Bm045 3-3-smgt tp021569 3rd question

BM045-3.5-3 TP021569

Executive Summary

The main objective of this assignment is to answer the 3rd question where by the given part A,
part B and part C which refers to the Low-Cost Carriers industry in India. The part A disccuss
about the Critical Success factors of LCCs player globally. As for such, in this assignment, I
have used WestJet and Air Asia as examples. WestJet has been using their 7 domain of
attractiveness opportunities model, sustainable advantage on corporate culture and low fare
model whilst Air Asia has been using absolute cost advantage model comparing to Ryanair.
More case studies of LCCs have also been given in the appendix of the end of assignment.

In the part B, I have discussed about the performance of LCCs in India on macro development,
costing and pricing and diversification, also employee shortage, fuel prises arise, low regional
connectivity, gaps in infrastructure, declining yields high input costs are the reasons behind
the failure of LCCs in the country.

In part C, I have suggested the strategic options available to the LCCs in India which prior to
economically viable. There are basically restructuring or turnaround strategy, competitive
ticket price against traditional full service airline, flying out of secondary airport, making the
travel distance short and enforce political advantages.

In conclude for this assignment, I have suggested for Indian LCCs to revise strategies done by
others and adopt the needed in order to remain sustainable advantage in the industry.

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Table of Contents

No Content Page Number
1 a) Critical Success Factors of LCC player globally 3-5

2 b) Performance of LCCs in India and the reasons behind the 6-9
failure of LCCs in the country
3 c) Strategic Options to make Indian LCCs operations 10-12
economically viable

4 Conclusion
5 Reference 13
6 Appendix 13

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a) Critical Success Factors of LCC player globally

Critical Success Factors of WestJet Airlines
WestJet Airlines is a Canada’s leading airline and the founders are Clive Beddoe, Tim
Morgan, Donald Bell and Mark Hill- a group of entrepreneurs who embarked with the ideas
on creating a low cost model airline following the practices of Southwest airlines. WestJet’s
journey started in the year 1996 and there are many critical success factors contributed by this
airline.

In the beginning, WestJet has adopted the business model namely “7 domains of attractive
opportunities” which helped them to search for market attractiveness. From the model, they
have found the market results of demand buyers who would consider on cheap travelling
options when they offer lower pricing for air fare to purchase. They started on targeting the
passenger who has the purpose on visiting friends and family and then business travellers in
north America and later global travellers.

Sustainable advantage would be one of their success factors which give additional corporate
culture of bringing out WestJet having the mission to provide extra ordinary environment to
fly in. Also, WestJet has value chain of connecting up and down which had made their staffs,
owners to interact directly with the customers and clients, and empowering them some
necessary authorities on exercising out for some decision making which allows enjoyable
experience. Thus, it becomes the vital role of WestJet’s ability in executing the critical
success factors.

From the interviews with WestJet’s staff, the Times business magazine had shown that there
are 3 main critical success factors of the airline- the staffs, the customers or clients, and the
logistics.

WestJet put on the message on “Employees are also the Owners” which embarks worldwide
corporate. Also, having the vision and mission- “The entire environment is conducive to
bringing out the best in people, it is the culture that creates the passion to succeed,” said Clive
Beddoe, previous CEO of WestJet Airlines in the organisation management culture believing
if employees are happy, the customers will be too, and keeping customers happy means return
on investment for the investors.

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.
Furthermore, Low Fare model is another crucial success factor for WestJet to capture and
maintain loyal customers. From the starting of the flight service, WestJet founders realised
that it is an opportunity to satisfy the need of Western Canada population for making the air
travel affordable and sufficient service. The success factors of the Low Fare model practised
by WestJet are Lower staff cost which their Pilot salaries are 75% of the industry average
where staff salaries are 95% of industry median. The employees are staying with them
because of their profit sharing model. WestJet uses 75 employees to support one of its aircraft
where, its competition Air Canada uses 180. Also, Maintenance and training costs are low for
WestJet because they are using one type of airplanes which is Boeing 737. As a result
stocking cost of parts and training employees are significantly lower than that of its
competition Air Canada. Continued by implemented direct consumer phone bookings and
electronic ticketing system. This also includes online booking, self-checking at kiosks and
online check in. Ticketing costs and distribution overhead is lower as a result of this. Last but
not least, Efficient Flight schedule and service model. They use one destination to another
destination model rather than a web and spokes model. Higher infrastructure and logistical
costs are involved with web and spokes model which accumulates people in hub cities to get
them to the spokes, which are smaller destinations. WestJet’s destination one to destination
two helps them keep the cost lower which in turns helps them keeping the price of tickets
lower for its customers.

