GoAir bets on ULCC model
On 22 March 2021, the Wadia-group company GoAir announced that Jeh Wadia had stepped down from his position as managing director, GoAir. However, he would continue as a promoter of the company. The company also announced the appointment of aviation industry veteran Ben Baldanza as vice-chairman of the company.
Baldanza has been an advisor to the company since 2018 and director since 2019. Analysts tracking the development say this comes as no surprise – the group has resorted to its time-tested strategy of bringing on board proven industry professionals and letting them drive the show. In other words, GoAir is also on board to becoming a professional-run organisation, rather than promoter-driven.
“We are happy that Baldanza has accepted the position as the vice-chairman,” says Nusli Wadia, chairman, GoAir. “His experience in creating the first ULCC (ultra low-cost carrier) in the US, turning it profitable and successfully leading its IPO (initial public offer) are of great value, as GoAir embarks on the next phase of its growth journey.”
Meanwhile, according to regulatory filings, during 2019-20 GoAir’s operating revenues had increased by 11.73 per cent to Rs6,997.07 crore (Rs6,262.44 crore). But its EBITDA tumbled 59.24 per cent to Rs114.38 crore (Rs280.65 crore), while its total expenses rose to Rs8,280 crore (Rs6,559.49 crore). GoAir explained that its operating and financial performance for the year was adversely affected from the end of Q3, and more so in Q4 of 2019-20, as there were frequent failures in engines.
“With the goal of taking GoAir to its next phase of growth, the promoters of the company and its board have come together to formulate a long-term plan,” says a legal industry veteran. “Amongst other initiatives, a key element of this plan, forged over the last weeks of discussions and consultation, was to further strengthen the management of the company by bringing on board proven industry professionals – a strategy that has worked well for the group in its other ventures.”
Implementation of this plan commenced with the appointment of Baldanza. As vice-chairman, he will now work directly with the management team, comprising of Kaushik Khona, chief executive officer, and Pankaj Chaturvedi, chief financial officer, in the next growth phase of GoAir, which is to make it India’s first ultra-low-cost carrier (ULCC).
Baldanza is an airline industry veteran of several decades, having worked in American Airlines, Northwest Airlines and Continental Airlines, among others, before becoming the CEO, Spirit Airlines, in 2006. He successfully repositioned Spirit Airlines into the first ULCC in the North Americas and increased its fleet from 32 to 100. As a result of his efforts, Spirit Airlines achieved the highest profitability among all airlines in the US between 2008 and 2015. He also took the company public, by leading its IPO in 2011.
Spreading its wings
GoAir was founded in November 2005 by Jeh Wadia, son of Nusli Wadia. The airline is a wholly-owned subsidiary of the Wadia group. Among its peers in the Indian aviation sector, there is not another airline, which is backed by a group with more than 280 years of legacy – which may have come in handy in surviving in an ultra-competitive space such as Indian aviation. It commenced its operations using an Airbus A320 aircraft and operated its inaugural flight from Mumbai to Ahmedabad in November 2005.
Since inception, the 15-year-old airline has flown over 81 million passengers. The GoAir fleet comprises 56 state-of-the-art Airbus A320 aircraft, flying to 39 destinations including 10 international destinations. Recently, it started its first night flight from Srinagar to New Delhi, thereby becoming the first airline in the history of Indian aviation to achieve this. It has doubled its fleet since 2017 and has a confirmed order of over 100 more Airbus A320neo aircraft. It has a 10.8 per cent share of India’s civil aviation market. According to the management, new routes were under evaluation and the airline is already selling tickets for flights to new destinations, such as Amritsar, Dehradun and Surat.
GoAir followed Southwest Airline’s strategy to be a strong player and gain market at hub, rather than expanding across the country. The advantage of the hub model is that the airline is benefited from optimum utilisation of its crew and aircraft, as it provides services from only one hub.
Moreover, the chosen hub will be a Tier II or metro city, which is usually equipped with better facilities, infrastructure and contains high levels of income in a target segment. Further, unlike other airlines, it has come up with a slow fleet expansion plan, which would support its business model without affecting its operating profits.
“GoAir made a deal with Air France Engineering for $40 million to handle its future A320 fleet maintenance,” says an airline veteran. “This is a clear indication of how GoAir combined its plans into the current strategy, by monitoring its costs effectively.”
The company believed in its business model, despite a challenging industry landscape. In January 2009, British Airways was interested in buying a stake in the airline. Later, in November 2009, GoAir entered into talks with Indian airline SpiceJet over a possible merger, which ended in a no deal. Then, in 2013, the airline appointed investment bank JP Morgan to scout for potential investors. The airline’s growth in those years had been slow, compared to other airlines established at the same time, such as IndiGo and SpiceJet, which have larger market share, fleet size and destinations served, as of 2016. According to the airline, its planned strategy (necessitated by the tough aviation environment in India) was to focus on maintaining profitability, rather than on capturing market share and increasing destinations and fleet size.
