Very few airlines in the world make money, and the ones that do, operate on wafer-thin margins. Still many Indian carriers want to fly abroad and are seeking permission from the government.
Both Kingfisher Airlines and Air Deccan, in which Vijay Mallya's UB Holdings acquired a 26 per cent stake, want to fly abroad and so do Delhi-based no-frills carriers Spicejet or Indigo.
"It's only a prestige issue. Yields on international routes are lower than those on domestic routes," says Air India's executive director S Venkat. The average return fare to the US is Rs 30,000 (minus taxes), for a to and fro distance of 24,000 km. "The yield is hardly enough to cover the costs, which is nearly Rs 2 per available seat km against a revenue of Rs 1.20 per seat km," adds Venkat.
Even if you assume a higher return fare of Rs 40,000, the yield will still be lower than the costs. Indeed, 15 years back, a return economy ticket to the US would have cost you $1,200-$1,400 (Rs 42,000 - 49,000, assuming you paid Rs 35 for a dollar) without taxes. Today, the same fare has come down to around $800 (Rs 30,000-33,000), without taxes. While fares have come down, the costs of flying (fuel, operations) have gone up, making life difficult for the airlines.
"In international flights, margins are wafer-thin. As long as you can achieve a cash break-even, you operate. Sometimes, you make up in peak season or the money you make in short haul goes to subsidise the long haul routes," admits Venkat, who also handles the finance portfolio for the airline. But then one wonders how do airlines like British Airways, Lufthansa, or Emirates make money? "Singapore Airlines operates in a niche market. They have very high load factors in the upper classes (business and first class), which subsidises economy fares, where again they have high load factors," says an airline executive. "Lufthansa, British Airways have wedded their customers with alliances, loyalty programmes and a hub-and-spoke model. They generate enough traffic in the higher classes to make their operations viable," adds the executive.
Southwest Airlines, the most successful airline which has delivered profits for 25 consecutive years, has stayed away from flying on international routes. "They will not want to fly Trans-Atlantic, which is a very densely fought route and is difficult to make money," says an expert. But Indian carriers feel they can break in.
"If you have the right tie-ups (partner with big airlines who take onward traffic) and the right product, you can make money on international routes. Not everything is sold at the lowest fare," says Jet Airways CEO Wolfgang Prock-schauer. Of course, airlines have to target higher occupancies (75-76 per cent load factor) to achieve a quickly break-even.
Jet has demonstrated this by turning around its international operations in the last quarter. While it makes money on the London route, flights on Southeast routes are still not profitable. But this turnaround will be short-lived as it incurs huge start-up costs for starting new flights to Newark, Toronto or other cities.
Indian carriers are lured by the growth in business and leisure travel in and out of the country and the non-resident Indians coming home more often than earlier, thanks to lower fares. "For us, going international is the next logical step, an extension of our domestic network. There's a huge business opportunity, which Indian carriers should take advantage of," adds Prock-schauer.
As India becomes more and more palatable to foreign investors, international traffic is going to continue growing both in and out of the country.
The advantage that both Kingfisher and Jet have is their domestic network, which can serve as a feeder to their international routes and carry inbound traffic coming into the country.
"There's a prestige of flying international. Eighty per cent of the traffic in and out of India is catered to by foreign airlines. By going international, we can leverage our network both ways: use our domestic network to feed international and vice-versa. Everything (service, fares) being equal, people feel comfortable flying a national airline," says a senior official with Kingfisher Airlines.
While going international could be logical for domestic airlines such as Jet or Kingfisher, their moves are also driven by the bloodbath on domestic skies. "Given the high cost of operations and over-capacity in the domestic market, airlines will bleed to death if they aren't allowed to fly abroad," said a senior executive with an airline. Experts estimate that Indian carriers together have lost $400-500 million during the last fiscal, and continue to make huge losses.
Experts say that international expansion offers opportunities because in many instances the competition is inefficient. "When was the last time you had a great service on an international flight on a western carrier? If you look at KLM, Singapore Airlines and Emirates and what they have achieved in developing a winning strategy out of countries without any domestic potential, there is a lesson to be learnt," says Steve Forte, a former CEO of Jet Airways.
But is there a difference between Kingfisher and Jet for going international? The answer may lie in the motivations that drive Mallya vis-a-vis Jet's Naresh Goyal. The opportunity to make money is probably a common factor for both, but experts feel that the primary motivation for Mallya is 'success.'
"He saw an opportunity to further strengthen his image as a successful businessman by creating Kingfisher, in the same spirit as Richard Branson created Virgin. Given the right opportunity, why not show the world you have the 'Midas touch' for whatever business you wish to undertake? The latest aircraft order at the Paris Air Show promises an aggressive future for Kingfisher and lots of trouble for Jet Airways and Air India," adds an expert.
As Indian carriers plan to fly abroad, they will have to incur initial investment in fleet, technical support, commercial set up, crews, training, operational support, offices (and the list goes on...), just about everywhere they want to fly. "But once you have reached the initial critical mass, substantial growth can be absorbed by the existing structure," adds Forte. Eventually, it is passenger perception and satisfaction that will drive commercial success for Mallya or Goyal.