It takes two to tango and the Indian aviation sector is all set to takeoff to a new zone. After Air India-Indian, Jet Airways-Sahara, Kingfisher-Air Deccan, now Paramount plans to have a go at flying together with another airline. So, how does this consolidation change the dynamics of the Indian aviation industry and how does it benefit the Indian consumer? Director, SpiceJet, Ajay Singh and CEO, India and Asia-Pacific at Capa Kapil Kaul discuss this issue.

Excerpts from an interview given to CNBC-TV18

Q: How does this consolidation change the dynamics of the aviation industry and how does it affect players like you?

Singh: This makes the industry very efficient and if the consolidation happens, then it does two things - it increases yields because essentially airlines are able to rationalize their flights and take up the value of their fares and secondly, it reduces cost because people are ready to share infrastructure and thereby bring down unit cost.

Q: Do you have to rework you business models for standalone players who are not consolidating at this point, how does it affect your lives?

Singh: It doesn’t affect our lives because the low cost model always flies on the principal that unit cost is the lowest you can possibly achieve and you try and ensure that your service is up to the mark. So you fly the same model of aircraft and you sell your tickets on the net and you do all the basic things that a low cost airline would do to try and bring down the unit cost. So that story remains the same, and once you are of a certain size, it becomes difficult to squeeze any carrier out of the business and SpiceJet has achieved the size and is growing rapidly.

Q: Give us broader perspective, there are three combines now controlling 80% of the market what else is left to consolidate?

Kaul: Three strong groups are operating almost 80% of the marketshare and having 276 planes as of now and so now it's between these three groups and two other airlines primarily SpiceJet and IndiGo who so far had an efficient run. But what the standalone players have to do is continue to operate efficiently as possible and drive the unit cost down, it’s a game about efficiency and execution. As long as they can stick to the model and continue to attack your cost structure and be relevant in the markets you are operating in. But obviously, the consolidation that has happened will bring its own challenges and it’s difficult to foresee those challenges, but it is going to be a  challenge for all of them.
 
Q: If it’s going to be about efficiency and execution, does positioning like low cost, budget or premium hold any relevance any more?

Singh: Yes, low cost is essentially the airline positioning which will attract first time customers like people who are coming off trains and getting into planes are surely going to be attracted by low cost positioning. The premium segment in our view is going to be a smaller segment, which attract business customers and people who are graduating from low cost airlines, so certainly positioning is relevant and in that I think Air Deccan and Kingfisher themselves are in consolidation and will face a challenge because they are completely two different models which is being sought to be put together, so, execution is going to be a big challenge.

Q: Given the fact that there is now a combined clout, how about other issues like infrastructure constraints or manpower - isn’t that going to be difficult to compete as a standalone player?

Singh: It was difficult to compete so we have all learnt to depend on fairly minimal infrastructure and we have learnt to fight for infrastructure at the airports and I don’t see how that changes with consolidation. 

Q: How does all this change for consumer?

Kaul: First thing the consumers have to accept is that the fares will go up eventually to my estimate it should go up between USD 12-15 over a period of time. Till the Indian LCC’s (low cost carriers) fares don’t reflect their cost structure, there is no game for anyone and so the consumer have to be prepared to pay little more to enjoy a sustainable low fare regime over a period of time. Because there is not point if you enjoy low fare for two years and the entire industry collapses and then go back to fares prevalent before 2003.

What is needed to pay the fares, which affect the cost structure of these airlines. For eg Delhi- Bangalore was about Rs 12,500 three yrs back and now it is around Rs 3,500-4,000, but if it is at about Rs 5,000, then they will start making money and so the consumers have to accept the fact that the airlines need to recover their cost and if the airline is able to recover the cost and become viable, then they can (customers) enjoy the low fare regime over a sustainable period. I don’t think it is game for anyone if they continue to operate at the fares they are selling in the market.