Kingfisher Airlines' failure was partly due to the fact it was forced to compete with lowcost carriers (LCC) while saddled with a high-cost structure, said aviation consulting firm Centre for Asia Pacific Aviation (Capa) in a report. With LCCs continuing to expand aggressively and grow their market share, they will set the pricing levels in the market they have the scale, network and product to do so, the report noted.
India's domestic market is dominated by the low-cost fare model, with even full service carriers (FSC) pricing economy class at a level comparable with LCCs. This is a fundamentally unviable situation given the difference in their cost structures, Capa noted.
The gap in costs is only likely to increase over time as LCCs are scheduled to receive re-engined narrow body aircraft ahead of the FSC, commencing from 2016. Meanwhile, the recent regulatory approval of unbundling and ancillary pricing will enable LCCs to become even more competitive on base fares. As a result, a restructuring of full service business models is inevitable.
Hybridisation - offering both lowcost and premium services - is inevitable, said CAPA. If Air India and Jet Airways
want to participate in the larger and faster growing segment of the market, they must achieve a low-cost base. "It is no longer a question of deciding how or whether to establish a lower cost subsidiary. Instead, the market has progressed so far that the core operations need to be hybridised to some extent," Capa noted.
Meanwhile, LCCs are also moving to offer more of the features of a full service carrier on a user-pays basis. For India's LCCs, unbundling is a way of being able to offer additional but optional services. For the passenger, this means greater choice and control of the travel experience, while for the airline, it means additional revenue. In contrast, the challenge for FSCs in hybridisation is that unbundling generally involves taking something away from passengers and offering it back to them for a fee.
According to Capa, the structure of India's airline market is expected to change significantly in the coming months as carriers revisit their business models to restore industry viability. Nearly two-thirds of the seats flying on domestic routes are on LCCs, one of the highest proportions in the world.
In this highly competitive system, Indian six main scheduled airlines have largely converged in terms of pricing and product. However, given their significantly different cost structures, this situation is unsustainable for some, while presenting opportunities for others.
Higher fares relative to LCCs would be achieved by offering services such as premium cabins, through check-in, interline capability, code-sharing and global distribution system (GDS) distribution which are important for both the corporate and offshore markets and which have the potential to generate a yield premium.
However, in order to be profitable, they must reduce their cost base to be closer to the LCCs.