Budget air travel, present and future

After making its mark in the United States and Europe, the low-cost airline carrier arrived in India in 2003 with the first flight of budget airline Air Deccan. In the aftermath of the attacks of 11 September 2001, the SARS epidemic and a general worldwide economic slowdown, traditional airlines saw a drop in their profit margins and passenger volume, a downturn that also hit India's carriers. Entering the market during this period, the budget airlines have boosted their operations, turning the industry's crisis to their advantage.

Besides Air Deccan, the demand for competitive fares has been filled by SpiceJet Airlines, GoAir and Air India Express, particularly on short-haul routes. The explosion in the number of carriers is spurred by the 25 percent per year increase in domestic air travel, fuelled in turn by the country's economic growth. The number of airline passengers in India rose from 12.8 million to 19.4 million annually in just three years, through 2004. The market share of budget airlines, meanwhile, has increased by 30 percent since 2003, and the Australia-based Centre for Asia Pacific Aviation projects the figure to be 70 percent by 2010. Air Deccan has already cornered about 21 percent of the domestic air-travel market, bringing it almost at par with the state-owned carrier Indian (previously Indian Airlines), which until the early 1990s had a monopoly over the Indian skies.

The concept of the low-cost carrier (LCC) originated in the United States, where the first successful carrier, Pacific Southwest Airlines, took to the air back in 1949. In order to keep prices low, typical LCC practices include the use of a single type of airplane, thereby reducing training and servicing costs; a single economy passenger class; simplified routes, including flying to secondary airports; low-frills service, including the elimination of complimentary in-flight offerings; direct sales of tickets, especially over the Internet; and small increases in fares as seats fill up, thereby rewarding early reservations.

Budget airlines are finding the Indian market attractive because ticket prices have traditionally been prohibitive for most travelers. In addition, Indian LCCs have been able to reduce travel time by providing better connectivity – in the form of more flights, more destinations and shorter turnaround times. Passengers flying these airlines generally comprise either public- or private-sector professionals, whose employers prefer that they travel by air for the time saved over a train ride. As airfares remain competitive and more destinations are offered, this trend will undoubtedly continue.

Forsaking road and rail
The domination of state-owned Indian Railways (IR), which moves just under five billion passengers and almost 650 tonnes of freight annually, is now facing stiff competition for its high-end travelers from low-cost airlines. New airlines like SpiceJet are offering fares that can compete with those of both Indian Railways and traditional airlines like Indian (see Table 1).

The railways have experienced a significant drop in passengers in luxury classes. This has created a challenge, because IR has traditionally used earnings from its luxury classes to subsidise the fares on second-class coaches, on which 98 percent of its passengers travel. In response to this competition, IR has for the first time in many years cut fares on its luxury classes. Starting this past April, First Class AC prices were cut by 18 percent, and those for AC-2 Tier were cut by 10 percent. At this time, there is no discussion of an increase in second-class fares, however.

TABLE 1: Lowest fares offered, LLC v rail (July 2006)

Source: SpiceJet Airlines, Indian Railways and Indian

Despite the decrease in luxury-class charges, issues such as overcrowding remain disadvantageous to high-end rail travel. During holiday seasons, for instance, reservations need to be made two months in advance, and reserved coaches are often swamped with passengers without reserved tickets. The growth of the LCC industry has subsequently forced Indian Railways to address issues of overcrowding, as well as of passenger safety and high accident rates, in order to remain competitive.

India's network of national highways, which connect all of its major cities and state capitals, make up about 65,000 km of road, 5000 km of which are classified as expressways. Much of the Indian population travels by bus for distances of up to 500 km, beyond which, for overnight journeys, they take the train. Even long-haul luxury-bus passengers, however, are being drawn away by the competitive pricing of new low-cost airlines. Table 2 compares the lowest fares and travel time offered by both Indian LCCs and luxury-bus companies.

TABLE 2: Lowest fares offered, LCC v luxury bus (July 2006)

Sources: SpiceJet Airlines, Delhi Transport Corporation, Jammu & Kashmir State Road Transport Corporation and Karnataka State Road Transport Corporation

There are several additional drawbacks associated with road travel in India. First, there are no direct bus links between the major metropolises of Delhi, Bombay, Calcutta and Madras. Even if there were, due to sheer distance, road conditions and heavy traffic, the average travel time between any two metros would be two to three days. Heavy highway traffic also increases travel time between cities. Because of the time, expense and comfort involved, few Indians prefer to travel by bus for distances over 500 km. Even on some of these short routes, however, luxury buses are facing competition from low-cost carriers.

