GoAir to become ultra low cost carrier: What it means for passengers
ULCCs look to unravel latent discretionary dollars that can be diverted to air travel instead of being deposited in the bank
When Jeh Wadia stepped down as the managing director of GoAir last month, there were two other important announcements. First, the airline elevated old hand Ben Baldanza as its vice-chairman and also expressed its intention to move towards being an ultra-low-cost carrier (ULCC).
Baldanza's promotion, in this respect, carried a lot of significance, given his history of using the ULCC model to transform America's Spirit Airlines from a loss-making entity to one earning significantly more than its rivals. It remains to be seen if Baldanza succeeds in making GoAir catch the spirit, as it were, which could help GoAir to tide over its financial woes much like its US peer, especially during these difficult Covid times.
Spirit was running a low-cost operation before Baldanza's arrival and become even more discounted under him. This policy was severely criticised and Baldanza even faced a US Congress hearing regarding the unbundling policy, but he remained firm and helped in engineering a turnaround at Spirit, a simpleflying.com article pointed out.
Let us try to understand the ULCC model. GoAir has been positioning itself as a low-cost carrier (LCC), much like its peers IndiGo, SpiceJet and AirAsia India. Today, over 80% of the Indian market is controlled by LCCs, which is probably the highest anywhere in the world, aviation expert Ameya Joshi wrote in an article for Moneycontrol. This has succeeded the failure of two major full-service carriers Kingfisher Airlines and Jet Airways and another -- Air India -- floundering in debts and losses.
The LCC revolution started in India with GR Gopinath's Air Deccan in 2003. It completely changed the face of aviation in India and ensured that the aam naagrik (common citizen) can take udan (flight). Before that, airfares were so high that only the rich, the VIP, or those on company tours could afford them. Air Deccan made air travel a mass concept and unlocked sources of revenue that one did not imagine before.
An Air Deccan aircraft beside that of LCC behemoth IndiGo. Image courtesy: Wikimedia Commons/Trinidade
Unlike the traditional carriers, Air Deccan offered absolutely none of the frills that had come to be associated with the elite product that was air travel, except of course the speed of the journey.
There were no first-class or business class and the elaborate comforts associated with them. The airline served no fancy cuisine, but sandwiches, cakes and biscuits. Passengers were crammed in all-economy-class planes and had to pay for on-air services like food and beverages. There were no plush business lounges, or frequent flyer miles, no cutlery.
In-flight service was reduced to skin and bones, which made many at that time joke that while the Air India Boeing 747s were 'Palaces in the Sky', being the ultimate definitions of in-flight luxury, Air Deccan planes were 'flying city buses'.
What was the clincher, however, was the fare. Air Deccan offered tickets at a rate 50% lower than that offered by the other airlines. Air Deccan fares started to make even first-class train travel unattractive. Passengers had also to pay an extra price for cancelling their tickets. Revenue was generated through advertisements both inside and outside the aircraft.
What Air Deccan lacked in terms of frills and comforts, it more than compensated by its efficiency of service. Passengers, who cared little about luxury, but wanted to go safely and quickly from one place to another and possibly return the same evening would choose Air Deccan. It made air travel the 'normal' and 'regular' thing.
By 2006, the airline operated from seven base airports and boasted of very low turnaround times, according to an article in The Better India. Soon it claimed a 22% share in the Indian market and operated 350 flights every day to over 60 destinations with a fleet of 43 aircraft.
The airline introduced 24-hour call centres with a globally free toll-free number, which were to be answered not by machines, but by real human voices. Passengers could book their tickets through these call centres and then pay in cash within 24 hours into the firm's account.
That is the LCC model pioneered in India by Air Deccan. Soon others started to copy this template and, in fact, pushed Air Deccan out of the market.
IndiGo took the model further by selling a variety of products onboard. Another budget carrier SpiceJet introduced a service called SpiceMax, under which passengers can buy extra facilities like enhanced seat legroom, priority check-in, quicker and priority boarding and baggage delivery and complimentary meals with beverages, for a nominal fee without having to pay the huge business class premium for comfort and convenience. Similarly, IndiGo's 6E Upgrade offers facilities like unlimited cancellation/change of bookings, choice of seats, extra legroom, window and aisle seats and fancy in-flight snacks.
The LCC model also typically involves a single type of fleet, limited personnel costs, limited baggage allowances, point-to-point network and direct channel bookings. It also involves operating flights to secondary airports and avoiding the high-cost primary airports.
