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1
STRATEGY
FORMULATIONTHE ECONOMICS OF
LOW COST AIRLINES
THE KEY INDIAN
PLAYERS ANDSTRATEGIES ADOPTED
SUBMITTED BY:
Section B, Group 6
Kunal Jain (089
Maanic! "an#ia (090
Mani$% Ben#ani (09&
Me%a! Mon#a (09'
"ii$%a Goel (09)
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ACKNOWLEDGEMENT
We extend our gratitude to Professor Sonu Goyal for her cooperation and
encouragement during the completion of this report.
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Table Of Contents
An overview of the Indian Aircraft Industry 4
Low ost arriers !"
Strategies followed #y low cost carriers in India !$
omparative analysis 44
Present scenario 4%
&uture 'utloo( 4)
*eferences +"
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An overview of the Indian Aircraft Industr
he Indian economy has grown at an average rate of around ), in the last
decade. -he rise in #usiness and leisure travel #oth domestic and
international/ due to this growth0 India emerging as a ma1or origin and
destination for international travel have all had a significant impact oncommercial aviation in India. According to the airports authority of India AAI/0 the
passenger traffic is expected to grow at over 2", in the next five years. Since
2""$ there has #een sharp increase in #oth domestic and international traffic
carried #y and in capacity of Indian carriers.-'n the supply side0 since 2""$0 when low fare travel in India was ushered in0 a
num#er of low cost carriers L/ have entered to serve this fast growing mar(et.
3owever0 all of the L carriers andwith rare exceptionseven the full service
carriers &S/ charging higher fares have #een ma(ing losses. 5y and large0
operating a commercial airline in India so far has not #een a profita#le #usiness. In2""60 the industry witnessed a wave of consolidations primarily to stem the tide of
red in(.
Ma!or "laers in the Industr#
Indian Airlines7
Launch7 !st August !8+$
urrent &leet7 8!
9aria#le fare0 all frills.
&lies to over )"
destinations over the
world. Largest airlines inIndia.
Air India
Launch7 !st August
!8+$
9aria#le fare0 all frills.
:erged with Indian
Airlines in 2""6.
;et Airways
Launch7 :ay 2""+
urrent &leet7 !"+
9aria#le fare0 all frills. Its
economy class su#sidiary
;etlite. &lies to over %2
destinations #oth
domestic <
international.
Spice;et
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Air =eccan
Launch7 August 2""$
Low0 varia#le fare0 no
frills. 'nly >conomy
lass. :ix of metro and
cross?country
destinations.
Was ac@uired #y
ingfisher and later
renamed ingfisher *ed
ingfisher Airlines
Launch7 :ay 2""+
urrent &leet7 84
9aria#le fare0 all frills.Single ingfisher class.
Premium in?flight
service. 'nly metro
destinations.
Launch7 :ay 2""+
urrent &leet7 2!
Low0 varia#le fare0 #ut
not cheap @uality
service. Low frills0 small
complimentary snac(.
Paramount Airways
Launch7 August 2""+
Proposed &leet7 )
BSP7 Low fare0 all frills.
'nly 5usiness lass at
less than economy fares.
:ostly non?metros.
&ocus South India.
Indigo
Launch7 Covem#er 2""+
Proposed &leet7 !8
Low?cost0 low frill
airline. :ix of metro and
cross?country
destinations.
GoAir
Launch7 'cto#er 2""+
urrent &leet7 !6
BSP7 Low?cost0 low?frill
airline. :ix of metro and
small cities. Initial focus
to #e western India.
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$ositionin% of Different Carriers
&OOM AND &'(T IN INDIAN A)IATION IND'(T*+
Air India and Indian Airlines retained a monopoly over civil aviation in India till
!882. -he deregulation of the Indian economy that started in the mid?!8)"s0 and
proceeded more aggressively after the Cew >conomic Policy in !88!0 led to calls for
opening up of the airline sector. 'ver the following years0 several new airlines
including =amania0 >astWest0 ;et0 Sahara0 :odiluft and C>P started operations.
3owever0 high fuel costs0 poor infrastructure0 and a regulation that re@uired them to
fly on routes to distant parts of the country as well as on non?trun( routes
threatened their financial via#ility.
5y !8860 =amania0 :odiluft0 >astWest and C>P were forced to suspend services.
;et and Sahara were thus the only survivors of the first phase of li#eralisation of the
Indian domestic airline industry. In 2""$0 ;et0 Sahara0 and Indian Airlines shared
the mar(et #etween themselves with mar(et shares of 4%,0 8, and 4",
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respectively in the year?ending :arch $!0 2""$.
The Emergence of a New Indian Airline Industry
-he steady growth of the Indian economy after li#eraliDation at a AG* exceeding%, increased the siDe of the economy0 and hence demand for #oth #usiness and
leisure travel. Sensing opportunity0 a new phase of development of the Indian
airline industry (ic(ed off in 2""$ with the entry of new players into the airline
industry. In spite of the fact that several costs of operating an airline were fixed
irrespective of #usiness model as high as )",/0 most of the new entrants chose to
use low fares as their main competitive weapon and hoped to create low?cost
operations to ma(e these low fares via#le.
In 2""$0 aptain GopinathEs started Air =eccan0 the first low cost Indian airline
that positioned itself as an airline for the common man. It revolutionised air travel#y allowing everyone to fly #y offering free tic(ets and fares as low as rupee !.
While the esta#lished players F Indian Airlines0 ;et and Sahara ? initially ignored Air
=eccan0 the o#vious demand for air travel at lower fares and the urge to fill vacant
seats prompted them to start discounting fares as well. -his too( the form of a
limited num#er of seats sold at lower prices apex faresH/ if purchased 60 !+ or 2!
days in advance with su#stantial penalties for cancellation. Later0 as other low?
costH carriers entered the airline industry0 discounting without the pre?purchase
re@uirements of the Apex fares #ecame the norm.
Air =eccanEs growth in the Indian aviation sector induced other players to enter as
well. -hus0 #egan the boo, "hasein the airlines industry with a num#er of low
cost and full service airlines entering the industry in a span of 2 years ingfisher0
Paramount0 Goair0 Spice;et0 and IndiGo entered in 2""+/. -wo of the new entrants
F Spice;et and IndiGo F followed the classical low?costH airline model of very
competitive fares0 a single type of aircraft and a single class of service0 point ?to?
point operations0 @uic( turnarounds0 no frills0 and internet?#ased tic(eting. -hree
other airlines F ingfisher0 Paramount0 and GoAir? also entered the industry and
followed diverse approaches to the airline #usiness.
Competitive Dynamics
-he rapid entry of new players into the Indian Airline industry changed its
competitive dynamics. 'n one hand0 the low fares of the low ?costH players
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changed the growth dynamics of the industry. 'n trun( routes such as :um#ai?
=elhi or =elhi?5angalore0 the fares of these airlines were close to the fares of air?
conditioned rail travel. 'n the other hand0 since airlines had an expensive fixed
asset a new Air#us A?$2" had a list price in excess of BS 6" million/ and a
perisha#le commodity each seat on a given flight/0 they strove to fill their seats #y
offering attractive deals such as special fares of *upee ! or *upees 88 perpassenger for a seat that had cost passengers more than *s. !"0""" in the past.
&ull service airlines were forced to drop fares as well though their minimum fares
tended to #e still higher than those offered #y the low?costH carriers.
-hese low fares attracted leisure travelers to fly #y air. -he overall growth rate of
the mar(et was a#out three times faster than the growth in #usiness travelers. -he
proportion of #usiness travelers on full?service carriers such as ;et Airways came
down to a#out two?thirds.
Airlines sought to #uild strong relationships with the manufacturers of aircraft so as
to get the #est possi#le terms and support. Low?cost carriers sought to supplement
their revenue streams #y advertising0 sale of food on #oard0 and selling other
services e.g. insurance/. In the full?service airline category0 competition too( on
several new dimensions. ingfisher Airlines introduced leather seats0 in?flight
entertainment with live television0 gourmet meals0 and a luxurious ingfisher &irstH
for its #usiness travelers on #oard its fleet of new A?$2" aircraft0 and valet services
on the ground.
