Deccan’s new avatar in Gujarat- Can it work?

Deccan's new avatar in Gujarat- Can it work?

 

 

There have been many serial airline entrepreneurs in the world. It is as much an addiction as any. Branson and Neeleman are the two names that come to mind. Closer home is Capt. Gopinath, who is attempting is fourth Airline venture in Gujarat. With fuel at USD 125 per barrel, this requires considerable nerve. The house is however divided and the jury still out, on whether this will qualify as courage or audacity. Time will tell.

 

I just wanted to examine the possible directions this venture may take and how it could be grown through various stages, (a sort of a business plan, written more from the point of view raising finances):

 

STAGE 1: Getting off the ground-(Intra-State traffic)

Year 1

All the assurances from the Gujarat government mean nothing on the ground.

For a planner to actually implement flights and come up with a financially viable and coherent schedule is a nightmare. When planning them for the whole of India, there are at least a lot of airports available to play with. We are talking of only a dozen Airports here- most of which do not operate at night; many do not have fuel depots (it really matters in summers, when temperatures are high and payload is restricted). Most of all, ATC timings have remained unchanged for years. Just like the Indian courts, they function for a fraction of hours a day and then are in recess. Hopefully, corporatization of ATC will perhaps improve this situation. This isn't the full list of woes. The Airport Authority of India, a central government controlled body, feels no compulsion to lend an ear to what the state government may have to say. We have not even started talking about BCAS and CISF who are perpetually short of staff and only personal initiative from some of the more proactive commandants ensures that the day is saved. The Airport equipment- X-ray machines, Radars, passenger amenities, ground handling equipment….You get the idea of what it takes to get off the ground. Even with this list, the flight completion rate of the operator remains woefully low, because operations are so totally dependent on the elements without proper infrastructure. Passengers aren't likely to patronize a service that anything short of reliable.

 

When however, the above is achieved, the commercial target would be to get break-even traffic on the aircraft. This would mainly come from the point to point Gujarat intra-city, traffic, some from existing services, if any, and other from surface transport. For example, Surat to Bhavnagar is a lucrative route, as traveling by road can take easily upto 8 hours. Train takes longer. If, the promised additional new airports come on line sooner than anticipated, it will help improve Deccan's prospects.  

 

STAGE 2: Growth beyond the state  

Year2- 3

I believe that Deccan is not targeting getting into bigger planes beyond ATR's, if its stated objective is to provide intra-state traffic. I cannot, however, imagine that Deccan can survive independently just on the intra-Gujarat traffic, even if it makes a major break-through in terms of shifting traffic from surface transport modes. The fixed costs are far too high in India (Even if recent developments in third party maintenance provider availability and other related costs are taken into account) and it needs enough scale to cover all of them, which means growing the number of flights. This can happen in 2 ways:

 

1.      Replicate the model in neighboring states: Deccan, can fairly easily replicate the model in Maharashtra, Goa and Rajasthan. They all fall within the range of an ATR and can easily be linked. This takes the scale up to about 30-40 airports. There are enough business linkages to provide sustainable air services, provided they come at the right price. AND, most importantly, the major carriers are too occupied with the trunk routes that it is unlikely that Deccan will find competition. Its real competition would be the railways and what has come to be known in India as 'Volvo' bus services (law of marketing: first entrant defines the category).

 

2.      Become a feeder: I bounced this suggestion off a few people but they weren't convinced. It is true that Airlines that have an established network into Gujarat out of Mumbai have little incentive to change anything. But an Airline like Indigo, with one plane type, could use a feeder at AMD, can it not? Look at the US market- they are full of feeder carriers. Some are part equity owned by the major airlines and share the infrastructure keeping their overheads and costs low. While we are a long way off from achieving the traffic scale available to these feeder carriers, I have at least one very strong reason to believe that the time has come for a feeder carrier in India.   

 

Currently most of the traffic to Gujarat's cities (other than AMD) is flowing over Mumbai. So, if you were coming from Calcutta and wanted to go to Jamnagar, you would have to connect via Mumbai. However, as is very well known, Mumbai is full up to the brim and will have no choice but to push out the smaller planes completely. That plan is dependent on the upgrade of Juhu Airport. Airlines will have no choice but either upgrade their Gujarat flights into larger code C aircrafts or move to Juhu. Looking at the number of hurdles, I suspect neither will materialize. However, the unintended consequence of this could be that traffic to Gujarat from the rest of India, that is today flowing over Mumbai could move to flowing over Ahmadabad, if (Big if), a feeder network is built at AMD. Let me explain: For all the traffic that is NOT local, ie, between Mumbai and Gujarat, there is no need to connect at Mumbai if an alternative was available to connect to any/all Gujarat cities via AMD. Deccan can provide this alternative. It is a great opportunity for AMD Airport if they can see it. They must therefore work with Deccan to make this happen.  

