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Airline Industry

 ‘If you want to be a Millionaire, start with a billion dollars and launch a new airline.’
 That is one of the most famous quotes in aviation, said by none other than Sir Richard
Branson. The nature of the aviation business is such, that while it is a glamorous business
to be in, it is subject to all sorts of uncertainties which are not in the control of the airline.
Geopolitical issues, fuel prices, weather and the vagaries of nature, everything affects
this business. An airline can be ahead of the curve and be prepared for some of these,
but not all.
Jet Airways problem

 The fact that Jet Airways is in a liquidity crunch is something that has come to the fore a
few months ago, and ever since then, their troubles have been played out publicly
almost on a daily basis. Some days there is news about their employees not being paid
in time. On others, they haven’t paid out the lounge operator in Mumbai, and hence
guests get turned away leading to a social media outrage.
 Unfortunately for Jet Airways, these troubles are playing out in their 25th year, where I’d
initially thought there would be more joy flying with them. Jet has been a very successful
airline over the years, raising the bar on customer service when the bar was falling for
flying Air India. I know of many corporate customers in Europe who switched to flying
Jet Airways over their home carriers on their Indian visits because of the service levels.
 But over the past few years, those service levels have been inconsistent due to the fare
wars and the identity crisis that Jet Airways underwent. While Kingfisher Airlines was
serving up prawn entrees on their flights, Jet Airways was trying to decide which
flight was going to get a meal or not based on if it was Jet Airways, JetLite or
JetKonnect.
Jet Airways problem

 Me and several corporate travellers, who are budget insensitive, continued to

patronise Jet Airways because of their network and a very strong loyalty program in
JetPrivilege. Others switched to IndiGo for their on-time performance.
 Then came a fresh lease of life in Vistara, which was the second coming of Tatas into
aviation along with their long-time friend Singapore Airlines. As much of a fresh
approach, Vistara brought to flying with their high standard product and focus on the
guest all over again; they were not able to garner a significant foothold because they
could not gain slots at key metro airports which are premium markets.
 Vistara has kept at their measured growth, but they’ve been flanked on all frontiers by
competitors such as IndiGo and Jet Airways who have kept all the prime slots to
themselves, and in the case of IndiGo, also kept pricing low to bleed everyone else out.

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 Competition from LCCs. Neither Air India (AI) nor 9W fully anticipated the level of competition that they
would face from low cost carriers. While the first wave of Indian low cost carriers such as Air Deccan
fizzled out through absorption into Kingfisher (itself a troubled company), now there are the likes of IndiGo
and SpiceJet that seem to understand the Indian flyer much better. Worse still for AI and 9W, these LCCs
are now looking at expanding abroad, which further threatens these legacy carriers in what they have
always considered their own, protected markets.
 Poor fleet acquisition. 9W has been suffering from poor decisions with regard to its acquisition of
widebody aircraft for a long time. Specifically, in the late 2000s, they ended up onboarding too many
Airbus A330s and Boeing 777–300ERs and only realized afterwards that they did not have the network and
volumes to deploy these aircraft in an economically viable manner. They then ended up leasing out
these aircraft to third parties such as Thai Airways and Turkish Airlines—no idea if these leases were
financially profitable for Jet or not; or merely to cut their losses. On the other hand, 9W to date still has not
taken delivery of the Dreamliners (Boeing 787–9), which would probably have been a better fit for the
airline compared to the 777s. Unlike 9W, Air India has been able to capitalize on their Dreamliner fleet,
going into an impressive expansion phase over the past 2 years, since these aircraft allow for “long and
narrow” (i.e. long distance, but low demand) routes to be profitable.
 Poor network planning. In continuation of their poor fleet planning, 9W also suffers from bad network
planning. The fleet acquisitions described above (especially the 777s) were envisioned to launch ultra-
long-haul services such as Bangalore-San Francisco, which ended up being short-lived or never
materializing because of fluctuating oil prices at that time. Instead of playing that risky game, 9W would
have been far better served streamlining their service offering to better compete with the LCCs entering
the market domestically, and also strengthening their regional Asian and Middle Eastern networks using
lower risk narrow-body aircraft acquisitions. They had almost a 2 decade head-start over IndiGo, GoAir,
SpiceJet, etc. which they completely wasted through this period of poor planning.
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 CompetiConfused partnerships. 9W also can’t seem to find a stable partner that can help
them grow. Originally, there were rumors that the airline was seeking admission to Star
Alliance by elbowing Air India out of the way, but this ended up not being the case. Then,
they sought out a monied relationship with Etihad, which also came to a sour end as falling
oil prices globally has been strangling the UAE’s own state support for Etihad, which itself has
been shrinking over the past year. In any case, even if this had not come to pass, there were
many signs that Etihad was only interested in using Jet as its Indian regional arm to feed its
own long-haul operations, rather than investing in Jet’s global growth. Once that stopped,
9W sought to tie up in a joint venture with Air France-KLM to strengthen its position on the
India-US market. Only problem is, yields on the India-US market are quite poor, and pursuing
a limited chunk of that market will only earn you so much, so the airline should have been
pursuing other opportunities as well—there is no sign that they did. In the end, I don’t know
what happened to this partnership, but now, they seem to be trying to jump onto Delta’s
bandwagon instead. In all of this, you can see that there is no well thought out long-term
strategy as to what parts of the world, what sorts of customers, and what style of network that
9W should have.
 Revolving door management. The confusion I have previously described could be due to the
fact that 9W has gone through a multitude of leadership changes within its top brass over the
past several years. In particular, there have been several expat appointees. Now, of course,
nationality is not an indicator of management talent or predictor of success, but the Indian
aviation market and workforce is quite a unique challenge, and it is uncertain whether
having a management team stacked with expats is the best way to runs such a company.
Will the acquisition work?

