Dogfight for middle India

JAGSON AIRLINES' TINY OFFICE, around 2,500 sq. feet, at New Delhi’s Indira Gandhi International Airport, is buzzing with activity on a chilly winter day. At its entrance is a six-foot tall standee carrying the Jagson blue and red logo against a white background announcing the airline’s routes—Delhi to Shimla, Delhi to Kullu and so on. I am ushered into a small conference room done up in grey, where a couple of pilots wait to be interviewed. My meeting with Jagson CEO Koustav M. Dhar is delayed. He is caught up at the Ministry of Civil Aviation. Though most apologetic about his late arrival, Dhar can’t hide his excitement. The ministry meetings apparently went well, though Dhar refuses to say what they were about. As the interview proceeds, he is interrupted, thrice, by his colleagues who want his attention on issues like ticketing.

By end February, Jagson should begin flights across seven of India’s small towns, connecting them with Delhi. Jagson, which has been around since 1991, runs helicopter charters. Its attempts at running an airline have failed in the past. (Well, in aviation lingo, Jagson still runs an airline, not one with fixed-wing aircraft but with rotary-wing ones.) Dhar is hoping that this time round, he’ll finally have an airline that flies planes.

He has already bought two BAe 146 Avro jets, models of which are placed in his room. “We believe there is huge demand for an operation which can ferry passengers from small towns to Delhi,” he says.

He is not the only making such bets. SpiceJet’s (ranked 275 on the Fortune India 500) new owner Kalanithi Maran—he bought the airline in June 2010—has finalised two new aircraft orders, including one with Bombardier, worth $446 million (Rs 2,037 crore), for fifteen 78-seater Q400 turbo props, with the option of ordering fifteen more. These will join the fleet this June and allow SpiceJet to fly into India’s interiors. (The other order with Boeing is for planes that’ll connect the metros.)

Then there are the likes of Jet Airways, Air India, Kingfisher Airlines, pretty much all those who ply India’s skies, who want a piece of the action. Even Chennai-based Paramount Airways, which has been mired in debt trouble and had stopped flying, is in the process of restarting operations, and is buying aircraft, including Q400s. All that M. Thiagarajan, the airline’s CEO, is willing to say is that things are hectic.

Though only a few of them have been flying these routes—Air India for existing government obligations, or a few flights of Kingfisher, for example—the signs of a dogfight are already brewing. Dhar is miffed that larger airlines are encroaching on what he believes are his routes. “You can’t allow a carrier like SpiceJet to come and hit us on regional routes. Otherwise, what’s the use of having a separate policy for regional airlines?”

The government announced a policy for regional airlines in 2007, which allowed companies with capital of Rs 12 crore to apply for licences to fly regionally between small towns and connect them to a single metro in the region. That meant an airline that got a licence for the North could fly only between northern towns and connect them just to Delhi. The South was an exception. There, regional carriers could connect towns to Hyderabad, Bangalore and Chennai.

In the American model of regional aviation, smaller airlines act as feeders to larger carriers and are thus guaranteed revenue. Kanu Gohain, former director general of civil aviation, says regional permits were issued not just for connecting towns to metros but also to promote intra-regional connectivity. “Look at the way China has developed a plethora of smaller cities and connected them. That is what needs to change with regional airlines.”

However, what is now becoming increasingly evident is that the national carriers (Jet, SpiceJet, and so on) are threatening to crash into the regional routes.

There’s hard economic logic driving this. Business is booming in states such as Chhattisgarh and Madhya Pradesh, which can be seen in the 219% rise in corporate tax collection in the first quarter of this financial year. A further indication of the prosperity of non-metro cities is in a McKinsey report, which projects that the per capita GDP of Vadodara in Gujarat will cross Mumbai’s by 2030.

But, small towns that actually have business potential are not always connected by air, and if they are, flights are infrequent. Take Ludhiana. Although it is one of the most important industrial towns in northern India, it is serviced by a single flight a day connecting it to Delhi which takes about 75 minutes. The other options are a seven-hour drive or a train journey that takes at least four hours. In either case, the loss in time would hurt productivity.

According to Centre for Asia Pacific Aviation (CAPA) estimates, there are 250 to 300 city pairs (departure and arrival cities comprising a flight segment) across the country that will be connected over the next five years.

Meanwhile, many small airports are also readying to welcome more traffic. Since 2006, the Airports Authority of India (AAI) has involved the Confederation of Indian Industry, local chambers of commerce, and the tourism industry to draw up a list of 58 airports to be upgraded. AAI chairman V.P. Agrawal says only 13 of the 85 operational airports are actually making money. Still, the impact of better air connectivity on the local economy will be huge, ultimately benefiting AAI too.

Neil Mills, CEO of SpiceJet, says Maran’s aggressive moves are logical. “You are talking about a large enough addressable market. Our business model hinges on frequent flights and we will be flying between a metro, and tier II and tier III cities several times a day with the Q400s.” The airline estimates that the revenue share of such routes will grow to around 22% from the present 12% in the next three to five years.

So, will the likes of Jagson be able to take on the might of, say, SpiceJet? The broad trends show that the market is indeed growing. In 2010, passenger traffic reached 520 lakh, a growth of 19% over 2009. Airlines are expected to add capacity at a rate similar to the demand growth of 15% over the next five years. While macroeconomic threats such as oil at over $100 a barrel remain, airlines are better positioned to take it on, having improved their efficiency during the hard years. Analysts say private airlines will make at least $300 million this year and they also expect Air India to cut losses to around $650 million from $1.2 billion in 2009-2010.

But Kapil Kaul, who heads CAPA in South Asia, says running regional airlines is fraught with uncertainty since many of these players “come under-capitalised and with poor business cases”. “The result: They never reach even the drawing board.” Dhar’s response: Given the way small towns are growing, the business case remains irrefutable. Moreover, smaller airlines have lower cost structures and that’s an edge that can be used.

Meanwhile, Boeing India president Dinesh Keskar appears happy with the developments. Though Boeing doesn’t make the 70-80 seaters appropriate for small-town routes, Keskar, every bit the airplane salesman, says: “There may be just 50 people who want to fly now from, for example, Salem in Tamil Nadu. But in five years there might be 150, which means eventually I can sell more 737s.” Talk about the spoils of war.