Rescuing airlines from the trap of cost world


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This document describes the current undesirable situation of airline companies in India and gives a direction to rescue themselves.

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Rescuing airlines from the trap of cost world

  1. 1. Rescuing Airlines from the Trap of Cost World Tracking and Demystifying Inefficiencies within Airline IndustryFirst DraftNeeds EditingWith this article we start tracking Airline Industry, with a special emphasis on BusinessModel Innovation and Operation Excellence.Key words: Indian Aviation Industry, Airlines, India, Air India, Jet Airways, KingfisherAirlines, Spice Jet, Indigo, C. K. Prahlad, Bottom of the Pyramid, BOP, Ramadorai,Mohandas Pai, TCS Story, Economic Times, Business Model, Business ModelInnovation, Operations, Alfred Angula, Tata Steel, Airline Industry, Managing Aricrafts,Operating Airline Business, Gartner, Hype Cycle, Easy jet, Ryan air, South West Airlines________________________________________________________________________7th Nov 2011“Airlines in India are in turmoil”, this has been now the headlines for over a couple ofyears now.The argument goes like this:<start> Indian aviation market is one of world’s most expensive one, due to high levieson fuel, (appx 24%) and airport charges, (while the base oil price itself has surged 40%during past year), adverse impact of depreciating Rupees (more than 10% this year, whilemore than 1/3rd of operating cost is dollar dependent). Further, the Indian sky has openedwider, leading to cutthroat competition. And finally, the threat of another slowdown islooming large. And ……. To come out of this situation, Indian aviation industry believesthat it now needs huge FDI. <end>Given this situation, airlines are cutting cost by, timely payments to Oil companies ( 10-15% discount), efficient flying (saving 2%, taxing with one engine, flying short routeflights at low altitudes, better cleaning to reduce friction etc.) and re-negotiating Foodcontracts(saving 0.5%).The industry as a whole feels that, it can not do much about fuel price, depreciatingrupees, artificial low ticket prices. They know that they can bring the cost in other areas.And so, they are squeezing every penny, laying-off staff, outsource internal work andadopting automation.After using all the tricks in the book to cut the cost, it is now waiting for Policy clearanceon foreign investment. Wrong prescription for a classical management problem.Yes, this is a pretty classical state of industry description. 1Copyrights ©2011, CVMark Consulting, All rights reserved.
  2. 2. Consider this, India is one of the fastest growing aviation market (growing at 20% YOY).And look at Rahul’s blog ( , on Indian aviationindustry, to know how poorly Indian aviation industry is being managed… Kingfisherhasn’t seen black since 2005. Market leader Jet Airways hasn’t sniffed profits since 2007-08.The less said about AirIndia, the better it is. Mohandas Pai’s lamentation in the EconomicTimes (today) on the state of affairs at the national carrier is not without reason.But despite all odds Spicejet and Indigo have shown quick turnaround and healthyprospects.The question is, why big airlines are going burst despite significant growth in thepassengers. Their finger pointing on external issues does not seem justified, and least toone who has spent time in ‘Operations.’Lets see more things:Gartner brings out yearly status (or maturity) of different technologies, called hype cycle,that help technology creating and adopting organizations to build strategies on when theywant to enter the market. Some of the organizations (read start-ups), play early in thehype cycle, where they build on the initial market euphoria and high valuation, with anintention to quit when the hype peaks. These hypes are created by media, subject matterexperts, entrepreneurs, investors and consumers by outlandish projection of benefits ofeach technology, as the all time best opportunities. And as we know not several of theseearly stage companies last longer, despite which a large number of entrepreneurs are ableto cash out rich.Characteristics in Service sectors in any growing economy, like India, follows a similarpattern. Whether it is telecom, retail, power, renewables, infrastructure or for that matteraviation industry. Not for nothing, the sustained high single digit growth of India, led tosetting high expectations and sequential projections, that led to high aspirations ofentrepreneurs and businesses (also government). Organizations, therefore, took longrange shots, but committed and elevated their capacities too early, in the hope that thegrowth will be unidirectional. Every airline tried to book and hoard as many aeroplanesas possible (even created artificial production constraints for aeroplane suppliers), theyrecruited and created bench for as many pilots as possible and over built ground andoffice resources as much as possible. While they were doing this, they built their booksfatter and claimed higher valuation. They amassed massive debts and operating cost,much before the demand actually took place. And since the market does not remain asyou think initially, organizations were locked in the debt trap of their investments. Astroubles kicked in, they further lost focus of good business, as their attention wasdiverted towards protecting and justifying investment than on increasing revenues.The way they built their organization was on building infrastructure and capacity, tooearly. They followed the philosophy of ‘more from more’, which is a trading mentality 2Copyrights ©2011, CVMark Consulting, All rights reserved.
