Kingfisher and Jet Airways are betting on two different strategies to come out of the deep financial mess they have found themselves in
Since May 8 this year, a curious new bird has been flying on Indian skies. Maverick businessman Naresh Goyal has sprung a surprise by launching a new low-fare flying service, Jet Airways Konnect, by taking away half the number of flights from his flagship brand, Jet Airways. And he has done something normally unthinkable — he has ripped out the business class and replaced it with economy class seats. Then, in a complete break with his business philosophy, he made Jet Konnect a low-cost carrier (LCC), setting prices that compete with the likes of SpiceJet and Indigo.
- Disconnect with J Class, Forbes India, June 2009
Almost two-and-a-half years have passed since Naresh Goyal swallowed his pride and launched Jet Konnect, his answer to the low-cost challengers who were threatening to change the ground rules in Indian aviation. In many ways, Jet Konnect turned out to be quite a phenomenon. Even today, it accounts for 70 percent of all the seats that Jet Airways sells in the domestic market. Along with JetLite, it’s roughly twice the number of low-fare seats of Indigo and SpiceJet combined.
Based on these statistics alone, you’d imagine Naresh Goyal would be in clover. Instead, here’s the paradox: If insiders are to be believed, Goyal is almost about to abandon his Jet Konnect service and reboot operations completely. The trigger: Jet reported losses of Rs. 838 crore between April and September 2011. That’s not all. The airline has also made significant losses in three of the last four years. Debt is already piling up. The situation is so alarming that the canny entrepreneur has begun to look at every strategic option on the table. One thing is now amply clear: His Jet Konnect strategy may have helped him hold market share at 28 percent for a while, but it failed to make long-term business sense. And neither did JetLite, yet another low fare offering, built from the ashes of the erstwhile Sahara. Neither service had the operational efficiencies of a low-cost carrier like Indigo, nor was their cost structure low enough to allow it to sustain a low-fare strategy.
The realisation has dawned that Jet Konnect was no different from Jet’s full service offering (with all its attendant costs) minus the meals. Two weeks ago, the top management at Jet met to explore the possibility of adopting a two-tiered strategy: A full-service airline aimed at premium business travellers and a newly branded low-cost airline with a completely separate management team and a larger national footprint. There’s still no confirmation yet on whether Goyal has given the plan the go-ahead. “It is like trying to unravel a plate full of spaghetti,” admits a senior executive from Jet, on conditions of anonymity.
Even as Goyal figures a way to get out of the classic stuck-in-the-middle syndrome, Vijay Mallya, his bitter rival, has his task cut out in his bid to save his airline. He too has much the same dilemma: The dual strategy of running Kingfisher Red, a low-fare airline, along with his full-service airline Kingfisher has completely backfired. With debts of Rs. 7,500 crore and accumulated losses of Rs. 4,500 crore, Mallya is barely able to meet solvency norms. Like Goyal, his team led by CEO Sanjay Aggarwal is making a desperate attempt to adopt a whole new radical game plan. “We’ve looked at both options: To become full-service and low-cost. We believe there are simply too many players who’ve taken positions in the low cost space. We’ve therefore opted to play the game the best way that we know: Remain focussed on the full-service model,” says Aggarwal.
Given the size of Kingfisher’s debts, there aren’t too many folks who’d pay much heed to this strategy just yet. So first, Mallya has to find fresh capital quickly — and time is running out. But even if he continues his search for suitors, a significant part of his revival plan depends squarely on whether his new bet on an entirely full-service model is able to win back the patronage of his business travellers at a fare that’s at a reasonable premium over the low-cost players.
So here’s the tricky question: Who has the best chance to emerge out of the rut? Much like everything in life, there aren’t any simple answers. So belt up, and let’s hit the road to understand the delicate survival plan that two of Indian aviation’s best-known entrepreneurs are plotting.
Catching the Low-Cost Bug
Three years ago, Goyal had dismissed the low-cost carrier (LCC) model as untenable and Mallya thought it wasn’t worth his while. Which is why both of them bet their futures on full-service carriers.
