Will regional operations become the secret sauce for airlines' success?

Data show that airlines make more money flying regional than on metro routes

SpiceJet boss Ajay Singh is mighty pleased with the performance of his airline. Despite a load factor of more than 90 per cent, the airline’s yield has remained healthy. Yields give an idea about the airline’s ability to command a price for its ticket. For SpiceJet, it was positive despite cut-throat competition on prime routes.

SpiceJet’s better yields are a result of the higher fare it commands from its regional operations. Pricing on some of the routes has been reasonably good, resulting in much higher yields when compared with key metro routes. 

“SpiceJet, which has sizeable capacity on such routes, has better yields despite high load factors and heightened competitiveness on metro routes,” SBICaps mentioned in a research report.

So, are regional operations becoming the secret sauce of an airline’s success? 

Ajay Singh believes so and, hence, he took the bet too aggressively participate in the government’s UDAN (Ude Desh Ka Aam Nagrik) scheme, which intends to connect regional cities that are not served or are underserved by an airline.

At present, SpiceJet flies on three UDAN routes — Mumbai-Porbander-Mumbai, Mumbai-Kandla-Mumbai, Hyderabad-Puducherry-Hyderabad — with the 78-seater Bombardier Q400. “The seats start selling immediately after booking opens. Even our team is pleasantly surprised with the demand on such routes,” Singh said. 

Initial results on the UDAN routes have shown there is money to be made from regional operations. With proper network planning, an airline can command higher fares flying people from a tier-III city into its hub in comparison to metro routes.

A fair analysis by travel portal Yatra has shown that last-minute fares on UDAN routes are higher than that between two metros. So, while one can book a ticket three days before a journey from Delhi to Mumbai at Rs 4,300, SpiceJet commands a last-minute fare of Rs 8,609 on Mumbai-Porbander. Alliance Air can charge Rs 10,500 for a last-minute booking on Delhi-Shimla flight.

“If I’m flying people from Delhi to Kolkata, my ability to get an outsize fare is really bad. I’m flying from two major hubs, and there’s a lot of opportunity for people not to select me,” said a senior IndiGo official. “But if you’re in Puducherry, Shirdi, and Rajahmundry you need to connect to Delhi to go somewhere else, I think you’re stuck. And that’s the game.” He said explaining the opportunity of flying into smaller cities.

But despite the initial promise, regional routes have shown, they can only be sustainable if operated on a large scale. 

“If you don’t have economies of scale, it is very tough to do this business. Your costs are different in running a five-aircraft operation, vis-à-vis a 50-aircraft operation, the smaller the plane, the more expensive it is on a per-seat basis. The cost of the pilot, crew — everything remains the same,” Singh said.

The economy of scale is the reason why market leader IndiGo has entered regional operations with a 50-plane order. Mainly eyeing the regional and industrial clusters, firstly it is playing the game of size. So, cities like Rajahmundry and Tirupati would have four to six departures daily connecting it to metros like Chennai, Hyderabad and Bengaluru. Secondly, it has started to give shape to its hub-and-spoke model by connecting the cities to international destinations like Dubai, Muscat, and Singapore through bigger hubs like Chennai, Bengaluru and Hyderabad.

Operating in large scale becomes more important as profitability from such routes would reduce dramatically with two domestic majors competing directly on the regional routes. 

“Incremental capacity deployed by IndiGo on some of SpiceJet’s existing routes may lead to a moderation of yields. While the regional strategy has helped SpiceJet to withstand pricing pressure, it will have to bring down the non-fuel cost structure. The large aircraft order will help in cost-improvement,” SBI Caps wrote.

SpiceJet has, in fact, ordered for 50 of 90-seater Q400 which Singh believes would bring down the cost of operations. “If you divide that by a lower number of seats, it becomes that much more expensive, it’s any day more profitable to fly a 90-seater than a 70-seater if the cost of operation is similar on both,” he said.