Restructuring of the Industry
-he rapid increase in costs com#ined with competitive pressures to (eep fares low
threatened the survival of relatively less efficient airlines. At the same time0
leadership in terms of siDe and mar(et share emerged as a @uest of some of the
industryEs important personalities. -hese developments spurred consolidation
initiatives.
-he first of these was the ta(eover of Sahara #y ;et Airways. -his ac@uisition gave
;et access to SaharaEs fleet of 5oeing 6$6 and *; aircraft0 and0 more importantly0SaharaEs par(ing slots in ma1or Indian airports. -hough the deal was announced in
early 2""%0 ;et completed ac@uisition of Sahara in April 2""6 and decided to run
the airline as a value carrier su#sidiary under the #rand name ;etLite.
An even #igger ac@uisition was followed F in mid?2""60 ingfisher ac@uired a
controlling sta(e in Air =eccan. ingfisher 1ustified the ac@uisition #ased on
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synergies in aircraft maintenance0 and spares since Air =eccan and ingfisher #oth
had fleets of the same types of aircraft A ?$2" 1ets and A-* tur#oprop/. 'ther
shared services would include sales and mar(eting0 ground handling0 engineering
services0 customer service0 and training. 'ver time0 ingfisher hoped to mesh
routes and fre@uencies through com#ined strengths of networ( reach0 connections0
fre@uencies0 and infrastructure.H
Since =eccan would #e eligi#le to fly on international routes #y August 2"")0
ingfisher planned to use the =eccan #rand to enter international routes in case it
was una#le to get the policy re@uiring five years of prior operating experience
changed.
&ollowing the ta(eover of =eccan0 it was re?christened as Simplifly =eccan0 and
=eccanEs aircraft were re?painted in the distinctive red and white livery of ingfisher
at a reported cost of *s. %"" million. Ground handling e@uipment and #uses
reflected #oth the ingfisher and =eccan #rand names. &ollowing the ta(eover0
=eccan served free water on #oard0 operations were streamlined0 and =eccanEs
prices increased. -he airline was renamed once again as ingfisher *ed in 2"").
-he third ma1or consolidation was the merger of the two national carriers Indian
Airlines and Air India into a single national entity under the corporate name of
Cational Aviation ompany of India and the #rand name of Air India. -his move
was first mooted several years earlier0 #ut was ultimately consummated only in
2""6. Shortly #efore the official approval of the merger0 the #oards of Indian
Airlines and Air India approved ma1or fleet expansion plans that would result in a
complete overhaul of their respective fleets.
With no ma1or new carrier having entered the airline industry since 2""% partly
due to the intense competition in the industry0 and partly due to the reluctance of
the government to allow more airlines to 1ostle for an already congested air
infrastructure/0 consolidation is expected to help the long?term sustaina#ility of the
airline #usiness.
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Low Cost Carriers
A low?cost airline offers a point to point service0 rather than the hu# and spo(e
model concept followed #y conventional full service airlines. In the hu#?and?spo(e
model0 the aircraft flies out from the airport only when all the connecting flights
come in. While in the point?to?point model a passenger travelling on two separateconnecting flights is issued two separate tic(ets. 3e has to chec( out his #ag and
then chec( in to ta(e the connecting flight.
Cost advanta%e#
Low cost airlines provide air service at costs 2+?+", lower than a full service
airline. -he cost structure of a full service Indian airline is given in the figure #elow7
An Illustration of the ost structure of &ull Service Airlines as a , of 'perating>xpense7
Sour
ce7 I*A report0 ivil Aviation0 April 2""+/
1!
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Breakdown of Cost savings
Source7 www.indiastats.com/
-he cost advantage of the low cost carrier is a result of savings on various factors
given #elow7
&ull service airlines provide their passenger with many attendant services li(e
hot meals0 fre@uent flyer programmes0 spacious legroom etc. While low cost
carriers do not provide frills li(e hot meals and fre@uent flyer programmes and wor(
with the minimum num#er of air hostesses on the flight. *emoving #usiness class0
storage space for the meals and limited seat pitch maximum inclination of the
seat/ ma(es space for additional seats which can increase the seat capacity of the
plane #y 2",.
Low cost carrier aircrafts ta(e less time to leave the airport after landing
which increases their flight time #y 2"?2+, as compare to the full service carrier
aircrafts. -hese airlines do not issue tic(ets to passengers to save costs on printing0
mailing and processing tic(ets. Passengers are issued a #oo(ing num#er0 which they@uote at airport chec(?in0 and present their photograph to collect their #oarding
pass. -hey also save on distri#ution costs #y disintermediating travel agents and
central reservation systems and selling through internet and call centre. -hey also
try to minimiDe capital costs and costs of the crew and hangerage.
In >urope and the B.S. low cost airlines avoid flying into the mainland
airports and save on high par(ing and landing fees. India has very few secondary
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airports0 #ecause of which the airport charges constitute a siDea#le portion of the
cost structure that could #e reduced considera#ly.
T-E .LCC/ $-ENOMENON IN INDIA
Southwest Airlines0 now a ma1or carrier in the B.S.0 operating local routes in
-exas in the !86"s pioneered the low cost carrier #usiness model. In India0 the
model was introduced in 2""$ #y Air =eccan. 3owever0 the same descriptive la#el
mas(s the significant differences in ways the model has wor(ed in India vs. B.S.
&irst0 in terms of mar(et share0 Ls accounted for almost $", of all
domestic passengers carried in 2""% . As of Covem#er 2""%0 it rose to $+,. -his
rate of mar(et penetration of Ls is remar(a#le given that the mar(et share was
Dero in August 2""$. Low cost carrier operations account for 44, of all flights
within India compared to!8, in the B.S..
-he second significant difference has to do with the relationship #etween low
cost and low fare.In B.S.0 the Ls offering low fares are also truly low cost
operations. In India0 the airlines that offer low fares are in reality not low cost
operations. -hey are Ls only in name. Among the Ls in India0 Spice ;et has
the lowest unit cost at %.2 cents per AS0 which is compara#le with Southwest0
>asy ;et0 and ;et 5lue. 5ut this is more than twice that of the #est performer0 Air
Asia with unit cost of slightly over $ cents per AS..
-his flies in the face of what Ls outside India li(e *yanair have done when
they were in a similar stage of their growth. *yanair focused on lowering costs
while finding ways to enhance revenues #y selling food and drin(s during flight to
captive passengers and selling services such as insurance0 hotel reservations0 and
rental cars on its we#site. =eccan seemed to have followed similar strategy in
terms of charging for #aggage #y offering limited #aggage allowance/ and food0
and expanding capacity #ut with a crucial difference that it did not share the
o#session of *yanair and Air Asia to reduce costs.
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(T*ATEGIE( 0OLLOWED &+ LOW CO(T CA**IE*( IN
INDIA
AI* DECCAN
Air =eccan started its operations in August 2""$0 offering a low #udget0 no frills
airline service. It was operated #y =eccan Aviation Pvt. Ltd and head@uartered in
5angalore. It started operations on non?trun( short?haul routes in South India and
offered fares that were compared to high?end railway fares. -he airline also offered
flights on trun( routes on significant discounts to the full?service operators li(e ;et
Airways and Air Sahara. Air =eccan had positioned itself as the first domestic low
cost carrier.
aptain Gopinath0 the promoter0 owns 2%, of the e@uity in the company0
while venture capital funds0 III 9entures and apital International0 had infused
e@uity worth BS 4" million with an option to infuse a further BS !" million at a
later stage.
-here was demand for airways in various small towns that had airports #ut
did not have any connectivity. -his pointed to a dormant need for scheduled air
services to connect the hinderland. Air =eccan was launched as a low cost airline to
meet this need. :r. Gopinath did not dream for =eccan to #e the #iggest airline in
the country0 #ut one that was tapping into a niche mar(et. It initially connected
only the smaller towns with metropolitan cities0 starting with airports in South
India.