ULCC takes the LCC model further. Every single inch of space is to be used for advertising. Therefore, luggage bins, foldable seat back trays, paper cups, food packaging, and even the uniform of the flight crew carry advertisements. Every unbundled service comes with a charge. As an LCC, a ULCC also offers a bare-bones in-flight service. But there is more to ULCCs.
According to aviation expert Michael Boyd's article in Forbes, ULCCs are the wildcatters of the airline industry. In the petroleum business, wildcatter refers to an entity that goes to drill oil where mainline companies have no interest. The wildcatters take the plunge based on their own research. Sometimes they are hugely successful, at other times, their ventures end up in massive failures, but yet they are willing to take the risk. ULCCs, similarly, chase markets and consumers that the traditional carriers tend to ignore. But often, those neglected markets contain a wealth of opportunity.
The ULCC model initially perfected by Allegiant Air offered low-fare, high-value vacation packages from secondary airports to Florida and Las Vegas. Allegiant's revenue, therefore, was not dependent on airfares per se, but the customers buying optional ancillary products like hotel and tour packages, Boyd pointed out.
Four main ULCCs in the US market include Allegiant, Frontier, Spirit and Sun Country. ULCCs are not air service providers per se, in terms of simply connecting places based on known and expected consumer demand. ULCCs look to unravel latent discretionary dollars that can be diverted to air travel instead of being deposited in the bank or spent on let's say a new kitchen. ULCCs encourage consumers to make impulse purchases drawn by super-low fares and high value-to-cost equation for the consumers.
America's Spirit Airlines have been a successful ULCC. Image courtesy: Wikimedia Commons/Tomás Del Coro
The ULCC service is typically low frequency -- maybe two to three flights per week. The schedule is devised in a way to suit the ULCC's fleet availability and not necessarily passengers' travel needs. The fare is the stimulant, not the 'need' to get to the destination, Boyd wrote.
Spirit under Baldanza introduced commercials of its own that went viral, according to simpleflying.com. Spirit cashed in on pop culture trends and slipped in innuendos to carry campaigns far and wide and avoid expensive advertisements.
As pointed out by Joshi, GoAir is at best a low-fare carrier rather than a low-cost carrier, given that it has not been doing everything that would classify it as an LCC. Also, in India, LCCs fly to the same airports as FSCs. No city has secondary airports to operate to and save money and services offered by LCCs are also offered by the FSC Vistara under its Economy Lite scheme.
The LCC model also involves direct selling and not offering tickets to third party platforms or travel agents in order to save distribution costs. In India, however, a majority of air tickets are sold through online travel agencies like MakeMyTrip, ClearTrip, Yatra and others and also through corporate and neighbourhood travel agents.
Such being the LCC scenario in India, GoAir's ULCC move is fraught with challenges. If it is successful, it would give GoAir a separate and slick identity and a breathing space amid its numerous financial troubles.
The airline had meagre revenue in the first 17 to 24 days of March 2020 during the early days of the Covid-19 pandemic. The airline had asked the government and banking system for financial support and had implemented strict cost-cutting measures including salary cuts and leave without pay.
India Ratings downgraded GoAir's debt and raised concerns about the carrier's liquidity and deteriorating operating performance in FY21, according to a Business Standard report in July 2020. As of January 1, 2021, GoAir had pending dues to the Airports Authority of India (AAI) amounting to Rs 33.13 crore, which was the second-highest at that time.
GoAir's ULCC plan is not without challenges. Image courtesy: Wikimedia Commons/Flickr/Venkat Mangudi
The airline's overall debt rose 6% sequentially to Rs 1,891 crore in the June quarter. Its unencumbered cash and bank balance fell by almost half to Rs 72.5 crore during the same timeframe.
The airline had a net loss of Rs 1,346 crore in FY20 as against a net profit of Rs 123 crore in FY19 because of higher provisioning and foreign exchange loss.
GoAir has also faced flak for the delay in replacing faulty Airbus A320Neo engines despite the Directorate General of Civil Aviation's (DGCA) orders, sudden flights cancellations, unresponsive customer care staff and also over delays in refunding payments made during the lockdown. The Hindu reported in June last year that online travel agencies had warned against booking GoAir tickets following a spate of customer complaints.
GoAir's Go Business premium product, which offers extra services like greater legroom, free meals, increased baggage allowance and priority boarding at a higher rate, could be affected as and when GoAir becomes a ULCC.
It remains to be seen if GoAir succeeds in its ULCC plan, especially in these Covid times when bare minimum air service may be all that passengers would be interested in and indeed all that airlines would have the capacity to offer. The presence of the ULCC-experienced Baldanza would, however, be a distinct advantage.
(Cover image courtesy Wikimedia Commons/Laurent Errera)