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Abu Dhabi, UAEThursday 15 November 2018

Vistara counting on Indian air passengers to choose service over savings

Carrier backed by Tata and Singapore Airlines pins hopes on superior quality to encourage flyers to pay more for their tickets

A Vistara plane at Chhatrapati Shivaji International airport in Mumbai. The carrier hopes Indians will pay more for better services. Reuters
A Vistara plane at Chhatrapati Shivaji International airport in Mumbai. The carrier hopes Indians will pay more for better services. Reuters

In the highly price-sensitive Indian aviation market, Vistara, a full-service carrier backed by local conglomerate Tata Sons and Singapore Airlines, is betting it can convince passengers to buy higher fares in return for superior service.

Alhough all airlines in India are feeling the pinch - with debt-laden Air India and Jet Airways in such a parlous financial state they have been struggling to pay staff salaries on time - Vistara says its upmarket strategy is starting to bear some fruit.

The carrier has narrowed its losses and seen average fares rise this year as customers take to its product offering, including a domestic premium economy class, even though ticket prices at most rivals are falling, Vistara CEO Leslie Thng said at the carrier's headquarters.

"We have seen a steady improvement in terms of demand, in terms of load factor as well as in terms of the fare passengers are willing to pay," Mr Thng, a Singapore Airlines veteran who previously ran its South East Asian regional arm, Silkair, told Bloomberg.

India's domestic airline market, the world's fastest growing at 20 per cent a year, represents an enticing long-term opportunity for Tata and Singapore Airlines. But in the shorter term it has turned into a financial sinkhole - high oil prices and a weaker currency are not being recouped in fare prices, driving carriers into the red.

"That is a paradox," Association of Asia Pacific Airlines director general Andrew Herdman said of India. "It has a lot of exciting potential but from a business point of view, very challenging."

In September, the International Air Trasport Association (Iata) said in a report that from 2010 to 2017 the number of people who travelled to/from/or within India doubled from 79 million to 158 million. That number is expected to treble to 520 million by 2037.

Fundamentals supporting Indian market growth are strong, Iata said. By 2036 India’s population is expected to reach 1.6 billion and average incomes are expected to rise to almost $5,000 per capita (a five-fold increase on 2006). With that, the number of “middle class” households should reach 20 per cent by 2036 (up from 2 per cent in 2006).

"Domestic markets will continue to drive industry growth. Of the 359 million additional passengers expected to fly in 2036, 228 million will be on domestic routes and 131 million will be connecting internationally," Iata said.

By 2026 India is expected to be the third largest air transport market in the world (up from its current 7th place ranking), the report said.

“Meeting the significant growth potential of Indian aviation will also create challenges – for the airlines, its industry partners and policymakers, said Brian Pearce, Iata’s chief economist. "For example, this will require the right type of infrastructure at the right time and in the right place.

"Equally, the broader business and policy environment should not place hurdles which inhibit growth and reduce the level of benefits that aviation can deliver to the nation. The industry, its supply chain partners and the government and policymakers have a clear mandate to work in collaboration towards the common goal of ensuring that aviation’s economic and social benefits are fulfilled," Mr Pearce said.

In addition, Iata said the number of airport pairs in operation within India has risen by more than 50 per cent since 2015 – as well as increases in the average frequency of flights on each route.

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On the rise

Vistara, which started flying in 2015 and now has 22 Airbus A320 narrowbody jets and a 4 per cent domestic market share, has struggled financially as it scales up.

It narrowed its losses to $58.9 million in the financial year ended March 31 from $70.9m a year earlier, according to accounts filed with the corporate regulator this month, but it faces tougher market conditions this year, with consulting firm Capa India estimating it could lose $150m to $200m.

"It was tough. It is getting tougher because of the macro conditions, the higher fuel price, the lower rupee," Mr Thng said of the operating environment.

Budget airline IndiGo, the Indian market leader with a 43 per cent share, is adding capacity rapidly to protect its dominant position even though fares fell almost 10 per cent in the quarter ended September 30, Bloomberg said.