Their pessimism wasn’t off-the-mark. India had none of the infrastructure advantages that low-cost players in the West had: Secondary airports, low-cost terminals, etc. The dramatic flameout of Air Deccan and its sale to Mallya in 2007 reinforced the same fact: LCCs did not have much of a future.
Four years later, low-cost carriers account for 70 percent of all seats sold in the domestic market. So what went wrong?
Goyal and Mallya may have clearly underestimated the concept of jugaad — the ability of local entrepreneurs, particularly Rahul Bhatia of IndiGo, to discover a whole new model based on local market tweaks. Thanks to this pioneering and disciplined effort, India saw its own model of low-cost carriers emerge.
And that brings us to a subtle difference between a low-fare carrier (LFC) and a LCC. The difference between the incumbents and the challenger is exactly this. Indigo operates as an LCC; not an LFC.
“The idea for us was to set up a certain kind of an airline… The kind that is on time, clean and delivery is well executed,” Rahul Bhatia of Indigo told us last year when we attempted to document what made him tick. “This is our DNA and we intend to hang on to it. It has worked for us, and we have no desire to change, even when we have 100 more planes,” he told us then.
Under him, IndiGo is evolving into a different beast from the low-cost models practised by Ryanair, Southwest and others in the West. This is because LCCs in India simply do not have satellite airports and ancillary revenues from streams like checked-in baggage etc, which Ryanair depends on. So, IndiGo had begun selling its front row seats to passengers willing to pay for more legroom. But the Directorate General of Civil Aviation (DGCA) disallowed this. These are variables that are completely out of the operator’s control. Therefore, savings have to come from innovations built into every aspect of the airlines operations.
Quite unlike Ryanair or Southwest, IndiGo had placed orders for 100 planes even before it launched. This gave it leverage not only with airplane manufacturer Airbus and engine builder Pratt & Whitney, but with dozens of other makers of sub-system vendors on avionics, brakes, wheels and radios. They were able to squeeze these suppliers to offer discounts as well as warranties for longer periods than other airlines could.
Each contract was negotiated with tech-support wrapped around it. This ensured that whenever there were technical glitches, the onus was on the manufacturer to set it right quickly. The other far-sighted bet, taken some years ago, was that technology was changing and Airbus would have to launch an improved plane soon. Bhatia had begun signing sale and leaseback agreements for much shorter periods, compared with the industry norm. Airbus did launch the A320 Neo and Bhatia was among the first in the world to order 150 aircraft. The airline is now in a sweet spot where it will be ready to induct new planes from 2015, timed perfectly with expiry of the lease periods of older machines. This means that the fleet age remains young. Airbus says the new Neos that will join the Indigo fleet are 15 percent more fuel efficient and will give IndiGo an extra edge over the others.
Now, here’s the nub: Today, IndiGo’s share stands at 18 percent. If it continues to expand in the same way, it will likely to go past Jet on domestic market share alone, by this time next year.
So, now that the facts have been driven home hard, both of these entrepreneurs are attempting to figure out how to get their act together. Goyal seems clear LCCs are the way to go. For over two months now, the chairman of Jet is doing what he knows best — using his connections in the international airline business and talking to CEOs who have led successful as well as failed LCC ventures. He’s asking them what’s worked, what hasn’t and why. He’s hearing two clear refrains: That there is enough evidence that proves full-service airlines that launch low-cost airlines usually fail (see Prof. Nawal Taneja’s piece on page 53). And that brand loyalty is thin in their business. In fact, a Harvard study shows passengers are loyal only if the fare difference is within 5 percent of their nearest competitor. The moment it changes, they move over to a cheaper option, reveals a senior executive from Jet.
But that’s where the catch really is. A low-fare carrier isn’t necessarily a low-cost carrier. For almost a year now, Jet has been selling tickets below what its operating costs. And that is where Goyal has begun work in earnest. Top of the mind for him is a plan to cut costs by $180 million.
