THE AIRLINE FLYING SOLO IN INDIA’S CROWDED SKIES
Vistara is shunning the country’s popular low-cost model to entice passengers with quality - at a price
In the highly price-sensitive Indian aviation market, Vistara, a full-service carrier backed by local conglomerate Tata Sons and Singapore Airlines, is betting it can convince passengers to buy higher fares in return for superior service.
Alhough all airlines in India are feeling the pinch – with debt-laden Air India and Jet Airways in such a parlous financial state they have been struggling to pay staff salaries on time – Vistara says its upmarket strategy is starting to bear some fruit.
The carrier has narrowed its losses and seen average fares rise this year as customers take to its product offering, including a domestic premium economy class, even though ticket prices at most rivals are falling, says Vistara chief executive Leslie Thng.
“We have seen a steady improvement in terms of demand, in terms of load factor as well as in terms of the fare passengers are willing to pay,” Mr Thng, a Singapore Airlines veteran who previously ran its South East Asian regional unit, Silkair, told Bloomberg.
India’s domestic airline market, the world’s fastest growing at 20 per cent a year, represents an enticing longterm opportunity for Tata and Singapore Airlines.
But in the short term it has turned into a financial sinkhole – high oil prices and a weaker currency are not being recouped in fare prices, driving airlines into the red.
“That is a paradox,” Association of Asia Pacific Airlines director general Andrew Herdman says of India. “It has a lot of exciting potential but from a business point of view, very challenging.”
In September, the International Air Trasport Association said in a report that from 2010 to 2017, the number of people who travelled to/from/or within India doubled from 79 million to 158m. That number is expected to treble to 520m by 2037.
Fundamentals supporting Indian market growth are strong, says Iata. By 2036 India’s population is expected to reach 1.6 billion and average incomes are expected to rise to almost $5,000 per capita (a five-fold increase on 2006). With that, the number of “middle class” households should reach 20 per cent by 2036 (up from 2 per cent in 2006).
“Domestic markets will continue to drive industry growth. Of the 359m additional passengers expected to fly in 2036, 228 m will be on domestic routes and 131m will be connecting internationally,” Iata says.
By 2026, India is expected to be the third largest air transport market in the world (up from its current 7th place ranking), the report says.
“Meeting the significant growth potential of Indian aviation will also create challenges – for the airlines, its industry partners and policymakers, says Brian Pearce, Iata’s chief economist.
“Equally, the broader business and policy environment should not place hurdles which inhibit growth and reduce the level of benefits that aviation can deliver to the nation. The industry, its supply chain partners and the government and policymakers have a clear mandate to work in collaboration towards the common goal of ensuring that aviation’s economic and social benefits are fulfilled,” says Mr Pearce.
In addition, Iata says the number of airport pairs – a pair of departure (origin) and arrival (destination) airport codes on a flight itinerary – in operation within India has risen by more than 50 per cent since 2015 – as well increases in the average frequency of flights on each route.
Vistara, which started flying in 2015 and now has 22 Airbus A320 narrow-body jets and a 4 per cent domestic market share, has struggled financially as it scales up.
The company narrowed its losses to $58.9 million in the financial year ended March 31 from $70.9m a year earlier, according to accounts filed with the corporate regulator this month, but it faces tougher market conditions this year, with consulting firm Capa India estimating it could lose $150m to $200m.
“It was tough. It is getting tougher because of the macro conditions, the higher fuel price, the lower rupee,” Mr Thng says of the operating environment.
Budget airline IndiGo, the Indian market leader with a 43 per cent share, is adding capacity rapidly to protect its dominant position even
though fares fell almost 10 per cent in the quarter ended September 30, Bloomberg said.
As a full-service carrier, Vistara is more focused on obtaining a premium ticket price to cover the higher costs of offering perks such as food, a checked baggage allowance and a frequent flyer programme.
Vistara sees a path to eventual profitability through plans to launch international flights as soon as it obtains approvals and to more than triple its fleet over the next five years to give it a larger share of the Indian market, says Mr Thng.
A major strategy shift is to own some of its fleet rather than leasing all of it. Vistara will own 19 aircraft worth a combined $3.1 billion ordered from Boeing and Airbus earlier this year, and lease another 37, underscoring its growth plans and strong financial support from its top shareholders.
“This is a market that is strategic for them in terms of aviation and this is a market where Vistara will continue to grow and be profitable,” says Mr Thng.
Tata and Singapore Airlines this month invested $273.4m in the airline.
For Singapore Airlines, the growth in India far outpaces its established markets and Vistara provides a strategic opportunity to build a business in a country of 1.3 billion people and a growing middle class who can now afford to fly.
For Tata, which once owned Air India, it represents a way back into the full-service airline business 65 years after that carrier was nationalised.
The idea is to build up a premium Indian brand that stands on its own, rather than an offshoot of Singapore Airlines, says the Singapore carrier’s general manager for India David Lim. “I see benefits for Indian customers. It is an Indian product.”.
The international route network will be similarly India-focused, Mr Thng says, with the airline looking to send passengers from its New Delhi hub to a variety of international destinations to the east and west – not just Singapore – particularly after six long-range 787s arrive from 2020.
In India, the government requires an airline to have more than 20 jets before operating international flights. Vistara reached that milestone in June but has been waiting on regulatory approvals before launching into the more lucrative international market.
A government official who spoke on condition of anonymity says Vistara’s hopes of doing so by December appeared optimistic but approvals should be granted within “a matter of months”.
Vistara’s entry into the market has not been without its challenges. Little more than a year after its first flight, the airline reconfigured its planes to cut the number of premium economy seats in favour of a larger economy class.
The Indian market is dominated by low-cost carriers like Interglobe Aviation’s IndiGo and SpiceJet, and selling tickets at a premium is particularly difficult in less wealthy second-tier and third-tier cities where Indian regulators require carriers to place 10 per cent of their capacity.
“What the full-service carriers have started doing is pricing like a low-cost carrier and downgrading their service value – that is the mistake Jet Airways has made,” says Elara Capital analyst Gagan Dixit.
In August, Vistara added a new economy-lite fare class that excludes a complimentary meal and has a smaller baggage allowance, raising questions over whether it was changing its business model to compete.
Mr Thng, however, says the lite fares were being offered mostly on smaller routes rather than popular ones such as New Delhi-Mumbai, with the intent of giving more price conscious customers the opportunity to get a taste of the premium Vistara product.
“Hopefully they will move up the value chain,” he said.
“The economy is still growing. The number of people who can afford to pay, I believe will in the coming years continue to grow very aggressively.”