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Kingfisher CEO defends full service strategy

6-Oct-2011 9:34 AM

Kingfisher Airlines CEO Sanjay Aggarwal, responding to media speculation about the carrier's recently-announced focus on the full-service sector, justified (05-Oct-2011) its plans to close its LCC in four months, stating the operating costs involved in the LCC operation are the same as in a full-service carrier but the revenues and yields lower. Full details of the carrier's rationale and future focus is as follows (PTI/Live Mint/Financial Express/IANS/Hindustan Times/Business Standard, 05-Sep-2011):  

  • Operating costs: Mr Aggarwal stated the operating costs of full service carriers and LCCs in terms of fuel, airport charges, engineering and maintenance and crew costs are similar in India. However, full-service carriers incur additional costs on global distribution, in-flight catering, ground amenities and FFPS. These additional costs are more than recovered through higher yields;
  • LCC fleet expansion and yield dilution: Mr Aggarwal noted the rapid pace of fleet expansion by LCCs in India. "In addition to large aircraft orders placed at time of start up in 2004/2005, the Indian LCCs in the recent months have placed orders for over 250 aircraft. In the last two years, capacity induction of the LCCs has outpaced the demand growth in the domestic market. The induction of so many additional aircraft in the low cost/low fare segment will potentially lead to substantial over capacity and a price war with declining yields," he said;
  • Business travel/opportunity costs: With continuing economic growth, business related travel is "increasing significantly", with this sector not as price sensitive as the classic low cost/low fare segment, Mr Aggarwal said. The carrier stated its existing two cabin configuration of full service and no frills has meant a lack of premium business class or full service economy class product on all its routes which has meant it "is losing a certain amount of business class traffic on many routes";
  • Full-service product: Kingfisher stated that over the past six months, its full-service product has "generated higher yields and load factors which is consistent with the assessment that the business travel segment is more sustainable than the extremely price sensitive low fare segment". Mr Aggarwal continued: "Of the incremental yield, only 25% is spent on providing the extra services associated with a full service carrier. The remaining 75% is net contribution to the bottom line";
  • LCC/Full-service carriers: There are currently five airlines participating in the LCC segment, but only three FSCs. "While competition certainly exists in this full service segment, such competition is tempered because of the frequent flyer loyalty programmes that are offered by each one. In short, we believe that the competition will be far more intense in the low fare space than in the full service space," Mr Aggarwal said;
  • oneworld Alliance: Kingfisher’s integration into the oneworld alliance is on track;
  • Fleet configuration: The carrier is reconfiguring all its Airbus aircraft over the next four months including its single cabin aircraft into dual cabin aircraft with a reduced premium business class cabin and an increased number of full service economy class seats leading to a capacity increase of approximately 10%. The economy class product will remain the same, with the space requirement for additional economy seats to be made available by reducing the number of business class seats. The carrier expects the reconfigured aircraft to have the seat equivalency of a LCC but an opportunity to generate much higher revenue as demonstrated by current yields. "Kingfisher will achieve incremental business class revenue as a result of wider and uniform availability and the airline will also generate incremental revenue through its increased full service economy class capacity," Mr Aggarwal said;
  • Fleet/network size: There will be no reduction in Kingfisher’s fleet size or its network. [more - original PR]