Friday, September 30, 2011

Politics and business in India

On a fine september day, the anti corruption crusader Anna Hazare asked all "clean"
politicians to quit their respective parties, join hands and form a new party. He feels that this is the best way forward for India to have sustainable growth.

However, in my opinion, there are a few basic flaws in his statement. The bastc fact is that finding candidate for every constituency could prove difficult. That aside, a party should have a set of principles, mission and vision for the future of itself and for the country. In the developed countries, political parties have different ideologies and principles. Some of them are pro-business while others appreciate larger government. These principles should attract people and politicians to join a particular party.

So, Mr. Hazare's statement confirms that the party ideology has nothing to do with the development of the country. It inturn means that the role of government in the India Inc. success story in the past decade was minimal. The growth was mainly driven by private entrepreneurs, whose spirit and hunger has driven the country to greater success.

Without these bunch of jokers, the corporates could have taken the country to greater glory. Htwever, the corporates had to forge a nexus with the ruling government for a share in production. This was confirmed through various scandals including the 2G spectrum scandlal that has emerged in that last yeat. The Jan Lokpal bill addresses all the corrupt practices by the government. It has been alledged that the corporates are orchestrating and funding the agitation for Jan Lokpal bill. Is this not a conflict of intrest from the corporate's point of view? If the allegation is true, why would the corporates do this when they have a partnership with the ruling politicians? Why is the UPA government not insisting Anna to include corporates in his version of the bill?

The main role of an ideal government is to regulate the corporates. Very little corporate corruption have not involved any government role. From 2G scam to the mining scam, corporates have partnership with the government. Now the corporates want a check on their partners in the government. Why?

Why does multiple political parties, especially in states like Tamil Nadu,compete in a election when most of the parties have no differences in ideologies? But, they all do have same vision, mission, values and principles. LOOTING!

Please refer the article below for the main news:

The dreamliners and the extra wide bodies

The Boeing 787 or the "Dreamliner", developed by Boeing, is one of the hottest aircrats that is entering passenger service. The main difference between other aircraft and 787 is that most of the body of the aircraft is made of carbon composite material. This material has higher strength to weight ratio which means that the desired durability and strength of the body can be achieved with less weight.

This is a major breakthrough as the persistently high oil prices is hurting the airline industry. The growth in the aviation industry in the developed western market is feeble. However, due to higher growth rate of GDP in the developing world means higher demand for oil. Due to the new-found hunger for energy by the developing world, developed world has to pay higher prices for oil and energy even though their growth rate is close to zero. Hence, there is a greater need to run fuel efficient aircrafts to cut down the cost of running an airline. Fuel is the most expensive expense in an airline's income statement.

Therefore B787 is a highly welcomed aircraft as it provides higher fuel efficiency due to reduced weight. The components are more durable and hence the cost of maintenance is less as well. According to official statements, B787 is 20% more fuel efficient than similar sized aircrafts and it incurs 30% less maintenance cost. Apart from fuel and employee costs, MRO (Maintenance, Repair and Overhaul) is one of the major recurring expenses for the airline. If the Dreamliner can deliver the promise of reducing recurring MRO expense by 30%, it could potentially help the airline to break even with a lesser load factor than normal.

The dreamliner is 20% lighter than a similar sized aircraft, so it is 20% more fuel efficient, releases 20% less CO2, flies 20% more distance than an aircraft with similar sized fuel tank. On top of this, Dreamliner emits 60% less noise. Also, the cabin pressure at cruise altitude is 25% lower. This can help travellers to cope with jet lag better.

To counter B787, Airbus, the rival company for Boeing, is offering a similar aircraft called A350XWB (Extra Wide Body) in its product line. If the official records are to be believed, A350XWB delivers 8% reduction in the total costs than operating a B787. Most of the statistical figures are deceptive as no one clearly understands the underlying assumptions in the cost calculation. However, if A350XWB can deliver the same operating performance as B787, it is a great news for the airline industry.

ANA (All Nippon Airlines) operates the first Dreamliner on November 11, 2011. ANA deploys this aircraft on a domestic route in Japan and later it intends to operate the aircraft for Tokyo-Frankfurt service. This is not a surprise as airlines normally use the most fuel efficient aircraft for its longest route as more fuel can be saved.

What can an aircraft like the Dreamliner do to the airline industry in the near future? The dreamliner is a mid sized long range jet with the best fuel efficiency. This opens up the possibility of opening up routes for which the demand is average. For example, in the far east, for an airline like ANA, it opens up the possibility of starting direct services to less glamorous destinations like Glasgow or Manchester. The seating capacity in a 3 class configuration is around 210. It is almost half when compared to 777 jet.

Airlines make money when the load factor (the ratio of total occupied seats to total number of seats in an aircraft) is higher. This is because airline is a very high fixed cost industry. The incremental cost for carrying one additional passenger in an aircraft is very less. The cost of fuel, pilots, cabin crew, airport parking, take off and landing taxes are the same no matter how many traveler travel in an aircraft. The variable cost of taking an additional passenger is perhaps the cost of food and other services provided by the airline.

B787 provides an opportunity to start routes that seemed unprofitable earlier. With smaller capacity and higher range the problem with load factor can be resolved easily than other aircrafts. The problem with the capacity was probably one of the reasons why full fare airlines are operating in a hub and spoke model. For British Airways, London Heathrow is the hub airport. If a passenger wants to fly from Glasgow to New York in British Airways, then the customer is transported to London Heathrow hub in a smaller aircraft (A320) and then the customer is transported in a bigger 777 or a 747 aircraft to New York. In the hub, the airline uses smaller aircraft to get passengers from smaller locations, gather them and use bigger aircrafts to travel to longer distance cities.

