The big opportunity and many challenges for Vistara

With Jet Airways suspending operations in April — another full service carrier (FSC) shut shop in India. From January to June, over 70 percent of Indian passenger traffic was carried by Low Cost Carriers (LCCs) with national carrier Air India and TATA-SIA joint venture Vistara being the only two FSCs in operation currently.

The Indian aviation market has been growing at record speeds since 2014, until the fall of Jet Airways. Airlines have placed record orders with both Airbus and Boeing, the country has recorded good growth and yet since 1991 when the civil aviation sector was de-regularised, FSCs have not been able to make a cut in the market — which has been dominated by LCCs since mid-2000s.

From 1991 until 2005 when Kingfisher Airlines started, the FSC flag was being held high by Jet Airways and Air Sahara along with state-owned Indian Airlines. By 2006, Air Sahara was pocketed by Jet Airways and Air Deccan which started operations in 2003 was hurting competition, until Kingfisher purchased it in 2008. Kingfisher ceased operations in October 2012, after being in “holding pattern” for a few months. From 2012 to 2015, Jet Airways had a free run again — with just one competitor in the FSC space — the

state-run Air India.

And that’s where the word of caution for Vistara comes in. The competition in India is too intense that having little competition has seldom helped airlines make money, especially in the FSC space.

The nemesis of FSCs has been the seating configuration. While LCCs have a single class, offering certain seats at a premium for the frills, FSCs have had different configuration and almost all have gone back on their initial studies. Kingfisher at its peak had 80-plus aircraft and they included A319 (144 seats), A320 (174 seats), A320 (180 seats), A320 (20 Business, 114 Economy seats), A321 (199 seats), A321 (20 Business, 156 economy seats), A321 (32 Business, 119 economy seats) and the A330s which did the international routes. The complexity was enormous.

Kingfisher later announced that it would re-configure all its A320 aircraft to operate with eight Business class seats and 156 Economy class seats. However, it was a case of too little, too late. May be one or two aircraft were inducted before the airline went into an unrecoverable spin and shut down after being in “holding pattern” as was termed by the management.

Jet Airways finalised on its configuration of 12 Business class and 162 Economy class seats, taking the total up to 174 seats in its B737 MAX8 aircraft which it inducted last July. Unfortunately, the research which went into this after having multiple kinds of configuration across the -700s, -800s and -900s, lasted less than a year as the airline suspended operations this April. Again a case of too little, too late as the airline intended to replace its older aircraft, one a month to standardise the fleet in terms of configuration and product.

Vistara — on the other hand has a different history. The airline which did a lot of market research before finalising the configuration of 16 Business class, 36 Premium Economy and 96 Economy class seats — a total of 148 seats. Just a year into operations, the airline decided to re-configure its aircraft to cut down the premium offering and have eight Business class, 24 Premium Economy and 126 Economy class seats. The airline further tweaked the configuration, adding a row of Economy class seats. And just when it looked settled, the airline has inducted B737-800s, which earlier operated with Jet Airways. Did this become a case of too much, too soon? The size of business class traffic between the metro routes which Jet Airways carried was available on a platter for Vistara — if it had the capacity and while Jet Airways had 12 Business Class seats, Vistara has eight, a 33 percent drop. No doubt the ex-Jet Airways B737s which are now with Vistara help, but at a marginal drop in product from its very own A320s.

While Jet Airways lost a lot in the seven-year battle with Kingfisher, Vistara had to battle Jet Airways for just over three years. Most of which, Vistara invested in creating its own niche than going after Jet Airways and avoiding “locking horns” which Kingfisher and Jet Airways did, leading to erosion of value for both.

While both TATA and SIA have remained committed towards Vistara and funded it time and again, the airline needs to show profitability and not just increase in revenue. Everybody knew that Vijay Mallya had deep pockets, but nobody knew how deep they were. Likewise, everybody knows TATA and SIA have the capacity to fund losses due to growth and expansion, but nobody knows how long they would be patient.

History shows, Indian market works on wafer-thin margins and the only way to remain profitable has been to cut costs and have discipline on the cost side, in the absence of increasing margins on the revenue side and for Vistara it would be no different. In an year when the airline lost Rs 800 crore, one wonders if it was justified to invest in a robot which merely scans the boarding pass and tells the gate, something which is visible on the Flight Information Display System (FIDS) or such investments have long term value and would be realised over a period of time — an answer which only the airline can give. Company strategies are not discussed in public domain, analysts can at best take a guess but this is an opportunity which if missed may never come again for any FSC in India and Vistara has a golden opportunity to turn around this tide and be a successful FSC with international scale and reach.