STAND-UP COMEDIANS IN THE WEST LOVE AVIATION—especially the front of the cabin with its bells and whistles and privileged air. “Stewardesses close that upper-class curtain, giving you a look [that says], ‘Maybe if you had worked a little harder, I wouldn’t have to do this’,” goes a wildly viral Jerry Seinfeld number. But in India, aviation humour—and the business itself—has been all about “cattle class”. Blame it on a market that’s obsessed with cheap.

That could now change. After years in the wilderness, when the plain-Jane cabins of no-frills, low-cost carriers (LCCs) ruled Indian skies, premium flying is making a comeback. At the centre of the action is Vistara—the much-hyped “luxury” airline born out of a Tata Sons-Singapore Airlines joint venture. Though operational details about the airline are under wraps (it didn’t respond to my e-mails), it is widely believed that its Airbus A320s are being prepared for a whole new 148-seat configuration—with as many as 16 seats in business class and 36 in a new category called premium economy.

“Indian air travellers are made to feel like a cog in the wheel or just a seat number,” Vistara proclaimed during its launch in New Delhi a couple of months ago. It promised to make amends, with “personalised services” that would “redefine travel”—not just the hot meals, boxy screens, and blankets on request that full-service flying has been reduced to.

On the face of it, such promises appear silly in a market where 70% of the capacity, according to consultancy KPMG, is owned by LCCs Indigo Airlines, SpiceJet, Go Air, JetKonnect, and JetLite. (Latest entrants Air Costa and Air Asia are yet to reach significant scale.) As capacity generally reflects market share, that means seven out of 10 Indian fliers choose these carriers. With more than 32% market share, Indigo is the country’s largest airline. That’s a full 12% lead over closest rival Jet Airways, which owns JetKonnect and JetLite in addition to its full-service flagship.

Buoyed by the numbers, Indigo recently unveiled a 250-aircraft purchase order, the largest in India’s aviation history. Aditya Ghosh, chief executive at the airline’s parent company InterGlobe Aviation, justified the mammoth order, stressing that aviation in India covers hardly 3% of the population. That means price-sensitive first-time fliers will drive industry growth for a long time: Trade body International Air Transport Association (IATA) estimates that by 2034, India will fly an extra 266 million of them annually. These are the hordes Indigo and other LCCs are banking on to keep their aircraft full.

In contrast, the full-service players—Jet Airways and Air India—have struggled under a tonne of debt (about Rs 10,000 crore and Rs 42,000 crore, respectively) and dwindling passenger numbers. According to widely quoted Centre for Asia Pacific Aviation (CAPA) numbers, only about a third of the 6.1 crore domestic passengers this year have flown either of them. Moreover, the segment is still reeling from the fall of Kingfisher Airlines, which couldn’t sustain founder Vijay Mallya’s premium focus and imploded within a decade of launch, despite a strong community of fans. Any talk of luxury appears bizarre in this context.

Yet, rivals are echoing Vistara’s plans. Jet Airways—which hasn’t made a profit in a while—announced on the same day as Vistara’s launch that it would shut down its LCCs to concentrate on the full-service business. “I give you my commitment,” said chairman Naresh Goyal in a statement announcing the decision, “that by the end of the year, Jet Airways will have the best domestic full-service product in India.”

Even Air India—the national carrier often pilloried for stodgy service—is trying to pave a recovery trail, with ads flaunting swank 787s and the promise of a better flying experience. Recently, it entered the world’s largest airline network, Star Alliance, which gives frequent fliers access to a bevy of perks. All this has contributed to green shoots of revival: Operating losses are reportedly set to fall to Rs 1,200 crore from Rs 5,140 crore in 2012.

Industry watchers, however, are divided on how all this will pan out. Some foresee struggles, because Indian fliers, including business travellers with deep pockets, are content with the LCCs’ transactional approach. “The domestic Indian flyer is price- and schedule-sensitive rather than service-sensitive,” argues Samyukth Sridharan, president and chief operating officer at travel portal Cleartrip. “Is there room for another full-service player on top of Jet Airways and Air India? No.” Of course, Kingfisher did make room for itself in its heyday, but the LCCs weren’t quite so dominant then. Add to that the overhang of austerity in the country and Sridharan’s prognosis appears valid.

He finds support from a former senior airline executive who didn’t want to be named. “There may be people who are willing to pay a little extra, but the question is whether there are enough of them,” he said.

