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By Devesh Agarwal
At Kingfisher Airline’s annual general meeting last week, Chairman Vijay Mallya announced a drastic change in strategy by the stoppage of the Kingfisher Red low cost service for a focus on the full service segment.
Kingfisher Red Airbus A321 all economy cabin
In response to the myriad of media articles, many of which speculated on the possible reasons for the announcement , airline Chief Executive Officer Sanjay Aggarwal clarified and justified the change in strategy. We have reproduced the statement below without comment and edit for your unbiased reading.
We will analyse the statement at a later date.
Following an announcement made last week about Kingfisher Airlines’ (Kingfisher) focus on the full service segment of air travel, there has been a lot of speculation in sections about the media around. I would like to set the record straight and clear up any misconceptions around this announcement.
It is important to carefully analyse and understand the low cost or low fare segment of the Indian aviation industry. Let me begin by answering the most common question: Why focus on the full service product?
- Operating costs of so called low cost carriers and full service carriers in terms of fuel, airport charges, engineering and maintenance and crew costs are similar. Full service carriers incur additional costs on global distribution, in-flight catering, ground amenities and the frequent flyer programme. These additional costs are more than recovered through higher yields.
- In addition to large aircraft orders placed at time of start up in 2004/2005, the Indian LCCs in the recent months have placed orders for over 250 aircraft. In the last two years, capacity induction of the LCCs has outpaced the demand growth in the domestic market. The induction of so many additional aircraft in the low cost / low fare segment will potentially lead to substantial over capacity and a price war with declining yields.
- With continuing economic growth, business related travel is increasing significantly. Businessmen and executives prefer to fly with full service carriers because of ease of buying tickets, frequent flyer program and convenience offered. They are willing to pay extra and this segment is not as price sensitive as the classic low cost / low fare segment where there is a lot of discretionary travel involved.
- A detailed study over the last six months during the high oil price regime has clearly demonstrated that Kingfisher’s full service product has generated higher yields and load factors which is consistent with the assessment that the business travel segment is more sustainable than the extremely price sensitive low fare segment. The analysis also showed that of the incremental yield, only 25% is spent on providing the extra services associated with a full service carrier. The remaining 75% is net contribution to the bottom line.
- While there are currently five airlines participating in the low cost / low fare segment, there are only three full service carriers namely Air India. Jet Airways and Kingfisher Airlines. While competition certainly exists in this full service segment, such competition is tempered because of the frequent flyer loyalty programmes that are offered by each one. In short, we believe that the competition will be far more intense in the low fare space than in the full service space.
- Kingfisher Airline is widely recognised as a premium carrier and is the recipient of 38 national and international awards. The brand and service quality image is well established. This is evidenced by the higher yields and higher load factors generated on Kingfisher’s dual cabin aircraft. For the first five months of this fiscal year, based on DGCA published data, Kingfisher Airlines has delivered highest load factors of any airline in India.
- Kingfisher currently operates airbus aircraft with two cabin configurations – Dual cabin full service and Single cabin no frills. This also means the Kingfisher does not offer its premium Business Class or full service economy class product on all its routes. As a result Kingfisher is losing a certain amount of business class traffic on many routes.
- Kingfisher’s integration into the oneworld alliance is on track. oneworld is supportive of Kingfisher’s move to focus its energy and resources on a full service and premium product which is in line with the philosophy of oneworld and its member airlines.
- Over the next 4 months Kingfisher will reconfigure all its airbus aircraft including its single cabin aircraft into dual cabin aircraft with a reduced premium business class cabin and an increased number of full service economy class seats leading to a capacity increase of approximately 10%.
- The economy class will offer the same comfort as it does today. The space requirement for additional economy seats will be made available by reducing the number of business class seats.
- The reconfigured aircraft will have the seat equivalency of a low fare carrier but an opportunity to generate much higher revenue as demonstrated by current yields. Kingfisher will achieve incremental business class revenue as a result of wider and uniform availability and the airline will also generate incremental revenue through its increased full service economy class capacity.
- There will be no reduction in Kingfisher’s fleet size or its network. Our guests will continue to enjoy the benefits of Kingfisher’s network that provides connectivity to 60 domestic and 8 international destinations.
