Has Goyal finally got his Jet Airways act right by killing JetLite, or will he join Mallya?

Naresh Goyal, Chairman of private civil aviation pioneer Jet Airways, yesterday (11 August) announced a decision to opt out of the low-cost-low-fare business and regain the airline’s original positioning as a full-service carrier (FSC). With the Tata-SIA Vistara set to light up the skies at the upper end of the market by October, IndiGo sewing up the low-cost end, and Air Asia set to knock the bottom out of fares in newer routes, Jet actually had no other option.

Jet’s failure is a classic case of a market leader forgetting its core customers and going after mythical volumes and spurious business synergies through mindless acquisition and a complete misunderstanding of the fundamental principles of branding. A chastened Goyal is now quoted by Business Standard as saying: “We as an airline confused customers (with multiple brands).”

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And how. In what must be called the daftest efforts at customer segmentation, brands in different market segments were all called by the name. If, in the beginning there was only Jet, the full-service carrier, a venture into low-cost carriers (LCCs) was called JetKonnect. And when Goyal bought Air Sahara in 2007 to add to the LCC business, it was called (surprise!) JetLite. So you had three services all called Jet. And when things didn’t work out, JetLite and JetKonnect got merged into a single brand - JetKonnnect. It didn’t quite connect.

It is not as if Goyal was all alone in this folly. His main competitor in FSCs, Vijay Mallya of Kingfisher, also made the same mistake when he acquired low-cost (but dripping in losses) Air Deccan and called it Kingfisher Red. Well, to cut a long story short, Kingfisher too confused the daylights out of his customers and all of Kingfisher was soon deeply in the Red. And then Dead.

The only question still to be decided is whether Goyal too will fade out of aviation history like Mallya or survive on the coat-tails of Etihad, and rebuild his brand. The chances are ultimately Etihad will have to take over Jet - when policy allows that to happen. As things stand, Jet has huge debts and in Q1 of 2014-15, ended 30 June, it was still reporting losses of Rs 258 crore). In the last nine quarters, Jet made huge losses in seven of them, and tiny profits in two of them. Its accumulated losses are over Rs 6,100 crore and debt is in excess of Rs 10,400 crore despite aircraft sale-and-leaseback deals in some quarters (see table).

Goyal’s initial statement, as BusinessLine reported it, does not give us much confidence that he has learnt his lesson too well. When asked how he will go back to being a full-service carrier after being in multiple segments for the last few years, he answered: “It is only a question of serving a meal and posting an additional crew member.”

One hopes he was only answering in jest, for the entire history of Jet and Kingfisher shows a cavalier attitude to business logic and branding basics. If the only difference between an LCC and FSC is the addition of one crew member and serving a meal, it would be even simpler for LCCs to charge higher fares for nearly the same costs they currently incur.

The Jet revival plan, which now focuses on creating a single FSC with two classes - business and economy - will also offer competitive fares, James Hogan, CEO of Jet’s partner Etihad, has said. It is not clear if this means Jet fares will be closer to LCC fares in economy class, with a free meal being the only differentiator, but clearly the rebranding will take some doing. Having messed up its branding over the last seven years, Jet starts with the handicap of having to erase the negative impressions customers formed when Jet was sliding downhill. It is always difficult to get back lost customers.

Regardless of whether you are a full-service carrier or a low-cost one, you have to keep driving costs down. As I have noted before, there is clear line dividing successful (or near successful) airlines from the rest. And that line is drawn in sand. It divides the pure low-cost carriers (LCCs) with a clear business model (Indigo, Go Air) from the ones who operate both full-service and low-cost carriers (Jet and Air India; Kingfisher is already gone).

The world over, there are five keys to airline success: costs, costs, costs, costs, costs. This is where the LCCs score over the FSCs.

The first cost in this bums-on-seats business is a four-letter word - CASK, or the cost per available seat kilometre. It helps to have more bums on seats, but the critical thing is to have the lowest possible seat cost per possible bum. CASK is a metric that measures what it costs to fly every seat for each km of distance.

The second cost to control is debt. Debt brought Air India down, with some help from former UPA Aviation Minister Praful Patel, the airline suddenly ordered 50 medium and long-range aircraft for $7.2 billion when the management thought 18 would do. The resulting debt laid the airline low. Now it is on permanent life-support from the Indian taxpayer.

The third cost is fuel. Aviation fuel costs the same for everybody. So what makes the difference? Aircraft age - which is related to fuel efficiency. In the 1990s, there was an airline called Damania. Passengers were just in love with it service, and couldn’t stop raving about it. But it went down for one simple reason: it bought old planes that just guzzled fuel.

Keep your aircraft fleet young, and you get fuel savings. Said a Forbes India article on Indigo in 2011: “Indigo has six-year sale and leaseback agreements for most of its planes. The lessor takes the planes back after this and the airline can induct a brand new one in its place. Though at a cost, this is effectively like a perpetual elixir of youth. The most important financial implication is that it never has to undertake the ‘D’ check, where the aircraft is completely stripped down and airlines often discover the need to spend on major repairs. This check is usually done when the plane is about eight years old.”

The fourth cost relates to aircraft maintenance. Globally, airlines have to maintain and service airlines to strict safety standards. This is why airlines with a diverse mix of aircraft tend to have higher costs, because they need separate staff to maintain Boeings or Airbuses or whatever.

The low-cost carriers (LCCs) have cannily focused on having only one basic aircraft (or sometimes two, with the second one connecting the smaller towns). SpiceJet uses Boeing 737s (NextGen). And Indigo Airbus 320s. But the big boys used several types. Kingfisher used many different Airbuses (from A319-321 to 330) and ATRs. Jet used Airbuses, Boeings and ATRs. At one point, Air India used Airbuses, Boeings and even a Lockheed L-101 Tristar (has anyone heard of them?)

In this business, diversity is weakness.

The fifth cost is the cost of idling. Getting bums on seats is one half of the challenge, but there’s no point getting them seated till you can fly them. In short, you have to fly more bums more often and for longer - and this means airlines which keep their aircraft flying for longer hours get better revenues. The figure to watch here is the aircraft utilisation rate - the time the aircraft spends in the air in a 24-hour cycle.

Indigo tries to keep the idle time between two journeys to 30 minutes and manages an aircraft utilisation rate of 11.5-12 hours a day.

But if one critical constant in aviation is cost management - it is a necessary, but not a sufficient condition, for success. For that you need to give your customer a reason to use you and not another airline.

IndiGo is not anymore about cost. It is about leaving and arriving on time. Go Air is not just about cost, but connecting the metros to smaller towns, that are now able to afford air travel.

Jet has to give its customers a reason to return and stay with it. If it gets its costs right this time, it also has to get its rebranding right. Otherwise, it will join Vijay Mallya on the dungheap of airline history.