ULCC model: A strategic shift or marketing gimmick?
Last month, the country’s leading stock trader, Rakesh Jhunjhunwala announced his plans to invest $35 million in a new ultra-low-cost carrier (ULCC) in India. The announcement to set up another ULCC comes at a time when both Indian full service and low-cost carriers are struggling to keep afloat in the wake of the pandemic. With demand for air travel plummeting, the creation of ULCC indicates a shift in both the business model and the domestic Indian aviation market that has witnessed a growth of low-cost carriers (LCCs) from 2000.
Unlike LCC, a ULCC does not offer frills such as baggage or food in the ticket price. ULCCs, pioneered in Europe by Irish carrier Ryanair and in the US by Spirit, target passengers who want to reach their destinations by spending as little as possible.
Jhunjhunwala’s proposed entity, when it comes up, would be the second ULCC in the domestic market. In May, the erstwhile GoAir announced its rebranding as GoFirst, including a change in business model from a low-cost carrier to ULCC.
When contacted, Jhunjhunwala refused to comment. GoFirst did not respond to HT’s query.
The Indian aviation industry has been facing major headwinds given the sharp contraction in travel demand due to the pandemic and high-fixed cost structure. This has resulted in a significant amount of cash burns and resultant losses.
Ever since the outbreak of the pandemic in March last year, the industry continues to have a demand-supply mismatch due to the sharp decline in passenger traffic amid consumers’ hesitation to travel, restrictions by the government on permissible capacity deployment on domestic routes, suspension of scheduled international air services and quarantine norms of various state governments.
“It is important for the airlines to contain costs and maintain liquidity to tide over this (situation). In such a scenario of excess supply and low demand, the entry of new players in the industry will only intensify the competition, further hampering the already weak pricing power of the airlines. This may negatively impact the yields, thereby worsening the revenue per available seat kilometre (RASK) and cost per available seat kilometre (CASK) spreads of the airlines,” said Kinjal Shah, vice president & co-group head - corporate sector ratings, ICRA Limited.
According to reports, Jhunjhunwala’s Akasa Air, on the anvil since the end of 2020, is aiming to take off by the end of this year and has received a No-Objection Certificate (NOC) from the Civil Aviation Ministry as well as the Directorate-General of Civil Aviation (DGCA) to start an airline in the country.
However, senior officials confirmed to HT that the airline is yet to get a NOC. “Contrary to reports, Akasa has not yet received NOC from the civil aviation ministry,” said the official.
Reports also say that the proposed Akasa airline is in talks with the US aircraft maker Boeing to acquire up to 100 737 Max aircraft. The airline has also approached the government to recertify the grounded aircraft. At present, all Boeing 737 Max planes in India, which are only in budget carrier SpiceJet’s fleet are grounded since late March 2019 over safety concerns.
According to an industry expert, the concept of LCC and ULCC is not clearly defined in India, unlike Europe or the USA.
“In Europe and the USA, ULCCs define their space. For example, they never go to major airports like Frankfurt instead they go to Frankfurt- Hahn airport which is 70kms away. By doing so they reduce their cost massively. However, we don’t have such a concept in India hence there is no way they can differentiate,” he said.
CS Subbiah, an aviation consultant and former chief executive officer (CEO) of Alliance Air, said all carriers have unbundled most of their services. “Except meal and executive class facilities, there is no major difference in India. I believe we have economy class airlines and airlines with two classes. Being cost-conscious and thrifty is a good thing in management parlance today. I believe in India ULCC is only a marketing gimmick but in real terms, they are the same as LCCs. They can’t pack more seats than the present six in a row. Maybe they can try and squeeze another row or more.”
Subbiah added, “Any ULCC bringing in A320 or B737 aircraft will need to touch a metro or a major tier-II airport. Where is the cost difference as LCCs do the same? Both will offer similar fares to the same traveller. In India, I don’t see a major difference between an LCC and ULCC.”
ULCC business model is to have a lower cost than traditional low-cost airlines- though in India due to structural cost challenges the reduction of cost is relatively marginal.
“Akasa has the opportunity to design a very low-cost base compared to other LCCs. ULCC also means lower revenues and hence, ancillaries are fundamental to its success but in India, we have regulatory barriers related to ancillaries that need to be sorted out by Akasa. However, one can expect all the carriers to match Akasa fares irrespective of their cost base,” said Kapil Kaul, chief executive officer of Centre for Asia Pacific Aviation (CAPA), India, an aviation firm.