In the above example, British Airways cannot deploy a 747 or a 777 aircraft to fly directly from Glasgow to New york as the demand wont match the available capacity. A smaller aircraft such as A320 cannot be deployed as the range for smaller aircraft is not enough to reach the destination. Hence the hub and spoke model works. The problem with the demand and range is one of the most important reasons for low cost long haul airline NOT to emerge.

Also, for an airline like British Airways, it is difficult to expand operations form the existing hub as the airport runs at a 99% capacity. At some point of time in future, the airline must break away from the main hub and establish secondary hubs in the same city or elsewhere. The merger with Iberia could solve the problem for now, but the airline would need a secondary hub at some time in the future. The airline could also pragmatically choose to fly point to point and slowly break away from the traditional model. The dreamliner or an A350XWB is well placed to solve this problem as well.

Air Asia X is the first airline to start a long haul low cost service. The airline is profitable and they use A330 and A340 aircrafts. According to official figures, B787 and A350XWB are smaller, more fuel efficient, and has higher range. Air Asia X has already ordered A350 for their operations in future. A few more airlines could potentially emerge with similar strategies.

On November 11, when all eyes are on ANA, there could be some airline thinking about starting a big low cost long haul point to point service in the near future. The unthinkable only about a few years ago, has now become thinkable. Exciting times ahead!!

Thursday, September 29, 2011

Kingfisher to close LCC operations

Kigfisher is grounding its low cost operation 'Kingfisher Red' as it wants to focus on its full service model. After a little over four years, Kingfisher has realized the bitter truth that LCC and full service cannot co-exist. Big carriers like British Airways and Delta have tried LCC operations and have failed. In the FMCG market, a company like Unilever can produce and succesfully market both Lux and Lifebuoy brands. But, in the aviation market, LCC and full service are different beasts and it requires different DNA to manage altogether.

However, there are a few important lessons to learn from this failure. Generally a low cost airline make money by cutting cost whereever possible. Hence, they do not provide any in flight entertainment, in flight meal and loyalty program. Also, most of the successful low lost airlines, such as Ryan air, have extensively used a single aircraft model strategy. For example, all of Ryan air's fleet comprises of B737 type aircraft. So, Ryan air only requires only one pool of pilots who are trained to fly B737. This applies to cabin crew, maintenance staff and load controllers, who only require training and license for a single aircraft type. A lot of money can be saved in MRO (maintenance, Repair and Overhaul) area. In the case of Kingfisher Red, they operate ATR42, ATR72, Airbus A319 and A320. So, Kingfisher Red was unable to take advantage of the cost synergies a single aircraft type can provide.

All the established low cost carriers make it clear that the more they fly, the more money they make. Hence, it is very important to utilise the aircraft efficiently. Kingfisher airlines have a bad on-time performance record and hence the aircraft utilisation is not as per the industry standards for a low cost carrier.

The average age of Kingfisher fleet is atleast two times more than that of Easy Jet and Ryan Air. With ageing fleet, the cost of maintanence is high. Most importantly, these aircrafts are average on fuel efficiency. With low aircraft utilisation and fuel efficiency, Kingfisher struggled to break even due to high operating costs.

The time between an aircraft touching down, deboarding passengers and baggages, boarding new passengers and taking off is called tuenaround time. If the turnaround time is lower, and on-time performance is higher, the aircraft utilisation is better. SouthWest airlines, the most succesful LCC, has the best turnaround time of all airlines. Hence, SWA enjoyed the best aircraft utilisation. Kingfisher was unable to turn its aircraft around like the way SWA did.

Kingfisher was also largely working on a hub and spoke model even for its low cost operation. LCC generally do not use hubs as they travel point to point across several cities within a day depending on the demand.

One of the most surprising piece of data is that the load factor in Kingfisher full service economy was better than the load factor in Kingfisher Red class. This fact is amusing because not a lot of people would buy tickets in full fare airline when they have the low cost option. For most of the domestic routes operated by Kingfisher airlines, there is pressure from LCC airlines such as SpiceJet and IndiGO. If Kingfisher airlines can compete with LCC better, why not Kingfisher Red compete in the same market ? There should be some other factors that should have influenced the poor performance of Kingfisher Red, such as poor selection of routes and timetables. Better routes and timetables could have saved Kingfisher Red from being in red since inception.

Kingfisher Red has mulitple aircraft types, uses old leased aircrafts which are low on fuel efficiency, got a bad turnaround time and on-time performance. Running a low cost model calls for higher proactiveness and sadly KF had to exit from LCC market. The combined losses over the years have eroded the company's equity completely. It requires immediate cash injection, better aircraft utilisation, capacity cuts, closure of non-profitable routes among many other initiatives.

The demise of Kingfisher Red could be a great news for SpiceJet and IndiGo. Especially IndiGo is the airline to watch. It has brand new highly fuel efficient A320 fleet, operates on a point to point model with low turnaround time, high on-time performace and better Debt to Equity ratio among all Indian carriers.

Moreover, it uses only one type of aircraft. Indigo has a great vision for expansion. It ordered 180 A320 aircrafts last year, which was a record at that time.

The flamboyance of Vijay Mallya and miserness of LCC do not match. It was indeed a sad day for Indian LCC market. Focusing on full fare service is probably best suited for the airline for now. However, a better understanding of LCC could have saved Kingfisher Red. SpiceJet and IndiGo could do well in the near future to capture the additional market share.