  3. 3. (and of speculation). Managers after managers brought in new capacity enhancementplans, new routes, new buying agreements, expensive media expenses, hiring of costlypilots, all went year after year. The top management got their bonuses and hefty hikes;and airlines started protecting their investment while the productivity continued toplummet. And, they waited till the slowdown and global phenomenon to strike, to find aguinea pig. And now they say that there is a policy constraint.Thus a majority of these players was to cash on the early hype and build valuation, (andpossibly, exit before the hype peaked). But it did not happen so. Actually, it happensrarely so.You can bet that there is no single individual in Airlines Industry, who ever thought thatFuel prices would not rise the way they did last year, dollar would not fluctuate the way ithas, competition would not kick start the price war, India is not price sensitive etc. Everybody knew it, but were blinded by their forecast and the way people act in a growtheconomy. Which means that these risks were considered in the strategic plan itself. Sowhy are they crying foul, now. Of course, now there is a big deal of when an airlineopens up a new growth story.The real growth of an organization as we know is, increase in revenue productivity. Thus,Organizations went all wrong. They never considered productivity as a parameter,whether productivity of money or people.Having built the fat, now they cut the fat. In a rush they signed all sorts of contracts andnow they are spending enormous attention of management on re-negotiation, even onsupplies that could be less than 0.1% of their cost. And people who cut the fat or costfastest, get the reward and career growth.The fundamentals remain the same. A business has to sustain and flourish on its own. Itsbusiness model must be innovatively built and operated excellently. Every organization,need to have a decisive edge for the space it wants to operate. If there are n number ofcompanies, then there has to be n different business models and n differentiators. No twocompanies can be operate the same way in same space for long time. Today, you havemore than two companies with identical business model.There is no bigger necessary condition for businesses than to increase their revenues, andthese revenues must increase faster than the increase in cost, while other things remainthe same. Plenty of examples are available in airlines and other industries about thenative innovations in business model. Indian airline industry so far rode on the growthcurve of general economic buoyancy, can not do justice to its aspirations if it does notinnovate itself. As of now we do not see any major innovation, than just replication ofEasy jet, Ryan air and South West airlines business model.Since changes will happen externally as well internally, with notice or without notice,things have to change by design, quickly within the organizations to make it nimbleenough to deal with change. Of course, the ability to respond faster to change is dictated 3Copyrights ©2011, CVMark Consulting, All rights reserved.
  4. 4. by how flexible and responsive is your ‘operations’. Cost cutting will make one onlyslim; but approaches of lean, six sigma and execution excellence could create long termcompetitive edge and hedge against changes in market place and prove viability of airlinebusiness.Why do I say that airlines in India are merely copy pasting external model; because theylack the behaviour and heart while implementing those models. Take for example, youwould see that in the name of low fare, the airline staff is almost as fickle (sometimerude) as it can be, without realising that it is still a part of hospitality sector. Often, theytreat low fare or no frill passenger worse than your city bus conductor and driver do.They are yet to understand, what it means to offer desirable service at low cost. Even forthe bottom of the pyramid, C K Prahlad warned that it is never low cost but lower cost atthe same quality. It is true sometime that you can migrate bus and train passenger to takeflights, but if you do not give the right experience, you would lose your business not toolate. The fact remains that not only low fair airlines have misread the template of theirbusiness models but full service ones that run low frills and full service, you see thedifference in attitude and quality of service. Every body knows that sheer focus on cost isonly going to break the service quality.Just look at, how well have airlines segmented their customers, not just by their payingcapacity but by intrinsic need of passengers. Luxury clients definitely want to have theirexclusivity, and therefore, mixing both class of passenger takes away the value an airlineprovides for luxury loving clients. The erstwhile full service airlines are trying to make a‘difficult’ balance between the cosy comforts of full service model and low frill model.But the mistake they are making is often an ugly compromise for both the model. As weknow, a compromise is not a sustainable solution, for it places your staff as well as thepassengers into great conflicts on regular basis. What is needed is separation of the twomodel with a win for both class of clients, since the airlines are not yet matured to findsynergy between the two types of operations.What spice jet and indigo have done is precisely being focused on a particular segment ofclients and allow themselves to grow naturally. They are trying to promise what they candeliver, and not more. So passengers have the right expectations. They are creating adifference on the level of satisfaction based on their promise, that is only increasing withtime with their competitors. Now as they move ahead, they are going to create loyalclients who got used to their commitment. And it is just the time that they are going toadd other benefits to their clients. Contrary to the general operation philosophy of hugeeconomy of scale is not a necessarily a key reason condition for their early stage superiorperformance, they have modeled their business and executed the model in such a focusedway that they are able to create a unique experience to passengers with just enough scale.And as it is, the market is big enough not just for existing airlines, but for a few more.Big boys, Jet, KF and Air India, all thought that by having best of both world, they wouldderive huge scale of operations, and ran after market share; but they failed royally intrying to grab market share and made ugly compromises. This has nothing to say thatbigboys’ business is not profitable, it only means that they have got their model mixed up 4Copyrights ©2011, CVMark Consulting, All rights reserved.
