Low service, high cost

Sanity returns to aviation sector

Jet Airways' decision to exit the low-cost segment may restore some sanity to the sector. India is the only market in the world where the fares of low-cost carriers and full-service carriers are the same. Everywhere else, there is a difference of at least 50 per cent between the two. But the costs of full-service carriers are as much as 50 per cent higher. The absence of this differential has been catastrophic, to say the least. Most carriers are bleeding. According to the Centre for Asia-Pacific Aviation, Indian carriers made losses of $1.7 billion (about Rs 10,200 crore) in 2013-14 and could end the current financial year with $1.3-1.4 billion (about Rs 7,800-8,400 crore) in the red. One carrier, Kingfisher Airlines, has been grounded. Recent reports suggest that another, SpiceJet, faces a financial crunch. Jet Airways, too, is losing money. The company reported a loss of Rs 258 crore in the quarter ended June 30 this year; however, it was less than the loss of Rs 348 crore it had made in the year-ago quarter. The decision to mothball low-cost Jet Konnect could help it improve its financial performance. In its new incarnation as just a full-service carrier, it could raise fares and install more business-class seats.

There are other signs, too, that there could be a clear demarcation between low-cost and full-service fares in the days ahead. Vistara, the airline floated by Tata Sons and Singapore International Airlines that is expected to start operations sometime in October, has clearly positioned itself as a full-service carrier. Not only will its fares be higher than low-cost carriers, it is expected to have a larger number of business-class seats. Business-class fares are three to six times higher than economy fares and help a carrier improve yields. The decoupling of low-cost and full-service carriers will get completed once state-owned Air India also raises its fares. In the absence of any other competitive strategy, it has slashed fares to a level that has become unviable. Now is the time for Air India to shed its price-warrior tag and raise fares to a level that its operations become commercially viable. It has cut its losses in recent quarters; this will help speed up its recovery.

The clear demarcation between low-cost and full-service carriers will receive a boost from the government's plan to set up no-frill airports across the country. The world over, low-cost carriers have dedicated airports where the charges are lower. It helps them keep their operational costs under check. In India, such a distinction does not exist. All carriers, whether low-cost or full-service, pay the same airport charges. This, coupled with the high price of jet fuel, has made the low-cost model inherently unviable in this country. Now, the Airports Authority of India wants to build 50 budget airports in 11 states. These will be fenced with barbed wire, not walls. Baggage will be checked manually, not by X-ray machines. The lounge will be small, and there will be no food court. Instead of the Central Industrial Security Force, security will be provided by the local police force. So long as security is not compromised, this is a good idea that could help the aviation sector.