India's jet challenger

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Even its most ardent supporters would have to concede that India's airline deregulation has been less than successful. Of the wave of airlines which emerged in the early 1990s to challenge the Indian Airlines domestic monopoly, only a handful are still flying. Their cause has not been helped by a series of embarrassing and well-publicised aircraft repossessions in the sector, or by the continuing political uncertainties over India's changing aviation policy.

If there are still hopes that domestic competition will flourish in the country, then they largely rest with Jet Airways, which has rapidly emerged as the only serious rival to state-owned Indian Airlines across much of its network. In particular, the start-up carrier is competing fiercely for the country's business travellers, a fact which has already resulted in a widely acknowledged improvement in service standards across both carriers.

The airline was the brainchild of chairman Naresh Goyal. He was already running a successful travel business called Jetair, and five years ago he saw the opportunity to take advantage of the 1992 deregulation with the launch of a new airline. With the backing of partners Gulf Air and Kuwait Airlines, which each hold 20%, Jet Airways took to the air in May 1993 from its base in Mumbai (the new name for Bombay).

 

Fleet growth continues

Five years later, the airline has built up a young fleet of 12 Boeing 737s, with another two due by August. A further four are scheduled to arrive on lease later this year and early in 1998, bringing the tally to 18 aircraft by March 1998. Firm orders have also been placed for eight of Boeing's new-generation 737-800s (which will be a mixture of acquisitions and leases), bringing the fleet up to 26 by 2002. In the rapidly developing Indian aviation market, that is just about as far ahead as it is wise to plan, says Saroj Datta, Jet Airways executive director and a founding member of the management team. He adds that the airline has been careful to retain some "flexibility" in its fleet plans, with the ability to cut back numbers if the winds of change begin to blow against the private-airline sector.

So far, Jet Airways' growth has been impressive, now with 83 daily flights to 23 destinations. Most services are on the main trunk routes from the Mumbai hub, but smaller hubbing operations are being established at the Indian capital Delhi and at Calcutta, with Chennai (formerly Madras) due to be added in August.

With the new aircraft, the carrier plans to carry on its expansion with the opening of another seven or eight routes, but Datta says that increasing frequencies remains a priority.

The success also shows through in a growing market share. In the latest financial year, to the end of March 1997, Jet Airways' passenger numbers rose by 50% to reach 2.4 million. The growth is even more impressive given that the overall Indian market edged down to around 12.4 million passengers. On these figures, Jet Airways has a share of close to 20% of domestic passengers, second only to Indian Airlines, which still controls over half of the market and has been making a strong fight-back. Other competition has visibly thinned with a string of failures under the stress of high fuel bills, rising lease rates and low fares.

In the initial wave of deregulation, around 25 hopefuls had rushed to start up new airlines, including four Boeing 737 operators. Then the casualties began as Damania Airways sank underneath its debt burden, swiftly followed by UB Air, Raj Air and East West.

Perhaps the biggest blow came in 1996 when Lufthansa ran out of patience with its partner Modiluft and demanded the return of its three 737-200s, citing non-payment of leases. The German airline is still fighting for the return of the aircraft through the Mumbai High Court, with a final ruling due in August. Few observers within India believe that Modiluft, now without any aircraft, will make it back into the air.

Of the remaining start-ups, only two other significant passenger carriers remain: Sahara Indian Airlines, with a fleet of three 737s, and the now merged Skyline NEPC, which is in the process of trying to pull together its Fokker F27 and Boeing 737 fleets into a coherent operation. "I wouldn't be surprised if we end up with only a couple of private carriers," says Datta.

He adds that Jet Airways started with important advantages over its now-struggling rivals, not least Goyal's sound commercial knowledge of the travel business. His Jetair agency provided an established network of sales offices throughout India and links with foreign airlines.

Even before operations started, Jet Airways secured participation on the major computer reservation systems and joined the International Air Transport Association's clearing- house system. General-sales agencies have been appointed worldwide and interline agreements signed with more than 95 foreign airlines, giving the carrier a reach which it could not otherwise have achieved. As a result, nearly one-quarter of the airline's traffic comes on to the network from outside India, giving important foreign-exchange business.

