Sunday, November 20, 2011

Indian Low Cost Airlines and FDI

Not too many years ago air travel was a luxury of the rich. But for last five years or so, low cost air carriers (LCCs) have changed the way the middle class India travels. However, if you look at how few of them are there and how they struggle to survive due to the volatility of the airlines industry and high infrastructure and maintenance costs, you will think whether this luxury will be short-lived.

There are only two to three operators in LCC sector and among them only one - IndiGO - is profit-making. And the current crisis the Indian airlines industry is going through where even the high cost players are struggling to survive due to ever burgeoning maintenance costs makes the situation of the LCCs more precarious.

Even from a customer’s standpoint, the LCCs are hard up. There is not much to choose between their fares and the quality of their services is uniformly mediocre. But that mediocrity is justified as perils of being ‘no frills’ service. It means you have to pay for everything onboard, starting from meal to water. (They sometimes serve toffees free.) Some LCCs even refuse to refund your ticket fare when you insist on cancellation and instead ask you to keep the money with them to use it for any future travel by the same carrier.

Alas, this ‘pay for a service if you want’ is not unique to Indian LCCs. In the US, on LCC flights, you are expected to pay additional spot costs for additional leg space and similar things.

If you fly low-cost, you have invariably faced these or any one of these situations. But surprisingly, after sulking for a while, you moved on. And when you flew next time, you flew low-cost again.

Because LCCs solve certain fundamental travel problems for you: They phenomenally shorten your travel time if compared with trains (and they say their target customers are those who travel by train) and they ensure general comfort of air travel, again not if compared with their high-cost variants but train. And they, of course, charge you almost half as much as costlier service providers.

But will this breed with their existential problems doubled by the aviation crisis survive or will they die a quick, natural and uncontested death?

I did some net research to find out how the lone profiting-making LCC carrier IndiGO is managing to remain profitable amidst general gloom. These facts will explain.

IndiGo has a record on-time arrival. An article says, “The average Indian mayn’t be punctual in his day-to-day life, but he values being taken to his destination on time by a service which he is paying for.” (I can identify with it.)

The LCC carrier also acts quickly on customer complaints. While onboard, a flier wanted to change his seat for a front row seat and he had been asked for extra money and denied a receipt for the same by the staff. Next time, while travelling by IndiGo, the same flier saw the air attendants give receipts to those asking for a change of seat.

IndiGo uses lighter aircrafts that guzzle less fuel and it buys more aircrafts than it requires and earns money later by leasing or selling out the additional aircrafts.

If anlyzed by a technical expert, these methods will reveal their weak points. For example, do light aircrafts undermine safety in inclement weather? Keeping a fleet bigger than your needs so that you can sell or lease out the additional fleet is speculative in nature and if there is a hike in fuel prices leading to an increase in airfares and thereby a fall in demand, the additional fleet mayn’t find buyers or leasees.

But, given that IndiGo has been posting profits following these methods, they can be considered safe practices to follow.

Talking about LCCs and not talking about the airlines industry and its ailments is limiting the discussion. And even for LCCs to function properly and profitably, there needs to be a healthy airlines industry, and that will require policies that can maintain and improve the health. The Indian government is
considering FDI (foreign direct investment) in airlines. There are views both against and in favour of it.

I again did some net research to understand the vox populi on FDIs.

Let me share the general concerns against FDI. The foreign players with deeper pockets will maul the domestic operators. They will offer artificially low fares and make the domestic players uncompetitive. They will pose security problems. And some countries like the US and Canada have been denying foreign players entry into their aviation space.

While these views can’t be outrightly dismissed, if you see these views carefully, you will notice that any competitive market poses these problems. If you also put these views together, they will reveal two patterns that are generally found in a competitive market: supremacy of deeper pockets and presence of ulterior motives in very few cases (security in this case).

The first can be combated by creating a level playing field through regulations and the second, by creating transparency. Of course, both are difficult to achieve, but a beginning can be made or at least a direction taken. And that would lead to something much better than what is present today where, some allege, the foreign players are at greater advantage than the domestic ones.

FDI will ensure influx of funds which is required for an ailing industry and competition will mean the consumer will have greater choice. Additionally, it will also create jobs and ensure lesser danger of job losses.

If you look at the IT industry, the admission of foreign investment, instead of killing the domestic players, has helped them carve out their distinct position in the market space. So you have tier ones, tier twos as also small startups.

And in a healthier industry, LCCs will be at greater advantage than the high-cost carriers because they can
attract a greater consumer base.

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