Banking on ULCC
The ULCC model involves a single type of fleet, limited personnel costs, focus on ancillary expenditure, point-to-point network, single class of service and direct channel bookings, amongst others. This also includes flying to secondary airports and avoiding high-cost primary airports. In the ULCC model, every space is worth selling, if not for passengers then for advertising.
Advertising on the luggage bins, foldable seat back trays, paper cups, food packaging and just about everything. And a separate charge for every unbundled service, such as each bag and each seat. Close to 80 per cent market share of ULCCs comes by operating to the same airports where full-service carriers (FSCs) operate.
Like all other carriers, GoAir is at best a low-fare carrier and not a low-cost carrier, since all the tricks in the book tried to keep costs low elsewhere are absent in India. No city has secondary airports to facilitate landing and save costs, and the options which ULCCs have are the same as provided by a premium full-service carrier like Vistara, under its Economy Lite scheme. GoAir has also been using space in the aircraft for advertising.
Worldwide, the LCC space is based on direct selling, with many airlines not offering their inventory on third party sites or travel agents – a huge saving in distribution costs. However, India again stands out with a majority of inventory being sold by OTAs (online travel agencies) and corporate or personal travel agents. All such challenges make the ULCC move something to watch with bated breath. Spirit Airlines in the US allows passengers to carry only one carry-on baggage, which is either a laptop bag, or a purse. Additional carry-on baggage and checked baggage draw charges. Southwest only sells drinks and snacks and not meals.
Another feature of the Indian market is the high costs of necessities like jet fuel. Fuel prices and subsequent high taxes mean that jet fuel accounts for nearly a third of airlines’ costs. This is nearly double the global standard of 12-16 per cent of airlines’ costs for fuel in the last few years. Other policy changes, both macro and micro, also hurt growing airlines. Due to India’s policy of not allowing airlines to share resources at small airports, carriers struggle with red tape across the industry.
Other factors like the depreciating rupee have also increased airlines’ operating costs in the last few years. Full-service airlines have little manoeuvring room to reduce capital expenditure when seen in total. Purchasing new aircraft, some wide-bodied too, adding premium cabins, and offering free services, means high expenses. Add high input costs like fuel and taxes, and low fares are out of the picture.
Regulatory changes could help ease some of these pressures for struggling airlines and perhaps lead to profitability. However, the government has not shown any willingness to make changes despite high-profile airline failures in the last few years. This could be due to the high costs it already covers subsidising the debt-ridden Air India.
“LCCs in India differ much from their counterparts in other parts of the world,” contends aviation expert Devesh Agarwal, editor, bangaloreaviation.com, in a recent media statement. “There is no pure-play LCC in the country. Here, they are actually low-fare carriers.” For instance, LCCs in India offer free check-in baggage of up to 15 kg, carry-on luggage and free water on board. As per DGCA regulations, free water is a must. Apart from this, Indian LCCs operate in the country’s main airports, as there aren’t any secondary airports.
“If you take Europe, LCCs don’t operate from the main airports. Southwest, too, does not fly into the main airports in the US, only to smaller secondary airports where the cost structure is lower,” says Agarwal. “In reality, the operating environment makes it very difficult to be genuinely low cost,” says a CAPA report.
Market for ULCC in India
Airline companies in India are banking on the post Covid surge for leisure travel, largely to Tier II cities and destinations. The key opportunity is to tap the premium railway travellers, who are now aspiring for reducing travel time by paying a small premium. At the same time, the prime minister’s ‘UDAN Scheme’ (Ude Desh ka Aam Naagrik) will play a large role in priming the nation for the ULCC play. UDAN is a regional airport development and regional connectivity scheme with the objective of ‘letting the common citizen of the country fly’.
It is aimed at making air travel affordable and widespread, to boost inclusive national economic development, job growth and air transport infrastructure development of all regions and states of India. The UDAN scheme will add to this number by expediting the development and operationalisation of India’s potential target of nearly 425 unserved, underserved, and mostly underdeveloped regional airports with regular scheduled flights. One can expect first-time flyers from small towns getting started with UDAN, to ultimately upgrade to ULCCs – a sector that is presently at the core of GoAir’s future growth strategy.
Going by data from the Directorate General of Civil Aviation (DGCA), it seems the worst is over for the aviation sector. There is gradual improvement in all parameters – the number of flights, number of passengers flying and, as a result, number of passengers per flight. Hardeep Singh Puri, Union minister for civil aviation, recently announced that more than 52.7 million people have travelled since the resumption of domestic flight operations in May 2020.
Domestic flight operations were paused from midnight of 24 March last year in the wake of the corona pandemic. In a tweet, Puri shared statistics pertaining to the recovery of domestic flights operations. As per the infographic in the tweet, 253,008 passengers on more than 2,300 flights travelled on 1 April 2021. The total footfall at the airports was recorded to be over 507,000, with 4,633 flight movements.
Further, airlines will also get more flexibility in raising the fares, with the government deciding to raise the lower fare band by 5 per cent. This comes after the ministry of civil aviation (MoCA) increased the lower and upper limit of fares of air tickets by 10-30 per cent in February 2021. This increase in airfares was effected as a result of an increase in the price of aviation turbine fuel (ATF).