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.
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