'nce Air =eccan got experience in connecting the unconnected airports0 it
ventured on the trun(?routes #y see(ing to connect the larger airports. Leveraging
on its initial success0 the enterprise entered the trun( route segment with an Air#us
A$2" 1et aircraft.
Vision
>mpowering every Indian to fly
Mission
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-o demystify air travel #y providing relia#le0 low cost and safe travel to the common
man #y constantly driving down the fares as an on going mission. &or the same
reason :r. *. . LaxmanEs Jommon :anEwas chosen as the #rand am#assador.
Air Deccan1s Icon# The Co,,on Man
Air Deccans targeting
!. orporates middle?level employees/0 small and medium enterprises S:>s/0
2. AK Second class travellers middle class/ of Indian *ailways. -his can #e
again divided into two parts7
a/ -ravellers who dream to travel #y air at least once in their life time
#/ -ravellers who did care a#out time #ut couldnEt afford the price whichwas #eing charged #y the full serivice airline.
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Here, we can see that Air Deccan is competing with other airlines on fares
euivalent to the railways!
The &usiness (trate%
-ypically0 Ls provide point?to?point service avoiding connecting flights and
#aggage transfers while &Ss #ase their operation on a hu#?and?spo(e
system. Air =eccan has deviated from the L #usiness model in the sense
that instead it has a hu#?and?spo(e type operation to connect metros with
smaller towns. It also provides point?to?point service #etween metros and
large cities. 3owever0 industry analysts have pointed out that this has
increased the costs for Air =eccan.
Concentrated on unconnected re%ional areas#
-hey did not connect with the metros initially. -hey entered the regional areas0
which were disconnected0 #ut promised capacity traffic.
Two "ron%ed fleet strate%#
-hey were plying 4) and 62 seater A-*s on the regional routes and the !)"?
seater A$2" on the trun( routes. -he logic #ehind the strategy was that the
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smaller aircrafts were suita#le for the shorter runways at the regional airports0
which were much smaller in siDe while the 1et aircrafts on the trun( routes
helped it to achieve higher capacity and carry passengers over a longer range
than the A-*s.
Lease with AI*&'(7-hey entered into a operating lease with Air#us0 wherein the title remained with
the aircraft owner0 while the operator paid up rental payments0 which were tax
deducti#le and reduced not only the capital expenditure on the operatorEs
#alance?sheet #ut also the operatorEs exposure to uncertainty of the aircraftEs
residual value at the time of its disposal. -he lease payments comprised of a
fixed #ase payment and a varia#le maintenance reserve determined #ased on
the aircraft usage.
2uic3 turnaround#
Implying that the aircraft are utiliDed more there#y reducing the capital andcrew costs0 apart from the hangar and finance costs.
-i%h 0re4uenc7
3igh fre@uencies of flights plying #etween 2 cities0 thus ensuring customer
loyalty -he #usiness traveler thin(s if he misses one0 he can ta(e the next one
as there are flights every !+ minutes0 or the one after that/.
Lean (taffin%
It adopted a Mlean and meanM approach to staffing levels and aimed at
maintaining a low aircraft?to?employee ratio to (eep costs down and tic(et prices
low.
*educed e5"enses on Cabin crew#
Air =eccanEs pilots stayed in company guest houses and transit houses
while the full service airlines pilots stayed in five star hotels
Air =eccan did not have a separate cleaning staff. -he air hostesses
cleaned the aircraft and o#tained a cleaning allowance.
-he transit inspections were not done #y a separate engineering staff.
-he pilots themselves did the inspection.
&oo3in%6custo,er touch "oints
-he company pioneered the introduction of e?tic(eting and tic(et purchase through
multilingual call centres that were open through out the day.
'ther modes were as follows7
Airport counters
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-ravel agents across India
*eliance We# Worlds
Indiatimes we# site
lu# 3P outlets of 3industan Petroleum orporation in 6 states of India
ity office counters at 5angalore and hennai
Dna,ic fare "ricin%7
Its fares were dynamic in nature and were governed #y the demand and supply
situation. -he earlier one #oo(ed0 the lower was the farethis was also (nown as
AP>N?advanced purchase scheme/.-he fares were advertised through the news
paper media.
Source7 I*A report on ivil Aviation
Other distinct features of Deccan as compared to Full-ervice Airline
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Air Deccan1s innovative ,ar3etin% strate%ies#
!. =uring off?seasons sometimes even during pea(s/ it offered seats as low as
*s.+"". -his intrigued the customer to the hilt. -hey would wait patiently
rather notO/ for the announcements from =eccan to come. 'nce announced
customers would #oo( as many tic(ets as he could in the allotted time frame.
3owever0 there was a loop?hole tic(ets #oo(ed in this promotional scheme
were not refunda#le nor were any date changes permitted/.
If this wasnEt enough0 they then came up with a *e ! tic(et in ;une0"+. -hese
made the customers and the competitors/ go mad. It was evident in the
num#er of hits on the we#site the day these promotions were launched.
2. In addition to this0 Air =eccan plans sold tic(ets #y mo#ile vans and at petrol
pumps to tap the middle class segment0 with a tie up with 3industan
Petroleum orporation Ltd 3PL/ to sell tic(ets at its lu# 3P petrol pumps.
:aruti vans hired #y the travel agency installed with we#?ena#led services
will serve as mo#ile tic(eting counters to sell tic(ets six days a wee( :onday
to Saturday/ and payments could #e made in cash or #y cards. -he mo#ile
tic(eting centers will #e connected to a central reservation system to ena#le
providing confirmation of the tic(ets. -he #ul(
of the customers at petrol refueling stations were the middle class0 the verysegment that Air =eccan wanted to tap. -he proposal is a win?win situation
for #oth0 since the cash earned #y the petrol pumps could #e rolled over due
to the sale of tic(ets.
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E5hibit 7# Milestones in the histor of Air Deccan
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2!
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!"hi#it $% Financial results of Air Deccan During $&&'-&(
Total O"eratin% *evenue 89:
'perating expenses
&light 'perations 22$.4
:aintenance and overhaul !+%.4
=epreciation !!.2
Bser harges %"
Station >xpense 2%.+
Passenger Service 2".4
-ic(eting0 sales and promotion !+.$
General and administration !!"
'ther operating expenses !).6
Total o"eratin% e5"enses 8;7
'perating result 4".!
Con?operating items ?$!.)
ProfitKloss
Net "rofit6loss before ta5 9
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We can see that the ma1or share of expense of the company is on &light
operationsH and :aintenance and overhaulH. -he next ma1or area of expense is
General and AdministrationH. It is also #ecause a country li(e India doesnEt have
secondary airport which has low taxes and surcharges unli(e the western world
where its counterparts en1oy the differential taxes and surcharges on different
graded airports.
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($ICE?ET
Spice;et is a low?cost airline#ased in Cew =elhi0 India. It #egan service on :ay 2$0
2""+. It was earlier (nown as *oyal Airways0 which was earlier (nown as :odiLuft.
It is promoted #y the ansagra family. 5y 2"")0 it was Indias second largest low?
cost airline in terms of mar(et share. Spice;et was voted as the #est low?costairline in South Asiaand entral Asiaregion #y S(ytraxin 2""6.
Cost Control
Spice;et is focused on twin pillars of cost control and growing its ancillary revenue.
It follows the classical low?costH airline model of very competitive fares0 a single
type of aircraft and a single class of service0 point?to?point operations0 @uic(
turnarounds0 no frills0 and internet?#ased tic(eting. 5ut unli(e other low?cost
airlines0 water and snac(s served on?#oard Spice;et aircrafts is free.
Spice;et has also focused on the curved winglet design which reduces noise and
improves fuel economy #y 2?$ per cent. -he company has also expanded inner
aircraft room #y reducing unnecessary storage areas and allotting them to
passenger seats.
)ricing strategies
-he airline mar(ed its entry in service with *s.88 fares for the first 88 days0
with 8""" seats availa#le at this rate. -his deal was followed #y a *s. 888
promotional scheme on select routes. -heir mar(eting theme is Moffering low
everyday spicy fares and great guest services to price conscious travelers. -heir
aim is to compete with the Indian *ailwayspassengers travelling in A coaches.
