Strategy & Competition
India's Jet Setters Now Prefer Coach
As soon as Jet—which controls a quarter of the market—started canceling flights, competitors doubled or even quadrupled fares. "We raked it in," gloats the chief operating officer of a rival, who asked not to be named because India's government frowned on the move. "All the industry needs is for one major airline to go out of business, and the rest of us will be fine."
That would be bitter medicine for a sector that has seen passenger traffic nearly double every two years this decade. They wooed economy fliers with tickets at throwaway prices and wowed business-class travelers with lavish meals, plush lounges, and helicopter rides from airports. "These airlines, they treat you like a king," says Jagdish Chattra, a 52-year-old hotel owner from Dallas. He spent $130 to fly business from Delhi to Mumbai on Kingfisher Airlines, India's largest private carrier. A valet toted his bags, his lunch included spinach-and-brie soup and salmon, and a flight attendant polished his eyeglasses before landing.
You don't need clean spectacles to see the red ink when earnings season comes along. All told, India's carriers have fewer planes than American Airlines (AMR). Yet they lost $2 billion in the fiscal year ended March, a fifth of the global total for the industry. Jet Airways had operating losses of $268 million, and Air India, the aging and stodgy state-run carrier, lost more than $1 billion.
The biggest problem is overcapacity. As the economy surged, carriers added planes and destinations in a frantic race for market share. They hoped to hook Indians on air travel and leave profit worries until later. Low-cost carrier IndiGo ordered 100 Airbus A320s, with a total list price of $6 billion. Kingfisher queued up for five double-decker Airbus A380s at $350 million each.
As it turns out, Indians did get addicted to air travel, but only when it's cheap. Airlines flew 8.5% fewer passengers in the first half of 2009 vs. the same period last year as carriers raised prices and customers opted for state-run Indian Railways. A 16-hour train ride from Delhi to Mumbai in an air-conditioned coach can cost as little as $15. "If I can fly for $30 or so, fine," says Agneesh Yadav, a 27-year-old accountant in Delhi. "Otherwise, I take a train and enjoy the scenery."
As the airlines play a game of chicken—no one wants to trim capacity or raise prices if rivals don't—airplane makers are suffering. Jet Airways has cut available seats on major routes as much as 30%, deferring deliveries of two Boeing 777s and five 737s. Air India is in talks to cancel a half-dozen 777s. And Kingfisher has cancelled a $1 billion order for Airbus A340s and deferred deliveries of the A380s and 32 smaller planes.
The posh offerings are also on their way out as airlines take out business-class seats and pack in economy passengers. Jet Airways, for instance, has moved 70% of its traffic to its low-cost arm, called Jet Konnect, by converting some two dozen planes. Ultimately, such moves will mean a smaller industry, at least in revenue. Flying may not be glamorous or include salmon lunches and eyeglass-polishing, but it might just be profitable.