News: Kingfisher + Deccan: Hope trumps reality

(DNA 02/06/2007) Mumbai - When liquor baron Vijay Mallya and low-fare aviation pioneer Capt GR Gopinath decided to tango on Thursday, the prime reason they gave for the decision was synergy.

Using the your-beauty-and-my-brains logic, the two said that Kingfisher's upmarket full-service carrier (FSC) will complement the no-frills airline's mass market, with infrastructure being shared for cutting costs for both airlines.

History, unfortunately, is not on their side. Full-service carriers and low-cost carriers (LCCs) belong to separate worlds, and their DNAs seldom match. Whenever they have developed the urge to merge or work together under one umbrella, they have almost always failed.

It happened when UK's full-service carrier British Airways got together with budget carrier Go. It was repeated with Delta Air and Song. When Germany's Lufthansa tried to soar high with GermanWings, it crashed, too.

But if Mallya and Gopinath are looking for more cheerful examples, they should look down under. Australia's full service airline Qantas took a shot at running no-frills airline Jetstar Asia and came up trumps. So what clicked with Qantas?

Industry players and experts say Qantas' model has worked because Jetstar's operation was insulated from any Qantas influence. "Earlier examples have not worked because they were not planned well.

But since then the business model of airlines with FSC and LCC operations has evolved. Qantas has been successful because it has maintained a high level of 'strategic distinction' between the two operations," said Centre for Asia Pacific Aviation (CAPA) CEO Kapil Kaul.

And now India has three airlines with similar models (full service and low-cost airlines run by one organisation) ready for take off. Full service carrier Jet Airways is converting the acquired Air Sahara to a low-cost airline - JetLite.

National flag carrier Air India's low-cost subsidiary Air India Express (AIE) will soon be launching domestic low-cost services. Kingfisher chairman Mallya, who has picked up a 26% stake (to be raised to 46% after an open offer to minority shareholders) has also decided to retain the identity of the acquired airline.

Will these Indian models work? "Kingfisher's decision to not merge with Air Deccan and keep it as a standalone operation is very good," says Kaul. Ankur Bhatia, executive director of Bird Group, a travel conglomerate, says the two services have to be kept separate as they have different cost bases and pricing strategies.

"It is not feasible for an FSC to operate a LCC. They have to be run independently. They are two different models and there is no middle path. There can be a sharing of resources for maintenance, ground-handling, engineers and pilots between the two but they cannot switch inventories (seats) because their cost base is different," says Bhatia.

Kingfisher + Deccan

And it's not just economic issues that necessitate an arm's length distance between two. Culture clashes can also cause havoc.

"While one is used to pampering its passengers by totally focusing on services, the other is used to taking out frills from services and saving cost. Apart from engineers and pilots, even the workforce - the cabin crew, airport staff and others - cannot be common as they are tuned to different cultures," says SpiceJet Ltd CEO and chairman Siddhanta Sharma.

There are some who are sceptical of such a model succeeding at all. Says IndiGo president and CEO Bruce Ashby: "There were several of such experiments in the US but they were eventually abandoned." United Airlines started 'Shuttle by United', Delta tried with 'Delta Express' and US Airways tried 'MetroJet'.

"The idea of each was to run a low-cost airline within an airline, with differential rates of pay for some or all of the employees, different branding, and a different product on board the aircraft (typically, no-frills).

These experiments were generally successful as branding exercises, but the FSCs found that were not able to reduce costs sufficiently to create an airline within an airline that was truly cost-competitive with their lean, focused LCC competitors," says Ashby.

Mallya and Gopinath have a lot of history to learn from.