Insight into India’s low cost carrier industry – tough times ahead

TravelMole guest comment by Parita Chitakasem, Asia Pacific travel and tourism manager, Euromonitor International

In 2003, the Indian aviation industry was arguably the most dynamic in the world in terms of growth potential for low cost airlines. However, four years later, the market looks less rosy.

More challenging market conditions and heightened competition are starting to take their toll. There are now eleven competing budget carriers offering domestic routes, and at least another nine players are due to enter the market in 2008.

Euromonitor International predicts that the industry will have difficulties accommodating these players and many will fall by the wayside.

Difficulties and competition from rail transportation

One major challenge that all budget carriers still face is high airport charges, which are expensive by international standards and eat into players’ potential profits. Also, rising fuel prices, which increased by a further 5% in April 2007, hit low cost carriers particularly hard as ticket price margins are already squeezed.

Between the local budget companies themselves, fierce pricing – including the launch of tickets as low as Rs1 – has eroded the pricing power of all but the most aggressive players in the market.

India’s rail network, which previously catered for 99.9% of domestic travellers before low cost carriers, has also started to fight back after witnessing share erosion.

Rail companies now offer more facilities such as cyber cafés, fast food centres and ATMs, and have begun competing on price with budget airlines. Such market conditions are reflected in the results of Air Deccan, India’s first budget airline, which registered a net loss in fiscal 2006.

Certain market leaders stay resilient

Several players have nevertheless taken measures to stay ahead of the game. Air Deccan has introduced other revenue sources, such as travel insurance services and hotel rooms.

It also now earns a substantial sum through selling advertising space. Banking company ICICI has adverts on the aircrafts’ headrests, and IT company, Sun Microsystems, pays for advertising on the body of the aircraft.

Spicejet launched in 2005 and follows the low-cost model as advocated by Ryanair and Air Asia, using single class configuration seats to push the number of airline seats to 189 for maximum capacity. It also focuses more on internet transactions, rather than telephone and agent channels, to save on agent and distribution fees.

Number of players to decline through consolidation

All players will find it tougher to compete in the next few years, and consolidation will be the next step.

April 2007 already witnessed the start of consolidation with the number one player Jet Airways acquiring rival Air Sahara for Rs1,450 million. Some current players could be potentially wiped out as rapidly as they entered the market over the last four years.

Euromonitor International estimates that by 2010, there will be a maximum of nine budget airlines left out of the 20 players expected to operate in 2008. The rest will either be taken over or forced to shut shop as they fail to compete within market conditions and the strength of market leaders.