In November, Jet Airways went further with a deal to link into the British Airways frequent- flyer programme and in January extended its existing links with KLM, including a through check-in service. "This is just the first step," says Datta, adding that connecting flights from the Mumbai hub are being looked at if the numbers make commercial sense.

Shareholding partners Gulf and Kuwait also brought technical and commercial support to the new start-up. "From the start, Goyal selected people who were experienced airline professionals, which gave him a lot of strength in getting the basics of the airline right," says Datta, himself an Indian Airlines veteran.

Perhaps because of this experience, Jet Airways also broke with "conventional wisdom" in its fleet choice, deciding against the 737-200, long established as the ageing workhorse of the Indian domestic fleet. Instead, the airline stuck to the 737-300/400/500 family. "The lower maintenance costs and higher reliability more than make up for higher lease costs," says Datta. He adds that the young fleet gave a "tremendous marketing advantage".

High service levels were a key part of Jet Airways' strategy of wooing Indian businessmen, who Datta says make up perhaps two-thirds of the Indian air market. Jet Airways duly offered separate business-class seating and lounges, as well as an impressive level of in-flight catering throughout the cabin, and regular frequencies. The result has been a string of "best airline" awards and a loyal following among flyers. Indian Airlines has rapidly followed suit, increasing frequencies and brushing up its own service levels. Datta believes that competition within India will increasingly be fought out on service rather than price.

There is little problem with demand, as anyone who has travelled through the country's overburdened airports will have discovered. Jet Airways itself is still averaging load factors of above 75%, and has been close to 80%.

 

India's market demand

Not only does India have a staggeringly large population of 950 million, but even on a conservative estimate, 15% of that total is made up of a burgeoning middle class. That equates to at least 140 million potential travellers and rising. Jet Airways is forecasting that annual traffic growth could run at 10% or more over the next five years, taking the Indian passenger numbers up to 20 million early in the next century - still only the tip of the market.

The problem has been in providing a supply of seats at the sort of fare levels which India demands. Datta estimates that India's passenger yields are one-third of the world average and only one-fifth of those in Europe. Yet up to 40% of costs, in particular lease payments and fuel, are paid at international rates. The result is that break-even load factors are at 69%. In short, there is little room for price wars if the airline industry is to stay solvent.

Jet Airways' own profit margins are in single figures despite soaring sales, which reached around $200 million in 1996/7 and are expected to grow to $320 million in the current financial year. The airline is also painfully aware that its fortunes could be radically changed by the political decisions being taken in Delhi. The new policy proposals unveiled by aviation minister CM Ibrahim, seemingly leaning back in favour of Indian Airlines, are already causing some anxiety and not a little confusion among the country's private airlines (Flight International, 26 February-4 March).

In a reversal of previous policy, Ibrahim has ruled against investments by foreign airlines in Indian carriers. Jet Airways has been given until October to extricate itself from the shareholdings of Gulf and Kuwait, a process which the airline has reluctantly begun planning.

The proposal would equally seem to end chances of India's Tata group from going ahead with its joint venture with Singapore Airlines, so removing a potential competitor.

The new rules would also put limits on airline growth, including proposals to prevent a carrier from grabbing more than 20% of new traffic in any one year - a limit which Jet Airways could be in danger of nearing.

More worrying is the talk of imposing a withholding tax, which would affect future aircraft leases. That could mean double taxation at both the Indian and foreign ends of a transaction, raising tax rates up to 50%. "That sort of tax level is going to kill us," says Datta, adding that there is fierce lobbying taking place in Delhi. The tax threat comes at a time when airlines are already having to contemplate fare increases to recoup a mooted 10-15% increase in fuel prices.

Datta admits that the future remains impossible to predict with any certainty, but in the meantime Jet Airways plans to make the most of its free run as India's leading private carrier. "We have a breathing space now until any other new airline comes along," he says.