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Regional Connectivity in India: Figuring UDAN Scheme the American Way

Founder, 335bazaar.com
Nov 24, 2017 12:50 PM 4 min read
Editorial

Regional Connectivity in India: Figuring UDAN Scheme the American WayEditor’s comment: The Government of India launched the Ude Desh ka Aam Naagrik Scheme (UDAN Scheme) in April 2017, an initiative to facilitate regional connectivity by making it affordable and accessible to the common man. As part of the second round of the scheme, the Union Minister of State for Civil Aviation Jayant Sinha recently announced the commencement of 92 new routes in the Northeast.

 

State-backed support aside, airliners which have to date driven their strategy around cherry-picking and veering away from loss-making routes would require a fresh model to make the UDAN Scheme worth their participation.

 

While India proceeds with its regional connectivity plans through schemes like UDAN, it is still early days to figure which business models will crack the space. In a sector that is both highly challenging and promising, Indian regional airline entrepreneurs would be in good stead to learn a few things from similar airline businesses in the US. Spirit Airlines and Allegiant Airlines present two distinct models that show that there are many paths to success. Here are some of the differences:

 

  • What aircraft to fly? Spirit Airlines started with a fleet of brand new A319 versus Allegiant Airlines that started with old MD-80 series with an approximate age of 24 years. Both Spirit and Allegiant have been successful despite aircraft choices on two ends of the spectrum. Shall we say success of a regional airline is aircraft type neutral?
  • What is the ideal Aircraft Utilization level?
    • Spirit looked at extremely high aircraft utilization implying higher frequency and quicker turnaround times to leverage the relatively low fuel cost and maintenance cost of its new fleet
    • Allegiant on the other hand adjusted its flight frequency regularly especially with seasonality and would only fly at full capacity since cost of plane acquisition and parking at small airports was extremely low
    • The relatively higher fuel cost and maintenance was acceptable given that fixed cost of older aircrafts was low and variable cost could be adjusted with revenue trends
    • Aircraft utilization strategy for regional airlines will determine choice of aircraft, this choice will have serious ramifications on the capital expenditure and operating expenditure of the business
  • What routes to fly?
    • The routes chosen by the two airlines were different. While Spirit was focused on high frequency flying routes, Allegiant varied the flight schedule on their routes with seasonality with a special focus on connecting smaller towns with holiday spots
    • Routes chosen to fly on will have to be carefully analyzed in terms of value delivery, this analysis will determine a significant component of the business model for Indian regional airlines
  • Who is the target customer? 
    • Spirit Airlines built its business with a greater focus on customers with specific schedule needs
    • On the other hand, Allegiant focused on casual travelers, keen on going for leisure travel from smaller airports, travelers who were purely concerned with getting the best deals
    • Indian Regional Airlines must factor in the target customer on the chosen routes to tie in with the aircraft choices made

Regional Connectivity in India: Figuring UDAN Scheme the American Way

The points above are all interlinked. One decision has an impact on all others. Hence when a business model is determined attention will have to be paid to each. Despite the different strategies for the two airlines there are common areas that ultra low cost regional carriers must focus on to succeed:

  • Homogeneity of Fleet: One key similarity when the two airline companies started was the focus on having a single type of plane to reduce staff training costs and maintenance costs
  • Ancillary product sales:
    • Both airlines have significant revenue from non-ticket sales. This has to be a feature of the regional airlines. Spirit and Allegiant charge for carry-on bags, checked in bags and even check-ins not done online
    • While this has to be catered to the Indian context, the key is allowing each customer to construct their flying experience. This allows base costs to be low and prevents one set of customers from subsidizing the other
  • Each route as a business segment: Treating each route as a different business segment is key for these airline companies. Each operating route is monitored for profitability. As soon as a route drops below profitability standards, operations are scaled down or eliminated completely

 

Considering the above differences and commonalities, regional airline entrepreneurs must pay a lot more attention on market microstructure by studying each route and realizing that every single route is an independent business. Once the core competencies of an ultra-low-cost carrier are met with business model analysis around aircraft choice, frequency, route choice and customer choice then Indian regional airlines can thrive. Not every regional airline is created equal! 

 

Originally Published in Financial Express