Wednesday, June 18, 2014

Tata’s new airline: finding the sweet spot of convergence

Cheating Geography

Singapore is a nation that was dealt a poor hand by nature but one, which has through vision and sheer determination cheated its geography repeatedly.

Take the land reclamation project as an example, which has increased Singapore’s land area nearly 10% since 1960 & will eventually by 2030, grow it a whopping 26%, more than 1/4th its original size. Singapore’s Changi Airport is almost entirely built on reclaimed land or land that was previously swampy. Or take fresh water supply- from being almost totally dependent on Malaysia for its fresh water supply in the 1960’s, Singapore is now not just self-sufficient, it has become a global water research and technology hub with active support from the government.

Not to be ignored is the example of Singapore’s Changi Airport- a predominant hub in South East Asia that handled a little over 53 million passengers in 2013. It was & is disadvantaged in no smaller measure than being a 2 hour flight diversion to the South if one were to fly from Australia to Europe. Not being directly en-route the popularly named route “kangaroo-Hop” was a major disadvantage to Singapore and a big plus for Bangkok, which, aside from being in a favorable location geographically, was also popular with the revelers of the 70’s. Thailand had all the beaches and sun that Europeans asked for.

Not to be discouraged, Singapore overcame its geographical disadvantage by building its remarkable success on its industry leading Airline and one of the most awarded Airports in the world. Passengers asked to be booked via Singapore and on Singapore Airlines; such were the standards it set.

Yet human intervention has its limits. Cities & hubs have risen and fallen throughout the history of humankind as circumstances changed. Even recent aviation history shows examples that define these changes- Bahrain, once a pre-eminent transfer point for Europeans traveling to Asia wilted as other hubs in the Middle East rose. Calcutta, an important mid-point for the British forces declined & remains the most poorly connected major city by air in India today.

As aircraft range/payload improved and continues to improve further, the rise of Middle East poses a threat to the Singapore hub and this is well documented & thought about. For the Airlines in Middle East are, quite literally, in the middle of the world now- New aircraft have brought Sydney well within the reach of Dubai even as Emirates introduces newer services to the western coast of United States. It flies to Buenos Aires (albeit with a stop today) and by and large delivers on its mission of connecting any urban conglomerate with another within 8000 nautical miles of Dubai, with enroute stop at its Dubai hub. With the 9600 NM range offered by 777-8x, scheduled for delivery in 2021, this mission statement would be more than fulfilled. 

Singapore, on the other hand, hemmed in by geography, finds limits to its ambitions- it cannot profitably access the US market without a stop either in Europe or somewhere in Asia, whether its Japan, Korea or Taiwan. It is this limitation that makes Singapore Airline extremely possessive about its bread & butter Kangaroo route. It has forced SQ to refuse to allow any other carrier to effectively use its network, despite being a member of Star Alliance.

And indeed it was this limitation that was behind the thought of investing money into other carriers such as Virgin Atlantic, helped of course by zero debt and available cash. As the Kangaroo hop starts to lose its spring, Singapore had to act.     
 
Tata’s Airline is re-born

No one can remain young forever. And so it is with the Singapore Girl. Singaporeans may squirm at the thought of their legendary icon being thus described but as unsexy as this may appear, she is about to become a mother to an Indian offspring fathered by the Tata’s.

Notwithstanding the genetic advantage this offspring may enjoy at birth, it may still be a worthwhile question to ask: What shape & size and looks would (should) the new-born take? Not all royals have succeeded and being born in royalty indeed is sometimes a disadvantage.

Take a peep into the airline world and one can, broadly, catalogue airlines into 3 types or business models:  

1.    Network driven characterized by complex network systems built over years. So most legacy US & European carriers will fall into this category, & Emirates would too, as it still is a network carrier, just newer. Today’s large airline systems would be tomorrow’s legacy carriers.

2.    Product driven in a classical differentiation strategy, some carriers sought to build their offerings around a superior product so the likes of Singapore Airlines and Virgin Atlantic would fall in this category. They have introduced many new aircraft to the market, kept onboard product standards ahead of others and spent extra-ordinarily higher on building a brand through an advertising strategy.