 

On Deccan's part, instead of simply adding more flights to maximize utilization of the aircraft, they must align their departure and arrival schedules to the schedule banks of other major airlines serving AMD, such that their flights can get feed/Defeed flights arriving into/departing from AMD. Even without a formal interline agreement, Indian public is smart enough to figure out connection opportunities. That is not to say, that it isn't important to gear your systems to offer formal interline/code share services, particularly in light of the next stage (STAGE 3).

 

STAGE 3: Become an International Feeder

Year 3-5

We are now really dreaming, getting unrealistic, are we? But assume, 3 years down the line, Deccan Gujarat has been a resounding success, what will it need to continue to grow? Assuming that major airports in Gujarat have been activated for night operations, Deccan could introduce an early morning bank of flights that de feed traffic off the international arriving flights. In addition, the early morning bank can only increase utilization. If the government allows, it is possible that a foreign carrier may want to formalize this interline relationship into a larger role through equity. Deccan must ensure that its mission critical IT systems are geared to offer these services that can add a much required revenue stream and have a very positive impact on the yields. Sure the cost goes up too, but today, these services can be offered at much less overhead than ever before. Airlines like Jetblue in the US and GOL in Brazil are doing it.      

 

STAGE 4: Launch International flights

Year 5 and beyond

You are laughing hysterically by now. But, look, all business plans can be unrealistic. Have you ever come across a business plan that shows negative growth in a given year? No right? Yet there are recession years where companies de-grow. Likewise, there is no harm in being a bit wishful when envisioning the future course.

So, the ATR is ETOPS rated for 120 minutes. A 2 hour (250-300 NMs) flight is more than within the profitable range of an ATR. You could probably offer flights to Karachi and some other destinations in Pakistan but that's about it. For other destinations like Muscat and Salalah in Oman, lesser known destinations in UAE like RAK and Fujairah and Bandar Abbas in Iran, Deccan would need to get into longer range aircraft. All of these are pretty poorly connected and can at max, support 1-operator. This cannot perhaps happen today, but 5 years down the line, anything is possible.  

   

If you however ask the Deccan watchers, they will say, ah…why get into these complicated models, so much thinking is simply not required! The real plan is to get the company off the ground and then sell it off to a willing party! There are plenty of fools out there, who want to get into the Airline business. J

Reverse hubbing?

 

 

 Air India is in the news for all the wrong reasons so often, that even when it does something really sensible, it goes virtually unnoticed. Take for instance, its decision to establish an operational control center at Dubai, with the reasoning that too many AI flights are bound for Dubai and it therefore makes sense to operationally manage them through a central network control from there. I believe this is very sound reasoning. I have been thinking about this for sometime albeit from a more commercial angle.

India is sandwiched between the heavyweight mega-hubs-The Middle Eastern trinity-Dubai, Doha and Abu Dhabi and the Asian quartets- Bangkok, Hong Kong, Kuala Lumpur and Singapore. These international hubs and their home carriers have been in the making for 20-30 years with oil money and the sub continental traffic funding the former while Asian tiger economies and Chinese growth, funding the latter. All of these have capacities above 50-100 million. A lot of silly money has been thrown on rearing the airlines to give them the scale and reach they have today. Infact, if you ask the network Planners from Emirates, such is their appetite for global dominance, they will tell you they are still not happy with the payload range of planes available to them today. For instance, they have not been able to dominate the Americas (US, Canada) to the extent possible; particularly the US/Canada West Coast remains virgin territory, as far as MEB3 are concerned. The airframe manufactures will tell you their great dilemma- on one hand, is this 1000 pound gorilla (or 3 gorillas), which is fortunately or unfortunately their largest customer today and on the other is the rest of the old world order. This 1000 pound gorilla is not shy of trumpeting its weight at the slightest of provocation, demanding aircraft designed specifically to offer payload-range solely to suit their network requirements.