-he airline in :ay 2""6 offered two?la(h seats at a special price of 88 paise for two
or more persons travelling together on all non?stop flights covering !4 destinations.
*ecently in ;anuary 2""80 it came up with another attraction F J5oo( two air
tic(ets0 Pay for oneE.
Value-addition to customers
Spice;et has introduced online travel insurance in partnership with -A-A AIG with
which they have maintained a consistent rate of 2) per cent of sales since the
introduction of the product.
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It provides value?adds to clients #y having internet #an(ing for customers0 wherein
they can select any #an( with which they have an account and can use their own
login credentials0 which is essentially for customers not owning a credit card or not
inclined to using one0 are among the other ma1or initiatives.
Apart from these0 it provides efficient information flow to clients0 wherein thesystem gives the clients a recorded call giving information a#out the flight creating
a portal for crew pilots and ca#in crew/0 which ena#les them to communicate with
each other. Spice;et plans to introduce an on?#oard wireless telephone system for
all Spice1et passengers.
Operational efficienc*
As :ichael Porter says0 a company can outperform its rivals only if it can esta#lish a
difference it can preserve. It has partnerships with glo#al leaders in their respectivefields to enhance safety and relia#ility. -he company is well supported in the
maintenance department #y L: and state?of?the?art technology from world
leaders li(e the Star Cavigation0 *ussell Adams and -ech Log.
Spice;et Airlines has started partnership with Cavitaire0 the worldEs renowned low?
cost support system for reservations and revenue management. >?#oo(ing and >?
tic(eting are availa#le in Spice;et. It made significant investments in information
technology to provide a #ac(#one for operational effectiveness.
-hese approaches resulted in Spice;et achieving the lowest costs in the industry
*s. 2.%+KAvaila#le Seat ilometre AS:/ in 2"")/ and a flight dispatch relia#ility
exceeding 88.+,. Spice;etEs efficiency is compara#le to that of the legendary low?
cost SouthWest airlnes.
Marketing trategies
Spice;et has a uni@ue mar(eting strategy that focuses on word?of?mouth
mar(eting0 supported #y print and Internet media initiatives. -o #uild further on its
#randing value0 Spice;et has introduced on?#oard merchandise sales such as
goggles0 airplane models0 perfumes0 caps and watches. Sales of #randed
merchandise will also #e availa#le through the companys we#site.
While there is stiff competition in the low?cost carrier mar(et in India0 the
competitive edge for Spice;et lies in the @uality of service offered during the flight.
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-his has resulted in 42, repeat flyers0 4+, of #usiness travel and over 8", of
passengers recommending the airline through word of mouth.
trategies for Future sustenance
a+ !"pansion )lans
Spice;et started its operations with + 5oeing aircrafts in its fleet and ramped it up
to !) aircrafts covering !6 destinations and !!6 flights daily #y :ay 2""). It
reported a net loss of *s. !$$.+! crores in the year 2""6?") and a loss of *s. !6.8!
crores in $rd@uarter of 2"")?"8. Spice;et still has ma1or expansion plans. It has
another $" aircrafts on order for delivery #etween 2"") and 2"!!.
#+ Open to Foreign investments as well as #u*outs
'n ;uly !+0 2"") 5illionaire Wil#ur *oss invested )" million a#out *s $4+ crore/in the low cost airline.
"If any foreign airline comes on #oard as a strategic partner, we will certainly
welcome them!If the right opportunity is presented $pice%etcould #e a #uyer too!M
F hief >xecutive 'fficer0 San1ay Aggarwal on &e# !)0 2""8. 3e expects
consolidation in the Indian airline industry over the next !2 to 24 months as the
landscape is too small for so many players.
c+ Convenience to passengers
It plans to initiate roaming agents wherein passengers without #aggage areassisted #y the roaming agents at the airport to s(ip chec(?in are some of the other
initiatives. In future0 Spice1et plans to start We# Access Protocol WAP/ on the
mo#ile phones of the passengers and S:S chec(?in through which passengers can
s(ip chec(?in #y 1ust showing the #arcode or the notification on their mo#ile
phones.
d+ Ancillar* ,evenues
Spice;et have entered into a ;oint venture with -he B #ased online retailer
Bnder&ivePound.com. -he company through its we#site0 sells a range of menEs0
womenEs and childrenEs clothing along with other items such as 1ewellery and
houseware gadgets0 all for less than Q+ and is (nown for its discounts and free#ies.
eeping the pricing of the merchandise in sync with the image of a L0 Spice;et
expects to sell value?for?money items on #oard0 to its customers.
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e+ Automation to sustain e"pansion
Spice;et has automated its cargo #usiness processes to support its aggressive
expansion plans for its domestic cargo operations. -his will ensure an integrated
management of cargo reservations and ground operations including flight planning0
in#ound cargo operations0 #illing and shipment trac(ing. Spice;et #ecomes the firstIndian L to use this high?end #usiness solution.
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INDIGO
Indigo Airlines has #een one of the airlines which has #een eating away mar(et
share from its competitiors. Its mar(et share increased from +, in the first @uarter
of 2""6 to !".$, in first @uarter of 2"") to !+.4, in =ecem#er 2"") &igures #y
=GA/. -he airline has #een ta(ing radical steps to cut down on costs. -hey haveset a record for using the lightest passenger seats in India which weigh only !2.)
gs. -hey have started using paint which overall weighs +" gs less. Such weight
savings are negligi#le on their own #ut collectively0 It has #een helping Indigo to cut
on costs and function as a low cost airlineH.
-he airline has trained its crews to de?plane the passengers in % minutes and
unload the #aggage in !" minutes. It regularly acheives -urn around times of
around 22?2+ minutesIndustry Average #eing much more than $" minutes/. -he
lesser the time ta(en at the airports0 the more the airplane can fly and earn more
revenues.
Indigo has a fleet of !8 Air#us $2"s and they intend to receive )! more similar
planes #y 2"!%. All the planes have exactly the same configurations0 having the
same engines0 same num#er of seats in one class configuration. IndigoEs fleet
ma(es up approximately %.+, of IndiaEs com#ined fleet siDe and comparing this
figure with the mar(et share figures0 it shows that Indigo has #een successful in
attracting customers away from other airlines. Indigo has reported a Load &actor of
6+.6, in =ecem#er 2"") when the IndustryEs average was %+.%,.
ndigos trateg* for ustenance
Indigo has adopted a three strategy to sustain in the current difficult environment.
It tries to (eep its cost lowest amongst the low cost airlines0 provide passengers
with #est on time performance0 clean aircraft0 high relia#ility and finally grow
cautiously without tin(ering with its #usiness model.
.ar on Costs
'n an average0 an IndiGo aircraft flies for around !2 hours a day0 compared to
eight to !" hours logged #y most competitors. -he extra hours allow it to underta(e
one extra flight daily0 which translates into more seats and revenue.
-o do this0 the airline realiDed early that it has to ready its aircraft for another flight
@uic(ly. Its first target was $" minutes. IndiGo has #ested the target7 it has #rought
the turnaround time in secondary cities to 22 minutes and on many days it has
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achieved the feat in less than 2+ minutes in #usy airports li(e =elhi.
Indigo has #ro(en up the 1o# into small parcels li(e loading0 unloading and cleaning
with time targets and each of these is monitored. -he team is trained to focus on its
1o#. -hey have even turned around an aircraft in !4 minutes.
-here are other simple ways IndiGo has employed to trim costs. -he airline0 for
instance0 was amongst the first customers for the Select! 92+"" engines
manufactured #y Rurich?#ased IA>0 a 1oint venture #etween *olls *oyce and Pratt ven full service airline
;et has only 22 per cent of its pilots trained to fly under fog.
-o support such high on?time performance0 IndiGo has set up a centraliDed
operations control centre which monitors the weather0 anticipate delays and even
provides advance information to the ground staff in case an aircraft re@uires some
repair or maintenance while it is air#orne so that the engineers are ready to rectifythe pro#lem and waste no time once the aircraft lands.
