Competition has happened because of our own success,” is the emphatic statement of Captain Gopinath, Managing Director, Air Deccan, India’s first low-cost airlines. A unit of Deccan Aviation Private Limited, Air Deccan is a fast growing carrier. The Bangalore-based airline since inception in 2003 operates in the domestic network linked to cities such as Hubli, Belgaum, Hyderabad, Tirupati, Chennai, Dehradun, Jaipur, Goa, Vijayawada, Mangalore and Amritsar…from Bangalore, Chennai, Mumbai and New Delhi.

The business model of low-cost airlines has been tailored to target the large Indian middle-class. This burgeoning section of the economy will ensure the sustenance of this low-cost model even though many players are entering this section. India’s middle class, already bigger than the population of the United States, is expected to grow to 445 million by 2006.

Moreover, the age profile of the population is likely to sustain consumer spending. The more the percentage of young people in a population the more it increases the ‘spending lifetime’ of a country. More than 45 percent of Indians are under the age of 20. More the people below 20, more they are likely to transition faster into the working community and start spending.

Since a considerable part of the population is young then the ‘spend worthiness’ of the population will increase which will benefit, say, airlines like Air Deccan. The National Council for Applied Economic Research in Delhi estimates the “consuming class”, or those with an annual income of Rs. 45,000-215,000 will constitute 75 million households by 2006.

Now low-cost air carrier fares are similar to AC train fares, hence customers can be lured to travel by flight. Statistics are favorable —800,000 passengers travel in I and II class AC train compartments daily in India. Since the budget airline fares are similar to the AC train fares, the potential to tap this segment is huge especially considering that only 40,000 aircraft seats are up for grabs daily.

Consider this: The Indian aviation industry has to go a long way considering that all Indian airports together handle only 16 million passengers whereas Singapore airport alone handles 32 million passengers! In a country whose population is greater than one billion only less than one percent is flying in spite of India being the fourth largest economy on the planet. Hence there is room for more players in the low-cost airline segment. If the middle class flies three to four times a year a billion seats are required and for a billion seats 40-50,000 flights (considering an average of 55 seats in an ATR aircraft) are required per day! Today only 600 flights operate in India. Now seeing these statistics many players like Airone Feeder Airline, Crescent Air, SpiceJet, Go Air, Magic Air and Air India Express have emerged in this segment.

There are others who have made their intentions clear like Yamuna Airlines, Visa, Inter Globe, Paramount, Indus Air, Skylark and Alliance Air. There may be ten new budget airlines in the next two years.

Gopinath believed that this middle-class could fly rather than chug on trains and he modeled Air Deccan after Southwest Airlines. Flying is done using the bare minimum with passengers flown from A to B in time. “We are not embarrassed about being low cost and being an economy model,” states Gopinath. The success of this low-cost business model has broken new ground in airline functioning and marketing.

The ticketing at Air Deccan is through the Internet, which shaves off 20 percent (nearly Rs.150 per ticket) of the distribution costs compared to the competition. It is absolutely a no frills airline where everything including water being charged. Local call charges are applicable for over-the-phone enquiries. According to Gopinath, “The principle of low-cost airlines is ‘You pay for what you use’.”

It would have been interesting to get Kingfisher Airline's viewpoint on this model but they refused to comment at this point.
Revenue is generated through every possible source like advertising in the website of the airline company and in-flight advertising and shopping. Fixed costs are optimized with increased frequency of flights. Gopinath says, “Our business model is totally different from our competitors. This is underlined by the fact that 30-40 percent of our flyers are first time flyers.” Costs of on the ground functioning are also to the bare minimum with the proliferation of small offices instead of swanky brick and mortar locations. Multi-tasking is also done to reduce costs. “When the planes are full I decrease the fares and increase the number of flights and aircrafts!” reveals Gopinath.

With the success of this business model Air Deccan has launched the one-rupee air ticket to keep the planes full. In every flight three or four seats are earmarked as one rupee to be booked in advance through out the year. The hype in the media due to such innovative marketing is nothing compared to the business generated in this manner. The scenario looks nothing but the better with 17.7 million passengers carried in 2004 by domestic carriers in India a rise of 24 percent more than the previous year.

For people without credit cards Air Deccan has established collection points for cash payments at leading tour operator’s offices. Travelers can also pick up tickets at selected gas stations, which are wired to the Internet. Thus innovation is a must for sales.100 percent of Air Deccan sales are through the Internet. There are 24-hour call centers and a ticket can be bought any time on the phone.

Commenting on the flaws of the business model of Air Deccan Gopinath says, “We have to improve our on-time performance being a new airline. These are basically teething problems where due to the limited aircraft we possess, a flight cancellation can’t be rectified immediately. This has caused quite a number of re-funding of tickets. Inventory management is also a sore area. More number of engineers and better systems are required.”

Cost cutting is not easy. It has to come from all levels like the pilot using the best technology available, proper utilization of fuel, application of proper braking of wheels and the baggage handler not losing bags. Other means are reducing distribution costs and having low staff ratio. It is not a one-day affair but rather a sustained effort by all involved in the service of the flight. There has to be a conscious effort to tailor all the processes to scale down costs. Smaller airline companies can easily mould to this through developing innovative culture across the organization.

“Quick, clean and affordable—we are the Udipi Hotel of the airline industry,” summarizes Gopinath proudly.