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Corporate Aug 29, 2012

Premium fares: The real reason behind IndiGo’s success

By Sindhu Bhattacharya

A recent study by Centre for Asia Pacific Aviation (CAPA) suggested that IndiGo, the single largest domestic airline by passengers, has also become the most profitable in India.

The study pegged IndiGo's profitability in the first quarter of this fiscal at Rs 106 crore, which is double the profit that SpiceJet declared and more than three times what legacy carrier Jet Airways reported for the same period.

A careful analysis of the fare monitoring routinely done by the regulator Directorate General of Civil Aviation (DGCA) will perhaps explain how IndiGo's market leadership also translated into profit leadership. According to the data for July, IndiGo tickets were the most expensive on most sectors compared with average industry fares on these sectors.

IndiGo operated flights in only 11 of these sectors but was found to be the most expensive in 8 of these sectors. Reuters

Many times, IndiGo demanded a premium even over full service carriers such as Jet Airways. Put simply, this means IndiGo has begun commanding a premium for its enviable on-time record and simplicity of operations.

The DGCA monitored fares on only tier 2 cities. So most popular routes like Delhi-Mumbai were not tracked. But it is clear that IndiGo has begun charging a small premium on even these less populous routes.

Its fare on Delhi-Bhubaneshawar last month was Rs 7,242 against industry average of Rs 7,221 and when even full-service Air India was a bit cheaper at Rs 7,207. Delhi-Dibrugarh on IndiGo cost you Rs 9,425 against industry average of Rs 8,361 and when Jet Airways (full service) was ready to fly you for much less at Rs 7,754. Delhi-Vishakhapatnam on IndiGo was for Rs 7,479 against industry average of Rs 7,190 when Air India cost much less at Rs 6,946 and SpiceJet was also a little cheaper at Rs 7,144.

The DGCA's fare monitoring cell tracked 48 sectors, IndiGo operated flights in only 11 of these sectors but was found to be the most expensive in 8 of these sectors.

IndiGo is not just charging a premium on fares, it has raised tariffs on various ancillary activities also to generate more revenues. So from June this year, the airline has begun charging Rs 50 for duplicate ticket print outs. Also, it had revised cancellation fees to Rs 950 for domestic and Rs 1759 from international travel beginning April this year.

IndiGo has also started an "IndiGo Plus" programme whereby a passenger can get a meal on board and choice of seat for additional payment of Rs 600.

An executive with a travel website said internationally it was a normal practice for low cost airlines to charge extra for seats where there is more legroom available-like the first seat in an aircraft-but fares for these seats are not as high as business class fares at full service carriers. And IndiGo was just following this international practice.

Meanwhile, a story in Business Standard last week pointed out that one of the reasons for IndiGo's unprecedented success is its decision to increase capacity by 29 percent since last October-the highest among all airlines-when SpiceJet and GoAir increased capacity by 14 and 11 percent respectively.

The story went on to explain that despite having lesser number of aircraft than Jet on domestic routes (IndiGo has 57 while Jet and JetLite have 97), IndiGo is able to offer higher capacity as its planes are 180 seaters.

But IndiGo has also been facing cost headwinds like the rest of the aviation industry stakeholders. The CAPA report quoted earlier has cautioned that despite the all-round robust performance, IndiGo needs to "apply some focus on is ensuring consistency of service levels as it continues to expand.

The pressure of rapid growth is beginning to impact the customer experience at some key stations, although IndiGo's overall customer satisfaction is still highly rated."

As per DGCA data, IndiGo commanded 27 percent share of the domestic market share in July which means it carried about 12.5 lakh passengers last month. It also managed to fill its aircraft the most, with seat factor of 75.5 percent or two in three seats.

The only other airline which reported seat factor of over 70 percent was JetLite with 71.7 percent, with Kingfisher Airlines at the bottom of the seat load pecking order with just half its aircraft occupied at any time.

by Sindhu Bhattacharya

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