But I digress from the topic I want to tackle in this note, which is reverse Hubbing.

Progressive liberalization of Indian bilateral air rights has ensured that even secondary cities like Jaipur, Lucknow, Chandigarh, Goa, Nagpur etc. are opening up to foreign carriers. Our Hubs, at Mumbai and Delhi, cannot at present handle traffic growth from these cities, and as a result, people are choosing to connect out of these International hubs outside India.

Given this scenario, does it not make sense for a carrier like Indigo or Spicejet to launch what I call 'Reverse Hubbing'? Let me explain:

Indian traffic is fragmented over 50 plus cities. India has 35 cities with over a million people that have an Airport that can handle Code C aircrafts. I talked about 7 hubs around us in Middle East and South East Asia. Multiply those number and you get 245 city-pairs. Not a small number. Multiple those by 4 daily frequencies in both directions and you get 2000 flights per day. That is not a small number either. Just as a fly Dubai, Air Asia, Tiger Air or Air Arabia can fly from their respective hubs at Dubai, KL, Singapore or Sharjah respectively to Lucknow, so can Indian carriers, as the bilateral allows that. Why not build operational bases in these 7 hubs and launch flights to all 35 Indian cities? The flight can be scheduled such that it originates at an Indian city to avoid violating the BASA, however, the operational base is used to rotate the aircraft between various city pairs. It is essentially a hub operation, but since it is outside the home country, I call it reverse hubbing. Very similar to what Ryan Air does, but EU is one single market, unlike the above.

Instead of resisting the liberalization therefore, Indian LCC carriers may in fact want to hasten it and even ask for open skies. In the end, an Indian carrier will know the Indian market better than foreign competitors and thus must prevail over them, eventually. The trick is to get the scale as fast as possible. 

 

The New Mumbai Airport

 

 

The New Mumbai Airport offers the best ever opportunity for the newcomers to level the playing field against incumbents.

The protest season is about to start, as the New Mumbai Airport gains traction.  Expect even the corporate big-wigs to join just as they did when the New Bangalore Airport went online.  And if you are overwhelmed with a feeling of Déjà vu, well, expect even more.   

In the case of Bangalore, I expected that some intelligent soul, an industry veteran, people exposed to the world, Industry think tanks (such as CAPA), perhaps the Aviation press (if such a thing exists in India), would look at precedents around the world to suggest a solution. Because certainly, Bangalore's situation was not unique. Other cities around the world have been put through this dilemma of what to do with old infrastructure, once a new facility replaces it. Instead, we had a CEO of an IT company resorting to displaying placards and picketing outside the old Airport, in a cheap publicity stunt. Nobody even mentioned the Wright Amendment and the formula used to carve capacity between Love Field and DFW Airport in Dallas.

But this is not about Bangalore. This is about Mumbai. The situation is a bit different in this case, because Mumbai is so short of Airport capacity that both the new and the old Airport will continue to function ( and possibly the Juhu Airport will be made operational too for commercial flights).  Given a chance, no airline would want to give up its operations at the old Airport and move to the new one, due to a number of issues- Distance from the city and lack of proper Airport transport in terms of a high speed train. Besides, cost of operation at the new airport in all likelihood is going to be far more than the old one.  However, most certainly, some airlines have to shift to the new facility, as the old Airport is operating above its capacity and it's only going to get worse in the next few years until the new airport comes on line.

The central question then is: How would the authorities divide Airline operators between the old and the new airport?

In order to decongest the old Airport, will it require that some airlines be 'forced' to operate out of the new airport? And who will these be? All the foreign carriers, perhaps? Remember, discriminating between carriers on grounds of nationality is in contravention to the laws of EU and of ICAO and could seriously entangle the whole process into a legal fight.  

Let us examine some similar case studies elsewhere: 

Moscow has 2 Airports- one privately owned and home to most foreign carriers operating into Moscow, the other govt. owned (but proposed to be privatized soon) which is home to the home carrier and some other carriers from the so called 'Eastern Block'. Most carriers chose to operate from the private Airport, so there was no need for intervention.