Though Goyal did not agree to speak to us about the new airline, highly placed sources say the holding company structure — with two airlines — one entirely full service and the other an LCC is being looked at seriously. Jet Airways and JetLite have separate airline operating licences. The simplest option would be to run one of them as Jet Airways, the full service airline. This will cater to the premium business traffic and will operate planes in a two-class configuration (business and economy) on the creamy (trunk) routes as well as international sectors. The other, possibly larger airline will operate with the JetLite licence, as the low-cost airline. Early indications are that it will be renamed, since JetLite was never able to become a brand of choice even in the low-fare segment. This (new) airline will operate on the high-density trunk routes as well as tier 2 and 3 ones. The Jet Konnect brand will also be folded into this operation. It will compete with Air India Express, IndiGo and SpiceJet, with the international low-cost flights.
Most importantly, the new airline will be run with a completely different cost and fare philosophy. “For the plan to succeed, it is vital that both airlines should be run separately,” says Saroj Datta, former executive director of Jet Airways. The big danger is fights over cannibalisation of routes and airport slots, he adds. Most airlines are unable to keep the distance or have the management discipline to share the routes in an optimal manner.
Qantas and its subsidiary JetStar have shown that it is possible. Nearer home, Flydubai and Emirates too are run as completely separate airlines, even though they have the same promoters. The tougher decisions would be on staffing for the LCC and salaries. Jet will also have to find the resources for new aircraft.
The Jet management has undertaken a huge exercise to cut costs from all aspects of the airline operations. For instance, at Mumbai airport, the space used by the airline is being cut by half. But it’s not just at Mumbai — the airline intends to cut down on the space it rents at practically every airport it operates out of, including counter spaces. This is because real estate rentals at airport terminals have gone up significantly as the companies that operate them seek to maximise revenues. To give just one instance, this exercise has bought down the annual ground handling expenses for Jet at the Toronto airport by $300,000.
Every route the airline flies on is being put under the scanner and all costs are being audited to figure out what can be cut out.
This includes catering contracts, the types and portions of food being served, and re-negotiating contracts with external agencies that do the ground and cargo handling. Even the cabin crew is being cut per flight wherever possible. On domestic routes, it’s going down to four crew members instead of the usual five wherever possible.
In an email to the airline’s pilots last month, Capt. Hamid Ali, the airline’s head of operations wrote that manpower is likely to be cut by 10 percent. Petrol and clothing allowances have been axed. For senior pilots who occupied management level positions, this translates to about Rs. 5,000 of petrol allowance being lopped off. New uniforms are being pared down for each crew member from four to two. And extra allowances for flying to international stations are likely to be cut as well.
Commenting on the mood, a senior captain at the airline told us, “It hurts us. But there is not much resentment. We are obviously aware of the difficulties the airline is going through.”
Making a Choice
Mallya’s strategy, on the other hand, is to switch business models from dual to single model — with a clear full-service focus, but with a small business class cabin in the front. This will become apparent over the next two months, as the existing aircraft get re-configured. Plus, his team is chopping off unviable routes and shelving the network expansion plan to focus on core, competitive routes.
The focus will be on profits, instead of market share, says CEO Aggarwal.
Eventually, Kingfisher plans to send back planes whose leases are expiring over the next one year and replace some of them with newer ones scheduled from Airbus. Rivals say lessors are getting impatient and are likely to pull out many of their planes if payments are not made soon. Aggarwal reckons that they will be able to stick to around their current size (about 60 aircraft).
Here’s the moot point: Why would passengers fly Kingfisher when there is a lower fare option available? The answers lie around the assumptions the airline makes on the needs of the market segment. The focus is on selling to corporate executives — people flying on official trips, who still constitute three-fourth of the passenger traffic in India. Leisure trippers make up the rest.
Besides, there is another significant difference. To save money, most low-cost airlines avoid selling through either a global distribution system (GDS) or forge a global alliance partnership. This is usually the prerogative of full-service airlines because access to the GDS costs the airline about $1.50 per ticket, but in the overall analysis, for many airlines, it more than pays for itself. Airlines around the world continuously evaluate their GDS expenses. In 2007, Southwest Airlines, the poster-boy of LCCs, broke with its past practices and opted to begin participating in a GDS with Galileo. This allows Southwest’s inventory to show up on the computers of thousands of travel agents around the world. New York carrier JetBlue too has seen the value offered by GDSs, says Aggarwal. It will give Kingfisher global reach and the ability to interconnect with multiple carriers.