3.    Low cost carriers that focus on one single segment of the market with simplified operational footprint enabling them to offer a lower price.

One can add a few more business models like the regionals or the boutique all business class carriers but all of them are essentially either variations of the above or extensions of the same basic models.


Models above illustrated in the figure below




 Gradually, carriers at any of the 3 ends of the triangle have continued to adapt & adopt best practices from each other such that their basic business model isn’t materially compromised with the desire to enhance their offerings to a larger segment. With the result that more and more carriers have started to closely resemble each other and their models appear to be indistinguishable. So low cost carriers are increasingly interlining and codesharing with legacy carriers and product based carriers want to get into alliances to enhance their networks and so on and so forth. 

It won’t be incorrect to say that typically the evolution of airlines has followed a set trajectory- First came the legacy carriers, which were then followed by some product based carriers and when the market was deregulated, it gave rise to a lot of low cost carriers. In general that trend has upheld. In India, however, no true network carrier has ever been attempted, perhaps restricted by over-burdening regulation or even by lack of physical infrastructure.

   
Finding the sweet spot of convergence

Time offers the luxury of critically evaluating the business models of those who have already played their hand, also referred to as the late mover’s advantage. So Emirates, which has largely played its hand & placed it bet (& what a bet it has played) for the next 30 years is, in that sense, exposed. Its business model is frozen in time now, it can only continue to enhance and refine its offering using some of the newer technology. It cannot modify its genetic make-up or, do so, only at a great risk to its business- something that Ryanair is attempting.

Tata has this late movers’ advantage. It has the luxury to see exactly what in each model is working or did not work. And it has the opportunity to chisel out a perfectly fitting model for its primary market that is India.

What is that perfectly suited model? Is it the ultra-luxury onboard that some in the Middle East are offering or something that CAPA suggests- a Hybrid model? – CAPA doesn’t quite define its characteristics- A hybrid could look like a Jetblue but then Jetblue does not fly long haul. Would it then mean 2 different models for International & domestic? Besides, Indigo, is likely to look more and more like a hybrid carrier that closely resembles Jetblue, as it upgrades its offering and continues to have a spectacular operational record. So a Hybrid carrier, as it is generally understood today, is already a groove that is filled.   

Should Tata instead look like its parent Singapore Airline? If indeed there was a sustainable market for first class in India, why did Jet Airways private cabins in its 777-300ER’s not succeed? There is evidence to suggest that while there may be a small International market for the first class, it is not profitable for an India based carrier to offer one as seen in the cases of both Air India and Jet Airways.

In my opinion, Singapore Airlines’ product offering in its front cabins is a notch higher than what the Indian market would buy in enough numbers. And those who do want to buy such a product could always infact look at the Middle East carriers present in India or indeed Singapore Airlines depending on whether they are flying West or East.     

Something that is not so high up on luxury as to have priced itself out of the Indian market, nor as low down as to have erased any desired differentiation with a carrier like Indigo, What model offers that sweet spot of convergence?

After scanning the market for carriers that most closely resemble this desired model that offers just the right product elements for a full service carrier while still retaining the best practices of a low cost, the recommendation would be to look at what Air New Zealand has achieved.   



Scale is not to be feared

Being at the very end of the continent, like Air New Zealand is, does not offer you too many opportunities to connect traffic. Air NZ makes the most of what opportunities it has. It has carved out a neat niche for itself as a pre-dominant gateway to the numerous Pacific Islands. It flies the very lucrative and very profitable US routes and it has the domestic NZ-Australia business. And it does all this while still being profitable. If this is not enough, it wins awards too (the genuine ones).

Air New Zealand has had to face a lot of low cost competition too but they adapted- Air New Zealand was one of the first full service carriers (Air Canada was the first) to simplify, unbundle and brand its fares to compete with the LCC’s.

