Monday, August 29, 2005

The maths of low-cost flying.

Since no-one has done this till now, lets simply do the maths of a DEL-BOM flight.
The block-time (the time the plane is operational which includes the time taken on the ground) costs of running a A320 or B737NG aircraft in India (including fuel costs, navigation charges and landing charges) is around Rs 1.8-2 lakhs an hour. Since block-time is calculated from the time boarding starts till the last passenger has left the plane, DEL-BOM (or v.v) can safely be taken to be a two-hour block-time. So that is Rs 400,000.
Add to that the costs of crew, ground services. You pay a Commander on a A320/737NG upto Rs 450,000 a month and a First Officer upto Rs 200,000. The guys can only fly 25 hours/week and never more than seven hours a day, and only five days a week. So for each aircraft you need to have at least 10 pilots. Plus there is the cabin crew - even if you pay your air-hostesses next to nothing - Rs 20,000/month (lead cabin crew get around Rs 60-80,000 in a LCC) say you need one-airhostess per 50 passengers. The minimum crew requirement then is four air-hostesses on a plane carrying over 150 passengers (which a A320/737-800 does). Plus add in factors of ground-crew, check-in staff, baggage handlers, drivers etc. Amortise the costs between all your flights and that still means that you spend at least Rs 50,000 on employee costs every flight, because the management at many of these companies are paid in dollar salaries (Kingfisher, SpiceJet). So that is Rs 450,000
And then there are leasing/loan costs. A plane while cheap-ish to buy (85% of a loan is guaranteed, thus ensuring low interest rates in a time of low interest rates) a A320/737-800 costs upwards of $50 million and a loan over ten years means you need to pay back around $6 million a year, that is $500,000 a month and lease rates for a new A320 start at around $250,000-300,000. Even at 12/hour utilisation (again block-time) every nine days out of ten (every plane needs to be rotated out of service for routine check-ups every once in a while after all if it has to be kept from falling out of the sky). That means a plane would fly around 320 hours a month. Which works out to around $1600/hour (bought) or between $800-1000 (leased) that is Rs 40,000 - 80,000 in CapEx costs every hour. And this doesn't include the cost other equipment (safety equipment, air-stairs, computer equipment blah blah blah) so again assume around Rs 75,000 an hour (high-ish estimate). And that makes a flight's costs around Rs 600,000.
Now, a Air Deccan plane seats 180 passengers, which means that the fair cost of every ticket is around Rs 3333 without any margins and that doesn't include maintence costs, training costs and overnight parking charges. OK, so Gopinath pays his people less and uses e-ticketing and blah, blah, blah. Even then, the fair price would be around Rs 3000 a ticket. On Kingfisher Airlines with meals (@ Rs 200/meal) and the cost of maintaining LCD TV screens and other IFE equipment add to the cost (plus the foreign pilots and management) and they only have 172 passengers. So fair price would be around Rs 4000 with zero margin. (very low estimate)
And these calculations have been done with relatively cheap fuel charges factored in. With oil hitting $70/bbl plus, you can calculate yourself if these airlines will be profitable with ticket prices barely touching Rs 5000 at the most. I don't think any of the airlines can make much money unless they have huge fleets to get some cost advantages (on training costs, maintenence, infrastructure). There are going to be a slew of IPO's next year where the airlines (sometimes flamboyant promoters) will get their own money out and let the investors money sink - a la America. Lets put it this way, untile recently (and despite 80 per cent plus loads) Jet Airways didn't make too much money. Yet, everybody has a 'me-too' syndrome and wants to start-up a new airline. I'ld hate to see people out of jobs, but with airlines mushrooming up, unless there is a collapse soon, there are going to be a lot more tears than smiles in the skies above India. And many consumers might get badly burnt.
But what does the objective media say - Cheap tickets - good! Bad Economics - who cares, after all Kingfisher, SpiceJet and Air Deccan are big advertisers and most correspondents don't understand the E of Economics.


thalassa_mikra said...

But then, EasyJet and RyanAir have been doing it for years in Europe, and now JetBlue is doing great in the US. Apparently significant cost cutting can be made by landing in smaller airports, doing away with travel agents, and cutting on refreshments. Also EasyJet has flexible flight schedules, increasing flights during holiday travel season and cutting back for the rest of the year.

I also read in some article by Vir Sanghvi that apparently Indian airports have some of the highest landing charges in the world, perhaps rivalling Narita.

K said...

That is true Indian airports have high landing charges - though no Indian airport, despite Viru's arguments rank in the global top ten pound for pound. However, air navigation charges (ATC) are among the highest in the world. Therefore while it costs around US$1500 per hour for a A320/737-800 aircraft block-hour, in India the costs are around 33% more.

livinghigh said...

so buy me a ticket-vicket na. i wanna go by saddi dilli again. :(

Alltough said...

Wow. When I see a journalist number crunch, I am simply amazed.
I am zero in Mathematics, but you made it so simple. Thank you. Loved reading it.

Anonymous said...

Dear mr k.

you young boyz are knowing nothing about operations of airlines in india.

1) you must make sure that you fly into and outoff aamchi mumbai and are not pushed off to spend the nights at Ahmedabad.

2) you must ensure that your planez is flying with lots of cargo. Jet airwayz and heil sahara knowing thiz very well.

3) you must making sure that you have your own ground handling (so no snooping fellowz can go poking around)

4) After thatz itz always Nightz Flightz to Venuz.

yr friendly auntyz

mrs soonawalla from poona

K said...

thanks auntyz? I guess.

Anurag said...

Hi K, I work with Air Deccan where I am responsible for Revenue Management/Yield Management.

Its interesting to go through your calculations. Won't comment on the specifics, but by-and-large you are right that airfares in India currently are at unsustainable levels. Fares have to go up, or the airlines will go down. Having said that, keep in mind that airlines die an elongated death, as there's a lot of money pumped in running and starting this business. It has always been a low return business. And even with the Blue Ocean strategy that LCCs are adopting, it'd continue to be so! The only difference in India currently is that airlines are keeping a war-chest aside to fight the stupidity in the market!

So, for the next one year (with Indigo launching in June/July with its 100 toys order!), you can expect the frenzy to continue.

The only constituency that is having a great time in India right now is the air travelers! Fly on!!

K said...

Anurag : I know my calculations might be off the ball, after all fuel prices have increased and so have lease rentals. But if I can get BOM-DEL-BOM for under Rs 5000 why should I really complain.

Anonymous said...

if we talk abt only low ticket fares we r doing a unjustice. there r other charges also which r like lugage charges. charges more than the lugage allowed in the aircraft. tie ups with different hotels and travel agents also bring economies of scale n in the long run this helps a airline to build costumer base. cost can also be reduced by flying small aircrafts for short duration. there r no. of factors affecting the cost the only thing which matters is how we r dealing with the available resources.

Jim Karter said...

Yes. Now its showing in the companies.