Flying on International Routes

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Small wonder that for Indian operators, flying on international routes seems to be the next logical step to establish profitability as their hallmark. Even in the Indian context, the only private airline that has made profits in the past one year was Jet Airways, which earns about 30% of its revenues from international operations. The airline also hopes to take this level to up to a mind-boggling 50% by end of 2008 and also garner annual collections of $3 billion by that time! Surely, projected international flights will make Jet stand a good chance of achieving estimated revenue targets.

After Jet’s flights to the US were cleared in August 2007, it has been making a good game out of the opportunities and is on an aggressive process of route rationalisation, already having established Brussels & Shanghai as its global hubs. With 3,198 international flights as on December 2007 (a rise of 84.8% over October-December 2006) and $208 million in revenues from non-domestic operations, revenue contribution from international front adds up to 37% of the total (as on December 31, 2007). Since Goyal has plans to take that level to about 50% by end-2008, that alone spells higher profits for Jet (considering that international long-haul flights guarantee greater margins). Seems, this one is more serious about making money than about harping over market shares!

Some critics have also expressed fears about the long gestation periods in international operations and the high-cost implications thereof. However, as Sagheer puts it well, “The aviation industry in itself is a long gestation industry as investments are huge and break-evens happen very late. Long haul flights are more lucrative than short haul flights as the customer is less price sensitive and flight economy improves with a long range flight.” So though the load factor in such planes will be lower, yield per passenger will be higher. Even Albert Tjoeng, Asia Representative, IATA asserts, “Initially all players incur huge costs while going international, but if the right strategies are adopted then I don’t see why Indian carriers should not make big profits on international routes. ” Understanding this, it’s no surprise that Kingfisher too is hedging its future over international skies, despite the initial cost setback of $250 million required for starting its international operations.

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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