Jet Airways,
India’s favorite private airliner, posted its largest quarterly loss (of USD 360
million) recently casting doubts on its ability to turnaround despite the sale
of a sizeable equity stake to Etihad. Jet’s difficulties compound the loss
making operations of India’s full fare national carrier, Air India on one hand,
and the low cost private airliner SpiceJet on the other. Air India (together
with Indian Airlines) has been operational from 1932 with 4000 daily flights to
over 90 national and international destinations while Jet has been operational
from 1993 with 3000 daily flights to nearly 80 destinations and SpiceJet has
been operational from 1993 with 350 daily flights to 58 destinations. While
there are other marginal players like GoAir and Air Costa, their position is
not considered any better. The sad story of Kingfisher Airlines which once had
a 20 percent market share and has since ceased operations last year , and is in
serious debt repayment woes, continues to trouble investors and bankers. The
net loss of the major loss making airliners of India has exceeded USD 1.2
billion in fiscal 2013. Cumulatively, the Indian aviation industry is reported
to have lost over USD 8 billion over the last seven years and the industry debt
has exceeded USD 13 billion. The only successful airliner in India seems to be
IndiGo, a privately held operation (from 2006 with nearly 500 daily flights to
36 destinations).
Green is
red?
In this
scenario of airliner industry being in scorching red, AirAsia India, with its striking
red livery, has made its entry into the Indian aviation as a low cost airliner
(as an Indian subsidiary of the highly successful Malaysian AirAsia). It has
made a splash with the announcement of its inaugural flight from Bengaluru to
Goa on June 12, 2014 at a tantalizing fare of Rs 999. It is believed that
AirAsia would launch its additional flights also with such nano fares. In the
Indian aviation industry, approximately, Air India has a market share of 20 percent,
Jet at 22 percent, IndiGo at 29 percent
and SpiceJet at 19 percent. Together these four airliners garner 90 percent of
the Indian aviation market. Given the more or less equal division with three
unprofitable and one profitable airliner, new entry is a risky proposition on
the face of it. The existing airline players together are up in the arms
against the green light to AirAsia; clearly they are apprehensive of the
adverse competitive impact of a disruptive entry into the Indian skies.
Mittu
Chandilya, the young and aggressive CEO of AirAsia India has said that theirs
would be the only true low cost airliner in India while all others may try to
gain shares on low fares. He implied in several forums that the existing
airliners have their faulty or inefficient operational models rather than low
fares to blame. He has also committed himself to enter the market with
disruptive pricing but expressed confidence that the airline would breakeven in
a few months due to intrinsically superior operating model. In a characteristic
response Indigo offered the classic Indian formula of Re 1 fare even as SpiceJet
has been on low promotional fares for quite some time. It is unclear, at this
rate, as to where the operational and business models of the Indian airliners
would lead to, and if the Indian aviation industry would be in a perpetual red
zone. There are doubtless some differences, with established airliners like Air
India, Jet, SpiceJet and Indigo being
both national and international (in
varying mixes of course) and AirAsia being a pure domestic play. The Indian
aviation industry makes an excellent case for analyzing structure, strategy and
competitive advantage of firms, in particular the relevance or otherwise of Porter’s
theory of competitive strategy in multiple facets and the need for an alternative
theory.
Industry analysis
Transportation industry is a consumer facing
but highly infrastructure controlled, technology driven and investment
intensive industry. The industry has to perforce operate through public
(government owned) assets, be it roads, rail tracks, sea ports or airports. The
Indian aviation industry reflects these characteristics in a distinctive
manner; it is an oligopoly with a mix of public, private and overseas
ownership. Airports are tending to get privatized, but not entirely and the
skies are regulated. Aircraft makers are just two or three, and investment
costs are huge. Aircraft turbine fuel bears huge import costs and duty elements
and taxes dominate the fare structure. Air transportation is a highly technology
intensive operation with compelling needs of rapid turnaround and
uncompromising safety. It requires highly skilled workforce, be it pilots,
maintenance engineers, flight crew or ground handlers. In most cases, the
service an airliner can offer tends to be accentuated or attenuated by the
quality of airports while even the lowest of fare is ballooned by tax
components.
In terms of strategic
framework, at one level the competitive forces seem stable. With only two
aircraft builders with long delivery lead times but fiercely competitive
between themselves, the bargaining power of suppliers is high but not prone to
escalation. With capacity ahead of seats and occupancy factor being elastic
with fare competitiveness the bargaining power of buyers is low but not
compelling. With air transport being a favored requirement for business travelers
and time-sensitive travels, the threat of substitutes is low but distance
distorts the competitive force; the shorter the distance the greater the threat
of alternate transport modes such as rail and road. Given the loss-making
nature of the industry and the exits and consolidations that happened in the
industry from time to time (East West, Sahara, ModiLuft, and Air Deccan) the
threat of new entrants ought to be low but entry now and then (example,
Kingfisher, GoAir, Air Costa and AirAsia) with disruptive operating models reflects
that the threat of new entrants is real and the Indian aviation industry defies
the Porter’s norm of industry attractiveness.
