Low-cost airlines in India are no longer low cost. With the line between low-cost airlines and full-service carriers blurring fast, airfare is barely a differentiator. They are now differentiated by the ‘food’ factor: there are airlines that provide food on board and there are those that do not provide it.

On the other hand, full service providers are cutting cost, shedding frills and turning low-cost as much as possible in an effort to provide customers an affordable flight. They want to raise the competition and seek a bigger pie in the Indian skies.

The palpable changes in Indian aviation fail to go unnoticed. All three airlines in the full-service space — Jet Airways, Kingfisher Airlines and Air India — are trying to compete with Indigo, SpiceJet and GoAir on lower fares. As a result, tickets of the so-called low-cost airlines may cost you much more than those offered by full-service providers on certain sectors.

Except for food, most other services provided by the airlines are quite similar, and the only obvious marketing tool is the price tag. “To attract price-sensitive fliers, most full-service carriers are refurbishing aircraft to slash the number of business class seats, and add more economy class ones. Efforts are also on to optimise the cost of food served on board. So the focus is on cutting cost, and attracting more fliers with low fares,” said Vishwas Udgirkar, senior director at Deloitte.

The profile of an average Indian flier is changing, and airlines are bringing in strategies to suit his requirements. “We do not have a premium class of domestic air passengers in India. Since most of our air travel is short-haul, with a maximum of two hours, an average flier is looking for low-cost tickets with whatever services available,” says Udgirkar. Expensive food on board a flight is least of their priority.

Captain GR Gopinath, founder of India’s first low-cost airline Air Deccan, believes low-cost aviation is the way forward. “Globally, only low-cost airlines are consistently making money. For instance, Southwest Airlines in the US. In India too, Indigo Airlines made a profit of Rs 750 crore during the last financial year and Rs 500 crore in the year prior to that,” he pointed out.

Agreed Raajeev Batra, executive director of KPMG. “Low cost is the business model of the future,” he said. His July 2008 report ‘IndianAviation: Flying Through Turbulence’ said India’s airlines can become profitable by improving efficiencies and processes and switching to a ‘leaner’ business model. However, he got it completely wrong in predicting that domestic airlines could turn profitable by 2010-11. Everyone agrees that growth over the past 3-4 years has come from low-cost aviation. “A lot of Indians took to flying, thanks to low-cost airlines. What mattered to them was cheap tickets. Food or no-food, it didn’t matter,” says Udgirkar.

India added 100 million passengers in 10 years; from 42 million in 2000 to 142 million in 2010. Still only 2 per cent of Indians fly, which is lower than even Sri Lanka, Pakistan and Nigeria.

But low-cost airlines are not focusing on dishing out low-cost tickets. Their focus is to remain competitive with fares, and make profit. “Yes, at times you find a low-cost airline ticket costing you almost close to or more than a high-cost airline. Oil prices have been very high in the global market and high level of taxes on aviation turbine fuel across states is weighing heavy on airlines,” said Ankur Bhatia, executive director of the Bird Group, a major player in the space.

According to Batra, on most metro sectors seat availability-demand situation is skewed towards the latter. “There are two savings that full-service carriers are focusing on. One is to sell more seats at lost cost. The other is the cost of food. Other costs — whether it is fuel, insurance, landing/parking and ground handling — are mostly same for all airlines,” he said.

So is it the end of budget airlines? “I don’t think low-cost airlines are dying. The problem has occurred largely due to overcapacity on metro routes. There is space for capacity addition on many routes. But this capacity is not happening due to infrastructure bottlenecks. The situation will improve as more people start flying on these routes,” said Bhatia.

“Low-cost airlines are primarily volume-driven operations. It is doing well globally, and India is not an exception. In the past few years, a number of new low-cost carriers have come into existence and the numbers are growing,” said Neil Mills, CEO of SpiceJet. “Except for one airline, no others have exited the segment so there is no panic. On the contrary, globally some airlines which are only operating premium flights are now also launching low-budget services which offer about 40 per cent less cost compared to luxury flights,” he said.

The most important factor for the growth of low-cost airlines is missing in India. That is low-cost airports. Of the 142 million air passengers in 2010, 100 million were concentrated in 6 major airports. “The government has to create low-cost airports to cater to increasing traffic. By sharing common airports and services and paying high cost, it is difficult for low-cost airlines to sustain,” said Batra. According to him, there is no adequate improvement in existing airport infrastructure in line with the increase in traffic. “This leads to delay in aircraft takeoff and landing, which in turn pushes up fuel cost,” he added.

Another cause for high airfares is the aviation turbine fuel (ATF). This has at times reduced the gap between low-cost and full-service carriers. Sales tax on ATF is as high as 40 per cent in some states. Mills said, ATF now accounts for 30-40 per cent of operating revenue. ATF prices have gone up sharply in the recent past and that gets passed on to passengers. “In fact, some carriers continue to price their tickets below the cost with 15-50 per cent discount on them,” he said. This March, Chhattisgarh became the first state to slash value added tax on ATF to 4 per cent from 25 per cent. The state has witnessed 70 per cent jump in traffic over the past 9 months,” said GK Chaukiyal, member - operations at Airport Authority of India.

As per the ministry’s projections, total air passengers will grow to 350 million by 2020, with 15 per cent traffic growth projected every year till 2015. After 2020, 50 million passengers are estimated to be added every year — at 11 per cent annual growth. A majority of new fliers will patronise airlines that can afford to offer low fare with basic service commitments.