Using the individual airline’s Web site or an online travel site like Makemytrip or Cleartrip does not work for corporate customers with complicated travel itineraries. The plan, says Aggarwal, is to invest the monies they save from getting out of unviable routes back into the core product and the frequent flyer programme. Kingfisher will have to work hard to restore credibility and service standards that it once set for the industry.
By making the frequent flyer programme attractive, it will allow users to earn more miles to use for their personal travel. Once this is done, he says, most frequent flyers will pick Kingfisher over rivals.
Also, Kingfisher is hoping to join the Oneworld alliance in February next year. Mallya had earlier dreamt of setting up a huge network connecting North America and Europe.
The new plan is to use its A330s to offer limited connections that make strategic sense. For example, Kingfisher will connect to Hong Kong, from where Cathay Pacific (also an Oneworld partner) offers the passengers unmatched connections into China and other South East Asian countries. Mallya plans to continue flying into London, from where British Airways and American Airlines pick up the passengers wanting to travel beyond. Similarly, these airlines feed international passengers travelling to India, into the Kingfisher domestic network.
In the end, there’s no guarantee that either Goyal or Mallya will emerge trumps. But one thing is for sure: Indian aviation won’t be the same for a while to come.
Airline-within-airline Is Not The Only Option Left
By Nawal Taneja
Most airline-within-airline experiments have failed — Air New Zealand’s Freedom Air, British Airways’ Connect and Go, Continental’s Lite, Delta’s Express and Song, and KLM’s Buzz, to name a few.
All these experiments were initiated to battle low-fare competition, particularly during difficult times. Delta, for example, set up Song when JetBlue began to divert significant traffic away from its lucrative New York-Florida route. The objectives have typically been to offer simpler fares and customer service through lower costs and improved efficiency. The key assumptions have been that: Unions will permit flexible employee work rules and lower wage structures; and management can operate both brands economically.
Almost all such initiatives failed. First, because the management couldn’t develop and maintain a low-cost culture as usually at least some part of management, systems, processes and procedures came from the parent airline. Second, the management wasn’t successful in developing and implementing airline-within-airline multi-brand strategies.
To date, the only successful airline-within-airline has been Qantas’ Jetstar, launched in 2004. Qantas allowed Jetstar to be managed independently and grow at higher rates and generate greater profits, sometimes even at the expense of the parent company.
The success did not go unnoticed by unions. They could see an increasing percentage of Qantas’ network being handed over to Jetstar. This led to an unprecedented strike last month during which the Qantas management grounded the airline’s entire fleet worldwide. The Australian government had to intervene before operations could resume.
There is no question that full-service airlines need to explore new business models in light of increasingly demanding customers, stiff competition, continuation of entrenched labour rules and practices, and enormous debt. However, the question is, are these models viable and sustainable? The options being considered vary from basic low-cost operations to sophisticated strategic alliances, to joint ventures, to multiple brands, to airline-within-airline, to significant retrenchments.
For the airline-within-airline option, two key factors are leadership capability and culture to manage two separate brands simultaneously, and the willingness of labour to accept flexible work rules, reduction in wages and benefits, or lower wages for new hires. Past failures have often been due to wrong assumptions in both cases.
Is this the only option left for airlines? Hardly. Especially if one considers the experience during the past two decades. For airlines, such as Jet Airways, managing the core airline requires learning to work around them through an overhaul of fleet, network, and products, individually or through an alliance. Think about a network in which Jet flies from Mumbai, Delhi, Bangalore, Hyderabad and Ahmedabad non-stop to the top hub an alliance partner in the USA has (JFK if the alliance was Skyteam and Newark if it was Star). And what if the alliance partner flies non-stop from its top three hubs to the top Jet hub in India (JFK, Atlanta and Detroit in the case of Skyteam or Newark, Washington and Chicago in case of Star).
Think also about the possibility of foreign investor with a percentage large enough to have a seat on the board to provide some external ideas. What is needed to truly manage the core operations of legacy airlines are some unconventional thinking and the benefit of insights available from the best global practices in other industries.
Nawal Taneja is an advisor for the airline sector, an educator, and an author