There is the infamous case of Milan's Malpensa Airport. Italy insisted that routes carrying more than two million passengers a year should continue to use Milan's established Linate AirportLinate Airport (IATA: LIN, ICAO: LIML) one of the two major airports of Milan, Italy along with Malpensa International Airport. Due to its proximity to Milan compared to Malpensa, it is mainly used for domestic and short-haul international flights, with over 9. , because this would restrict its use to the Rome-Milan run operated by Alitalia, the Italian national carrier. Other Airlines were forced to use the poorly connected and untested new Airport at Malpensa.
There were also expected difficulties for passengers making onward journey into the city of Milan, as no rail or metro links from Malpensa to the City center existed.  There were only bus services along an often congested motorway. Sounds familiar?

Another case in point: The London Air Traffic Distribution Rules came into effect on April 1 1978 and were applied retroactively from the beginning of April 1977. These rules were designed to achieve a "better" distribution of traffic between London Heathrow and London Gatwick, the UK's two main international gateway airports, to meet Government policy objectives of the time.

The 1978 London Air Traffic Distribution Rules (TDRs) stated that at peak times:

(a) Airlines that did not already operate an international scheduled air service from/to Heathrow prior to April 1 1977 would not be permitted to commence operations at that airport. Such airlines would have to use Gatwick for all their London-based operations;

(b) Airlines that did not already operate at Heathrow prior to this law taking effect could still commence domestic scheduled services at the airport provided that the BAA and the Secretary of State for Transport granted them permission to do so;

(c) All charter flights were banned from Heathrow as of 1 April 1978; and

(d) All new all-cargo, business and general aviation flights were banned from Heathrow and Gatwick from 1 April 1978.

 

All of the above examples indicate a formula to equitably and justly distribute traffic between airports in the same or similar catchment area.  Mumbai does present a somewhat complicated situation, however, there are pointers to some solutions that I wanted to explore:

1.       If you examine the slot division and capacity deployed, you will find that incumbent airlines such as Jet Airways and Air India control 1/5^th of all slots available at Mumbai. Jet Airways alone deploys 20% or one-fifth of the seats available out of Mumbai Airport. This is little less than double of what an Airline like Kingfisher has. The situation is much the same in Delhi, if a little less imbalanced. This share is unlikely to change, as there is no more space left to grow.

 

2.       Incumbent airlines like Jet Airways are far less likely to move out of the old airport, as they dominate the better slots, and therefore enjoy an advantage over their competitors.

 

3.       Air India, in a business decision, decided to move its International schedule bank to New Delhi, as the new Airport allowed more flexibility to operate a hub and spoke network vis-à-vis Mumbai that is completely choked. Given that Air India's major stake holder and possibly its major customer as well, is the Government of India, it also makes good sense to be in Delhi.

 

4.       Unlike in the 80's or 90's, the world's airlines are far more aligned into the 3 major alliances- Star, One World and Sky Team.  In addition, the fourth major block is the so called MEB3- The Middle East Big 3-Qatar, Emirates, and Etihad, that remain non-aligned but have much the same strategies. India's own major carriers have chosen to align themselves- with AI becoming part of Star and Kingfisher becoming part of One-World. Jet Airways has been making aggressive overtures to both Star and Sky team, however, industry observers believe Jet will go with Star.

 

5.       The newcomers like Kingfisher and possibly even Indigo and Spicejet therefore stand to gain the most out of the New Mumbai Airport.  It offers carriers like Kingfisher, the best chance ever to level the playing field against the incumbents, differentiate the product and compete effectively.  Take Kingfisher for example: it has been unable to offer a coherent hub and spoke network to its International flights, competing mainly for the point to point traffic, which has grown fast enough to keep them going. However, it is not going to justify building an International network, if you have no schedule bank to feed it. The advantage it may enjoy today on some short-haul International markets, is fast depleting, as the market fragments between more carriers coming on line. Sooner or later, they will have to evolve into a proper network carrier.  Kingfisher must continue to tightly integrate with the one-world carriers (possibly even equity if the government allows it) It must continue to develop One world Alliance dependencies on its domestic and sub-continental network to such an extent that it must make it necessary for all one-world carriers to move along with it to the new Airport.  The move to the new airport is not without risks, as it is dependent on support infrastructure. But there are advantages- such the incentives that the new Airport may provide to subsidize the move.  In addition, it also opens up the very lucrative Pune market and the industrial belt cities of Maharashtra.  Failing to do so, could result in Kingfisher being in the same situation as Virgin Atlantic today.