Also0 as the average age of the fleet is a#out ! year0 the occurance of technical
faults are low and #ecause of this IndiGo has managed to achieve high 'n?-ime
performance.
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Avoiding Deccans Mistakes and 0row Cautiousl*
-he pain which apt. GopinathEs Air =eccan faced has often #een attri#uted to
haphaDard expansion in routes which it undertoo(. Indigo has consciously tried to
stay away from such an expansion. With a fleet siDe of !80 Indigo touches !6 cities
while =eccan with a similar siDe of fleet managed to touch 4$ cities. Indigo usuallyreaches a new city0 consolidates its position and then offers new flights from there.
As mentioned earlier0 Indigo managed to get su# 2+ minutes turn around time
which even others managed. 3owever0 Indigo did not freely hire to achieve such
times. It has (ept a tight leash on staff re@uirements and has only !"" wor(ers per
aircraft while other operators are (nown to have nearly !$" wor(ers per aircraft.
Outloo3 for IndiGo
Analysts say that IndiGo has the potential to #ecome a glo#al low?cost carrier0provided it can tide over the current slowdown. If it has the cash to sustain itself for
another two years0 IndiGo surely will #e one of the #ig players in the low?cost space
glo#ally with its expected fleet siDe of a#out !"" planes #y 2"!%.
At the moment0 little is (nown a#out IndiGos financial health #ecause it is not
listed on the stoc( exchanges and0 therefore0 does not have to put its profit and
loss statement in the pu#lic domain every @uarter0 though it is certain the company
is in the red li(e all other Indian carriers.
IndiGo has hardly advertised and indulged in #rand #uilding activities. Its fastgrowth has #een solely due to word of mouth and repeat customers. 3owever such
fast growth may not #e sustaina#le without some #rand #uilding exercises. -he
airline could concentrate on surviving the tough times which the industry is facing
and then once the environment gets #etter then should indulge in #rand #uilding
exercises.
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GoAir
-he airline was esta#lished in ;une 2""40 and it started operations on 4 Covem#er
2""+ .3ead@uartered in :um#ai0 Go Air is wholly owned #y the Wadia Group0
:um#ai #ased and ma1ority ownersof 5om#ay =yeingand 5ritannia Industries. 'n
8 ;une 2""+ GoAir announced that it intended to launch operations in 'cto#er 2""+with a fleet of 2" leased Air#us A$2" aircraft. At the time the airline was in
discussion with #oth Air#usand 5oeingon the purchase of #etween 2" and 4" new
aircraft0 with a contract to #e in place #y the end of 2""+ and with deliveries to
start #y 2""6. An order for !" aircraft from the Air#us A$2"family was announced
in ;uly 2""%.
CO,)O,A/! /,A/!01 A2D C3/OM!, FOC3
Go Airs o#1ective is to offer its passengers a consistent0 @uality?assured and
efficient performance at afforda#le fares.
Go Air airlines has tried to target the &irst0 Second and -hird AK *ailway
passengers and 9olvo 5us Passengers. GoAir has strategically divided the
fare structure in such a way that the railway passengers can #enefit most
from this arrangement.
Its fares are 4", lower than that of traditional airlines.
-he chief motto of GoAir is to provide a consistent0 time?efficient operation
while maintaining the low fare scheme through the state?of?the?art Air#usA$2" Aircraft fleets
GoAir and as part of its strategy to maintain @uality0 it has strategically tied?
up with the *adixx International0 a leading technology provider of automated
aviation and travel related software solutions
Initially0 the airline was limited to :um#ai0 Ahmeda#ad0 Goa and oim#atore.
With induction of more aircraft0 the networ( has expanded its wings and now
GoAir services can #e availed in !$ cities. GoAir has %! flights daily to all
theses places.
&ocuses on providing @uality service
5est on?time performance
uic( turnaround of aircraft that average around 2+ minutes.
3!
http://en.wikipedia.org/wiki/Wadia_Grouphttp://en.wikipedia.org/wiki/Majority_ownerhttp://en.wikipedia.org/wiki/Bombay_Dyeinghttp://en.wikipedia.org/wiki/Britannia_Industrieshttp://en.wikipedia.org/wiki/Airbus_A320http://en.wikipedia.org/wiki/Airbushttp://en.wikipedia.org/wiki/Boeinghttp://en.wikipedia.org/wiki/Airbus_A320http://en.wikipedia.org/wiki/Wadia_Grouphttp://en.wikipedia.org/wiki/Majority_ownerhttp://en.wikipedia.org/wiki/Bombay_Dyeinghttp://en.wikipedia.org/wiki/Britannia_Industrieshttp://en.wikipedia.org/wiki/Airbus_A320http://en.wikipedia.org/wiki/Airbushttp://en.wikipedia.org/wiki/Boeinghttp://en.wikipedia.org/wiki/Airbus_A3207/24/2019 Strategies Followed By Low Cost Carriers
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Delivering Value to customers%
>ase in 5oo(ing7 -he passengers who may not have a credit or de#it card or
access to a omputer need not travel long distances to #oo( their GoAir
tic(ets0 #ut can #oo( them from any of the distri#ution mediums0 which
include Go-ravel Agents0 Go-ata Indicom 'utlets0 GoInlott outlets0 Goy#ercafT and GoP's.
Passengers can carry fast food items li(e the sandwiches0 #urgers in the
flight. 3owever the passengers are also given complimentary peanuts0
#iscuits and water during the flight.
ervices offered to the passengers%
" We# 5oo(ings of -ic(ets
" -ic(et #oo(ings without Passenger Service &ee PS&/ and any applica#le &uel
surcharge.
" Provision for >xcess 5aggage with the payment of a nominal amount.
" &are StructureInfants up to the age of 24 months will #e charged *s 26+
plus applica#le PS&0 provided they donot occupy a seat. -axes and &ees
include passenger service fee of *s 22+0 a fuel surcharge of *s 6+" and a
congestion surcharge of *s !+" and passenger handling fee of *s !""
T-E -'& MODEL-he strategy of GoAir has #een to #e a strong player around a hu# rather than
spread all over the country and grow step #y step. -his is an attempt to emulate
the point?to?point strategy of South West Airlines of the Bnited States the first to
come up with a low?cost airline/. -hat is why initially they concentrated on :um#ai0
then went on to Ahmeda#ad0 Goa and oim#atore and now they have services in
!$ cities.
-he logic #ehind this model is that instead of aggressively moving to new cities0 if
an airline first increases flights in the existing networ(0 it has a two?fold #enefit0 it
can spread its costs across different overheads. 3ence0 if it deploys three flightsfrom the same place it can utiliDe its crew0 fuel and aircraft more0 leading to
positive yields and thus profita#ility.
-he other point to #e noted is that its hu#s are usually metros and tier?2 cities
which have #etter infrastructure or are in the process of development and also have
higher occupancy rates due to higher levels of income. Its strategy has #een to
garner as much load factor as possi#le.
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*ED E+E O$E*ATION(
-hese are the early morning and late night flights. -he flights get their name from
the fatigue symptom of having red eyes. -his concept is also a replication of the
strategies of airlines a#road. -hese flights usually operate during the period from
87"" p.m. to +7"" a.m. local time. -hey are also sometimes called Mdry flightM0since there is an a#sence of moisture in the air at high altitudes during late evening
and early mornings.
-he advantages of this model are7
" -hese flights lead to higher utiliDation of resources
" -hey attract traffic especially from those small and medium enterprise
S:>s/ and #usiness travelers who after finishing meetings late in the day0
need to connect with a new destination the following morning.
" 3elps reduce infrastructural pro#lems of governments as it decreases rush
during pea( hours #y diverting traffic
" Gives #enefits of lower fares to passengers
:oreover0 this model has #een implemented only for connecting metros and tier?2
cities as most of the #usiness meetings ta(e place in such cities.
-his is a perfect example of how GoAir fits its extra resources strategically to help in
#etter utiliDation #y using a com#ination of increasing operational effectiveness and
satisfying uni@ue customer need at the same time.
