Wednesday, June 27, 2007

What is the future of low-cost airlines in India?

I know I took a sabbatical from blogging, but I am back nevertheless.

The extremely competitive but fast-growing Indian commercial aviation industry is the subject matter for this post. The so-called consolidation that is happening in the industry, through high-profile mergers, has been consistently hitting the headlines for the past few days. First, it was the now-off-now-on merger between the market-leader, Naresh Goyal's Jet Airways and Sahara Group's Air Sahara that finally came through, with Jet announcing that Air Sahara will be converted into the merged entity's low-cost, no-frills arm, known as Jet Lite, positioning it in direct competition with the pioneer in low-cost airlines in India, Air Deccan. But the bigger news was when Kingfisher Airlines, India's first luxury airline, owned by the uber-rich liquor baron Vijay Mallya, picked up a 26% stake in Air Deccan. Capt. Gopinath, an ex-armyman, the founder-chairman of Air Deccan, publicly snubbed Mr. Mallya's offer in the beginning, only to embrace it whole-heartedly within a fortnight.

Are you wondering why I am featuring this air-borne drama in a "Development through Enterprise" blog? The reason is that I have always been a fan of Air Deccan's philosophy of bringing air travel within the reach of the masses in India. The airline, which began operations in 2003, positioned itself as a common man's airline, even using R K Laxman's popular "common man" cartoon character in its marketing campaign. Air Deccan offered flight tickets at unbelievably low-prices, something that was unprecedented in the history of Indian aviation. The airline offered no service on board and expanded its customer base by connecting tier-2 and tier-3 cities. The strategy was to woo the customer base, which travels mostly by road or rail, into air. This was an extremely positive step towards achieving inclusive economic development in India since air connectivity naturally boosts economic activities in tier-2 and tier-3 cities and towns. More than anything else, Air Deccan provided the necessary spark to the ailing domestic aviation space in India, inspiring a series of low-cost start-ups such as Spicejet, Go Air and Indigo Airlines.

Unfortunately, Air Deccan failed to break even after 4 years in the market, with losses going up to Rs. 213 crore in the quarter ending in March 2007. It is perhaps this desperation that drove Capt. Gopinath to accept Mr. Mallya's offer. The ultra-rich Mr. Mallya, who is known for his luxurious lifestyle, had started Kingfisher Airlines in order to cater to the elite air traveller but was keen to use Air Deccan's reach and network. It is perhaps good for both the airlines since they can share India's scarce airport infrastructure and man power. But the deal has raised questions about Air Deccan's continued capability to offer ultra-low priced air tickets and also the future of low-cost airlines in India. Mr. Mallya, who takes over as the Vice Chairman of Air Deccan, with Capt Gopinath as its Executive Chairman, has already announced that the airline will have to increase the ticket prices to stay in business. Questions also remain about whether Air Deccan will continue growing its network by adding newer destinations.

As a follow-up to their successful acquisitons, Mr. Mallya and Jet's Mr. Naresh Goyal have launched a campaign to acquire stake in Spicejet, the other successful low-cost airline. All these recent developments have sparked a debate about the future of low-cost airlines in India.

Air Deccan was and still is a revolutionary experiment in India and I think the Indian Government should have done something to bail out the airline. Considering the economic impact that the airline has had in the country in such a short duration, the Government should have offered some help, which would have allowed the airline not to compromise on its philosophy. In any case, it would be interesting to see the future strategy of Air Deccan. I hope it won't change much!

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