 Airline fit: Are the two airlines a fit? The route network would need to be looked at, as much
as the fleet. The route network won’t be a problem I assume due to the newness of Vistara,
but the fleet should be a discussion to be had. Jet Airways has traditionally been an all
Boeing operator, with some Airbus planes thrown in, while Vistara chose to go with Airbus
narrow-body aircraft and some Boeing 787s thrown in, which they ordered earlier this year.
The good thing is that most of these planes are on a lease, so an airline could work with one
fleet and choose to return the other. Not as painless as it sounds, but at least the capital is
sitting on someone else’s books.
 The brand name: I don’t even think this is the first thing to be discussed, but it will be an all-
important discussion to be had. Jet Airways or Vistara? 9W or UK? My initial guess is that both
airlines, and hence brands, will work separately under a single holding company, given they
would have different Air Operator Permits, before they first start with synergies, codeshares,
and eventually, combining forces under a single legal entity. Ultimately, one brand name will
survive. Would Tata’s
want to go with Vistara, or is it going to be Jet Airways with its well-known international
reputation?
9W and UK

 Other airlines grab market share: The whole affair of merging these two airlines will
mean business will not be as usual for a while. The airlines’ management will focus
inwards on the merger for at least a year, if not more than that, and that would give
other airlines time to take away passengers, and perhaps even slots.
 It’s Expensive: Last but not least, it is expensive to merge airlines. Repainting planes in
itself are one significant cost of millions of dollars, not to forget, an investment of time.
Apart from that the costs of rebranding everything is going to be massive.
9W and UK

 Human Resources & Culture: Another question for a later date, but this is where most airline mergers take years and years
to go through really or eventually fail. People. The entire airline industry works on vintage. It is joked amongst the observers
such as us, that the three most important things for people with flying-duties such as Pilots and Cabin Crew are Seniority,
Seniority and Seniority. The more senior you are, the better you get paid, and of course, you get your choice of work
schedules.
For many years, the Air India and Indian Airlines crew worked on different pay scales, working hours, schedules. They were
never truly integrated as an airline. Vistara is certainly new-generation and nimble, and Jet Airways is old school and has a
large hierarchy. It will be essential to have the people merger worked out correctly and sensitively. This issue will work
through the length and the breadth of the airline. For instance, Jet Airways has labour unions of some form, Vistara does
not.
 Reservation systems: The reservation systems are the first point of customer contact, with computers that continuously work
towards managing schedules, generating your bookings, working the finances and many more such things. Vistara works
with Amadeus; Jet Airways works with Sabre. It is a mammoth task to integrate reservation systems. United & Continental,
during the merger, literally came to their knees with reservation systems merger not going through as planned
on day one in 2012.
 Frequent Flier Program: While Jet Airways runs an independent program in JetPrivilege which is majorly owned by Etihad
Airways, Vistara runs an in-house platform. Over the past four-five years, JetPrivilege has resurrected its position as the best
frequent flyer program in the country, with enough inventory open for redemption tickets, and the addition of new
partners over the years.
Those 8 million members are a gold-mine for any airline, and the frequent flyer programs of both airlines are built on
different philosophies. Will the frequent traveller march away if they chopped away some of the liberal benefits Jet
Airways offers? Or does the new combined airline not have to worry because IndiGo does not provide an option and Air
India does not count. We already see in the hotel space people being frustrated with the new Marriott program taking
their business
elsewhere.
What Vistara sees – and issues???

 Market Share?
 International ?
 More slots
 What will happen to the employees of 9W
 Does Tata have the money
 Where will Air Asia fit in this story
 Tata Sons may have to shell out over $1 billion if it were to buy out a majority stake in Jet
Airways and invest an additional ₹1,000 crore immediately to stabilise the airline’s
operations.
 The parent of the Tata Group will also have a major task on hand to convince the joint
venture partner, Singapore Airlines to participate in the deal if Jet Airways were to be
merged with Vistara.