 

6.       Kingfisher has also struggled with its fleet- having 2 different kinds of cabins even within the A320's required them to launch 2 brands- Kingfisher and Kingfisher Red.  The new Airport offers them the opportunity to operate a hub and spoke network, while they can choose to operate the fleet configured for an LCC operation, out of their existing slots at Old Mumbai Airport. This will result in a split operation scenario driving costs somewhat higher; however, it will also allow division of risk and minimal disruption of cash flow. A smooth transition as far as the changeover to the new Airport infrastructure is concerned will take time to settle down and is not without risks. But do you have a better idea?  

 

7.       Finally, this would probably be the first time ever that Airport capacity is neatly carved out based on the 3 large alliances and Airlines operating within them.  With AI calling Delhi its Hub, incumbent Jet Airways happier than ever at its old Mumbai Airport Den, and Kingfisher finally finding space at the New Mumbai Airport to transform itself into a true network carrier.

 

Market Research: A neglected function in the Indian Airline Industry?

 

 

The CCO's phone starts to ring abruptly. Ordinarily, this would be a non-event except that it is 3 am in the morning and the much harassed CCO had only just completed half the 40 winks that he manages to get every night. Of course, it is the MD-owner of the Airline on the other side of the phone. And, of course he is in a daylight zone, somewhere in Europe-excited and talking hurriedly. The minister has been so kind to approve the plan to import 20 aircraft worth hundreds of crores. Not just this, in an extraordinarily generous gesture, the Minister has even agreed for allocating parking bays so the aircraft could be imported. There is just one small condition to this-They must launch a flight to his constituency somewhere in an obscure corner of India. That is not even the major issue. Now that the aircraft are finally arriving, the CCO must figure out where to use them. And quickly too, because the aircraft will start arriving in exactly 2 weeks time lest the Minister is shuffled out and his successor has a change of heart. The MD has spoken for about 2 hours about his wit and negotiation skills. It is 5 am now. There is no time to waste. Soon the CCO may find himself addressing a press conference in this regard.

The CCO scribbles down the names of a few cities on a scrap of toilet paper, while sitting in the potty and then decides to call his crack team: consisting of a failed property dealer, 2 fresher Hotel Management graduates (from Sri-Devi College of Hotel Management, Chickpet, Bangalore) and a retired Indian airline man.  The team would be sent for a 'recce' trip to the 8 cities in question where they will do the following drill: They will meet some touts, local bullies and union leaders around the airport area, or the local MLA's cousin who could be possible candidates for PSA's. Then they will go and meet a handful of city Travel Agents, who are industry experts with years of experience in organizing Tirupati-Tirumala tours. You may see them salivating at the first mention of the possible flight to the city. Some may drop names of local MP's/ MLA's to get the coveted GSA contract. The evening is reserved for getting drunk and some merry-making. As for the prospects of the flight, you will get as much relevant information from them, as you can get in a film magazine. Armed with this anecdotal information and some figments of imagination, a 'report' would be drafted next morning and handed over to the CCO with an 'All iz well' conclusion. Oh and the fresher's, they haven't yet taken to the game, so they feel a bit guilty. They do some extra research on the internet about companies operating in the city and add those names in the report, as their contribution.

Welcome to the Indian Airline industry-You see it is almost philosophical- Life is about trial and error and so my friend, is the route planning process. So what if the Airlines are dabbling in assets worth millions of dollars, not one of them can produce a coherent 5 year, 3 year, even 1 year route plan driven by market research. That is because of the belief, that the universe will unfold as it has to, whether one plans or not.  And when the day of reckoning comes, it must be won by way of Jugaad, the all Indian concept- the cure for all ills, for all human suffering. Ladies and gentlemen, hold your breath, for this certified management best practice will launch India into realms of a super power nation.       

Could airlines learn something for an FMCG and the process of launching a new product? The process, in an FMCG could start almost 2 years in advance with a good budget assigned for market research. Just how much work and thought and detail goes into developing even a soap brand could be mind-boggling. Ask some of the advertising people and they will tell you how much they dread being on a soap company account because all that could be said about soap has already been said. I won't be surprised if we soon come across a brand that claims that it can negate or cure the harmful effects of nuclear radiation.  

Some may say, this is the function of margins available in the business- an Airline's 2% net margin vs. an FMCG's 15%. However, I believe the process can adapted to reflect the realities of the airline industry. The truth is that Market research as a function does not even exist in most airlines.   

Disclaimer: This article is not a work of fiction. Any resemblance to any events or persons, employed in the airline industry is purely intentional and deliberate.