Airline plans to spice up the India – UK market with low fare offering

Over the last couple of months Indian carrier SpiceJet has been formulating a plan to grow into the medium- and long-haul markets with the introduction of its first widebodied aircraft. With other airlines in its homeland already planning similar moves, the carrier is reportedly now close to formalising a leasing deal for two Boeing 787-8 Dreamliners to enter the market as early as this winter to gain a competitive advantage.

It is an amazing turnaround for an airline than was close to collapse earlier this decade, but is now one of India’s most efficient operators and among the nation’s most punctual. The first signs of SpiceJet’s ambitions became clear when they placed transferable option commitments to purchase widebodied aircraft as part of a $11 billion deal to buy 100 additional Boeing 737MAX-8 jets at the start of this year. This built on an earlier SpiceJet order for 55 of the 737MAX model, and the airline also has the option of buying 50 more in future.

While the airline says it is mainly focussing its network development on the expanded market opportunities the MAX will deliver, it has been increasingly looking at the opportunity to become India’s first low-cost long-haul carrier. “We feel there is huge demand for this. As the country becomes richer, personal incomes increase and people want to travel, provided fares are affordable,” said Ajay Singh, chairman and managing director, SpiceJet in an interview this week with The Times of India.

It appears the busy India – UK market is at the heart of the airline’s development plan. This market has grown 20.8% since the start of the decade, O&D demand data from OAG Traffic Analyser shows. This is an average annual rise of 3.5% and has been driven not by new non-stop connectivity between the countries but mainly enhanced transfer connectivity, especially via the Gulf hubs.

“Imagine the demand a fare of Rs 15,000 on the Delhi-London route will have,” said Singh; although standard fares are more likely to be in the region of Rs 25,000 – Rs 30,000, but still lower than the average currently being charged by scheduled airlines such as Air India, British Airways, Jet Airways and Virgin Atlantic Airways that currently offer non-stop links between India and the UK.

When SpiceJet says London it acknowledges that will not be Heathrow as served by incumbent operators, but more than likely Gatwick, where the number and range of low-cost services is growing significantly due to the congestion at Heathrow. It is also understood to be considering other points across the UK, notably Birmingham and Manchester as well as other countries in Europe. If these operations prove successful then Singh confirms that the option commitment for new widebodied aircraft could be exercised “in due time”.

“An airline has to make money while keeping fares low. We are looking at a bunch of steps through which we can bring down the cost of operating a seat while maximising the revenue. The common model includes food, beverage and Wi-Fi,” he says. “Can we unbundle that and ask the passenger to pay for services? I feel people will want to see it — you decide what you want to buy and pay for that,”

The low-cost long-haul model remains in an evolutionary stage and it is unclear how SpiceJet will configure its aircraft and how it will exactly generate the necessary revenues to offset cost reductions. Media reports suggest the carrier is considering an all-Economy layout, although the consensus is that some form of premium offering is required within this sector to boost yields to a sustainable level.

Singh has an optimistic outlook and says one cannot remain stuck to a tried and tested model especially in a competitive market. “I think the time has come to think out-of-the-box. People always said that a single model fleet is the ideal option. We have shown it is possible to make profit with smaller planes on regional routes; now, others are following us,” he says.

A closer look at traffic data for the current decade highlights how the India – UK market has transitioned as airline models have evolved. Back in 2000 passenger flows were dominated by non-stop services and accounted for 54.6% of the annual two-way demand. In 2016, this share had fallen to just 40.8% due mainly to the rise of the Gulf airlines. In fact between 2010 and 2016 non-stop demand actually declined by 9.7%, but this was more than made up for by a 57.6% rise in indirect passengers.

Air India was the largest operator in the India – UK market with a 20.7% share of the annual two-way demand ahead of Jet Airways (19.0%) and British Airways (15.9%). The rise of indirect demand is clear when you consider that the fourth, fifth and sixth largest operators are the big Middle East hub airlines, which collectively held more than a quarter (28.3% share) of the demand.

Annual O&D Demand on busiest routes between India and UK (2016)