The Indian airline business is the fastest expanding in the world and the third biggest. Despite being the death zone for survival and profitability, many people, from the flamboyant to the modest, have been drawn to try their luck in the category due to its external attraction. However, on average, one airline has been grounded annually since 1994, when private ownership was first permitted. In an industry where the return on invested capital has continuously been negative for an extended period, Jet Airways four years ago and Go First last year were the most recent victims. The difficulty in achieving profits hasn’t been a problem that’s idiosyncratic to the airline industry in this country. This is a situation that has occurred in the world’s most developed economies as well. In his influential 2008 Harvard Business Review (HBR) article, strategy expert Michael Porter evaluated all key US businesses according to the Return on Invested Capital (ROIC) they had produced over fifteen years. You may guess which industry came in last on the list. Airline.
Even while the sector appears to be in dire straits, isolated instances of profitability have flourished. Before the pandemic, for example, Indigo had a successful profit run for years in the Indian environment. Similarly, Air India Express’s achievements before its merger with AirAsia were sometimes overshadowed by the challenges faced by its larger and more well-known sister company, Air India. There have also been cases of Southwest Airlines and Singapore Airlines making large profits over extended periods globally.
Therefore, while it is true that making money in the aviation sector is challenging, it is not impossible, as some of the aforementioned cases show—despite how uncommon they may have been. If we examine these exceptional cases, the key to their accomplishment is their capacity to comprehend the subtleties of the industry structure and manage it with superb resource and capability allocation.
For example, Indigo quickly saw that the industry structure in its area of operation was marked by hostile forces: powerful suppliers (fuel, aircraft, etc.) who could charge high prices; buyers who had many options, could easily compare prices, and were remarkably price sensitive; rivals who occasionally had ample financial resources; and the constant influx of new players drawn to the market by its allure. Selecting the Southwest route, it purposefully positioned itself to generate profits through large-scale operations, trying to offset the power of these factors. Therefore, the goal of its whole endeavor was not to attain cost efficiency superficially; instead, it concentrated on reducing expenses as much as possible throughout all of its activities to maintain lower pricing than other carriers. Additionally, it could synchronize its procedures, and its punctual performance notably contributed to decreased operational expenses. Table 1 shows that year over year, its cost per available seat kilometer (CASK) has remained the lowest among its counterparts in the nation. As a result, it effectively evolved into the low-cost strategy leader that Porter discussed in his writing. The issue for the others, or those that didn’t succeed, was that an industry could only have one low-cost leader since only one company could maintain the lowest expenses and then pass those savings along to customers through reduced pricing.
Conversely, if we look at global success, Singapore Airlines achieved success via a different route – that of differentiation. It is renowned for providing outstanding service at a premium for the customer. Finally realising this, Vistara, the Singapore Airlines subsidiary operating in India, is now focused on delivering a premium experience for its patrons, including complimentary meals, first-rate service, a loyalty program, and premium economy seats for an enhanced traveller experience. As a result, it reported its first EBITDA profit since its entry in 2016 during the first quarter of the Financial Year (FY) 2023–2024. Vistara should avoid making the error of directly competing with the low-cost group’s prices. Vistara has a unique value proposition, and it has to ensure that premium pricing pays the expense of delivering a higher value.
As part of its expansion strategy and in response to strong demand, Vistara has announced the deployment of its Boeing 787-9 Dreamliner on the Delhi – Bali route, effective from 31st March 2024. This move comes in anticipation of increased travel during the upcoming summer season. Vistara initially launched daily non-stop flights on this route in December 2023, operated by its A321LR aircraft, becoming the sole airline to offer direct flights between Delhi and Bali.
In any business, companies need to hold any of the two possible positions for success: either aim to create differentiation by spending higher or pursue low-cost leadership. Of course, there are many different kinds of differentiation; this is evident when one looks at another transportation area. Toyota, Mahindra, and Tata Motors strive for differentiation in the Indian market, albeit in different ways. While Toyota is associated with durable cars, Mahindra is recognised for its toughness. Tata Motors has established a strong reputation for safety while achieving a fantastic turnaround quickly from loss-making to a highly profitable position. In the airline sector, for example, offering premium economy seats like Vistara or operating unique routes that no one else flies, like Air India Express, are ways to stand apart.
Since the low-cost leadership group is a significant client category that can be catered to, it has a strong attractiveness that draws in most airlines. Indigo’s substantial market share of nearly 60% in India is attributed to its low-cost leadership position. However, the industry’s profitability could improve if other airlines pursued their unique differentiation. Currently, five Indian airlines operate in the low-cost segment, which can lead to a problematic scenario for profits due to competitive strategy. The more airlines that pursue differentiation, the greater the profitability tension would be relieved.
Porter states that the essence of strategy is gaining a competitive edge via differentiation. Finding, creating, and maintaining this distinct position no one else has taken hold of is the key to success. It would be simpler for Indian airlines to increase their own and the sector’s profitability the sooner they grasp this.
The authors are the Assistant Professor of Finance and Economics, SPJIMR and Assistant Professor in the Strategy & Consulting Area at the Goa Institute of Management.
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