Thursday, August 11, 2022

Hybrid Model: Way To Go For Jet Airways?

By Ameya Joshi

Ameya Joshi, Airlines Network Analyst

It has been three years since Jet Airways suspended operations. History suggests that no airline has been able to make a comeback in India, once it has suspended operations. In late 2012, when the Indian government allowed Foreign Direct Investment in airlines, Kingfisher Airlines was on the deathbed, efforts to revive the brand continued even after the suspension, all of them unsuccessful. 

Cut to 2019, Jet Airways went through the same story, but this time around – the Insolvency and Bankruptcy Code (IBC) had been approved in 2016 and through the National Company Law Tribunal (NCLT), the airline came up for bidding. A consortium led by Murari Lal Jalan and Kalrock Investments won the bid to get Jet Airways back to life, but this has been just one of many hurdles!

After spending a lot of time with clarifications around the slots and bilateral rights, which were expected to be protected. After a long break, the consortium appointed a Chief Financial Officer and a Chief Executive Officer in quick succession. Both industry veterans. The ball is rolling, with an aircraft being earmarked for proving flights, setting the tone for the next steps, which includes reinstatement of the Air Operating Permit (AOP). However, what is interesting is the “Hybrid” model, which the airline would follow as per its new CEO – Sanjiv Kapoor, who has been with SpiceJet and Vistara in the past.

Low Cost Carriers (LCCs) dominate the Indian market. In 2019, 87% of the entire domestic traffic was carried by LCCs. This was also the year when Jet Airways suspended operations, with LCCs filling up the void. Air India and Vistara – the only two Full Service Carriers (FSCs), tried filling up the void, however the LCCs triumphed in expanding. The FSC landscape in India has been a difficult one. A cost conscious country like India has seen people veer towards LCCs while FSCs – which have a higher cost base have struggled to make ends meet.

The Hybrid Model

Very few airlines have the business class the way we know it in India. A hybrid model more often than not refers to having a full-service business class and an economy class that follows the low-cost model wherein passengers have to buy on board and pay for meals, among others. The opinion and lines start being blurred here. The likes of Lufthansa, British Airways, Swiss and other European airlines started distinguishing the business class into a regional business class and a long haul business class.

The hybrid model entails that the airlines price the economy class in line with what the competitive low cost carriers do, by unbundling the bags, seat selection and food, while the cabin in the front takes care of premium experience – from lounge to priority boarding and loyalty points to multi course meals in flight. The handful of people who fly business class are lucrative for the airline while the price sensitive economy class passengers can be offered competitive fares.

How different is the business class landscape? The European FSCs have started having a regional business class. Essentially these are the same seats with more legroom and a middle seat that remained empty, with few airlines having a fixture there, which adds to the personal space or even lets the middle seat fold.

The business class offers meals and lounge service, amongst others, but get to the economy and one may just get water, tea or coffee with the meals being buy-on-board — in line with the LCCs in the region.

Will Jet Airways go this route? Go FIRST (earlier GO Air) started with this offering known as Go Business. The airline has had these seats on sale on and off because they also double up as normal seats. The value positioning of the airline probably did not work in its favour but could the premium positioning of Jet Airways make it work? For the sector lengths in India, Business class with plush seating is not an absolute necessity.

FSCs Have A Turbulent Past In India

Vistara, a joint venture between the Tatas and Singapore Airlines that started operations in 2015, promised service like no other. The airline claimed that its surveys had shown that there was demand for premium traffic, yet when it came to meeting the bottom line, the airline has not been profitable yet. The airline changed course multiple times, altering its configuration twice, inducting the all economy aircraft and further adding to that mix with two class aircraft.

Vistara followed the earlier full-service carriers (FSCs) — Kingfisher Airlines and Jet Airways, to try the buy-on-board offering — very different from its initial survey of ultra-premium offerings. While Kingfisher Airlines and Jet Airways operated entire flights with Kingfisher Red and Jet Konnect branding to denote their low-fare offerings and played around with serving food as well as buy-on-board, in case of Vistara, the buy-on-board was for a small section of passengers within the same flight becoming a fourth service class!

While FSCs have clawed back some market share, the proportion of business class seats deployed in the market is less than five percent. Translated into numbers, this would be less than 2,000 seats in business class per day across the country. A number that can have very high yields but risky to begin with.

Unity In Diversity?

The basic principle of an LCC is simplicity. The much-touted single fleet model with the ability to swap planes or crew and requiring the same training for all got IndiGo into the spotlight. IndiGo now has a fleet of ATR 72-600, A321neo and A320neo and A320ceo planes. SpiceJet moved to a multi-fleet model even earlier.

Months before the airline went down; Kingfisher had done an analysis for reconfiguring its fleet. Sadly, only a handful could be converted before the airline shut. Jet Airways had done the same. The jury has been out on a single type v/s multi type.

Global giants like American, Delta or United have mixed fleets with different configurations as they adjust the demand and deployment. American Airlines, alone, has a fleet, which is more than the entire commercial fleet in India. India is much smaller and to begin with, it makes sense to have a simplified model, lest it gets confusing for the passengers as well as internal operations of the airline.

With margins as thin as a boarding pass, it is simply too expensive to do a trial-and-error to find out what is the optimum mix of each class, only to realise that all of it goes for a toss when you sprinkle some seasonality and change the markets.

As Jet Airways takes a step towards creating history of being the only airline in the Indian skies to ever come back after shutting down, a hybrid with a configuration that is the same across all aircraft could be the differentiator, which would give it the benefits of LCCs, the easy swaps, the simplified training, better negotiating power and yet allows it to offer two class options.

If the airline can manage with costs just higher than LCCs and command a premium for business class yet continue to sell the economy class in competition with LCCs, we may have a winner

FSCLCC
201440.10%59.90%
201540.20%59.80%
201638.10%61.90%
201734.60%65.40%
201832%68%
201920.60%79.40%
202017.10%82.90%
202119.30%80.70%

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