How many IITians does it take to fix Indian aviation?

From http://www.livemint.com/2009/11/01233347/How-many-IITians-does-it-take.html

Although there have been very few profitable years in the lifetime of the global aviation industry in both absolute and relative terms, the industry is indeed going through its toughest year ever. Airlines in India posted cumulative losses of about $2 billion (Rs9,400 crore) in the last fiscal ended March. Air India reportedly lost $1.1 billion on revenue of $3 billion and is expected to lose around $1.2 billion this year too if corrective measures aren’t taken. It is also currently in talks with the government for a bailout. The two largest privately owned competitors also lost money last fiscal: Kingfisher Airlines Ltd lost about $350 million on revenue of $1.1 billion, or about 30%; Jet Airways (India) Ltd lost $209 million on revenue of $2.8 billion, or 7%.

Industry experts have been dissecting and diagnosing the problems and have suggested quick fixes for some of them. Overcapacity, overstaffing, high employee costs, high oil prices, high airport fees and inefficient yield management have been some of the obvious areas examined by these analysts. However, there has been relatively little discussion on a major inefficiency that is also the third biggest cost item on an airline’s expense sheet—distribution.

From the 1960s through 1980s, global airlines invested in the development of global distribution systems (GDS) such as Sabre in the US and Amadeus in Europe. The low-cost carrier (LCC) business model emerged in the 1980s and 1990s, which, along with other operational efficiencies, leveraged the growth of the Internet to push direct sales through the most efficient online distribution channel. In addition, online travel agents (OTAs) emerged.

At the beginning of the 1990s, reservation and sales expenses as a percentage of sales for airlines in the US hovered at around 20%. With the introduction of initiatives such as Web-only fares and by working with direct-connect technologies such as Orbitz, airlines in the US brought distribution costs down to under 10% of sales in the last few years. However, average GDS booking fee per segment in the same period kept increasing by almost 5% year on year.

In India, Jet Airways’ financial results for the July-September quarter shows Rs250 crore of sales and distribution costs, as opposed to Rs2,325 crores of sales. This implies a sales and distribution cost of around 11% of sales, compared with 8.9% of sales in the same quarter last year. For Air India, too, sales and distribution costs are believed to be 8-10% of sales with a slight increase rather than decrease over the last year. The annual sales and distribution costs for Jet Airways, Kingfisher Airlines and Air India were thus upwards of $200 million each, contributing to the estimated $700 million sales and distribution expenses of the Indian aviation industry. These three airlines account for almost 65% of capacity in India and almost 90% of the distribution costs. Contrast this with SpiceJet Ltd’s sales and distribution costs of almost 5% of its net sales of $360 million, with assumedly similar figures from privately-owned IndiGo, run by InterGlobe Aviation Pvt. Ltd, the only airline that posted a small profit in the last fiscal.

To compete more efficiently with the LCCs, both Jet Airways and Kingfisher Airlines have recently moved more capacity to their “low-fare” brands, which now account for at least 70% of total capacity for both carriers. However, distribution costs have either remained the same or grown. This has shown up as an increase of distribution costs as a percentage of sales in their financials. Even for LCCs that do not pay hefty agency commissions, distribution costs have been nearly 4-5% of sales.

Past efforts of distribution cost reduction have not yielded much ground. In the US, despite travel agency commissions moving down to zero, GDS booking fees and OTA incentives kept increasing. Even the promise of the airline-backed Orbitz seems to have not delivered—airlines in the US continue spending billions of dollars in distribution costs. GDS and OTAs have consistently maintained 8-10% net profit margins as a result. In India, Jet Airways and Air India tried in 2008 to enforce “zero commissions” on Indian travel agents in a bid to reduce distribution costs dramatically overnight. In a scenario where these agents control at least 80% of flight bookings in the country, the move was short-sighted and backfired, leading to a boycott of sales followed by a negotiated regression from 5% commission on base fares to 3% commission on total fares—airlines effectively ended up paying more commissions than they were paying before. In addition, airlines are paying overrides to preferred agents and booking fees to the GDS.

The distribution landscape in India has evolved rapidly in the last three years. At least 33% of railway bookings and 26% of all flight bookings now take place online, with online bookings growing at almost 25% year on year. OTAs, which use the expensive GDS distribution channel, account for almost half of these sales. This means that the advent of travel portals has actually led to an increase rather than a decrease in distribution costs. In addition, it has added to the complexity of airline yield management and increased the leverage that intermediaries have vis-à-vis airlines themselves.

