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The "low-cost airline" mania
IndiGo was not the pioneer of the budget airline space in India. In 2003, Air Deccan introduced the concept of discount pricing to lure customers and middle-class Indians took advantage of the opportunity and took to the skies. With air travel becoming popular even among middle class customers, others players like Spice Jet, Go Air and IndiGo entered the space. To capture the opportunities presented, airlines scrambled to expand capacity quickly. However, the cost of expansion coupled with rising fuel costs and taxation rates forced airlines to increase their prices. The effort to somehow try to remain "low cost" put a huge strain on the financials of many airlines, including the pioneer of the "low cost" model, Deccan Airways, and the industry saw a spate of mergers and closures.
With ticket prices no longer significantly discounted but close to full-service, some low-cost airlines changed their model started offering free refreshments and other frills or were forced to merge. The lines got blurred between low cost and full service, which put a big question mark on those who built their entire proposition around low costs.
IndiGo's customer proposition was starkly different
IndiGo does not market itself on a price point differential comparison with its competition. Instead, it has branded itself for a key service that many customers value - landing on time. Advertisements on TV and print have emphasized the airline's on-time performance as its distinguishing feature and not its low-cost price ticket. While the company's tickets are competitive within the low-cost airline space, it is the on-time performance IndiGo has come to be known for. Interestingly, not a single airline in the country ever thought of creating its proposition around "on-time" arrival, though intuitively, we all know how important this is for any airline traveler.
On time, every time
So how did the company turn a marketing strategy into ground reality? The company is so obsessed with being on time that it has taken many steps to reduce the turnaround time - the time taken up for a plane to be ready for the next flight between landing and take off. By continually fine tuning some of process, it has achieved an industry standard for turnaround time.
The company took a responsibility-sharing approach with its customers by asking them to be in airport two hours before flight so that the flight will depart on time. IndiGo is known to shut its counters 45 minutes before take off, with no exceptions - because it is the odd late check-in of one or two passengers that often delays the flight. Customers are encouraged to print their own tickets, further reducing time at the counters getting customers checked in. To help with the turnaround time, customers are encouraged to help crew clean up quicker by dumping food waste in sacks carried by air hostesses. A responsibility sharing approach meant that it no longer is only IndiGo's responsibility to get to its destination on time - every traveler has been sensitized to how he/she can play a meaningful role in achieving this objective.
An obsession with costs
Since planes burn more fuel on ground, with the reduced the turnaround, IndiGo planes spend more time in the air resulting in reduced fuel burning. This in turn further reduces the costs of fuel, one of the major components that airlines grapple with. The company also focused on details in every process to increase efficiency, cutting costs and increasing margins wherever possible. A distinctive step from competitors that the company took was to lease only one model of aircraft. By leasing only one aircraft model, it gave the company greater flexibility as it requires less change in crew and pilots and allows the flights to be airborne for longer. By using a short lease agreement, the airline has some of the youngest fleet and reduces the need for frequent overall checks and major repairs. The airline also opted to use vendor supports contacts instead of keeping inventory for repairs. By choosing to have the regular aircraft maintenance checks completed in Sri Lanka instead of other locations like Dubai, Hong Kong, Singapore or Kuala Lumpur, the airline was able to trim its maintenance costs.
The airline has also the leanest workforce and thus saves on hiring, training and upgrade costs. Instead of offering multiple destinations, the company chose to offer frequent flights on fewer destinations. This helped the airline to keep a tight leash on costs because it did not have to spread itself thin on infrastructure costs spread across various airports.
The airline also pays very close attention to maintaining fuel costs through detailed analysis. Pilots are trained on how to save fuel. Recognizing that in-flight magazines create weight which means more fuel burning, the airline opted to use a catalogue size magazine to reduce weight. Keeping costs low is an obsession at IndiGo, and it uses every possible opportunity in every aspect of its business to find ways of reducing costs - including a tiny detail like the weight of its in-flight magazine.
What this obsession with costs and its sensible operating strategy does is that it allows IndiGo to compete on price effectively in the marketplace and yet make much more money than any other airline in the business. Others bleed while IndiGo's profits keep improving, year after year.
Takeaways for financial advisors
The last mile connect between mutual funds and investors (distributors/advisors/direct/online platforms) is increasingly being viewed from a cost perspective, thanks in part to regulations that are increasingly focused on costs. You can either join the price war (like most airlines jumped onto the "low cost" bandwagon) or chose to focus on a customer proposition that your investors will connect with (like IndiGo chose "on-time" performance). You could for example focus on a proposition that you will get your clients to their destination (their goals) safe and sound, on time, every time. You can make the entire process just as participative as IndiGo has done, by sensitizing your clients about the role they play in helping achieve this shared objective, even as you focus on doing your part flawlessly.
At the same time, it is prudent to recognize that margins will come down in the financial intermediation business. You want to remain competitive on price and at the same time ensure reasonable profits for your business. Its time to focus on every element of your costs - challenge every process to see where you can either boost productivity or lower your costs. Just as IndiGo shows us, an obsession with costs cuts across every aspect of its business. That's what in the final analysis enables it to make money in a market where most were losing money until recently.
Content is prepared by Wealth Forum and should not be construed as an opinion of HDFC Mutual Fund.
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Wise Advice: Evolve
The airlines business is regarded as one of the most difficult businesses to be in - hardly anybody ever makes money in it - not just in India, but across the world. It's a business that tripped up our King Of Good Times among many others. Yet, one airline company in India has gone from strength to strength, increasing market share and profits at an envious pace. IndiGo - the airline owned by Interglobe Aviation has achieved this on the back of two significant initiatives - which redefined the airlines business in India - and which offer rich insights to financial advisors who are now worried about shrinking margins and increased competition in their own business.