homeviews NewsIndian aviation is an LCC market. The conventional FSC model will not work

Indian aviation is an LCC market. The conventional FSC model will not work

In a country that is loyal to low fares and dominated by low-cost carriers, a different mindset is needed for full-service carriers to thrive.

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By Ameya Joshi  Feb 10, 2020 2:12:22 PM IST (Updated)

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Indian aviation is an LCC market. The conventional FSC model will not work
Indian aviation has in recent years been dominated by low-cost carriers (LCCs). In 2019, LCCs carried 87 percent of the total number of passengers.

The number stood at 68 percent at the beginning of the year. Vistara – the only private full-service carrier (FSC) — after the fall of Jet Airways, decided to induct some of its future aircraft in all economy configuration. The airline is already operating one such aircraft.
Over the years, LCCs have been snatching more and more passengers from the FSCs. India might soon end up with one private FSC, Vistara. Air India, the government-owned other FSC is up for privatisation in the next couple of weeks.
In the early days of operations, Vistara revealed that its research pointed that food was one of the decisive factors for air travellers in India. But to an independent observer, the three-class layout of its aircraft, meal preferences, juices and Starbucks coffee in premium coffee seemed expensive for the Indian market. Slowly but surely, the airline scaled down its food offering, an area which every FSC in the past has looked to cut costs to rein in ballooning losses.
Vistara is not the first airline to do so. Over the last decade or so, FSCs in India tried every trick in the book — and sometimes outside the book — to take on the steady growth of LCCs. Yet, two large FSCs – Kingfisher Airlines and Jet Airways — had to shut down. Air India survives only because of government benevolence.
Kingfisher Airlines and Jet Airways both operated a low-cost subsidiary. These airlines tried operating certain sectors with a low-cost offering, operating non-peak hour flights as LCC offering and peak hour flights as FSC offering, reverting to a full-service model and then offering a fare class without meals and more. It is heartening to see that Vistara isn’t trying any of this, but merely going to operate certain sectors with only economy class on offer.
In a recent reply in Rajya Sabha, the minister of state in the aviation ministry said more than 7 lakh business class seats remained vacant in Air India in the year 2018-19. The number stood at close to 6 lakh the previous year.
India – a low fare market
Since liberalisation of Indian aviation in the early 1990s, India has always been a low fare market. The growth was modest in the initial years with load factors ranging in the 60s and 70s as the fares were high.
Once the LCC revolution started, the fares dropped drastically as LCCs tried adopting the global revenue management technique of having early bookers at cheaper fares and then building on. However, there was a problem.
Indians have always been loyal to one thing – low fares and discounts! Except on a few occasions, the traffic dropped when fares went up and traffic went up when fares went down. As capacity kept increasing, airlines started to look for bums on seats to get some revenue and kept dropping the fares.
This led to a mismatch between the costs and fares for an airline. Unlike the west, where LCCs operate to secondary airports to save costs, charge for frills like meals, seats, bags and even water, India is a constrained market. Water is to be given free and the propensity to buy seat is still lower. Airlines have been thus focusing on lowering unit costs, in the absence of ability to increase fares!
Going by Vistara’s decision and historic finances of Kingfisher and Jet Airways, it is clear that there are markets in India where selling premium class of service is a challenge and FSCs on most routes outside the metros have to price closure to LCCs to attract traffic.
Is it time to re-look at the model?
Air India has moved to offering only one choice of meal to its economy class passengers. Likewise, Vistara has scaled down its meal service for economy class and already has a buy-on-board service for one fare class. Can India have a model where there is Business Class – with all the frills and then there is an economy class where the passengers have to purchase food?
Food may not be very expensive for the airline, but it is elaborate – from contracting to deciding and rotating the menu and loading it to the aircraft with buffer and special meals loaded, it makes it costly. Airlines typically have 30 percent extra food as they do not know the preference and mix of the guest they are flying on a particular day.
Over the last few years, airlines in India have reduced fresh food on offer and have opted for food that has longer shelf life, helping reduce wastage and save costs.
Airlines could potentially reduce the cabin crew as the service levels will not have to be the same as current! This will also help the airlines compete better with LCCs, have faster turnarounds and possibility of additional ancillary revenue. The average flight time within India is between one to two hours with the maximum stretching up to three hours!
No matter the service, FSCs will continue to offer a loyalty programme irrespective of the class of service, the overhead of loyalty programme will remain. However, Jet Airways has shown that loyalty programme can be valued separately and could well be used to raise cash. As Air India goes for privatisation, the new owner – if an airline — may merge its loyalty programme and help reduce costs.
Who else does it?
American and European carriers have long moved to a differential way of service. European carriers, for example, do not have a business class seat. They have rows of economy class seats, most of the times with higher leg room and in case of a
3x3 seating like is the case with most aircraft in India, the middle seat is kept empty. The difference in business class? An empty middle seat and a meal, unlike economy where meal is not served but only water, cold drinks, juices and tea or coffee is served. Again this service in the economy class varies from airline to airline, with some airlines offering a cookie or a muffin to go along with the non-alcoholic drink with a full menu available for buying on board.
While most American carriers have a business class seat, the economy class sees a complimentary cookie or similar snack. With the expanse of the country, the US carriers fly for over three hours on many routes and yet do not serve meals and have them as a buy on board option in the economy class.
Both these mature markets have moved to a limited service in Economy. In India, Jet Airways tried this for a while. A dual-class aircraft operating Jet Konnect service offering full service in Business class and buy-on-board in economy. However, Jet Airways had multiple other models and challenges going on at the same time, limiting its success and its financial costs were so high that benefits realized from such unique ways were hardly seen.
Tail note
A European or American Economy class would still need a sub-fleet which both the FSCs are already operating, where the airlines either offer a separate Business class seat with additional features on metro routes and regional international and a limited Business class seating with middle seat empty on non-metro domestic routes or have first two or three rows being treated as business class with additional leg room, meals and more and the rest of the cabin being economy with no frills – similar to European FSCs.
Every FSC in India has found it difficult to find the right mix. For Kingfisher and Jet Airways, it was too late when they thought they had found the mix. Vistara too has tweaked the mix far too often in five years of operations.
That opens up the possibility of radically changing the mix altogether. In a country that is loyal to low fares and dominated by LCCs, a different mindset is needed to take them on as a FSC.
Ameya Joshi is the founder of aviation analysis blog NetworkThoughts. Ameya writes a lot on aviation. You can catch all his columns here.

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