Crisis in Indian Aviation Industry and
the Road Ahead
with Rishikesha T. Krishnan, Professor; N. M. Agrawal, Professor &
Jishnu Hazra, Professor
The Airline industry in India has witnessed a lot of turmoil in 2009. All the major air carriers have run into heavy financial losses over the year. Air India was forced to ask for a bailout package from the government. Other air carriers are also burdened with high rates of sales tax on Aviation Turbine Fuel, under-utilization of capacity and employee discontent, among other issues. In this context, it is necessary to put up a roadmap for the revival of the industry. To examine this issue from different angles, we take the opinion of Prof. Rishikesha T. Krishnan who specializes in Corporate Strategy and Policy and additional insights from Prof. Jishnu Hazra (Production and Operations Management area) and Prof. N. M. Agrawal (Organizational Behavior and Human Resources Management area). We look at answering a few questions on the existing market structure, following this with a discussion on the problems of Air India. We also try and understand strategies that would enable these airliners to weather the crisis, with a special focus on an operations perspective in the final section.
Market Structure
Tejas: During the five days that Jet went on strike recently, The COO of one of the competitors was quoted as saying "All the industry needs is for one major airline to go out of business, and the rest of us will be fine." Do you feel that the woes of India's aviation sector would be resolved if it were to be regulated to have a fewer number of air carriers?
Prof. Krishnan: It is clear that while air travel demand grew at a rate of 2 to 2.5 times the GDP growth rate in recent years, airlines increased capacity at a rate even faster than that of the growth of demand. The demand growth itself was driven by low fares and these fares did not allow airlines to recover their costs. Fares were not increased because airlines feared that demand would decline; also high levels of competition and the perishable nature of airline seats added to pricing pressures.
Only foreign airlines have the expertise and experience required to make an investment in the domestic airline industry worthwhile. It's time to remove the regulatory constraints on FDI by foreign airlines.
If any of the major airlines were to close, demand and supply would be better aligned in the short term. This would probably lead to the surviving airlines turning profitable. However, there appears to be little likelihood of such a thing happening.
Tejas: What is your opinion on the issue of FDI in the Indian aviation industry? What sort of restrictions, if necessary, need to be placed on the foreign airlines, with respect to stake in the company, governance etc.?
Prof. Krishnan: The cap on FDI by foreign airlines in the Indian airline industry was intended to protect the interests of Indian Airlines at a time when Singapore Airlines was seeking to enter the domestic aviation sector through a joint venture with the Tatas. Today, the Indian airline industry is badly in need of capital. Only foreign airlines have the expertise and experience required to make an investment in the domestic airline industry worthwhile. It's time to remove the regulatory constraints on FDI by foreign airlines.
Woes of Air India
Tejas: Despite absorbing large amounts of government money in the past decade, Air India is in extremely bad shape. What in your opinion is the cause for this?
Prof. Krishnan:
While some public enterprises like BHEL, ONGC, and IndianOil have become internationally competitive, Air India has failed to become an efficient organization. Air India's problems are well known. The airline is highly over-staffed, and has strong unions that fight to protect their own interests. The airline is not run on commercial lines and it suits politicians and bureaucrats to have it that way. The management is not given the authority and support to take tough decisions. Over and above all this, the airline industry is a brutal industry and airlines all over the world have lost money in recent years.
Tejas: Many of Air India's current problems can be traced back to its faulty marketing strategies. What sort of strategy should Air India look at for reviving its fortunes? At the same time, what do you think of strategies like the recent regulation requiring government officers to travel only by Air India?
Prof. Krishnan: Air India's problems can be attributed more to operational inefficiencies arising from inappropriate authority structures and accountability rather than to poor marketing. Putting in place an appropriate management structure must precede changes in business strategy and operations if Air India is to survive and prosper. Requiring government officers to travel by Air India is a backward step. It distorts the playing field for airlines, artificially shores up Air India's performance, and is essentially another form of subsidy to the airline.
Tejas: Air India, like many government institutions, suffers from the problem of an excess workforce whose average age is very high compared to other airlines. Given its current state and the sorry state of the sector, what steps could be taken by the government to tackle this problem?
I don't think that Air India's policy of retaining older employees is wrong. But once people got this right, they should have used it more effectively - see that they remain fit and are able to provide service.
Prof. Agrawal:It is only in India that people after a certain age cannot work as stewards or air hostesses.
Thus I don't think that Air India's policy of retaining older employees is wrong. But once people (employees) got this right, they should have used it more effectively - see that they remain fit and are able to provide service. There is no linkage between age and quality of service. The problem comes in when people take their position in the system for granted. In other words, while Air India was lenient on age restrictions, they did not pay enough importance to the service orientation. Other airlines have landed up with a competitive young force that makes Air India look very jaded.
Strategies for Survival and Growth
Tejas: What are the reasons for superior performance of low-cost carriers like Indigo compared to full-service carriers? How feasible are these low-cost models in the long run? What factors are important for the success of this model?
Prof. Krishnan: Many of the most important costs of airlines in India - aircraft lease rentals, fuel, landing and navigation charges - are the same for all airlines. The main cost advantages that "low-cost" airlines enjoy arise from lower staff costs, lower sales and distribution costs, and increased seat density. However, even "low-cost" airlines have struggled to be profitable. This is in spite of the fact that "low-cost" airlines have captured about half of the market and forced full service carriers to shift to a no frills service (Jet Konnect or Kingfisher Red). Government policy measures such as lower cost airport infrastructure, lower taxes on aviation fuel and a move away from looking at airlines as a luxury business could help decrease the cost of airline operations and thus help the airlines either lower prices or have higher realizations at the current price levels.
