<b>Surajeet Das Gupta:</b> Will Air India's new avatar work?

Since its costs are very different from those of Low-Cost Carriers, the move to convert it into an LCC will bleed it further.

If the loss in bilateral rights and high aviation fuel prices were not enough to bankrupt Air India, the Ministry of Civil Aviation’s plans to convert Air India into a low-cost carrier is likely to bankrupt the airline even faster. And with Air India vacating the full service carrier space, rivals Kingfisher and Jet Airways are likely to benefit.

The decision to move towards low-cost carriers (LCC), of course, is not entirely unexpected. Thanks to the economic slowdown, passengers are increasingly gravitating towards low-cost airlines — as for those flying for the first time in preference to rail travel, the allure of low-cost is obviously far greater. Which is why the market share of full service airlines (all of whom also offer low-cost travel, but to a lesser degree) has fallen while that of the low-cost carriers has risen. Jet Airways’ market share fell from 17.9 per cent in January this year to 16.6 per cent in June, Kingfisher’s from 27.6 per cent to 24.4 per cent and Air India’s rose marginally. Budget carriers like SpiceJet saw their share rise from 11.8 per cent to 12.8 per cent and IndiGo’s share remained the same at 13.6 per cent. More than that, the passenger load factor (PLF) of budget airlines rose dramatically while those of full service airlines rose a lot less — SpiceJet’s PLF rose from 68.3 to 77.3 per cent in the same period, GoAir’s from 64 to 85.1 per cent while Air India’s rose from 60.2 to just 67.9, Jet from 64.8 to 67.8 and Kingfisher from 64 to 72 per cent.

Given this, Air India chief Arvind Jadhav’s decision to shift a sixth of the airline’s 300 domestic flights to low cost operations by next month and, if the plan works, half the flights will also be shifted to this format soon. In-flight food services are to be scrapped on these flights and baggage allowances to be cut by half from the present 20 kilogrammes per passenger.

The problem with this model, as with all models, is that there are several assumptions which need to be fulfilled first. If the airline is not able to reduce costs dramatically, the move will bleed it further. A look at the cost and revenue structures for the two types of airlines makes this clear. Last year, on average, the LCCs spent around Rs 2.91 per seat kilometer — that is, take their total costs and divide this by the total number of seat kilometers the airline flew, the latter being the multiple of the number of seats and the number of kilometers flown. Do the same for revenues, and the revenues per available seat kilometer (RASK) was lower at Rs 2.39 — which is why, on average, the LCCs made a loss. A reduction in costs this year has reduced the costs per available seat kilometer (CASK) to Rs 2.5 and better rationalisation of fares has increased the RASK to Rs 2.6 — which is why budget carriers like SpiceJet are making money right now.

Now look at the numbers for full service airlines. Last year, full service airlines had a CASK of Rs 6.37 per kilometer and a RASK of just Rs 5.27 — that is, revenues were 18 per cent lower than costs, a figure which was more or less similar to that for the low-cost carriers. But the equation has changed quite dramatically in the first quarter of this year. Both set of airlines saw CASK fall, largely due to the fall in global and hence Indian aviation turbine fuel costs. But the RASK for full service airlines has completely collapsed — RASK fell from Rs 5.27 last year to just around Rs 3 in the first quarter of this year. This fall is explained by airlines slashing fares on full-service operations as well as moving a greater part of their operations to the low-cost/low-fare mode. As a result, the difference in the CASK and RASK which was 18 per cent last year rose to 45 per cent for the full-service airlines and became minorly positive for the low-cost airlines, all of whom are showing better results, even profits, this year. Though Air India claims its CASK is lower than that for its private sector counterparts, the trend of the CASK-RASK gap increasing is similar.

In which case, if Jadhav cuts tariffs faster than he is able to do costs, as is obvious since he plans to introduce low cost flights at the earliest, the airline will make more losses as revenue levels will come down while cost levels won’t. On average, fares will be cut by another Rs 500-1,000 to bring them in line with those for the LCCs. Not surprisingly, given the CASK-RASK equation, all full service carriers like Jet and Kingfisher have lost more money as they have tried to increase their low-cost flights — Jet is shifting a quarter of its flights to all-economy and no-frills through Jet Konnect, and Kingfisher has already shifted over 10 per cent of its capacity to its LCC called Red, and more are on the anvil. Jet made losses of Rs 225 crore this quarter compared to a profit of Rs 143 crore in the same quarter last year, Kingfisher’s losses of Rs 242 crore in the first quarter are more than the Rs 157 crore loss it made the corresponding quarter last year.

Jadhav is familiar with the areas where cost cuts have to be made — the number of employees as well as on their emoluments. Air India has 219 employees per aircraft compared to around 107-130 for the LCCs on average. Within this, the real fat lies in the salaries the pilots and technicians get and the performance-linked incentives (PLI) they get for logging in just basic levels of service — base performance levels were lowered to ensure staffers got a decent PLI-pay. While Air India’s wage costs are around 21 per cent of its total turnover, those for Kingfisher are 15 per cent and the figure is 11 per cent for Jet — it is a mere 8.5 per cent for SpiceJet.

But it is not just in salaries where Air India needs to make a dramatic change. Its aircraft have an average turnaround time of around 50 minutes as compared to around half this for domestic LCCs. Air India also needs to relook its arrangement with Air India Express, the low cost carrier that currently flies global routes — Air India Express gives Air India a fourth of its revenues as royalty for taking care of its service needs as well as for giving it routes to fly. Since Air India Express will now fly domestic routes, paying such a high fee will negate all other benefits that it enjoys.