The Hindu Business Line : `Discounted fares are here to stay'

As the tenure of Mr Sunil Arora, Chairman and Managing Director of Indian Airlines, comes to an end in June, he looks back at the "roller coaster" five years that he has spent with the airline.

A Rajasthan cadre IAS officer, during his tenure the airline added new foreign destinations including Singapore, Kuala Lumpur, Dubai and Bangkok. The airline improved the product and took up domestic marketing initiatives by signing MoUs with several State governments for tourism and holiday packages. To beat competition, the airline introduced the `flexifare system'.

By Mr Arora's own account, the challenge was formidable and he focused on four areas of cutting costs without compromising on safety and the product, increasing the use of capacity, launching an aggressive marketing drive, and enhancing the quality of the product by improving on-time performance, the behaviour of front staff, ground-handling services, and reservation systems. His strategy appears to have worked.

Excerpts from the interview:

How would you look back at your five years with Indian Airlines?

These five years were a kind of a roller-coaster in some ways. I do not think I could have taken over at a worse time in the sense that 2000-01 and 2001-02 are regarded by International Air Transport Association (IATA) and all other experts as the worst years in the history of civil aviation.

It fell to my lot to be heading the biggest national carrier, the largest fleet at that time. The prices of aviation turbine fuel (ATF), which were almost steady from 1992 to 2000 with a variation of about Rs 1,000 per kl in these years, suddenly shot up about a month before I took over to Rs 18,000 per kl and, in September 2000, to Rs 22,500 per kl.

Today, when the ATF prices are more than Rs 34,000 per kl and I look back, I wish those prices had prevailed now. But, at that time, the hike in ATF prices upset all fiscal projections, which was informed to the board when the budgetary estimates for 2000-01 were presented.

Then, the Patna crash in July 2001 further created doubts about the airline. Since Alliance Air is a wholly-owned subsidiary of Indian Airlines, anything which effects one will have a bearing on the other.

So, our daily carriage, if I remember right, had dipped to 15,000-16,000 and whenever we carried 17,000-18,000, we used to feel satisfied. Such situations do not give you too much time for planning at leisure. I held discussions with all my senior-, and middle-level and even selected junior officers just to get a hang of the things. My understanding was, and remains, that you could divide the performance of the airline into two broad heads — fiscal and physical. By physical, I mean the product. On the fiscal side, you could not have done much at that point of time because there was recession, a sudden spurt in the prices of oil and a perceptible drop in numbers.

A series of other actions was initiated, some short- and others long term. These included retraining of the front-line staff such as cabin crew, suitable IT upgradation wherever required, strengthening the sales and marketing teams, better service on board, which includes a gamut of measures, including aircraft cleaning, diversification and presentation of cuisine, a swifter turnaround of the aircraft when on ground and how a passenger is treated from the moment he or she buys a ticket till the time the journey is over. We tried on all these fronts.

Simultaneously, we also decided that ours is not going to be a reactive airline and we need to have an aggressive, dynamic, vibrant fare strategy in place, which should be backed by an equally dynamic approach towards marketing.

To what extent we succeeded is eventually for agents, passengers and others to judge. We even took a calculated risk of not raising our fares in the early part of 2000, notwithstanding a steep hike in ATF, because we thought that till such time we were able to show some improvement in the product, it would practically be suicidal to consider enhancing fares.

From October, we started getting the first tranche of the results in terms of better carriage. What should, however, not be forgotten is that the CMD of any airline is, and will always be, confronted by issues of relatively uneconomic, non-trunk, multi-sector routes as a part of the socio-economic obligations.But we did also take a major decision that, on the one hand, we would push our fleet acquisition proposal and, on the other, till we got our own fleet, we would go for dry leasing because we realised that as our Airbus A-300s were on the way out; to even stand at the same place, we needed to dry lease aggressively.

How much did these steps yield and did they meet your expectations?

Ultimately, passenger satisfaction cannot really be quantified. It can only be felt. The Indian Market Research Bureau (IMRB) has been conducting regular surveys to track passengers who fly only with our competitors, those who fly only with us and others who take all the carriers.

It is not easy to change the perception or mindset of an airline within the organisation or outside it. But the IMRB surveys from 2000-02 and till 2004-2005 show the difference in perception . These surveys quantify the intangible called passenger satisfaction.

This is not to say that we have achieved everything; we still have a long way to go. In fact, if any carrier or anyone in the service industry begins to think that the pinnacle has been reached, the decline of the organisation will begin from that day.

Taking a look at the bottomline, we had three bad years and the ATF prices did not remain steady at Rs 22,000; it rose to Rs 25,000-26,000; fell to Rs 19,000 and then went up to Rs 29,000 last year. But after 2001-02 we were able to reduce our operating losses and, finally, in 2003-04, we were able to bring back IA out of the red with a net profit Rs 44 crore. Not only this, our revenue in 2000-01 was Rs 3,793.34 crore and, in 2003-04, it was Rs 4,649.80 crore. You cannot ascribe it totally to market growth because it started showing signs of an upward spiral and recovery only in the two last quarters of 2003-04. Even the first two quarters of 2003-04 were better than 2002-03. Till 2002-03, the market may have improved from 2000-01, but if you carefully analyse, it had not even reached the last best year, which was 1999-2000.

You have mentioned a number of instances where you have managed to change the perception about the airline. Where do you see the airline moving from the base that you have set?