The success of the LCC, to the detriment of luxury rail and bus companies – has put a huge strain on India's civil aviation infrastructure and facilities. Pilots, aviation engineers, flight dispatchers, cabin staff and the like are suddenly in great demand. Major airports are congested and understaffed. In January, the New Delhi government approved a crash modernisation program for airports around the country.

Regional connectivity

As yet, the LCCs have not been able to take advantage of crossborder travel in Southasia, which beckons as a lucrative market given the difficulties in surface transport between the various countries. Due to the absence or inadequacy of rail links, budget travelers tend to choose buses over airplanes when traveling from within India to elsewhere in the region where there are bus routes. Going from Delhi to Lahore, for instance, currently costs INR 1250 by bus and INR 7500 by air.

At present, government regulations prohibit privately-owned Indian LCCs from flying to other Southasian locations.   ccording to these regulations, issued in January 2005, an Indian airliner must have five years of continuous operation and a fleet of at least 20 aircraft before it is allowed to fly internationally. Even those who fulfil those conditions are not allowed to fly on the lucrative routes to the Gulf region, which is reserved for state carriers Air India and Indian. Among private Indian airlines, as yet only Jet Airways and Air Sahara, both of which began operating in 1993, are permitted to fly abroad. But with many types of aircraft, multiple classes for passengers, complimentary in-flight services, agent-assisted ticketing and slower turn-around time, Jet and Sahara are not what you would call low-cost carriers. The only budget airline in India that currently flies internationally is Air India Express, a low-cost subsidiary of Air India, which flies to the Gulf and Southeast Asia but not to any Southasian country.

After five years of domestic operations, Air Deccan, SpiceJet and GoAir (which began operating in 2003, 2005 and 2005 respectively) will be eligible to fly overseas. Some airlines, including Kingfisher, which also began operating in 2005, are pushing New Delhi for an amendment to its policy that could allow them to fly overseas well before 2008. Although the government looks set to keep the rules in place for now, it remains open to discussion and is regularly lobbied on the subject.

Jet Airways and Air Sahara already fly to Kathmandu and Colombo. There is little reason to doubt that, once they have passed the five-year threshold, Indian LCCs will also look to extend their operations to the rest of Southasia. With normalcy returning to Nepal, the number of tourists visiting the country is expected to increase, and Indian carriers will be looking to profit from this trend. Budget airlines may also seek to connect Indian airports and smaller Southasian cities such as Pokhara, Biratnagar and Chittagong, and why not Multan, Peshawar and Quetta. Air Deccan links previously unconnected towns and cities all over India, but these connections are waiting to be extended to a regional scale. In the case of LCC flights out of airports in Nepal's tarai, like those in Bhairahawa and Biratnagar, they provide an opportunity for the population of Uttar Pradesh and Bihar to fly out to other parts of their own country.

Though the smaller airports have the potential to generate significant passenger traffic, carriers such as Indian, Jet and Sahara currently fly only to the region's larger cities. With the number of people who fly – and, thus, the number of intended destinations – increasing every year, however, it is possible that these 'secondary' routes will be economically viable from the very start. Moreover, the fact that low-cost carriers have been turning over substantial profits (SpiceJet reported an operating profit of INR 715 million for its first year of operation) means that expanding their operations would not overburden their resources.

Despite the suitability of budget airlines to the economies of the Subcontinent, such airlines are only in operation in a few countries. In Pakistan, these carriers include Aero Asia International and Airblue, which fly domestically and to the Gulf. Nepal has Cosmic Air, which is offering cut-rate fares domestically and on its flights to Delhi and Dhaka, but it is hampered by its small number of aircraft. It is clear that even more than in India, growth of the LCC sector in Nepal may be hurt by issues such as reduced passenger volume, government regulations, lack of capital and poor infrastructure

Nonetheless, low-cost airlines in Southasia offer great possibility for increasing connectivity between Southasia's towns and cities. Although the democratisation of air travel that these carriers promise does have rigid economic limits, with disposable incomes rising across the Subcontinent LCCs are sure to play an important role in a future of increased mobility, crossborder interaction and people-to-people contact.