No Frills, No Profit

In Spicejet's operations centre at its office in Gurgaon, company director and part-owner Ajay Singh is showing off the airline's impressive on-time performance. Pointing at a board full of numbers, he queries a nearby employee and tells this correspondent: "Only one delay today, and that too because of air traffic control (ATC) issues."

But while SpiceJet, and the three other budget carriers in India, Air Deccan, Indigo and GoAir, improve their on-time performance, their financial performance leaves a lot to be desired. Singh, in whose airline Tata Sons investment arm, Ewart, recently acquired a 10 per cent stake, laughs when he says: "No-one is making money, it is a bloodbath, but at least we are losing less money than the others and even make a marginal operating profit." SpiceJet, which has a fleet of 11 aircraft currently, expects to have 17 by year-end.

Another airline that has definitely not slowed down its growth plans is Indigo Airlines. Promoted by the Delhi-based travel services firm Interglobe, Indigo burst onto the scene with a huge 100-aircraft order at the Paris Air Show in 2005. So far, nine aircraft have been delivered and Bruce Ashby, CEO of the airline, expects six more by the end of the year. "By 2008, we should have a fleet of 23 aircraft." However, ask him if he is making money, and he shrugs: "This is not a business where you can expect to make money for the first 18-24 months. In the current environment in India, with infrastructural issues, that time frame might get slightly extended." However, Ashby did point out that Indigo hopes to turn the corner soon.

So what's the problem? "Customers only care about the lowest fare, there is little price elasticity for fares on a particular sector," says Jeh Wadia, MD, GoAir. "And the health of the industry is being compromised by things like sales tax on aviation turbine fuel (ATF). Over 42 per cent of my costs today are on ATF; if the government brought ATF under value-added tax (VAT), we would start making a profit overnight."

GoAir recently reduced its fleet from seven aircraft to five and the number of stations it serves from 13 to 11. While some in the industry see this as a sign of weakness, Wadia strongly quashes these rumours. "Our plans were always to bring in additional capacity every winter, because in winter we can bring in aircraft that are being underutilised in Europe at low-lease costs for the peak season in India." Wadia adds that GoAir expects delivery of its first brand-new aircraft from Airbus later this year

That said, Ashby and Singh both believe that a good customer experience can allow airlines to charge a certain premium. "SpiceJet is rarely the cheapest airline on a particular sector," Singh points out, while Ashby says: "In this industry, it is all about getting the job done with no hassles; if you do that time after time, the word spreads, and it gives us the ability to charge a slight premium."

Samyukth Sridharan, Principal Sales and Marketing Officer, Air Deccan, believes that fares will start climbing, "We believe that the low-cost industry has seen a bottoming out in costs and we will see prices begin to rise over the next 12-18 months." Air Deccan plans to increase ancillary revenues to 25 per cent of the company's topline within the next four years. "That will allow us to fiddle with fares," adds Sridharan.

However, while GoAir, Indigo and SpiceJet work on the tried and tested single-aircraft type, low-cost model, Air Deccan utilises its ATR aircraft on smaller sectors, prompting one rival to quip that the airline was "trying to be a jack of all trades", Sridharan, however, has confidence in the model. "We believe the ATRs give us access to smaller airports and the latent market in tier-II towns

The low-cost bunch has now also to contend with higher interest rates, which will result in a shrinkage in disposable incomes among the middle class. "There might be a short-term impact, but people will still travel in the long term", Wadia says. Sridharan is more forthright, "The alternative is to spend hours and even days on a train or bus."

Robey Lal, Country Manager, India, International Air Transport Association (IATA), believes that India remains a bright spot for the global aviation industry. "Policy decisions to liberalise markets have stimulated an enormous market. Consequently, India ranks amongst the top six fastest growing markets in the world." However, Lal adds: "In domestic markets, we see more scope for movement." Gautam Roy, aviation analyst, Edelweiss Capital, believes that pricing power will only come back if capacity is reduced. "I believe there needs to be a degree of common-sense consolidation in the industry. Even though planes are travelling full, the seats are being sold at unprofitable prices right now."

A few airlines share that view. "In the current environment there is space in India for (just) a couple of budget carriers," Ashby points out. "I think there is a market for two full-service and two budget carriers, plus the government airlines and maybe a couple of niche carriers, so I fully expect some consolidation," Singh adds. Any guesses on who will still be in business this time next year?