The amazing performance of Indigo Airlines( its the only airline company to make profit since starting operations) since its inception has finally made it possible to be the top leader of the market surpassing JetAirways and now occupies 27 % market share. Under the leadership of Aditya Ghosh ,Indigo has been able to survive the otherwise 'troublesome' aviation sector. This has cleared Vijay Mallaya doubts who had commented on the veracity of Indigo's profitability.
KFA share plummeted from around 20% in July last year to 3.5 % in August this year. No doubt that Indigo has benefited from the plummeting share of KFA but it is important to realize that this alone isn't the reason for Indigo's success. This opportunity was available to all the airline companies and it is because of its efficient way of functioning that it has been able to expand its market share.
What was the difference between the business models of the two companies that led to such a contrasting fate for the two companies?Indigo focused on a slow and steady approach , conducted a thorough analysis of the market to understand that the average consumer would not be fascinated by red carpets, expensive food and entertainment facilities but rather would be more concerned about the basics of the airline industry are supposed to provide that is clean aircrafts and punctual flights operations(hence the excessive emphasis 'on time'). I recall that the managing director Aditiya Ghosh had mentioned in an interview that he wanted to show that 'low cost' is not synonymous with 'low quality'. This has precisely been the reason for its success. Indigo understood what the customer essentially wanted from a domestic airline company. Thus it has been able to minimize the wasteful expenditure and focused on ‘no frills’ model followed by US regional airline companies.For example , doing away with 'free food' provided in the flights and instead making the food available on payment as per the choice of the customer.This in turn removes the cost of food in the ticket making it more competitive .Moreover KFA worked on the premise that luxury would sell in the airline industry. What it failed to consider was that fuel costs comprise a very prominent share of variable costs that are subject to changes in international market. In times when the price of fuel would escalate people would often cut down on luxury expenditure ( elasticity for luxury goods is greater than one)
Additionally both the companies followed different strategies to expand to international operations. While KFA followed an aggressive and haphazard approach ,Indigo followed a organized approach. This helped Indigo by not increasing costs immediately and gave the airline ample time to expand and stabilize.Malaya’s approach to expand to international operations is best described as aggressive. Impatient to start international operations, he chose to acquire Air Deccan – a low cost provider.This was done to meet the criteria of 5 year domestic operations to fly international routes. In this haste , KFA acquired a low cost airline with a low turnover and huge debts. The most damaging aspect of the merger was that it created a ‘brand conflict’ among the consumers. One of the most important aspects of a merger is to evaluate what would be the impact of the merger on the demand for the current product/service offering. This is exactly where KFA missed the mark and created confusion in the minds of the consumers.
As KFA's market capitalization now stands less than its debts , it now depends how well it can resume its operations back to normal. This will be possible only if the banks would be willing to lend the airline to support its daily operations. Just like an economy fighting recession has to ensure increase in capital expenditure to drive demand and escalate GDP similarly KFA has to get back to its normal operations to prevent the dilution of its market share ( that is supposed to reach its lowest 3.5%). T
No doubt the aviation industry is not the easiest to survive( even Michael Porter believes so) but Indigo’s management has proven that the doubts expressed by Mallaya are spurious. It is at the end what the business offers that will decide its fate.
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