Analysis - Jet Airways decision to axe Chennai-Brussels and add Bangalore-Munich is viable

It has been almost a month since India’s largest airline Jet Airways announced that it was cancelling its flights between Chennai (India’s third largest city) and its once robust scissors hub in Brussels, and I still am having trouble fully understanding the impetus behind the decision, though I do believe that there is a scenario where the move(s) made by Jet do make sense. The cancellation left Jet Airways with just 4 daily flights in Brussels; Mumbai and Delhi on the Indian side – Newark and Toronto on the North American side.

Separately, Jet Airways appears to be launching a daily Bangalore – Munich terminator as Jet Airways flights 152/153, though the route has not yet been officially announced by Jet Airways and the winter 2012-2013 flight schedules have not been finalized.

The elimination of Chennai-Brussels flies in the face of the strategy we outlined earlier this year for Jet Airways’ North American operations, which called for an expansion of the scissors hub. From a practical perspective, it reduces the value of Jet Airways to Star Alliance (by eliminating a hub-hub route), while also reducing the attractiveness of Jet Airways to the rapidly burgeoning merchant and manufacturing travel base in Chennai by eliminating the direct flights.

Adding Bangalore-Munich makes more sense, especially if the expanded partnership between Jet Airways and Lufthansa comes to fruition. Even with a Lufthansa partnership, 9W 153 is not timed optimally to connect into Lufthansa’s North American bank in mid-afternoon; the 8:35 am arrival would require a 6-7 hour connection for most US destinations. The United, US Airways, and Air Canada flights are timed a little bit closer to the Jet Airways arrival but the business case seems to be primarily built on European connections.

As of right now, Jet appears to have no immediate plans to terminate the Mumbai-Newark and Delhi-Toronto services through Brussels. What this implies is that Jet Airways plans to continue with both a European operation to Munich, and a North American operation through Brussels. This sort of split operation is typically a bad idea, because instead of a strong European operation in one place, you can end up with a weaker operation in each of two places. That being said, there is a scenario under which the switch would make sense.

Since Jet Airways currently under-utilizes its fleet of Airbus A330-200 aircraft, two A330s could be dedicated to Munich flights from Bangalore and Chennai. The purpose of these flights would be to feed into Lufthansa’s Munich hub and secure the two major Indian cities currently outside of Lufthansa’s destination portfolio in Munich. The flights would be timed to depart India in the early morning (between 6 and 8 am), and arrive in Munich around noon. 

The critical piece is securing membership in the Trans-Atlantic joint venture (JV) partnership between Lufthansa, United, Swiss, Austrian Airlines, and Air Canada. The JV offers its members anti-trust immunity (ATI) for all trans-Atlantic flights. In practice, this means that the airlines can act like one business across the Atlantic; sharing the costs and profits of their respective trans-Atlantic network proportionally to their size, jointly marketing and selling trans-Atlantic tickets, and most importantly being allowed to coordinate and discuss strategy. It doesn’t matter to United if a passenger flies Lufthansa’s Frankfurt-Newark leg or United’s; because United will still get a share of the profits.

Without membership in this JV, the Munich flights by Jet will have to be treated as Indian competition for Lufthansa’s lucrative business here (especially in Bangalore). Once under the umbrella of ATI, these flights can instead be treated as strengthening additions to the Star Alliance hub in Munich – giving Jet a shot at financial viability. I am still not fond of Jet’s decision to abandon Chennai-Brussels and add Bangalore-Munich, but I can understand the strategy behind it.

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Turbocharging Jet Airway's international operations

By Rishul Saraf and Vinay Bhaskara

Jet’s international operation, which began in 2004 with a Chennai – Colombo flight, today has over a hundred flights daily, which generate nearly 60% of the airline’s total revenues. Jet’s system wide load factors stay around a healthy 80% mark, but their revenues are unable to match up with this, hence denying them of consistent profitability. Jet lost about $74 million on their international operations between March and December 2011.

In their international network, Jet’s two biggest biggest international operational regions are the Gulf where they deploy 32% of their available seat capacity and the SAARC (Indian sub-continent) countries which sees about 27% of their total international seats offered.