(LOW 0LEET E@$AN(ION $*OG*AMME
>ven though GoAir follows a slow fleet expansion programme0 it does not #elieve in
aggressive expansion as it may create pro#lems in periods of slac( demands and
put pressure on costs. 3ence this is another one of its strategies to complement the
low cost model and #ring synergy in its costs and prices.
3owever0 as part of GoAirs restructuring plan0 its fleet growth does appear to have
#een ad1usted downwards. 'f the 2" A$2"s ordered0 the carrier plans to ta(e
delivery of four more A$2"s #y ;un?"8.-he airline currently has a fleet of six
aircraft0 #ut plans to return some aircraft to lessors0 for a net fleet of eight A$2"s
#y ;un?"8.
GoAir was originally scheduled to increase its fleet to ten aircraft #y the end of
2""8. -he carrier previously dramatically slowed its original growth plans of ta(ing
delivery of $$ aircraft #y the end of 2""). GoAir previously placed firm orders for
2" A$2"s0 and in Apr?") deferred a proposal to order another 2" A$2"s for
delivery after 2"!!/0 stating it planned to wait for prices to go down #efore #uying
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additional aircraft.
Source7 entre for Asia Pacific Aviation and Ascend
-he figure depicts how GoAir has #een very conservative in its approach of adding
planes to its fleet in order to not put pressure on costs. It is also evident that #y
2"!! it plans to get rid of all the leased planes0 which would in effect wash away all
the rental costs.
A#$%&'( )%(*%'+,- ('*)$# '&,#/ 0$$,#+ %&,) $,- *) %&*% G$A,( ,''/ -(('#%*,(-(*0% (,-') *) %$$ &,+& *#/ *) -$#/'#% ('"2!13 /','( )$%) , '-$9'
availa#le as other carriers would realiDe they cannot ta(e delivery of all the A$2"s
that have #een ordered.-he carrier also awarded Air &rance >ngineering a six?year
BS=4" million contract to provide :*' services for its future fleet of A$2" aircraft.
-his gives us a glimpse of how it incorporated its future strategies into its present
ones #y (eeping cost saving at the forefront.
0*E2'ENC+ EN-ANCEMENT $*OG*AMME
Another strategy followed #y GoAir is that of increasing the fre@uency of its flights.
It is a#le to do so due to its hu# model which concentrates on enhancing presence
around a particular hu# which are essentially -ier2 cities or metros where the
occupancy rates are higher and demand is higher0 hence creating need for higher
fre@uencies. As a part of this programme it had added two new aircraft to its
33
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existing fleet in 2""60 with this it announced that it would #e dou#ling its current
flight operations from 2+8 to +%! commercial flights per wee(. -he (ey focus was to
reiterate consumer commitment and ensure consumer comfort.
-his operational strategy came at a time when the airline had #een seeing a
consistent load factor in excess of )" per cent over the past few months. 3ence itidentified a #usiness opportunity at the right time and used its resources to
leverage on it and integrate it into its overall strategy. -his programme was also an
attempt towards consolidation0 in order to integrate the !! destinations the
company operated in at that time.
GoAir has added morning0 afternoon and evening connections in :um#ai and =elhi
to connect the two metro cities to (ey #usiness and leisure destinations li(e
5angalore0 Goa0 3ydera#ad and hennai as part of its flight operations strategy.
0LE@I0A*E
In 2"")0 GoAir launched a new scheme under which the passenger would #e
a#le to ma(e unlimited changes in its travel itinerary free of cost.
5esides0 GoAir has cut the cancellation changes to *s 2"" on all Go&lexi
#oo(ings. With the new plan GoAir is see(ing a competitive edge over other
low?cost airlines0 who levy rescheduling and cancellation charges of *s +""?
6+" on their passengers.
-hrough this GoAir is targeting fre@uent?flying #usiness passengers0 such as
traders and executives. It is not the leisure travellers or occasion?flying
customers ma(ing fre@uent changes to their schedule0 #ut the fre@uent fliers
who #ring in #igger chun( of revenue for airlines.
Go&lexi #undle allows cancellations or rescheduling to #e made up to two
hours prior to scheduled time of flight departure.
A passenger #oo(ed under Go&lexi &are will not #e charged the transaction
fee applica#le for re?#oo(ing a confirmed GoAir tic(et. -he passenger will
only have to pay the difference in fare amount #etween the original #oo(ed
fare and the applica#le fare of the revised #oo(ing.
In case0 the new fare is lower than the originally #oo(ed fare0 the difference
in fare amount will #e retained in the passengers credit account with the
airline for utiliDation within six months period.
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-his plan was initiated as an effort to gain a competitive advantage #y
catering to a uni@ue customer need of a niche customer segement there#y
increasing #rand loyalty.
LA'NC-ING O0 GOCOM0O*T
In an attempt to align its strategy to the recent trends in the environment0 GoAir
announced plans to trial a premium section0 MGo omfortM0 effective from the
Winter of 2"")K"8 Schedule. -his strategy is as part of its effort to re?#rand itself
as a Mvalue carrierH.
INDIAN DOME(TIC $A((ENGE* MA*KET (-A*E IN (E$B9#
Source7
entre
for Asia
Pacific
Source7Aviation and :inistry of ivil Aviation
3it #y high fuel prices0 intense competition and wea( growth in price?sensitive
demand0 GoAirs shift of #usiness model underscores the difficulties facing poorly
capitalised Ls. :inistry of ivil Aviation reports GoAirs captured only a !.),domestic mar(et share in Sep?").
Another reason for this move away from its current L model is the necessity to
sustain itself #y containing losses and retaining passenger num#ers aggravated #y
Indias rapidly slowing aviation sector. :inistry of ivil Aviation reports GoAirs
passenger num#ers fell a massive %2.), year?on?year in Sep?") to 4)0"""0
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although it partially attri#utes the result to capacity cut#ac(s0 as part of its
restructuring programme.
GOAI* $A((ENGE* N'M&E*( AND $A((ENGE* N'M&E*( G*OWT-
C-ANGE +EA*ON+EA*# ?ANBF TO (E$B9
Source: *entre +or $ia -aci.c /iation &
GoAirs load factors meanwhile were comparatively higher than its domestic
competitors at +6, no year?on?year change disclosed/.
INDIAN CA**IE*( DOME(TIC $A((ENGE* LOAD 0ACTO* IN (E$ B9
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-his carrier is positioned #etween Ls and full service carriers0 and thus aims to
create a new value for money product with passengers having to Mpay to get moreM0
while retaining its point?to?point operating strategy. As part of the repositioning
strategy0 GoAir also reportedly plans to further expand its return chec(?in facilities0
and telephone chec(?in services.
It is promoting this class as the Mcomfort of a 5usiness lass at the price of a full
service >conomy lass tic(etM. GoAir has initially dedicated the first three to four
rows of its A$2"s to the new section0 which will offer light snac(s and other MfrillsM0
charging IC* !06+" BS=$+.4"/ extra for the service. If successful0 GoAir
reportedly plans to remove further rows in the future to allow more leg room for
this segment0 and will consider offering full meals.
0EAT'*E( O0 GOAI*( HGO COM0O*TH CLA((
5etter leg space7 pitch #etween
two rows increased to $4M
omfort seating7 middle seat is
always free
Priority chec( in
*eschedule travel plans at no extra
cost
37
Source: *entre +or $ia -aci.c /iation
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omplimentary &'0 >dgardo 5adiali0 the current economic slowdown was an
opportunity to attract corporate travelers0 stating there was a growing trend among
#usinesses to tighten their travel #udgets and encourage middle?level executives to
travel with Ls to cut costs.
GoAirs new Go omfort class also aims to encourage repeat #usiness travel as one
fifth of the carriers passengers currently are repeat travellers0 hence this segment
offers huge potential.
T-E C*I(I(
In ;uly 2"") was predicted to #ecome the first victim of the downturn #eing faced
#y the domestic aviation industry. -he carrier was considered to #e facing a
massive cash crunch which would eventually lead to a #ailout sooner rather than
later.