Tejas: Jet Airways and Kingfisher entered a partnership for code-sharing, shared infrastructure etc. thereby helping in cost reduction. How much can such partnerships help in these troubled times? Would tie-ups with international airlines or entry into networks like the Star Alliance make a difference?
Prof. Krishnan: The Jet-Kingfisher alliance that was announced with much fanfare does not appear to have covered much ground. Code share flights and partnership between the loyalty programmes have not happened so far. The alliance has served one important purpose - it has allowed both airlines to take a more rational view of capacity expansion.
The international story is different. Today, there are three main alliances of airlines in the world. An important arena of competition is between these alliances. The larger airlines that have a significant presence (e.g Jet that already has more than 50% of its revenues coming from international routes) in international routes will almost inevitably have to become a member of one of the alliances.
Tejas: To keep costs low, successful Low-Cost Carriers like Ryanair in Europe and Southwest Airlines in the US usually fly to secondary, smaller airports in major markets. Do you feel airports on similar lines in the bigger Indian markets like Delhi or Mumbai can be constructed to give a boost to low cost flying?
Prof. Krishnan: In the U.S., no new airports were built for this purpose. In many cases, small airports (close to cities) that had given way to larger airports farther away already existed and these are used by low-cost carriers. In India, such secondary airports hardly exist. Given land prices and the current business model of the new private airports, it is unlikely that new airports will be able to offer significant cost advantages to low-cost airlines. Further, the present regulatory structure doesn't allow airports to be closer than 150 km to each other. It may be worthwhile to examine the Changi model - Singapore is building a new terminal within the Changi airport that will have less frills and offer lower costs to airlines. Government should also consider revising the criteria for the award of new airport contracts. As in the case of power projects, contracts should be awarded to bidders who quote the lowest price at which core aviation-related services will be provided.
Operations Perspective
Tejas: Would you regard the air connection network between Indian cities as efficient? Recently, there has been talk of implementing the Hub-and-Spoke Model in India's domestic airline network, with hubs at Delhi, Mumbai, Bangalore and Hyderabad. What is your opinion on the implementation of this model in India?
Prof. Hazra: Airlines companies in India have more frequent flights for heavy demand routes like Delhi-Mumbai, with lower costs compared to similar distances between other cities. This is efficient from the point of view of both - the companies and the passengers. However if you want to make air travel more widespread, you have to connect smaller cities and towns, and that is not possible with the current Point-to-Point or Direct Connection model. Thus from a consumer perspective, the current model is not adequate.
If you want to make air travel more widespread, you have to connect smaller cities and towns, and that is not possible with the current Point-to-Point or Direct Connection model. To connect the smaller cities, you have to go for Hub-and-Spoke
To connect the smaller cities, you have to go for Hub-and-Spoke, which is already there to a certain extent. For example, if you want to travel in the North-East, you have to go via Kolkata. Similarly Mumbai acts as a hub for the western part of the country. Thus the physical route is not the issue - the issue is ticket pricing. If you buy a ticket from Bengaluru to Lucknow (via Delhi), you're actually buying two different tickets. Under true Hub-and-Spoke, this ticket should only be slightly more than Bengaluru-Delhi but it's not. It costs Rs. 15,000 - 16,000, which renders this route inaccessible for someone who can afford air travel but not at so high a cost. Thus the physical routing is Hub-and-Spoke based, but the ticket pricing is not. Also, scheduling is not Hub-and-Spoke based.
Tejas: Indian air carriers placed several orders for new aircraft during the period of explosive growth from 2003 to 2007, anticipating greater demand. However, as the new aircraft will start to come in, they will be faced with a problem of overcapacity, as demand has in fact dropped. What would be the best way to tackle this problem?
Prof. Krishnan: The metro cities continue to be the major source of demand for air travel. The biggest markets - Mumbai and Delhi - are constrained in terms of landing and take-off slots and parking bays. Airlines are reaching a point where it is difficult to deploy additional capacity. Most airlines have already put orders on hold or sold their position in the delivery queue to other airlines. The next big burst will happen only after the modernization of Delhi and Mumbai airports is completed. Growth of disposable incomes in tier 2 cities will be required for sustained growth of the airline industry in the long term.
Profiles
Prof. Hazra is a professor in Production and Operations Management at IIM Bangalore. He researches in the areas of Supply Chain Management; Lean Manufacturing; Procurement and Pricing in Supply Chain. He holds a Ph.D. from the University of Rochester, New York and a B.Tech. from the Indian Institute of Technology Delhi.
Prof. Agrawal is a professor in Organizational Behavior and Human Resources Management at IIM Bangalore. He has consulted for several companies including BSNL, JSW and Novo Nordisk and also served on the Editorial Boards of the Sri Lankan Journal of Management, and the Asia Pacific Management Review Journal (Taiwan). He holds a FPM degree (Fellowship Program in Management, equivalent to a Ph.D.) from the Indian Institute of Management at Ahmedabad.
Prof. Krishnan is the Jamuna Raghavan Chair Professor of Entrepreneurship at IIM Bangalore. His research areas are Strategy & Innovation, Strategy Implementation, National Innovation Systems and Competitiveness. He has been teaching at IIM Bangalore since 1998, during which time he has also been a member of several prestigious committees like the India Advisory Board (Foundation for Excellence) and the corporate boards of D-Link (India) Ltd., Sundaram BNP Paribas Asset Management Company Ltd. and Halbit Avionics Pvt. Ltd. Prof. Krishnan holds a FPM degree (Fellowship Program in Management, equivalent to a Ph.D.) from the Indian Institute of Management Ahmedabad, and Masters degrees from Stanford University and the Indian Institute of Technology Kanpur.