  5. 5. and wrong, with what ever objective they built it, it is not built to transform with thechanges in airline as well as external industry. Also the lessons they need to learn is thatwhen the opportunity is aplenty, instead of committing to fulfil all needs of the market, itis important to fulfil at least one significant need of the clients like no other player canand would, and thereby create a differentiator. Today, low cost airlines have created atleast one such significant need of the clients by an order of margin compared to fullservice players.Now as airline industry looks forward, the investment policy for investment of foreignairlines would come in when it would come in, but that should not be the reason for theexisting airlines to improve their business model. By waiting for the policy to come andthen act, will be too late. Nothing prevents them from getting operationally prepared,when the policy comes and have a head start. As of now, not many are really thinkingabout the head start, they are looking at a valuation game a la telecom, power andinfrastructure sector.The release of TCS Story and beyond by its CEO, Ramadorai, is timely in this respect,and airline industry as a whole has a lot to learn from it. It tells why not to blame externalparameters that could be as strong as license restrictions or policy inadequacy. TCS is astory of dreaming to fulfil a necessity to bring India on global road map, about enteringintellectual business, and making is happen, irrespective of odds. It just happened thatafter a decade of its entry , opportunities followed a plenty. You would also understandfrom the book, why TCS is a class apart and why TATA is a brand that it is, because itsbusiness is not born to exploit an opportunity, but fulfil a need, meet a necessity andsolve a problem. TCS has its own business model and its own DNA.Let’s see how things unfold, even when more passengers are taking flights. It will beworth watching how organizations battle it out, and if they make business modelinnovation and operation excellence, central to their business. The least they shouldblame is unfair low pricing by competitors or policy bottlenecks for investment. The guywho created disruption in pricing, has already encashed his investment and in anyindustry, there can not be too many Captain Gopinath; it is time to operate the systemmore efficiently and effectively, that is where the buck lies. There is no other way, “Takeit or leave it”, as my friend Alfred Angula, the mass leader from Namibia says.There are a plenty of ways to improve operations of airlines. But do you have pearl ofideas that seamlessly weave into a business model that can make a successful and uniqueairline business. And most importantly, it should not only be built to perform profitablytoday, it must also sustain its superlative performance in future as well.If you look at the performance of Spicejet during the past two years (this year Q1 was ablip), you would get some idea, but I am still not convinced about the future as they ‘buy’more aircrafts and a large number of aircraft will cause them to get into highermaintenance cost as well as downtime (read B, C and D checks.) and if they are aware ofinnovating their model. Their last years annual report says that their performance wasmainly due to high load factor. And you can very easily understand that load factor is 5Copyrights ©2011, CVMark Consulting, All rights reserved.
  6. 6. nothing but the utilization, which is a prime operational metric. Spicejet is what it istoday, primarily because of operational excellence and the way they opened up theirbusiness model ‘one step at a time’. For them cost reduction is not the driver, rather costeffectiveness is inbuilt in the design itself (a la TataSteel). So they do not take knee jerkreaction to worsening situations around.There are three layers the way you drive your revenues ( and Spicejet is not too far inworking on them). First Flight Plan- the sector-wise distribution of flights, which comesin the domain of flight planning. Second- Aircraft availability, which is how fast aircraftis turned around in B, C and D check (as of now, because of leased airlines, Spicejet isnot facing the burden of D-check on its availability), this is in the domain of operationengineering and maintenance department (MRO). Third –Utilization, which is the loadfactor, i.e. revenue per available seat kilometre. It is not just these 3 parameters thatSpicejet has excelled and is ahead of others, the important point is that, Spicejet did notblindly copy paste any body’s business model. Rather it leveraged advantages of theirbeing new organization and avoided all the disadvantages of the incumbents, which is aninherent characteristics of a successful Startup company. They are just 6 yrs old, and stillseem to have the agility in their business model to meet external challenge.The fundamental that organizations somehow miss is that investment in business is doneto create value and generate revenue. Without creating enough value with the alreadyinvested money, trying to seek more investment is not the way to meet the demand. Lookat the operational parameters of full service airlines and look at their operatingparameters, they actually have not done justice to their investment. So their call for moreinvestment does not hold water. Keep it simple, organizations are not able to operate aspromised. They must first operate the existing business more effectively and efficiently,before they ask for more money and changes in policies. And Rahul is pretty much right incomplaining on behalf of stakeholders, for the enormous loss these organizations havecaused.So do you see any good movement in the thinking process of other airlines. Let me knowif you got any idea, on how Indian airliners need to move ahead. Or wait for a completebusiness model, when it comes out here.Clet:32-11 6Copyrights ©2011, CVMark Consulting, All rights reserved.
  7. 7. ___________________________________________________________________CVMark handholds business leaders in creating organizations that are built to transform.For developing, innovating and executing your business model, call Tel: +91 94480 70081 or Email details to : .CVMark Consulting, #2304, Nandi Park, Gottegere, Bannergatta Road, Bangalore 560083, INDIA Web: 7Copyrights ©2011, CVMark Consulting, All rights reserved.