-he :um#ai?#ased carrier slashed operations #y half in a #id to cut losses spar(ed
#y soaring costs of fuel. It was operating a little over 6"" flights a month0
compared with !04"" 1ust some time #ac(. It laid off nearly !%" staffers in a wee(.
-he airline was so starved for cash that it was selling :um#ai?=elhi tic(ets for
around *s68+ plus taxes of *s$0$2+/ compared with *s20""" plus tax/ that other
operators charge for the sector. It operates the maximum num#er of flights on this
sector0 which is the countrys #usiest route.
-his is a typical example of what was happening all around in the L Airlines as a
result of the hi(e in A-& prices as most of these airlines only employed a low price
#ut not a low cost structure.
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?etLite
;et Airways ac@uired Air Sahara in April 2""6 and decided to run it as a !"" per
cent su#sidiary under the #rand name of ;etlite. At the time of merger0 it was also
decided that ;etLite would #e positioned as a value carrier #etween a full service
airline and a low cost carrier. It will have less frills with economy class details. Atthe same time0 fre@uent fliers scheme will #e extended to ;etLite. In order to
provide its services as a value carrier0 ;etLite stove to cut down its costs in every
possi#le way. Some of the strategies adopted #y it were7
Fleet of same aircraft
;etLite currently operates a fleet of 24 aircraft0 which includes !6 5oeing 6$6 series
and 6 anadian *egional ;ets 2"" Series.
&oein% F=F Canadian *e%ional
?et :BB
omparing these figures with the fleet of other full?service airlines
Airlines -ype of aircraft Co. of planesAir India Air#us A$!"?$"" 28
Air#us A$2! !25oeing 6$6 $5oeing 646 $"5oeing 6+6 !5oeing 6%6 $
5oeing 666 !4;et Airways 5oeing 6$6?4"" $5oeing 6$6?6"" !$5oeing 6$6?)"" $$5oeing 6$6?8"" 25oeing 666?$"">* !"Air#us A$$"?2"" !2A-* 62?+"" !4
3
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ingfisher Airlines A-* 42?+"" %A-* 62?+"" 26Air#us A$!8?!"" $Air#us A$2"?2"" 2%Air#us A$2!?2"" )
Air#us A$$"?2"" +source7 www.airfleets.net/
Since ;etLite uses only 2 types of aircrafts compared to 4?+ types of aircrafts used
#y full?service airlines0 it is a#le to save maintenance costs. Bsing similar aircrafts
ensures interchangea#ility of crews0 furnishings and spare parts0 and results in
ma1or costs savings for ;etLite. :oreover0 #ul( purchases of spares can #e made
which results in economies of scale. Similar types of aircraft also means reduced
training re@uirements for the pilots as they had to only learn to operate a single
type of plane which further #rings down the costs.
weating its assets
Airlines Co. of aircrafts Co. of &lights
daily/
BtiliDation of
aircraft
&lightsKAircraft/
Average fleet
age in
years/Air India !") ? ? !!.8
;et Airways )6 4"" 4.+86 4.+
ingfisher
Airlines
6+ 2!) 2.8"% 2.2
;etLite 24 2+" !".4!% %.+source7 http7KKwww.indiainternalflights.comK 0 www.airfleets.net/
ompared to other full?service airlines0 ;etLite draws the maximum out of its
assets. >ven if the utiliDation of aircraft #y 1et airways and (ingfisher is discounted
considering the fact that they fly international also0 even then ;etLiteEs utiliDation is
much higher than full service airlines. -his results in significant cost savings as
fixed costs are incurred whether the planes are flying or not. So its #etter to fly
more and earn revenue than (eeping your aircraft idle.
&urthermore0 the average fleet age of ;etLite is %.+ years. -hough it does not have
the youngest aircraft in the industry0 still the fleet is not very old when compared tothat of Air India. 3aving a relatively young fleet means efficient engines0 which
translates into fuel savings for the airlines. Since air tur#ine fuel A-&/ is a ma1or
cost component0 having fuel efficient engines results in significant cost savings.
2o frills
4!
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;etLite follows a no?frills policy to (eep its costs to #are minimum. -his means that
it does not offer any complementary services offered #y other full?service airlines.
omplimentary services include multi?cuisine food0 airport lounges0 magaDines0
entertainment0 etc.
Airlines that serve food on flight incur not only the #asic cost of food #ut also thecost of oven0 microwave0 preheated food ca#ins and serving trolleys. Cot serving
food on?#oard minimiDes these costs. :oreover0 the aircraft #ecomes lighter as a
result of offloading of heating appliances which increases the fuel efficiency of the
aircraft. 'n an average0 a#out !$" (g to !+" (g of the #asic aircraft weight is #eing
shed which results in a saving of !+, to 2", on operating costs annually per
aircraft.
;etLite has a fixed menu of very few items which are served only when ordered #y
the passenger. -his reduces costs associated with food0 appliances0 heating and
serving stewards and stewardess/ thus0 resulting in ma1or costs savings.
'ther special services li(e airport lounges0 coach services0 on?#oard entertainment0
etc. are a su#stantial part of an airlines cost structure. Since ;etLite doesnEt
provide any of these services0 it doesnEt incur any of these costs and passes its
savings to the passengers in the form of low prices.
-he exhi#it shows the in flight menu of ;etLite.
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E1%i2it: In34li#%t enu
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Online #ooking and V, ticketing
;etLite allows you to #oo( tic(ets #oth online and #y an Interactive 9oice *esponse
I9*/ system. -his eliminates the need for commissions paya#le to middlemen.
Internet #oo(ing also o#viates the need of tic(eting agents and additional wor(ers0
thus cutting down the wage #ill. :oreover0 the paperwor( associated with
transactions is considera#ly reduced. -he tic(ets are sent online to the email
address of the customer and the customer can get a printout of the tic(et himself.
All this helps in #ringing down the cost of transactions resulting in lower tic(et
prices.
D*namic )ricing
;etLite tries to sell maximum num#er of tic(ets through dynamic pricing. -he tic(ets
are priced according to the availa#ility and demand of tic(ets. In airline industry0
the marginal cost of flying an additional customer is very low. -hus0 ;etLite tries to
maximiDe its revenue #y selling the maximum num#er of tic(ets possi#le. It earns
its revenues not only from the sale of tic(ets #ut also from the sale of food items
and any other service for which it charges over and a#ove the price of the tic(et.
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Advertising revenues
;etLite is loo(ing forward to enhancing its ancillary revenues #y opening itself up toadvertising. -he airline plans to offer the fuselage0 the exterior of the aircraft #ody0
and in?flight space for advertising. It is expected to generate revenues worth *s +"?
%" la(h a month from the move.
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COM$A*ATI)E ANAL+(I(
45 ,!)O/O220 /O 6VA73! CA,,!,8 A,72!
'wing to the rising A-& prices and increasing losses and massive cash crunches0
intense competition and wea( growth in price?sensitive demand Indias domestic
L mar(et appears to #e shrin(ing0
-hree main players have employed the value carrierH model which give higher
#enefits such as priority chec( ins0 inflight &
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It is evident from the a#ove ta#le that the airlines flowing the point to point model
tend to employ ! or maximum two types of aircrafts in its fleet in order to save
costs0 #ut those following a hu# and spo(e utiliDe more in order to use smaller
aircrafts for the short haul distances and the large ones for long haul distances.
'5 MOD!7 ADO)/!D
AI*LIC> :'=>L A='P->=
;etLitePoint to point #etween metros0
hu#?n?spo(e for non?metros to
metros and vice?versa or #etweennon?metros
GoAir 3u#KPoint?to?point model
Spice;et Point?to?point0 and regional hu#?n?
spo(e
Indigo Point?to?point model
Air=eccanKingfisher *ed 3u#?n?spo(e model
-he airlines connecting only #etween metros and tier?2 cities follow the point?to?
point model in order to increase fre@uency and concentrate on specific hu#s in
order to optimiDe costs0 and the ones connecting metros to non?metros follow the
hu#?n?spo(e model in order to connect all non?metros through one ma1or hu#. 5ut
there are still others following a mixture of the two 0 i.e. they follow the point?to?
point model for metros and the hu#?n?spo(e in regional areas. -his helps the
airlines operate #etween multiple locations and follow different strategies for
different types of places in order to save costs.