But others like Ankur Bhatia, president at travel conglomerate Bird Group, which looks after the India operations of Amadeus (a technology company which will power core functions at Vistara, including reservations, inventory management, airport departure control systems, revenue accounting, and revenue management), are gung-ho. “There is a clear and definite demand for a better product,” Bhatia tells me. “Fliers have become more aware of international standards. They want better service,” especially at a time when optimism has returned to the economy.

BHATIA MAY BE on to something, but the numbers don’t add up. Airlines don’t report occupancy break-up by service class, but a proxy like Cleartrip’s analysis of the brand filters applied in flight searches is handy: 97% users tick the boxes against Indigo and SpiceJet, but only 47% include Jet. Sridharan says that’s because Indigo and SpiceJet have managed to guarantee the two things—robust route networks and high frequency of flights on key routes—that matter in the domestic sector. He adds that few miss full-service airlines in India because LCCs here have access to the main city airports and are not shunted to secondary, low-cost airports, unlike in some other countries. Full-service airlines have a larger share of bookings only on routes like Delhi-Udaipur, purely because LCCs have not added much capacity there owing to limited demand.

So far, market leader Indigo has proven to be the one to beat. Though it is primarily in the no-frills game, the airline has emerged a top choice for business travellers too by overcoming the low quality perception of LCCs. With the fall of Kingfisher, which had 23% market share at its peak, Indigo gobbled up the vacant slots at crucial centres like Mumbai and deployed much of its capacity on increasing frequency in the busy metro routes. Its prime target was the morning-in evening-out business crowd, which it won over with the sheer frequency of its flights: With 30 flights daily, it owns nearly half of the capacity on the Delhi-Mumbai route—the seventh-busiest in the world by capacity deployed, according to the International Civil Aviation Organization.

Indigo also managed to build strong service differentiation by consistently focussing on the basics: clean aircraft and punctuality. The latter became the peg for a high-decibel branding campaign (“When we get our work done on time, we become the world’s most powerful economy on time; on time is a wonderful thing.”) at a time when the economy was slowing and companies embargoed expensive travel practices. Those who wanted a little more could pre-book meals or opt for seats with extra legroom for an additional fee. (That’s a template all LCCs have followed with varying degrees of success.) The approach, along with the airline’s sale-and-leaseback strategy, reportedly pushed up the share of corporate travellers in Indigo’s passenger mix to an impressive 60%, contributing to a net profit of Rs 786 crore for 2012-13—a fivefold increase over the previous year.

In comparison, the premium model seems to be bad economics. “When you go premium by reducing the total number of seats, your ASKs [available seat kilometres, calculated by multiplying the number of seats by the kilometres flown] go down,” says the former airline executive. “When that happens, your unit cost goes up, resulting in a higher breakeven seat factor.” Simply put, you need more of the plane filled up with customers who paid more for their seats, to have any chance of making money. That’s difficult to accomplish given the short domestic routes and the accepted wisdom that service tends to be more of a differentiator the longer the flight is. The longest route in India, Delhi-Kochi, is less than three hours. The busiest, Mumbai-Delhi, is an hour and 50 minutes. Higher business class fares can compensate for the cut in seat count—provided there are enough takers.

Amber Dubey, partner and head, aerospace and defence, KPMG, believes that Vistara’s three-class configuration will strain its finances. “The cost of creating the difference between various classes will be high. Each of the three requires different types of service, seats, food, and look and feel.” Dubey says Vistara won’t need to worry for the first six months because of the hype. “But what happens after that remains to be seen.”

Jet Airways’ return to full service, while being welcomed by loyal fliers, also faces scepticism. Saj Ahmad, chief analyst at London-based Strategic Aero Research, says, “The move to scrap JetLite and JetKonnect took too long. They never made money, nor were their cost structures low enough to support fares that truly reflected low price as well as value for money.”

As things stand, after years of dabbling in low-cost, the company may find it difficult to ensure service consistency across its flights. Naysayers point out that Jet is merely trying to cut out distractions and focus on international operations—as decreed by key investor Etihad. (International flights already account for 60% of Jet’s business.) This could also be part of a process to shed assets that don’t align with Etihad’s premium identity. Worse, given Jet’s recent history of reactive decision-making, it could just be a knee-jerk reaction to Vistara.