First, I would like to reiterate that no chairman can change the perception about the airline single-handedly; he can at best get all his colleagues on board so that everybody collectively follows a common goal. Now, to respond to the second part of your question, the last two years alone have seen one more player firmly established, two more having launched their operations and two or three more in the pipeline with different dates of launch. In other words, while in 2000-01 IA had to contend with two competitors and vice-versa, now the so called established players — IA, Jet and Sahara — have to share the cake with at least three more competitors which have formally started their operations. And at least two of them are talking of a different cost platform than what that of the existing scheduled domestic carriers.

During your tenure the market also saw IA launching a number of dynamic price policies. Do you see these continuing?

We started the flexi fare approach. Fares perforce , as per the requirements, cannot only be cost-driven; they have to be sensitive to market stimuli. I think when we started this approach, there were a lot of sceptics, but I am glad that, notwithstanding a drop in the yields of all airlines, the sensitivity of the airlines to market perceptions while computing their fares has come to stay and it is one determinate that will remain irrespective of the individuals who are, or would be, heading the airlines.

Even the so-called full service carriers such as IA and two of its nearest competitors are today offering anywhere between 20 per cent and 25 per cent of their inventory on discounted fares, which are classified under different schemes. Some of these are short-term, linked to seasonality, while others like apex fares or, for that matter, flight-specific fares, which each airlines has announced under different heads or names, are there to stay. Though the market per se is growing I do not think any airline, which does not sell 25 per cent or even more of its stock, depending on the seasonality at discounted fares or discounted schemes, is not going to be in the game for long.

Given these circumstances do you think that IA should have also looked at launching a low-cost model as some of the other airlines have done?

Let me ask you a counter question: Have the two other established players which survived the post-1996 liberalisation and bloodbath launched a low-cost carrier so far? But you cannot have two platforms under the same carrier. For example, the Oberoi chain of hotels has a three-star category of a hotel chain but under a different brand name, which is owned by the Oberois. Similarly, I think Taj is coming up with its own variant of three-star hotels. If, in the near future, IA wants a lower cost platform, it will have to be in Alliance. As it is, we are planning to have Airbus A-319s, whether they come by dry lease or acquisition, which fly under the Alliance banner on a single class configuration. This means that the number of seats will be more.

Besides that, the only savings left would be on the catering side. IA has no immediate plans of slashing the present catering package on Alliance. However, the very fact that these aircraft would be running on a single-class configuration, despite being a new induction, indicates the shape of things to come. With Boeing 737-200s already in the single-class configuration, you could ask me what the difference is. My answer to this is, in the Airbus A-319s, we had a choice of bringing in a two-class configuration, but we have consciously jettisoned that. Alliance in any case has a lower cost in terms of numbers — number of people employed and the nature of employment which is largely contractual. Therefore, while IA remains, like its competitors, a full service carrier, Alliance is heading towards a lower cost variant.

And after A-319s are inducted and the route network of IA and Alliance is integrated, conscious efforts will be made to put some frequencies with these new aircraft on trunk routes, especially in non-prime times at attractive fares so as to provide stiff competition to other airlines.

It was during your tenure that a number of activities were outsourced by IA. People felt that this was the wrong thing to do. How do you react to this and do you see this continuing?

I would like to dispel the notion that outsourcing started in my time. Catering, which is a major activity, has always been outsourced. At least, I have not seen any IA chefs catering earlier.

We have a Catch-22 situation. On the one hand, we have had no recruitment except in the operational categories for more than a decade. On the other hand, the total number of our employees from 1999-2000 have come down by 16 per cent till 2004-05. The departures have gone up by 35 per cent, passengers by 14 per cent to touch 8.6 million from 6.2 million. The number of daily flights have also increased from 261 to 320.

In the last four years, aircraft utilisation has risen by 51,349 hours, of which 66.8 per cent is due to the new leased aircraft and 33.2 per cent is due to increased utilisation of the existing fleet through improved engineering performance. In 2000-01, the per aircraft utilisation was 3,048 hrs annually on a 30 Airbus A-320 aircraft fleet. Currently, it is 3,573 hrs on a fleet of 47 Airbus A-320 aircraft.

In 2000-01 and 2001-02, since we were supposed to be in the disinvestment mode, there was a freeze on recruitments in any case, except in the operational categories. Post-disinvestment, there have been no inductions except in the licence categories and cabin crew. The management training scheme was approved by the board and the numbers are miniscule compared to the requirement.

In such a situation, what do you expect us to do? And what did we outsource after all? We did not have enough people to man 1,407, so we went to call centres. Tell me a single airline anywhere in the world where call centre activity is being done in-house? Probably, many of you will not be aware that, as far as activities such as major maintenance-like C checks in which huge outlays are involved, we used to send four-five aircraft abroad in 2000-01 and even in 2001-02.

Today, despite the fact that the number of aircraft is more — it has gone up from 31 to 47 in the case of the A-320 fleet — the number of aircraft that have been sent abroad in the last two years is zero. That is an activity that costs money and so if we are portioning out a series of small activities and trying to even it out by saving elsewhere and trying to cope with operations, I am puzzled at the usage of a highly subjective opinion.

You must have come with some plans for IA? How much have you managed to achieve?

My dream for IA is that it should always remain relevant in the domestic and international markets. That the orange logo of IA should be a matter of pride not only for its employees but it should be something to which every Indian can look up to with pride and a sense of belonging.

Though I cannot say that I have been able to achieve all this, I can say with certainty that all of us have proved sceptics wrong who, in their internal calculations, had started writing off IA. They know as well as we do that IA is, in fact, more relevant in the market place today than ever. And I would be looking forward to the day when the IA logo goes to the UK and the US. I will feel very proud if I can travel on that flight even if I have to make an effort to pay for it.

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