Sources from: Muhammad Afruzur Rahman, 4 March 2009, WestJet Airlines: Critical
Success Factors – From Marketing Point of View, available from:
http://www.seriousopinion.com/westjet-airlines-critical-success-factors/

Critical Success Factors of Air Asia airline

Air Asia is the second Malaysian National Airline which gave different type of service in line
that the nation's aspirations to benefit all the citizens and worldwide travellers. The service
takes the form is no frills with low airfares flight offering, 40%-60% lower than what is
currently offered in this part of Asia. Their vision is "Now Everyone Can Fly" and their
mission is to provide 'Affordable Airfares' without any compromise to Flight Safety Standards.

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The story of emergence of AirAsia is similar to Ryanair, since both carriers underwent a
remarkable transformation from a money-losing regional operator to a profitable, low cost
airline.

Practically, Air Asia is using Absolute Cost Advantage where there is Low cost per average
seat kilometre which AirAsia focused on ensuring a competitive cost structure as its main
business strategy. It has been able to achieve a cost per average seat kilometer (ASK) of 2.5
cents, half that of Malaysia Airlines and Ryanair and a third that of EasyJet. AirAsia can lease
the B737-300s aircraft at a very competitive market rates due to the harsh global market
conditions for the second-hand aircrafts because of the September 11th event in 2001. On the
other hand, the operating cost of the company is also dropped drastically.

Also, Low distribution cost that Air Asia focus on Internet bookings and ticketless travel
allowed it to lower the distribution cost which also claim for corporate social responsibility to
the society and environment. Next is with Attractive ticket price, providing the average fare
being 40-60 % lower than its full-service competitor, Air Asia has been able to achieve strong
market stimulation in the domestic Malaysian air market (Thomas 2003). For instance, the
fare for the trip from Kuala Lumpur to Penang on Air Asia starts from 39 ringgit. Comparing
to trip by bus charge 40 ringgit and 80 ringgit by car. The effect of attractive low fare is more
travellers switching from bus to air, similar case as Ryanair in Europe.

Last but not least is with Good Management Team that brings up Air Asia value proposition
which is more sophisticated than Ryanair placing equal emphasis on brand reputation and
customer service/people management, by a senior advisor to Ais Asia’s top management team.
AirAsia pursue a Ryanair operational strategy, Southwest people strategy and an Easyjet
branding strategy.

Note: More examples of LCCs critical success factors case study refer to Appendix

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b) Performance of LCCs in India and the reasons behind the failure of LCCs in the
country

Performance of LCC in India
Globally there are macro developments taking place rapidly in LCC industry but there are
uncertainties prevailing too raising questions such as, Will the trend continue to increase
through the horizontal and vertical forms on integration? What will be the impact of
deploying capacity through ever-larger aircraft such as A380? What timeframe are carriers
looking at in their search for new collaborative structures? How are the other market players
i.e. the non-carriers likely to build their strategies? Will some carrier become powerful to
impose other players including airport authorities and ground handling agents? With these
uncertainties one can construe that the players would be anticipating one other’s moves and
devising proactive strategies.

Ability of the Carrier to benefit from economies of scale and economies of scope is another
critical factor. When the carrier operates in hub or base in the airport, it would act as a
structural entry barrier to other players and new entrants. Sales and marketing costs, customer
service facilities, and flight cancellation costs would reduce in this case. Moreover, with the
increase in the size of the base, the flexibility to switch slots, to switch crew staff from one
route to another and to adjust the connections with the fluctuation in demand would increase.
Large scale carriers would benefit from the negotiation power they have to get attractive time
slots and other services from the airport. Hence, the advantages would increase with the
increase in size of the hub or base and it would become an important factor when companies
compete for merger or alliance with an incumbent having such a base or hub. In India, Spice
Jet which had its hub in Mumbai is planning to open hub in Chennai in South and in Gujarat
to realize the importance of economies of scale and scope. Jet Airways which started its
operations in 1993 has its main hub in Mumbai with secondary hubs at Chennai, Ahmedabad,
Delhi, Bengaluru, Pune and Kolkatta.

Like costing and pricing, the competition among players invariably comes down to another
critical factor which is the available capacity. The players increase the capacity by introducing
more routes and by choosing airports that are congestion free and less of bottlenecks. These
apply to both in the air and in the ground level. Congestion incurs costs and can lead the
player to compromise its competitive advantage. The number of aircrafts and the seating

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capacity would be advantageous to the incumbent especially in busy routes where the new
entrant would be required to incur huge fixed costs. In India, Spice jet which began its service
in 2005 has firmed up its strategic expansion plan with an order of 30 Boeing 737-800 aircraft
during the month of September 2010 with the expected deliveries of these aircraft
commencing in Jan 2014 through till 2019. Indigo which began its services in 2006, has
started its preparation for international expansion. In January 2011, Indigo signed a major
procurement deal with Airbus to buy 180 A320s in one of the largest ever deals of its kind.

