Discount airlines battle over India's skies

[HenryTo]

Very interesting article for people keeping track of the economic situation in India:
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Discount airlines battle over India's skies
Tue May 10, 2005 11:46 PM ET
By Rina Chandran

BOMBAY, May 11 (Reuters) - A dog-fight between Indian airlines is brewing with launch of an airline named after a beer brand, short-skirted flight attendants and fares as low as $5.

Kingfisher Airlines, which sports seat-back screens showing films, launched this week as a mid-tier alternative to leader Jet Airways (JET.BO: Quote, Profile, Research) and no-frills carrier Air Deccan.

Analysts expect domestic air travel to grow at 20-25 percent a year over the next five years, driven by discount carriers trying to woo millions of Indians who tend now take cheap train rides to even the most far-flung destinations.

"Low-cost carriers are designed for markets like India," said Kapil Kaul, head of the Centre for Asia-Pacific Aviation in India. "There is also a serious investor appetite for them because of the growth potential, and they are backed by large businesses and foreign investors, and other firms are waiting."

Kingfisher Airlines Ltd. -- owned by India's biggest brewer, the UB Group, and named after its top beer -- launched its inaugural Bombay-Bangalore flight on Monday with fares as low as 3,900 rupees ($90).

That's more than 30 percent higher than Air Deccan, but the highest fare of 5,900 rupees ($136) is one fifth cheaper than those of full-service carriers Jet Airways Ltd., Air Sahara and state-owned Indian Airlines [IA.UL].

"We will grow by expanding the base of domestic air travellers as well as gaining customers from other airlines," said Alex Wilcox, Kingfisher's president and a founding manager of U.S. budget airline JetBlue Airways Corp. (JBLU.O: Quote, Profile, Research) when it launched five years ago.

"MINING THE BOTTOM"

Ahead of the Kingfisher launch, Air Deccan said it planned to sell one rupee tickets with a tax charge of 222 rupees ($5), making it possible to fly for less than the cost of taking a bus.

Rock-bottom pricing by the Bangalore-based airline has helped expand the market, just as Ryanair (RYA.I: Quote, Profile, Research) and easyJet (EZJ.L: Quote, Profile, Research) did in Europe. About a third of Air Deccan passengers are first-time fliers, Managing Director Captain G.R. Gopinath said.

"We are mining the fortune at the bottom of the pyramid," he said, referring to a book by the University of Michigan's C.K. Prahalad, who urges firms to tap the vast base of value-conscious consumers in India, where the average annual wage is around $500.

Waiting in the wings is SpiceJet Ltd. (SPJT.BO: Quote, Profile, Research) , formerly Royal Airways, which will go toe-to-toe with Kingfisher when it launches later this month.

"Lowering the price created a huge demand in the cellphone market ... lowering fares will do the same for the air travel market," said Mark Winders, SpiceJet's chief executive officer.

COMPETITION HEATS UP

About 19 million people travelled by air in India in the last fiscal year to March, according to the Centre for Asia-Pacific Aviation's Kaul, just a fraction of its billion-plus population. Few flights in the country are more than three hours long.

Kaul expects 5 million new air travellers in India every year until 2010, and then slower double-digit growth. The government expects the sector to grow 20 percent annually in the next five years, with $20 billion in government and private investment.

Nearly a dozen more carriers are expected to begin operations in the next 12-18 months. Kaul estimates India can support two or three large low-cost carriers with fleets of 50-60 aircraft each, which also fly to South East Asia and the Middle East, as well as four or five carriers operating only in certain parts of India.

But falling fares will mean lower profits. Jet Airways, with its 43 percent share of the domestic market, has been charging mostly full fares, but reported a net profit of just 1.5 billion rupees on revenues of 35.66 billion in the year to March 2004.

Jet and Sahara are looking at overseas routes to boost revenues. They were recently allowed to fly to Singapore and Kuala Lumpur and will fly to London and New York shortly.

They will compete with state carrier Air-India [AI.UL], which this month also launched a discount carrier, Air-India Express, on the Kerala-Middle East route. Jet expects international routes to account for 10-15 percent of its turnover this year. ($1=43.5 Indian rupees)