4 minute read
To Save Air India, Look Further East
Written By
Tushar Chaturvedi Following a compounded annual growth rate of 20.3% in 2015, the highest ever recorded in the aviation industry, the Indian airline market is expected to stabilize at 10% until 2030. The explosion in airline demand is largely due to the country’s growing population and rising wages, with both trends set to accelerate in the coming decades. However, despite high market growth, Indian airlines collectively reported a two billion dollar loss in fiscal year 20202021, according to India’s Minister of State of Civil Aviation. Many aviation markets, including India’s, followed a similar path to the United States’ after deregulation of the aviation industry in 1978. Previously, airlines in the United States were restricted to specific geographical areas, limiting airline coverage. After deregulation, airlines began providing direct long-distance flights, leading to fewer passengers and ultimately higher seat prices. During the 1980s, the more cost-effective “hub-and-spoke” aviation model became more popular, in which connecting flights through large airports are used to reduce prices. Typically, “hub-and-spoke” airlines are Full-Service Carriers (FSC), meaning that they provide amenities such as meals and entertainment to passengers. However, due to the use of connecting flights, FSCs take longer than direct flights, leading to the development of Low Cost Carriers (LCC) such as Southwest Airlines. LCCs typically fly non-stop between origin and destination and often depend on lean service to maintain profitability. In India, the FSC industry has been dominated by the historically nationalized Air India, for which the Indian government instituted price caps of $35 for regional flights. Indian subsidy of full-service aviation resulted in an uncompetitive and unprofitable market, with nearly a billion dollars of losses in the Indian airline industry attributable to Air India alone. Another key piece of legislation, called the 5/20 rule, stifled FSC growth and spurred investment in LCCs. Under the rule, Indian airlines were required to operate domestically for five years and own at least 20 aircraft before offering international flights. Because the hub-and-spoke strategy is most profitable for long-distance flights and due to the price caps, Indian FSCs own under 300 aircraft compared to the 3,000 owned by major US airliners. However, with Tata Group’s $2.4 billion acquisition of Air India—resuming con-
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trol 69 years after it was nationalized in 1953— and the replacement of the 5/20 rule for the 0/20 rule (meaning that Indian airlines no longer have to fly domestically for five years), the Full Service Carrier market is ready for new entrants and poised for growth. Although Air India’s service quality and punctuality are bound to improve after Tata Group’s acquisition, several changes will be needed at Air India to maintain its market position and attain profitability. Indian airline companies do not need to look far for successful business models, and in fact can learn from their regional peers. For instance, Singapore Airlines (SIA) created a best-in-class brand and premium customer experience while turning a profit pre-pandemic. Following SIA’s strategy, the first objective for Air India should be to invest in building a reputable brand experience. SIA built and elevated the flight experience through the creation of themes such as the “Singapore girl,” a famous female cabin crew uniform in use for over 50 years, pioneered innovative customer practices like personalized in-flight entertainment system (myKrisWorld), and leveraged the latest aircrafts for long commercial flights, and in turn, generated more brand equity. SIA also converted challenges into opportunities. The airline similarly began with the disadvantage of possessing little to no domestic network and straightaway had to compete with international airlines. However, SIA took advantage of this challenge to benchmark systems processes and customer service. The specific Indian challenges of low margins and profitability necessitate greater automation, manpower utilization, and better contract negotiations, among other improvements. Fixing this cost base would provide them with a launchpad for harnessing higher volumes emanating from high market growth and traveller demand. Post-pandemic anticipated growth is the silver lining that presents several opportunities for growth that determined and savvy airlines will be able to take advantage of. Air India should seek to leverage opportunities arising from the rising number of airports and growing urbanization. New Delhi, India’s political seat, should be established as an international hub, especially for routing to Europe and the Americas and be able to compete against Singapore, Bangkok, Doha and Dubai. Although the FSC market is poised to be highly lucrative and has a highly addressable market, investors should remember that FSC aviation requires significant investment in wide-body aircraft, has a higher gestation period, and requires greater international networking. With ownership of Air Asia
and Vistara (only two airlines in a position to increase their flights compared to their pre-pandemic peak in 2019), Tata Group can maintain unparalleled access to domestic and international routes. However, Tata Group’s competitive edge could also be short lived if changes to the airline aren’t enacted. Emirates airlines has created a niche among various customer segments by offering innovative customer practices like pickup-from-residence and world media entertainment and in-flight services. To compete, Air India will have to innovate on its own terms.
February 22, 2019: Visitors outside the Tata Aerospace stall at Aero India 2019, a five-day long biennial event showcasing Indian aeronautics. Tata Group now owns three major Indian airlines.