A young entrepreneurial team of experienced returnee Indian Institute of Technology engineers and Insead MBAs has set out to change this. IXiGO.com, launched in 2007 and named a Nasscom (National Association of Software and Service Companies) Top Innovator in 2008, believes it can turn the tables of online distribution back in the airlines’ favour. Its “meta-search” business model allows travellers to search airline Web fares and then, in a neat move of disintermediation, redirects consumers to the booking page on the airlines’ own sites to complete an efficient transaction. No GDS booking fee, no agency commissions and overrides. Just a consumer, a vendor, and a search engine to connect the two. A paradigm shift that can fix the aviation industry when it scales.
Consumers are happy since they can believe what they see in iXiGO’s results, free from bias. For airlines, this bias-free display and redirection process also means more effective yield management and ability to cross-sell/up-sell to the consumer once he/she comes to the airline site. Read less cost, more revenue, more value to consumers and more power to the airline. No wonder then that iXiGO.com has been growing at a staggering pace of 300% year on year.

Capital efficiency and technology prowess have been the cornerstones of iXiGO.com’s premise. OTAs in India raised a cumulative of around $100 million of venture capital money in 2006-07. OTAs cumulatively spent around $20 million in print and television marketing during the last fiscal. iXiGO grew purely by word of mouth publicity. OTAs employ upwards of 600 people each while iXiGO is a 20-member team.

It seems obvious that these efficiencies get passed on to both the consumers and the airlines. For every dollar of revenue iXiGO generates from airlines, it is helping them save three dollars on distribution and generate a few cents in ancillary revenue, too.

Innovative businesses such as iXiGO.com offer airlines in India the means to drastically remove inefficiencies in the distribution chain, and more importantly, the hope to be back in the black soon.

Srivatsa Krishna is a Harvard MBA and an Indian Administrative Service officer. He writes weekly on business, government, infrastructure and entrepreneurship. The views expressed here are his own.

Respond to this column at offtherecord@livemint.com

Why CFOs love iXiGO.com

In these times of flat top lines and receding bottom lines, cost cutting is an imperative from which no CFO can shy away. Some key findings according to a recent survey conducted by CFO Research Services in collaboration with Amadeus and research carried out by Effective Travel Management:

• Around 50% of the CFOs / finance professionals interviewed for the respondents believe that booking directly on Airline / Hotel websites offers significant (medium to high) opportunity to save costs. (Source: Cost Control and Beyond)
• A major proportion of respondents feel that effective feedback tools save costs (25%) and improve operational efficiency (17%) (Source: Cost Control and Beyond)
• It is possible to enjoy cost savings of ~10% just through Advance Air Booking (5.7%) and booking Restricted Fares (4.8%)* (Source: Effective Travel Management)

* Note: As restricted fares are typically available in advance, there is a 1.5% overlap in savings from improved performance in these two areas.

iXiGO.com offers several tangible benefits to the CFO looking to keep costs in check:

• Book Direct – iXiGO.com searches directly on the airline sites. It also provides access to the world’s largest inventory of hotels, offering the greatest option to users while displaying fares from various booking sites (including direct hotel sites).
• Reduce Costs through “Visual Guilt” (Price Comparison) – It is a well researched fact that when people are presented with options and shown visually that they can get the same product for substantially less, they feel compelled to do the right thing (i.e. buy at the lowest price). iXiGO.com allows travelers to search and compare the same property across different vendors, thereby ensuring the lowest possible cost to the firm.

• Leverage Feedback of the Crowd – iXiGO.com searches multiple travel review sites, providing “Do-It-Yourself” (DIY) professionals a single window access to the wisdom of the crowd.

• Plan Ahead (Advance Air Bookings) – iXiGO.com’s fare outlook graph allows the business traveler to save costs by planning ahead.
  

• Search Lowest Business (or Economy) Fares – iXiGO.com enables the harried business traveler strike the ideal balance between cost and comfort by providing the flexibility to search both Business as well as Economy class fares across all airlines.
  
• Search Fare Trend on Preferred Supplier – Definitely a boon for the “DIY” traveler who can now view the next 30 days’ Fare Outlook for all airlines on their frequently flown sector(s).

• Monitor Fare Trend on Most Frequented Sectors – iXiGO.com makes it easy to monitor fare trends by "pushing" them to the busy professional's Desktop or Web based RSS Reader.

• Rail as a Viable Alternative – Super fast search allows the cost conscious traveler to easily identify the routes where rail becomes a viable alternative to air.

Smart CFOs understand that all travel portals are NOT equal - booking through Online Travel Agents (OTA) adds an extra layer of cost and makes true price discovery impossible due to opaque pricing strategies followed by the OTAs. It is also easier to make last minute bookings and modifications while dealing directly with the airlines. Most OTAs have a blackout period, hence in many cases flights which are displayed on airlines' site - as well as on iXiGO.com, may not even get displayed on the OTA!

We guess these are reasons enough for smart corporate users from firms as diverse as Puma, Microsoft, SAP, Oracle, ITC, L&T, Ranbaxy (and more...) to patronize iXiGO.com! :-)