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Low-cost flying in for the long haul

by July 23, 2017 General

Barely hours after the Union Cabinet gave an in-principle approval to national carrier Air India’s strategic disinvestment late last month, India’s biggest low-cost airline IndiGo jumped into the fray showing interest in taking over the debt-laden, loss-making airline.

However, at the heart of IndiGo’s interest lies its strategy to start long-haul international operations replicating a successful low-cost model which the airline follows on domestic routes. The airline’s promoters made it clear — the plan is to start long-haul international operations, with or without Air India.

In May, another interesting development in the aviation space unfolded when low-cost airline SpiceJet’s chairman and managing director Ajay Singh said he planned to introduce a direct Delhi-London flight at ₹30,000 for a round trip. The fare quoted by Mr. Singh was much lower than ₹40,000-₹45,000 a ticket being offered by other airlines on this popular route. He said the airline woud look at unbundling services such as food, beverage and Wi-Fi from the fare component, essentially sticking to a low-cost model on a longer duration international flight.

The difference between a low-cost and a full-service carrier is simple. Low-cost airlines sell only the core product i.e. a seat to travel from one point to another to the passenger as a part of the airfare and passengers need to pay separately for the frills. Full-service airlines offer passengers a host of value added services, including in-flight meals, free beverages, and lounge for frequent fliers, among others but generally at a higher fare as these elements are packaged together.

In India, the market share of low-cost airlines such as IndiGo, SpiceJet and GoAir has expanded from about 24% in 2006-07 to 65% in 2015-16 compared with full-service airlines such as Jet Airways and Air India.

The compounded annual growth rate (CAGR) of 11.7% of low-cost airlines in the nine-year period compared with an 8% dip for full-service airlines shows that the former now occupied the imagination of the Indian flyer.

But can the magic of a low-cost model in flightsof between one and three hours duration be replicated on a 10-12 hour journey on international flights?

At least this is what the promoters of IndiGo, with a 40% market share in the domestic market, envisage. “Just like the low-cost model disrupted the short-haul, full-service legacy carriers starting a few decades ago, we believe that international long-haul markets are ready for the right type of low cost operations,” IndiGo founder Rakesh Gangwal told analysts during a conference call.

Analysts feel that the low-cost business model has the potential to enter the long-haul international market. “Given the sheer variety of passenger segments, needs and purchasing power, there is enough room in the long-haul market to support both full-service carriers and low-cost long-haul model,” said Amber Dubey, partner and India head of aerospace and defence at global consultancy KPMG, “This model has attracted a lot of interest and we can expect that globally, it may follow a similar trajectory that low cost carriers did in the domestic market, albeit at a lower growth rate.”

Global airline executives do not foresee a threat from the low-cost model on long-haul routes. “Some passengers want extra baggage, seat choice, food and beverage on long-haul flight packaged together for a little comfort,” Oman Air chief Paul Gregorowitsch told The Hindu.

“However, I think it is creating an incremental demand like the low-cost model did on shorter routes. So, people not taking long-haul flights before can now afford to buy cheap tickets and take some discomfort,” he said.

“But passengers who have travelled previously on full-service airlines will not prefer to sit completely cramped in a tight seat without any further services. I would say, it is more of an incremental demand than cannibalising on the full-service market,” Mr. Gregorowitsch added.

Growing market

Globally, the business model of airlines is changing “scary fast” with IAG [International Airlines Group] unveiling last month LEVEL — the 15th long-haul low-cost operations to be introduced in the last five years, according to global aviation consultant CAPA.

Airlines including Air Canada, Hainan Airlines, Korean Air, Lufthansa, Qantas, Singapore Airlines and IAG have subsidiaries with long-haul low-cost operations. European airline group Turkish Airlines is evaluating a similar business model.

“The long-haul low cost sector seems to have turned the corner and quieted the initial sceptics,” CAPA said in its report titled ‘Global Strategy Report May-June 2017’ released earlier this month. “It is no longer experimental and is becoming more mainstream. The fact that 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.”

The size of the long-haul low-cost model has started to become significant with the sector surpassing 500,000 weekly seats for the first time, the report mentioned. This represents 0.5% of the global market but the share will grow to more than 1% within a year or two, CAPA said. In Asian markets, the market share is significantly high — Malaysia at 7% and Singapore at 4%.

Indian context

The low-cost long-haul model may also give Indian carriers like SpiceJet and IndiGo an opportunity to regain their market share of Indian passengers from their foreign counterparts. Roughly 38% people fly in and out of India through Indian carriers and the remaining 62% from foreign carriers, as per official estimates in January-March this year.

A significant share of traffic from India to Gulf countries is the long-haul traffic to U.S. or Europe. “Direct non-stop low-cost long haul flights from India in terms of frequency, fares and good quality services is one of the most effective ways to combat the domination of the Gulf carriers,” Mr. Dubey said. He felt that this business model will also provide opportunities for additional revenue generation for the airlines. “The demand for ancillary services like meals, pillows, blankets, wi-fi, in-flight entertainment, lounges, etc. in low-cost long-haul will be far higher than short haul domestic flights,” Mr. Dubey opined.

Way forward

For passenger convenience, analysts say, low-cost long-haul flights should not be typically more than 9-10 hours in duration. Across the globe, majority of such flights are mainly in the range of 5-10 hours. However, CAPA said long-haul low-cost airlines are starting to operate more routes of 10 hours or longer. Norwegian’s London-Singapore route will be the longest low-cost flight historically, covering a distance of 10,841 km in about 13 hours.

“Routes of five to 10 hours have so far been the sweet spot for the long-haul low-cost model. The economics of medium-haul routes are generally more attractive than long-haul routes,” CAPA said.

According to a report by Netherlands Institute for Transport Policy Analysis, route choice and a focus on uncontested markets are key factors for success of long-haul low-cost airlines. “In order to compete on long-haul with the incumbent FSCs (full service carriers), LCCs (low cost carriers) will have to adapt their business model. Consequently, the cost advantage over FSCs will be lower compared to short-haul flights. The total cost difference with full-service carriers is therefore much smaller on long-haul than on short-haul,” it said in its report titled ‘the potential of the long-haul low-cost business model and its impact on the Netherlands. Air Passengers Association of India (APAI) felt the business model will be a hit among Indian passengers. “It will definitely find acceptance. On a long-haul flight, passengers will also get option to choose for hot meals in advance. Passengers essentially want flight ticket at a cheaper price and it will be a boom to Indians travelling oversees,” APAI national president D.Sudhakara Reddy said.