And what of Air India? Though the airline has managed an improved show of late, its long history of false starts and over-reliance on government dole don’t make it a picture of confidence. Incumbent CMD Rohit Nandan, who has been credited with much of the purported turnaround, is on an extension and the government is yet to find a replacement. It’s anybody’s guess which way the wings will tip once the leadership changes.

THAT LEAVES VISTARA best placed to appropriate the position Kingfisher once enjoyed with its luxury pitch. Few expect a Tata venture to follow Mallya’s no-holds-barred style, but Vistara has shown early signs of the kind of attention to detail expected from a luxury brand. For instance, Brand Union Ray+Keshavan, which worked on the airline’s brand identity, says finding the right name “involved culture and phonetic checks in over 20 countries”. The final choice was distinctly Indian (vistara is a Sanskrit word meaning “limitless expanse”) while being easy to pronounce and remember for a global audience.
Mark Martin, chief executive at Martin Consulting, a Dubai-based aviation advisory, says business travellers, who settled for LCCs owing to lack of choice, should see value in Vistara. “No executive really wants to work on their laptops when there is high-density seating and when the guy next to you can peek in.” He adds that Vistara’s three-in-one seat configuration will allow it to compete in the low-cost and full-service spaces at once—without the encumbrance of separate brands. “And with Singapore Airlines’ [backing], there would be only one winner in business class.” To avoid slip-ups, crew members were sent to Singapore, where they were trained on the iconic Singapore Girl’s exacting standards.

Bhatia of Bird Group thinks premium economy, which Vistara is expected to bring to India for the first time, could be the real hero. Globally, several leading airlines—British Airways, Lufthansa, Cathay Pacific—have used it to upsell assorted creature comforts at lower price points compared to business class. Martin too sees merit in it: “If priced well, there should be demand for premium economy, as there is a large number of professionals and businessmen eligible to spend a little more on their flights.” This section will be key as business travel in India lifts off after a depressed period: Air traffic saw a 28% spurt in September 2014 compared to the same month last year, aided by low fares and increased optimism.

But all the trappings of premium notwithstanding, Vistara will have to run a mean backend from the get go. It can draw inspiration from FlyDubai, which transitioned from being an LCC when it started in 2008 to adding business class last year. Pran S. Dasan, FlyDubai’s regional manager for India, Nepal, and Sri Lanka, says that in a market like India, any airline following a hybrid configuration must follow an internal cost structure akin to LCCs. That will be daunting. “When 58% of operational costs is fuel and more than 80% are fixed costs, there are only so many areas where you can knock off costs: staff, distribution, and marketing,” says Dasan.

Or maybe there’s more. Dubey of KPMG says plugging into the Tata Group at large will give Vistara a cost efficiency difficult to copy. Need cars and buses? Tata Motors is at hand. Need hotels for the crew? Taj Hotels. Need catering? Taj Sats. Even TCS could be called for software needs. This sort of cross-leverage is common within the group: For example, Taj Hotels extensively use Jaguars and Land Rovers, the British luxury car brands owned by Tata Motors.

India’s pesky aviation policy and political wrangling will be a different ball game. Vistara has already expressed its concerns about a regulation that mandates a fleet of 20 aircraft and at least five years of domestic experience before an airline can go international. Vistara has also got a taste of India’s long-winded bureaucratic processes, which scuppered its plans to launch during Diwali. More significantly, the Prime Minister’s Office has sought clarification on the extent of management control of foreign airlines in Jet Airways, Vistara, and Air Asia. Subramanian Swamy, a veteran leader of the ruling BJP, opposes the FDI regime vehemently and has taken these airlines to court on this issue.

But Cleartrip’s Sridharan says the real threat for airlines with a higher break-even factor will come from technology and evolving consumer behaviour. As more and more fliers gravitate towards ticket booking on mobile—Cleartrip has seen mobile bookings swell to 30% of the total tickets sold from about 12% last year—the ability to display the absolute lowest fare will become critical. “After all, how many fares does one want to see on a small screen?”

Clearly, the votaries of the front of the cabin have their task cut out: Find stable business models as well as service propositions that will entice the well-heeled business travellers—and keep them hooked. And that’s no joke.

Follow us on Facebook, X, YouTube, Instagram and WhatsApp to never miss an update from Fortune India. To buy a copy, visit Amazon.