The government’s decision to allocate
Jet Airways’ slots to other airlines as long as they bring in incremental capacity has led to some interesting developments in Indian aviation. A market that swears by single aircraft types has seen complexity being introduced – almost overnight.
SpiceJet has already taken 10 Boeing737 aircraft with dual-class configurations and is launching a business-class product starting May 11. And now,
Vistara is also considering inducting six of these aircraft, perhaps more (the airline ordered six 787-9 Dreamliners from Boeing last year). This effectively means that both airlines will have sub-fleets: SpiceJet with a mixed configuration and Vistara with a completely new aircraft type in its fleet. It is a move that the airlines would only take in extraordinary circumstances. So what necessitates such a move? Without adequate and well-timed slots airline networks fail to deliver profits
The heart of any airline lies in its network. And the network relies on adequate availability of slots. A slot is a five-minute time window that provides access to runways at an airport. Consequently, this enables airlines to design their networks and schedule patterns. Not having proper slots impacts yield, efficiency and competitiveness on a route wise-basis and profitability on a network basis.
Slots also are important to target the higher-yielding travel segment. Because these travellers choose schedule over price.
And thus not having a sizeable chunk of the capacity and frequency share can lead to competitor actions that very likely force a pullout from the route. Take, for instance, the Mumbai—Bengaluru route. The route is dominated by IndiGo, India’s biggest airline by passengers carried, with a 40 percent share followed by Vistara with a 15 percent share and all the other airlines in the range of 9-12 percent. To even enter the arena, airlines at the very least have to offer schedules that are attractive to their passenger segments. Not having the right schedules will inevitably lead to a loss of passengers and profits to other airlines.
Without good slots, even the most meticulously planned and brilliantly marketed network will fail to deliver profits.
The grounding of Jet Airways has freed up slots but with caveats
The grounding of Jet Airways has presented a scenario that competitors could only dream of. Specifically: access to metro-slots and in sizeable proportions.
This is both due to the size of Jet and also its network structure which had significant metro presence. For instance, 280 slots of out Mumbai and another 160 slots from Delhi. It is a unique opportunity.
The government’s decision to allocate these on a “temporary” basis to other airlines as long as they bring in incremental capacity presents a challenge though. Especially for SpiceJet and Vistara. While both have capacity lined up, in the case of SpiceJet they are impacted by the grounding of the 737Max and Vistara’s capacity is lined up for induction later in the year.
Put simply, incremental capacity — that is additional aircraft — cannot be lined up as quickly. After all sourcing aircraft from the secondary market requires planning, preparation and negotiation.
De-registration of Jet aircraft by lessors presents a unique opportunity
Lessors continuously evaluate an airline's health. This is for risk mitigation. The risk is considered higher for markets such as India that do not fully subscribe to the Cape Town Convention (which standardises protocols and procedures with regards to transactions involving aircraft). Thus, in the event of an airline failure, lessors have no certainty on the ability to repossess their aircraft. And indeed this is a scenario, lessors have already faced in India with Kingfisher Airlines. In that case, several lessors ended up losing time and money while attempting to repossess on their core assets: aircraft.
But once bitten twice shy. For lessors, this earlier experience served as a catalyst when dealing with Jet Airways. Very soon after the grounding, the de-registration requests — a prerequisite to repossession - started to flow and soon lessors were reclaiming their assets. SpiceJet was quick to read the market. It moved swiftly, expressed an interest and then worked with lessors to lease and induct these aircraft. As of now it has inducted 10 aircraft and plans to induct an equal amount in the months to come. And in doing so, it paved the way for other airlines to follow.
Such induction requires not only aircraft but also a ready pool of trained pilots, engineers and cabin crew. And trained pilots and engineers with significant experience on a particular type of aircraft are hard to come by. Ironically, the repossession of aircraft by lessors Jet’s failure not only provides these but does so in large numbers. A unique opportunity indeed.
Timing is critical: for market share, for slot historicity and for route-maturity
The grounding of Jet has led to a supply-demand imbalance in the market. Jet’s 15 percent market share is up for grabs and critical to fill the capacity gap with industry leader Indigo. Additionally, Jet had a sizeable market for high-yield passengers and this travel segment is most sought after by airlines as their demand is stable and inelastic. But to capture this demand the airline must have robust schedules and frequencies which are driven by slots. And to capture and build this market share timing is critical.