Diversification is identified as another critical factor while designing strategies for Airline
players. Air freight which was once considered as a separate product has now become an
exclusive product of the Airline players. In some cases the freight helps the carriers to cross
finance the lower passenger fares. Diversification has also led the airlines by providing access
to products such as hotel and/or restaurants booking and shops in the airports by forming
strategic alliances with these groups. One such examples of diversification is IndiGo Airlines
offering a diverse array of packages for its passengers: Holiday packages, business packages,
religious packages, God's Own Country, hill station trips and Goa's sun & sand.

Sources from: ARIVAZHAGAN G D, PGP BATCH OF 2012, INDIAN INSTITUTE OF
MANAGEMENT AHMEDABAD (IIM A

Failure reasons of LCCs in India

The growth in the aviation sector and capacity expansion by carriers has posed challenges to
aviation industry on several fronts. These include shortage of workers and professionals,
safety concerns, declining returns and the lack of accompanying capacity and infrastructure.
Moreover, stiff competition and rising fuel costs are also negatively impacting the industry.

First of all is the Employee shortage which it is clearly a shortage of trained and skilled
manpower in the LCCs sector as a consequence of which there is cut-throat competition for
employees and in return, is driving wages to unsustainable levels. Moreover, the industry is
unable to retain talented employees.

Secondly is the Regional connectivity: One of the biggest challenges facing the aviation
sector in India is to be able to provide regional connectivity. What is hampering the growth of
regional connectivity is the lack of airports.

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Thirdly is the Rising fuel prices. As fuel prices have climbed, the inverse Rising fuel prices
and its effect on passenger growth. The increase in the international crude oil price has forced
many domestic players in India to go ahead with a hike in their airfares since the beginning of
January 2011. Although, the percentage of increase in the fares is not very significant, it
shows the latest trend in low-cost flying. The only means for these airlines to sustain growth
and increase profits is by increasing their tariffs. Although there will be lots of criticisms from
various groups on this, such an increase in the ticket fares will not have a drastic effect on the
volume of passengers. Compared to the time taken to reach from point A to point B in India
by train or other means, the number of people who will continue to use this means of
transportation will only increase as years pass by. Indian travellers are slowly getting used to
the fast paced and comfortable travelling by air and they are ready to spend on this.
Main players in India’s domestic aviation: Kingfisher airline, Jet airways, Indigo airlines,
GoAir airlines, Jagson airlines, Spicejet Airlines, Jetlite airlines, Paramount airways,
Kingfisher Red (Air Deccan) and Indian airlines.

Other than that, the declining yields LCCs in India and other entrants together now command
a market share of around 46%. Legacy carriers are being forced to match LCC fares, during a
time of escalating costs. Increasing growth prospects have attracted & are likely to attract
more players, which will lead to more competition. All this has resulted in lower returns for
all operators in the country.

Also, the huge Gaps in infrastructure in India, Airport and air traffic control (ATC)
infrastructure is inadequate to support growth. While a start has been made to upgrade the
infrastructure, the results will be visible only after 2 - 3 years. It is also a matter of concern
that the trunk routes, at present, are not fully exploited. One of the reasons for inability to
realize the full potential of the trunk routes is the lack of genuine competition. The entry of
new players would ensure that air fares are brought to realistic levels, as it will lead to better
cost and revenue management, increased productivity and better services. This in turn would
stimulate demand and lead to growth.

Into this, any form of aviation industry work need high input costs. Apart from the above-
mentioned factors, the input costs are also high. Some of the reasons for high input costs are

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withholding tax on interest repayments on foreign currency loans for aircraft acquisition.
Increasing manpower costs due to shortage of technical personnel.

All of the mentioned are the factors of LCCs failure in India.

Sources from: Civil Aviation, 2009, available from: http://www.civilaviation.nic.in/,
Economic Times, Indian Times, 2010, available from:
http://economictimes.indiatimes.com/news/international-business/airbus-lands-record-16-bn-
indigo-airline-order/articleshow/7263627.cms, Ibef.org, Aviation Industry, 2011,
http://www.ibef.org/industry/aviation.aspx, Deccan Herald.com, 2011, Kingfisher Hikes
Airfares, http://www.deccanherald.com/content/125297/jet-kingfisher-hike-airfares-
friday.html Rediff.com, 2010, Why Indian Aviation grew by 400 pc?,
http://www.rediff.com/business/slide-show/slide-show-1-why-indian-aviation-grew-by-400-
pc/20101220.htm

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c) Strategic Options to make Indian LCCs operations economically viable

