Thursday, January 28, 2016

The Low Cost Carrier advantage in India

The concept of low cost airlines came to India with Air Deccan founded by Captain G.R. Gopinath. It was an instant success since back then only 4% of India used flights. The ticket prices of full service airlines at that time was very high. Air Deccan provided people an opportunity to take flights at ticket prices that were lower than train's first class fares. 

Most flyers in Air Deccan back then were first time flyers. At that time the oil prices were much below $30 per barrel. Looking at the success of Air Deccan many other low cost carriers started their operations like Kingfisher Airlines, Spicejet, Go Air, Indigo etc. 

But things stopped going smoothly as earlier, the oil prices kept rising, forcing the airlines to increase fares. The airlines had to hire new people as well, trained people, ready to work for an airline were not available easily. So they had to dish out high salaries. This combination of factors increased the operational costs of the low cost airlines and many of them made losses. 

Air Deccan's model was too fragile and it was acquired by Kingfisher. Kingfisher airlines business model in face of high oil prices resulted in very high losses and ultimately it shut down. The ones that survived were SpiceJet, Go Air and Indigo. 

After many years of very high oil prices, the prices started coming down in the last 18 months and now the price of crude is as low as $28 per barrel. The airlines that managed to survive the days of high oil prices now have the advantage. All of them are making profits. Even a laggard like Air India is making profits.

It is likely that the price of oil may come down in the near future. Also researchers are working on technologies to make oil from coal and water in an economical way. Efforts have been made to generate fuel out of carbon dioxide and water. A German company has made diesel out of water and oxygen. So it is very likely that in the near and distant future aviation turbine fuel would be cheaper, enabling cheaper and more affordable flights. 

So one can safely say that the future of airlines  in India is very very bright. We will see many more people using airlines in the future and the very high number of planes would be purchased from India. So Boeing and Airbus must focus on making planes that cost less and consume less fuel. 

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