With regards to slots, they operate on two basic principles. The first one is that of historicity. That is, an airline that operates certain slots almost always gets similar slots in the upcoming schedule. The second is a “use it or lose it philosophy” which mandates that airlines must fly 80 percent of the allocated slots during the schedule period of 6 months. Airlines have to move quickly towards building historicity and subsequently ensuring that the slot portfolio is maintained by flying at least 80 percent of the route schedule (which is not possible if there are not enough aircraft in the fleet).
Additionally, routes take time to mature. Passengers have become extremely discerning and often factor in local (behavioral) dynamics that data simply cannot point to. For instance, a 7PM flight out of Mumbai based on data may be planned to capture high-yield passengers. But in reality, it may not get as much high-yielding traffic because of something as fundamental as the city’s traffic woes coupled with the lack of alternate transport – which make it very challenging for a business traveller to get to the airport in time. Further, if an airline does not have enough frequencies, it means that the business traveller will simply opt out of such a flight the next time around. Reading, understanding and incorporating such behavioural patterns into airline networks takes time.
Timing is critical to establishing a presence on a route. And the best time to do it is when there is a supply-demand imbalance - as the profitability impact is lesser.
Caution: introduction of a 2 nd fleet comes with challenges that must be proactively managed
While the case for soaking up slots is clear and compelling, introducing a second fleet type has several cost impacts. There is an impact to overall costs as the maintenance setup now has to cater for two aircraft types, there is a cost to productivity and cross-utilization, there is a cost to the complexity of network structures and network efficiency, and there are training considerations -- to name a few. Something as simple as an aircraft swap has to be re-worked.
On a network basis, the introduction of a second fleet type leads to an increase in cost per available seat (CASK). This is because ~45 percent of an airlines cost structure is driven by lease costs, maintenance, ground handling, spares and training. Thus the CASK increase HAS to be covered by a disproportional increase in the revenue per available seat (RASK). Failing that, the cost structure just does not work.
Other implications include the impact on the product. For instance, SpiceJet’s 737 fleet has 189 seats while Vistara has a hybrid offering flying a 3 class configuration with 8 business class + 24 premium economy + 126 economy seats. The aircraft being inducted come with a dual-class configuration of 12 business class seats and 156 economy class seats posing a challenge for both airlines on how to brand the product, how to sell the product and how to address product confusion.
That said, these challenges can be managed. The fact that they are temporary adds to their “manageability.” Eventually, SpiceJet and Vistara will have to transition back to their respective core fleets and decide on standard configurations. And by that time, the slot portfolios would have started to show the returns on investment while also creating a moat (slots, after all, are zero-sum games). Interestingly, by then Vistara would also have inducted its Boeing787s and gained institutional experience on operating and integrating a second fleet type into the overall network.
Airline strategy is always contextual. It requires an inordinate amount of time on understanding the market, understanding the revenue and cost drivers and understanding the operating environment. A copy-paste mentality does not make for success and frameworks that may have worked in other markets cannot be force-fit.
For India, this dynamic includes the constrained infrastructure at the airports, the supply-demand gap for talent and the market share that is up for grabs post the grounding of Jet Airways. It also includes the nature of changing consumer behaviour, improvements in road and rail transport and at times irrational competitive strategies.
It is said that
a bird in hand is worth two in the bush. For airlines that are looking at introducing a sub-fleet or a second fleet type, the bird in hand consists of the troika of slots + aircraft + trained pilots that till recently were all in short supply impacting airline growth and profitability. The sudden turn of events and the Jet Airways grounding coupled with the government’s decision has suddenly provided an opportunity. It is one that airlines are capitalising on even if it means introducing complexity to operations via sub-fleets.
Disclosure: Vistara and Boeing are among the four launch partners of cnbctv18.com
Satyendra Pandey has held a variety of assignments in aviation. He is the former head of strategy at a fast-growing airline. Previously he was with the Centre for Aviation (CAPA) where he led the advisory and research teams. Satyendra has been involved in restructuring, scaling and turnarounds. Has also provided policy inputs and suggestions. A certified pilot, he is an alumnus of the London Business School.