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LCCs IN ASIA
Above US$70 hurts demand.” SpiceJet and Boeing sealed a deal in
mid-January for up to 205 Boeing 737 variants worth US$23 billion.
Fares are not going up in a hurry and might even decline further
as capacity increases, CAPA said in its outlook for 2017. “ Traffic
growth is being stimulated above its underlying demand as a result
of excess capacity and competitive fares,” CAPA said.
LCCs — and other carriers in India — are only adding to capacity.
The budget carriers currently have around a 65 percent market
share. Boeing’s outlook showed all countries in Asia will need about
14,330 aircraft over the next 20 years and LCCs will account for the
acquisition of 10,370 narrowbodies. Other recent orders in addition to
SpiceJet’s include one from GoAir, which has signed a memorandum
of understanding with Airbus to add 72 new aircraft, doubling its
order book to 144 A320neo aircraft. Indigo, the largest carrier and
most successful LCC, has 422 planes on order.
“India’s LCCs are even cheaper than Malaysian airlines with tickets
costing US$2.50 per 100 km,” said Vinod Singel, managing director
of consultancy Aerosource India. Airfares in India are now matching
those of railways until mid-April. A one-way economy ticket on the
busiest air route in India and the world’s seventh, Delhi-Mumbai,
is on offer for as low as US$36 compared to US$98 a month ago.
The very low fares however, may impinge on profits. CAPA says
the low-fare phenomenon might last beyond mid-2017. “ With ex-
pected cost-creep of 10 percent, a 5-7 percent decline in yields,
oil at US$55-60 per barrel and an exchange rate of $1=Rs73-75,
industry losses could widen further to US$380-450 million in 2017-
18, although most LCCs are expected to remain profitable. Yields
could potentially decline further than assumed given the capacity
induction planned,” CAPA said.
The bad news for travellers is that the low fares won’t last forever.
“ We cannot cut fares indefinitely. Cost structures must be in tune
with revenues. Budget carriers by default have a lower cost structure
compared to full-service airlines that require higher revenues to
break even,” said a senior official at one budget carrier.
Aircraft deliveries, competitive dynamics and a positive outlook for
the economy, could result in domestic aviation growing 20 percent
for another two years, forecasts CAPA. Carriers in India have planned
an induction of 65 narrowbodies, of which 50 are by LCCs, and
around 10 regional aircraft in 2018, which will increase the share of
budget airlines to 75-80 percent.
IndiGo, India’s largest airline with a market share of 42 percent
as of November 2016, has a simple philosophy: offer fares that are
always low, flights that are on time, and a hassle-free travel expe-
rience. With its fleet of 126 Airbus A320 family aircraft, the airline
operates 883 daily flights connecting 41 destinations. Smaller, but
fast-growing SpiceJet is clear it is not looking at market share but
profitability and yields. Having been brought to life in 2014 when
Singh took the reins, he added: “ We have cleaned up legacy issues
we inherited and restored credibility to the airline.”
IndiGo and SpiceJet have expanded modestly on international
routes and are expected to ramp up from mid-2017. GoAir plans
to start international services for the first time, primarily to uncon-
nected destinations in Central Asia, the Gulf, China, and Vietnam.
SpiceJet with its recent order for up to 205 Boeing 737s, will get an
additional hour of flying that will enable it to explore more destina-
tions, Singh said.
The domestic sector will remain the core focus for LCCs. At Indi-
Go for example, increasingly controlling domestic capacity growth,
international operations are expected to account for only 10-15
percent of total capacity. SpiceJet has 20 percent of its operations
on international routes. “IndiGo’s share of traffic has crossed 40 per-
cent and could approach 55-60 percent within the next two years,
a remarkable achievement in such a large and competitive market.
As its share grows, the carrier is becoming more competitive with
its pricing,” said CAPA.
While AirAsia (India) has said it plans to have a fleet size of 20
by end-2018, it is not clear if plans are on hold given accusations of
fraudulent transactions and violation of Foreign Direct Investment
rules. Transactions were said have been cleared by chief Tony
Fernandes, a violation of Indian rules that mandate the majority
share should be held by Indian shareholders. AirAsia (India), is
a joint venture between AirAsia and Tata Group, each with a 49
percent stake and the remaining 2 percent held by two Indian
directors. The airline has said it will provide full information to
India’s Central Bureau of Investigation related to allegations made
by Tata Group’s ousted chairman Cyrus Mistry in a letter to the
company ’s directors.
Congestion and infrastructure issues at airports are starting to hurt
the industry as airlines increase capacity and passengers. “India is
the land of technology. There is no reason why we shouldn’t adopt it.
Congestion at airports should not become a bottleneck for growth,”
said SpiceJet’s Singh. SpiceJet became the first to take an initiative
for e-boarding at Hyderabad. A trial is now underway in Bangalore
to be followed by Mumbai.
Other initiatives in the sector are being introduced. Delhi-based
Airlines Technology (AT) is focused on NDC (New Distribution Ca-
pability), an XML-based data transmission standard provided by the
International Air Transport Association (IATA), and says it is creating
a “bridge between airlines and online travel agents.” While budget
carriers’ business models encourage web bookings, alternative low-
cost distribution methods are being sought.
“By saving on huge transaction costs, airlines will be able to sell
many other on-board services,” said Varun Bansal, the founder of AT.
“ We are working hard to create a long-term sustainable technology
platform that not only helps airlines’ top and bottom lines, but gives
consumers more choices and a better overall experience.” Using
technology is important to LCCs in India because at least 50 percent
of their tickets are sold via the web.
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