Re-structuring or Turnaround strategy
First of all, the LCCs in has to restructure their operation and management style. Best is to
have Cost Saving strategy to reduce the unwanted waste or expenses such in Reduction in
Operational Cost which LCCs in India have to strive to achieve the lowest as possible price
for their products and services. To be reminded, Low prices can’t sustain unless the company
itself maximises its operational efficiency. Meaning that is to fully use the company resources
efficiently which this can be done by having Service savings – the no frills cabin service and
extensive use of outsourcing including NO drinks, NO food, NO headphones, NO newspapers,
NO movies, NO VIP lounges, NO expensive offices, NO mileage programs, NO seat
allocation, NO children’s fares, NO paper tickets for Electronic tickets only, NO connecting
flights including all flight-legs must be booked independently. Operational savings which is
point-to-point services and uniform fleet. Overhead savings refer to internet sales and
streamlined bureaucracy that can compare the operational cost in terms of costs per available
seat kilometer (ASK), a measure of the running cost of the airline.

Competitive Ticket price against traditional full-service airline
Low cost airlines begins with two initial cost advantages arising from the very nature of their
operation: higher seating density and higher daily aircraft utilization. By removing business
class and reconfiguring their aircraft, low cost airlines can increase the number of seats on
their aircraft. Seat pitch of a low cost airline is usually 28 inches, compared to a traditional
conventional economy class pitch with 32 inches. Doganis (2001) calculates that should be
able to operate at seat cost that are only 40-50 % those of mainline rival. Combining the load
factor benefit and beneficial distribution cost, low cost airline’s cost per passenger can reduce
price by one-third of conventional airline. With this, it can also create customer loyalty
towards their price against services in a longer term.

Flying out of secondary airports
Many low-cost airlines keep expenses down by flying out of secondary airports, avoiding
major hubs where take-off and landing fees are much higher while still getting passengers
close enough to their destinations.

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Making the travel distance short
As the routes offered by low cost airlines are mainly short, domestic routes which may only
take one to two hours, travellers might be fine with no amenities on flights. Since LCCs are
travelling between the regions in India, they should make the journey shorter and faster
because they do not need to deal with a lot of other issues such as custody, custom,
immigrants and so on.

Merging or Business Alliances

With right choice of merging with strategic business alliances will help to recapitalise the
company investment as increase in modal to sustain the market share. For LCCs in India,
basically they can tie-up with Corporate by offering them benefits to ensure a longer run of
the business such corporate would always have travelling needs for their employee.

Enforce Political advantages

LCCs in India should establishe a political join venture with their government like Air Asia.
For example, Thai Air Asia with Shin Corp. Shin Corp. is owned by the family of Thailand’s
prime minister, Thaksin Shinawatra, and about 900 million baht will be invested in Thai Air
Asia over a five-year period. Shin Corp. has financial strength, synergy in information
technology and telecommunications, which support Air Asia to grow in Thailand. Air Asia
with its politically powerful backer can well grow up to bite, and therefore it should enforce
such political advantages in order to extend the growth in Thailand. Thus, LCCs in India can
presume the same established example as given by Air Asia

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Conclusion

The airline industry is a dynamic industry and every player in the field have been anticipating
one another’s moves and devising strategies accordingly. With the success of the strategies
devised by the management, Indigo, an unlisted company has been performing well and was
even conferred with Best Domestic Low Cost Carrier award in 2008. At the end of the day
how big the airline company does not matter when it comes to devising the strategy for the
airlines to remain competitive.

Every business sector has a price leader, who however, can be challenged by new comers
introducing artificial low cost to gain market share. This practice is not sustainable over the
long run. WestJet’s critics were critical about this factor when they first started their journey.
The truly successful businesses are those who have internal and superior low cost practice and
strategy in place. West Jet seems to do just that to save money at the end for its customers.

From all of these, the LCCs in India should learn from the business strategy posted by each
and every other LCCs in Asia and the World to keep their company sustainable in the aviation
market.

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References
Arivazhagan G D, PGP Batch of 2012, Indian Institue of Management Ahmedabad IIMA
Civil Aviation, 2009, available from: http://www.civilaviation.nic.in/,

Deccan Herald.com, 2011, Kingfisher Hikes Airfares,
http://www.deccanherald.com/content/125297/jet-kingfisher-hike-airfares-friday.htm,

Economic Times, Indian Times, 2010, available from:
http://economictimes.indiatimes.com/news/international-business/airbus-lands-record-16-bn-
indigo-airline-order/articleshow/7263627.cms,

Ibef.org, Aviation Industry, 2011, http://www.ibef.org/industry/aviation.aspx,

Rediff.com, 2010, Why Indian Aviation grew by 400 pc?,
http://www.rediff.com/business/slide-show/slide-show-1-why-indian-aviation-grew-by-400-
pc/20101220.htm

Appendix

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Bm045 3-3-smgt tp021569 3rd question

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