Industry rivalry,
the fifth competitive force, is judged by the scale and scope of competitive
responses of the players. In general fast moving consumer goods, electronic
goods and white goods industries are known for high competitive intensity. Road
transport in spite of the fragmented competition and rail transport by virtue
of being a State monopoly do not engage themselves in intense competition. Air transport
in India continuously fluctuates between cartelized high fares and disruptive
promotional fares. Apart from boosting occupancy factor and market share,
individual airliners do not have any other apparent reason for competitive
behavior. Given that market share is gained at the expense of profitability in
the Indian aviation industry, industry rivalry is intense. That being the case,
the air traveler ought to have been the winner but apparently it is not so;
poor connectivity, minimal options, high dynamic fares, long waits and bland
service are the common refrains of domestic frequent fliers. International
flights may offer better service but options tend to be few and expensive. Considering
the five competitive forces, the Indian aviation industry refuses to be
described adequately by the theory of competitive strategy.
Need for a
new model
The state of
the Indian aviation industry, as discussed above, is reflective of an industry
that has few degrees of freedom to control its destinies even though individual
firms aspire to succeed. The industry’s logjam which cannot be removed by the entry
of one or two overseas airliners as wholly owned subsidiaries or joint venture
partners. The industry needs to work on a multilateral collaboration model to
bring itself out of the logjam. The industry needs a model of collaborative advantage.
The author in his blog post titled, “A New Theory of Generic Collaborative
Strategy: Adding Value to Porter’s Generic Competitive Strategies, Strategy
Musings, March 24, 2013 propounded an alternative but supplemental approach to
industry analysis (http://cbrao2008.blogspot.in/search?q=A+new+Theory+of+generic+collaborative+strategy).
The blog
post proposed in the generic
collaborative strategy five collaborative value drivers. These are the values
of co-integration, co-development, co-fulfillment, co-expansion,
co-diversification and co-saturation. These value drivers are achieved collaboratively
with suppliers, innovators, customers, new entrants and also all the players
within the industry. By leveraging the collaborative value drivers, a firm can
ensure competitive operations, optimized investments, innovative products and
processes, enhanced consumer choice and larger market. As opposed to
competitive strategy which seeks to increase the value of the firm on a
relative basis at the cost of related as well as competing stakeholders,
collaborative strategy drives up the value of the firm and its stakeholders
simultaneously.
The
collaborative model is essential for the Indian aviation industry to come out
of the woods. Co-integration would require development of a total air
transportation value chain involving ground handlers, caterers, airport authorities,
maintenance hangars, air travel booking agencies much as automobile industry
works with its component suppliers and logistics providers. Co-development
requires that current plans leverage current enablers and future enablers are
developed to meet future plans. Currently,
the infrastructure at the Indian airports dictates the airliners’ fleet mix and
route planning (apart from regulatory licenses); for example, the small runway
length of certain airports rules out bigger aircraft such as Airbus A 320 while
air traffic instrumentation dictates the landing hours. While airliners must
advocate with government agencies to upgrade airports in all their facets, the
airliners must also perforce work with a fleet mix that harmonizes with the
available infrastructure.
Co-fulfillment
requires that air transport must transform itself from the most economical
alternative to the most preferred experience. That cannot come from mere hot
food or cumulative mileage points. It comes from a belief that if one makes a
booking with an airliner he or she would be provided with a total travel
experience. In multi-sector travels, notably international or multi-city national,
the originating airliner, for example, can offer the best option without
insisting on total routing with only its aircraft or code-shared aircraft. The customer
experience and loyalty that develop with sacrificing airline’s short term
profits would be significant in the long term. Co-diversification would require
acquiring potential technologies that could add competitive advantage to the
operations. It could mean co-branding of debit and credit cards at one level or
diversification into pre- and post-air travel logistics and travel portals on
the other. Co-saturation would mean the ultimate collaborative strategy of
networking with all agencies, public and private and central and state
governments to completely saturate the Indian skies with network that covers
all the cities and towns.
Beyond the
firm
It is
understandable that every firm in the Indian aviation industry, be it the
hallowed but loss making national carrier Air India, the favored Jet Airways,
the avowed low cost airliner SpiceJet, the profitable IndiGo or the disruptive
startup AirAsia, is focused on advancing the respective airliner level occupancy
factors and revenue parameters. However, the industry scenario offers few real
degrees of freedom to any individual airliner. AirAsia would probably do well
to play for the long term consolidation rather than short term disruptive entry
while others would do well to look at collaborative revival than competitive
blockage of AirAsia. A massive
collaborative transformation of the entire aviation value map is called for. The
industry needs to be reinforced and pulled out of the collective dire straits through
multilateral development before the individual firms can be on a sustainable
growth path. The Governments and the private firms need to work together to
find a lasting solution through the collaborative format discussed herein.
Posted by Dr
CB Rao on June 1, 2014
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