For product, Air NZ has been a pioneer by introducing the Skycouch in the economy class. It was also quick to introduce a premium economy class right at the beginning of the trend. In general, Air NZ has built its brand in a way that appeals to a younger audience- whether being active on social media or driving an advertising campaign viral (We have nothing to hide) they have captured not just eyeballs but also imagination, something many airlines are trying to emulate.

Air NZ was also the first to introduce sharklets in its narrow body fleet. It is the also the first to fly the B-789.  

One of the threats that consistently come up is the scale at which Middle Eastern carriers are operating and it is set to grow even larger as more aircraft are delivered. Combined with this scale is the unparalleled access to markets that allows them to deliver a ruthless cost advantage over any other carrier in the same space. Their labor force is largely from the sub-continent or low wage Asian countries, while a big part of their revenue source is Europe. Emirates is the very reason why no low cost long haul operator may ever succeed.

So how can other airlines, much smaller in size, compete? One answer was to join forces in alliances but it hasn’t quite helped smaller carriers or at least the jury is still out on this subject.

Here’s an unusual analogy on scale: Think of US forces in Afghanistan- As the US decided to increase its presence- add more soldiers on the ground, popularly termed the surge, Taliban responded by saying they now simply have a bigger, more visible target to hit.

Scale is not to be feared. The greater the scale of operations, more the complexity; slower the ability to respond. More the moments of truth generated more the likelihood that they would come out sub-par. Viewed from the angle of customer service, scale is most often a disadvantage. What is lost in cost competitiveness can be made up by agility. The evidence of this is also found in how US forces are changing- instead of becoming larger, they are becoming more agile. Just like Air NZ found its profitable niche (albeit it is argued it is far away from Emirates source markets), Tata could too.



Exploring Blue Oceans
  
What International routes can Tata-SQ fly and why?

Europe

Europe is a lost cause to attempt for an airline based in India. If there is a market that was lost in the interim 20 years that Tata did not get to start its services, it is Europe. With over 80 cities served by MEB3 (Middle East Big 3) and Turkish, it is nearly impossible to penetrate it profitably. A token route to London is often considered to be more attractive to local corporate clients in India but to make it profitable would be an uphill task with so much capacity already deployed. Instead a better idea is to tap into existing capacity by offering them more & deeper access into India, the Indian-Sub-continent & parts of Indochina, notably Myanmar. This helps SQ win back some customers to the group who may have been transferring via the Middle East to avoid backtracking that is unavoidable when transiting via Bangkok or Singapore. This could be achieved either by joining an alliance or better still by developing bilateral relationships with individual European airlines that matter.

North America

No Indian carrier can avoid looking at this market because of its volumes and yields but it is here that one finds the biggest overlaps with Air India. Today most of this market is served via hubs in Europe & will be increasingly served via the Middle East, as Jet joins the Etihad network, the opening of the US customs post in Abu Dhabi and with Emirates increasing the number of cities it serves in the US.  Assuming that AI did not exist, there is a case for offering services to the East Coast gateway cities in much the same as AI does today. The only thing that can & must be done differently is to partner with the new-age carriers at these gateways like JetBlue in JFK and West Jet in Toronto.


Africa- Project Cheetah

It is Africa that offers Tata-SIA, the chance to explore Blue Ocean. This is a chance to connect North Asia- China, Korea and Japan to Africa via its hub in Delhi, in what will be, the fastest possible transit route. In doing so, Tata will compete with of course the Middle East hubs (and with Ethiopian & Kenya Air who have existing direct routes to China) but because a large slice of source market actually resides in India, it is hoped that with a superior product and a flawless hub, Tata could win, much like SIA did on the Kangaroo route.        

A note on nomenclature

The Australia to Europe route has long been called the ‘Kangaroo-route’ because of the hop it requires at a mid-point such as Singapore or Bangkok.  Similarly, the project to directly connect North Asia to Africa via a mid-point in India, could be called Project ‘Cheetah’, as it will be the fastest way to get from North Asia to Africa. Cheetah is the fastest animal on land.


Views on this blog are personal

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