As a full-service carrier, Vistara is more focused on obtaining a premium ticket price to cover the higher costs of offering perks such as food, a checked baggage allowance and a frequent flyer programme.

Vistara sees a path to eventual profitability through plans to launch international flights as soon as it obtains regulatory approvals and to more than triple its fleet over the next five years to give it a larger share of the Indian market, Mr Thng said.

A major strategy shift is to own some of its fleet rather than leasing all of it. Vistara will own 19 jets worth a combined $3.1 billion ordered from Boeing and Airbus earlier this year, and lease another 37, underscoring its growth plans and strong financial support from its top shareholders.

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"This is a market that is strategic for them in terms of aviation and this is a market where Vistara will continue to grow and be profitable," said Mr Thng. "They will have to inject a lot more [capital] going forward."

Tata and Singapore Airlines this month invested $273.4m in the airline, according to a regulatory filing.

For Singapore Airlines, the growth in India far outpaces its established markets and Vistara provides a strategic opportunity to build a business in a country of 1.3 billion people and a growing middle class who can now afford to fly.

Attendees look around the premium economy class cabin of an Airbus SE A350 aircraft, operated by Singapore Airlines Ltd., during an arrival ceremony at Changi Airport in Singapore, on Thursday, March 3, 2016. Singapore Air, hurt by competition from opulent Middle Eastern carriers and a rash of budget airlines, is trying to revive its fortunes the way it knows best: wooing flyers with new aircraft. While the new aircraft with its extra-wide cabins and a new entertainment system will set Singapore Air apart from local rivals, it might be too little, too late to turn around its fortunes. Photographer: Bryan van der Beek/Bloomberg
Premium economy class of an Airbus A350 operated by Singapore Airlines. Vistara hopes such an offering will appeal to Indian travellers. Bloomberg

For Tata, which once owned Air India, it represents a way back into the full-service airline business 65 years after that carrier was nationalised.

The idea is to build up a premium Indian brand that stands on its own, rather than an offshoot of Singapore Airlines, the Singapore carrier's general manager for India David Lim said.

"I see benefits for Indian customers. It is an Indian product," he said.

The international route network will be similarly India-focused, Mr Thng said, with the airline looking to send passengers from its New Delhi hub to a variety of international destinations to the east and west - not just Singapore - particularly after six long-range Boeing 787s arrive from 2020.

In India, the government requires an airline to have more than 20 jets before operating international flights. Vistara reached that milestone in June but has been waiting on regulatory approvals before launching into the more lucrative international market.

A government official who spoke on condition of anonymity said Vistara's hopes of doing so by December appeared optimistic but approvals should be granted within "a matter of months".

Vistara's entry into the market has not been without its challenges. Little more than a year after its first flight, the airline reconfigured its planes to cut the number of business and premium economy seats in favour of a larger economy class.

The Indian market is dominated by low-cost carriers like Interglobe Aviation's IndiGo and SpiceJet, and selling tickets at a premium is particularly difficult in less wealthy second-tier and third-tier cities where Indian regulators require carriers to place 10 per cent of their capacity.

FILE PHOTO: An IndiGo Airlines Airbust A320 aircraft and JetKonnect Boeing 737 aircraft taxi past an Air India Airbus A321 aircraft at Mumbai's Chhatrapathi Shivaji International Airport February 3, 2013. REUTERS/Vivek Prakash/File Photo
IndiGo Airlines Airbus A320 at Mumbai's Chhatrapathi Shivaji International Airport.

"What the full-service carriers have started doing is pricing like a low-cost carrier and downgrading their services value - that is the mistake Jet Airways has made," said Elara Capital analyst Gagan Dixit.

In August, Vistara added a new economy-lite fare class that excludes a complimentary meal and has a smaller baggage allowance, raising questions over whether it was changing its business model to compete.

Mr Thng, however, said the lite fares were being offered mostly on smaller routes rather than popular ones such as New Delhi-Mumbai, with the intent of giving more price conscious customers the opportunity to get a taste of the premium Vistara product.

"Hopefully they will move up the value chain," he said.

"The economy is still growing. The number of people who can afford to pay, I believe will in the coming years continue to grow very aggressively."