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