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$*E(ENT (CENA*IO
7ow cost v:s low fare
In India0 the airlines that offer low fares are in reality not low cost operations. -hey
are Low cost carriers Ls/ in name only. Among the Ls in India0 Spice ;et has
the lowest unit cost at %.2 cents per AS0 which is compara#le with Southwest0
>asy ;et0 and ;et 5lue. 5ut this is more than twice that of the #est performer0 Air
Asia with unit cost of slightly over $ cents per AS. -here were operating losses for
Air =eccan in 2""6?").
-ypically0 Ls provide point?to?point service avoiding connecting flights and
#aggage transfers while &Ss #ase their operation on a hu#?and?spo(e system. Air
=eccan has deviated from the L #usiness model in the sense that it has a hu#?
and?spo(e type operation to connect metros with smaller towns. It also providespoint?to?point service #etween metros and large cities. Industry analysts have
pointed out that this has increased the costs for Air =eccan.
-here are serious dou#ts a#out whether Ls as we (now them elsewhere in the
world/ exist in India. According to 5ill &ran(e0 the :anaging =irector of leading
airline investment firm Indigo Partners0 -here is not a single airline in India that
operates a true low cost structure0 only low?fare and low?margin.H
Is the lowcost carriers1 business ,odel in India sustainable
Low?fare airlines outside India have many features in common F a single type of
aircraft to facilitate pilot training0 maintenance and aircraft utiliDation no free food
service to save costs and reduce turnaround times no inter?line transfer of
#aggage direct selling to avoid commissions to travel agents0 etc.
-hese features are easy to replicate and are an integral part of the low cost airlines
in India. As a result of their replica#ility0 they do not0 #y themselves0 offer a
sustaina#le competitive advantage.
-he dynamics of a low?cost airline are e@ually important. -ypically0 a successful low?fare airline chooses routes that are not already operated #y other low?fare airlines.
It increases demand for air traffic #y cutting fares0 and provides fre@uent services
to saturate the route. In contrast0 head?on competition #etween two low?fare
carriers on the same route often results in a price war that #enefits consumers #ut
is not profita#le to the airlines themselves.
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-he low cost airlines in India are not targeting distinctive routes. Instead0 they
seem to #e moving towards creating huge capacities on the trun( routes. Since
shorthaul services impose other cost disadvantages on an airline0 @uic( turnarounds
to achieve high utiliDation #ecome critical. learly0 on?time passage is an important
value proposition for this type of service and delays are extremely annoying to
passengers.
*unning a low?fare airline is a ma1or managerial challenge. In addition0 the
government will need to improve airport infrastructure @uic(ly if this model is to
succeed. -he increase in air traffic is not matched with the increase in the
infrastructure at the airports. -he airlines prefer to halt and ply #etween only
metros and airports which have sufficient landing and par(ing place0 this leads to
long halts and waiting of these planes at metros and also traffic congestion and
delays #esides loss of precious air fuel.
In India0 air fuel and not salaries < wages constitute the largest share in expenses
of airlines as the airlines have to procure their Air fuel from oil companies. -he
under?developed commodity hedging mar(et also puts a stum#ling #loc( on these
companies to hedge against fluctuating prices of air fuel.
-he cost of procuring new fleet also needs consideration #ecause they should #e
a#le to have at least )", occupancy of seats to #e via#le in long run. Cow if most
of the flights operate on the popular routes chosen due to a#ove reasons0 there
would surely #e a saturation of mar(et sooner or later. -herefore0 these airlines
must thin( of exploring low?cost routes0 less time ta(ing routes0 rather than hauling
on the same popular routes0 if they wish to remain via#le in long run. &or example
the north?east region of our country completely remains outside the gamut of
competition from these Ls.
-he re@uirement for trained commanders to operate these flights also is another
issue that needs urgent attention. A severe demand supply gap is emerging
resulting in price hi(e #y these commanders this may also lead to increasing cost
and defeating the entire spirit of operating a L.
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0uture Outloo3
Almost all the airlines in India are facing financial difficulties. -here are couple of
factors that account for this. 'ne factor is the ina#ility of the airlines to reduce
costs0 and the other is the irrationalH pricing that set in after the advent of Ls..
-hey have chased mar(et share0 i.e.0 revenue maximiDation and forced the
incum#ents to match their low prices. -hey have #een successful in ta(ing the
mar(et share from the &ull Service arriers &Ss/.
While revenue maximiDation may seem li(e a good short term strategy to enter the
mar(et0 sooner or later0 the Ls have to #e #ecome profita#le. -hese depressing
financial conditions can lead only to two types of outcomes for the airlineseither
some of them go #ust in a mar(et sha(e?out or they mergeKget ac@uired #y other
airlines or #usiness groups. 2""6 #ecame a landmar( year in the industry #ecause
of the ma1or consolidations that too( place during the year.
-he airlinesE plans to expand capacity and replace ageing fleet aggressively should
ena#le them to meet this growing demand more efficiently. 5ut in the near term0
they have to face significant challenges such as7
!. *ealiDing the #enefits of the consolidations.2. *ealigning their competitive strategies to #ecome profita#le.$. Pursuing aggressive cost reduction.4. -he availa#ility of capital.+. onstraints due to poor infrastructure for aviation in India.
2ew trategies
According to a survey conducted #y enter for Asia Pacific Aviation APA/0 %6, of
&ull Service arrier &S/ passengers and +!, of Low ost arrier L/0
passengers would still have traveled #y air if the fare had #een dou#le and0 +6.+,
of &S passengers would fly with an &S rather than an L even if the trip was
personal and self?financed.
Another strategic change will #e in the #usiness models. ;et Airways is now
concentrating on expanding its international operations targeting passengers ofIndian origin who travel to India mainly from B.S.0 B..0 anada0 >uropean
countries0 and South Africa. It has esta#lished a hu# in 5russels0 and in August
2""6 inaugurated flights from India to B.S. -his strategy helps ;et Airways escape
the #rutal competition in the domestic sector. It hopes to generate more than half
of its revenues in 2""8 from the more lucrative international flights. Its only Indian
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competitor for such long haul flights would #e Air India0 which it can out?compete
due to ;etEs superior service advantage.
According to Indian Government Policy0 private carriers are not allowed to have
overseas operations unless they have #een in domestic #usiness for at least five
years. ingfisher and Spice ;et have lo##ied for the waiting period to #e changed tothree years0 #ut the government is li(ely to stand firm on its current policy.
An interesting #usiness model #eing tried out is long?haul low cost carrier. Air India
and ;et Lite are flying international routes using this model. -his model is different
from and more complicated than the short?haul L model. &or instance0
passengers are willing to pay for more comforts during long flights. Airlines have to
serve food and maintain a larger crew. It is difficult to achieve the same level of
cost advantage as short?haul Ls.
-here are many opportunities for these Ls0 #ut challenges are no little. -hose
pro#lems must #e resolved #efore further expansion else it may spell doom due tosevere dissatisfaction among the customers and the airlines may find only new
demand and not repeat demand. It is not new among foreign low&cost carriers that
they have either merged or sold off their #usiness due to long&run un&sustaina#ility!
5!
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*E0E*ENCE(
Co,"etitive (trate% for Low Cost Airlines ? 3ongwei ;iang
R'IT (niversity, Australia
Aspirations0 >nterprise Strategy and Sustenance of a Start?up in a ompetitive>nvironment7
A Study of =evelopments in Air =eccan FM< *< Di5itJ (unil (har,a and A,it
Karna
Airports and airlines F sector focus A*-IL>
www.livemint.com
www.theindusview.com
http7KKwww.centreforaviation.com
www.airfleets.net
http7KKwww.indiainternalflights.comK
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