cost airline brand ‘LEVEL’ in June 2017. LEVEL is also the Spain’s first longhaul low cost operation and is the first step towards LEVEL’s expansion from other European cities. “This is the start of a fantastic new adventure for IAG. LEVEL’s sales are well ahead of our expectations in all markets. The brand has resonated with a new audience, many of whom are flying longhaul for the first time,” said Willie Walsh, IAG’s chief executive following the launch of operations in June 2017. “In 2018, LEVEL will increase its fleet to five aircraft and we are considering other European bases for the operation,” he added. Customers flying with LEVEL will also be able to earn and redeem, the loyalty currency for IAG’s airlines ‘Avios’. This offers them the opportunity to fly to 380 destinations across the Group’s network and is an important differentiator as compared to some of the other longhaul low cost carriers. Initially, LEVEL will be operating two A330 aircraft. LEVEL is IAG’s fifth main airline brand alongside Aer Lingus, British Airways, Iberia and Vueling.
As the long-haul, low-cost affiliate carrier of the AirAsia Group, AirAsia X serves 24 destinations across Asia, Australia, New Zealand, the Middle East and the US. It was the second longhaul low cost carrier to be launched. Since commencing operations in 2007 the airline has carried over 27 million passengers. AirAsia X started flights from Kuala Lumpur to Jaipur in February and is the only low-cost carrier to offer this direct route, which it will service four times a week. “India is one of our key growth markets, and we can build a stronger foothold here. We now fly to two destinations in the world-renowned Golden Triangle with the addition of the Jaipur flights to our existing Delhi services. This latest route addition brings the total of weekly flights connecting Malaysia to India under AirAsia Group to 110 times and total capacity under AirAsia Group including AirAsia X to 22,755 seats,” said Datuk Kamarudin Meranun, Executive Chairman at AirAsia Berhad and Group CEO at AirAsia X. “Through the increase in flight operations from airports in tier-II and tier-III cities, India’s regional connectivity will be enhanced. We expect this new route to boost passenger growth between Malaysia, India and the region,” he adds. The AirAsia Group has enabled over 16 million passengers to travel in and out of India since 2010. The AirAsia Group also plans to add all-economy class A330s in 2018, taken on third-party lease that will be deployed on shorter China routes, allowing the airline to redeploy its existing fleet to new markets. AirAsia X operates a fleet mainly comprised of A330-300s (30 aircraft). In contrast to full-service carriers, AirAsia X A330s are configured in a two-class layout with 12 Premium Flatbeds and 365 economy seats. The airline has a firm order of 66 A330neo, which are to be delivered starting this year through to 2027.