Jet’s strongest points are destinations which attract business centric traffic, Hong Kong, Singapore, London, coupled with high operational reliability, a good in-flight-product, and a strong frequent flyer program (FFP).

Although stable in-terms of passenger loads, there are plenty of problems facing Jet on the international front.

Integration
Firstly, Jet needs to effectively integrate their domestic-international operations. Certain routes, like Delhi-Milan and Mumbai-Johannesburg, depend heavily on passengers from beyond their immediate origins and destinations, and therefore well timed and integrated domestic connections. A lack of this much need connectivity, at both ends, is in our opinion the bigger reason for the underperformance of these flights, and not the cut-throat competition from the Gulf Carriers, as we are pre-disposed to believe.

North America and Brussels
Another big issue is Jet's North American operation. Despite impressive loads, and commanding a sizeable chunk of traffic at the European scissor hub, Brussels, Jet's revenues are getting eaten up by the high cost of operating this hub.  In comparison, Air India’s non-stop operations from Delhi to various markets in the US like New York and Chicago, have led to a lot of high yielding passengers shift from Jet to Air India because of more conveniently timed arrivals into the US and Canada, and shorter overall flights.

The problem in a scissors hub is that an airline cannot make significant changes in one of the flights and expect the hub-wide operations to remain stable, which is what limits Jet as far as Brussels is concerned.

However, Jet Airways could hypothetically re-time their entire Brussels hub operation to roughly match the timings of Air India’s nonstops, with the only limit being the operational flexibility of their overextended A330-200 fleet. The Brussels hub would also be strengthened by more destinations on the US and Indian ends. For example, Chicago-Brussels was recently cut by American Airlines, and Jet could effectively step in to replace this service and offer an India-Chicago service.

Jet Airways should also seek to improve ties with Brussels based Brussels Airlines, who operates flights within the EU and to Africa. Further integration between the two carriers would turn Brussels into a viable connecting option on the US-EU, US-Africa, US-Middle East, India-Africa, and India-EU sectors. If Jet and Brussels Airlines were to apply for Anti-Trust Immunity (ATI) in the Brussels hub, the two airlines could coordinate schedules and prices, share profits, and generally shore up their tottering finances.

Alliances
One way to improve system wide yields and effectively compete on mature markets such as the US is to join a major alliance, Jet may or may not be in talks with all three alliances, but going forward they have to decide which one to choose, as the advantages of being in a major alliance, by far, outweigh the advantages of having interlines/code-shares with airlines of all three alliances.

Boeing 777-300ER

One thing that needs to be addressed by Jet on a high priority is their Boeing 777-300ER (77W) utilisation.

At present they have five in their fleet and five are leased out to Thai International Airways, which are due to return late next year. Last year Jet had seven of this great aircraft from its fleet leased out to Turkish THY Airlines, and Thai.

It is a very incorrect perception of a lot of people who believe that B77W’s are very big planes for the Indian market. They’re perfectly capable aircraft for the Indian market.

The problem is the way Jet has configured their aircradt couple with Jet's operational and network strategy.

Jet is probably one of the only airlines in the world offering First Class Suites in the Boeing 777 aircraft, and has won global awards for the cabin product. Even their business class is a herringbone configuration with full flat seats. (See pictures here). These cabin products though very luxurious, occupy a lot of space and add on a lot of weight, leading to very high operational costs. Couple this with a competitive market ex-Mumbai especially by the Gulf carriers, married to the lack of Jet participating in any alliance, the carrier loses out as they’re not in a position to price their tickets proportional to the luxury reducing them to razor thin margins.

Jet should strongly consider eliminating their First Class, and downsizing their Business Class and as a worst case increase seats in Economy by changing from the current nine abreast 3-3-3, to the high density 10 abreast 3-4-3 configuration.

Overall there are various positive markers in Jet’s international operations, and results will improve again once the oil prices cool down and the rupee denomination stabilizes, but Jet will have to take certain measures so as to reduce their susceptibility to the ever fluctuating oil prices. Fuel hedging contracts at the moment may not be practical, but if the price of fuel drops below $70 per barrel (West Texas Intermediate) as some analysts have predicted, then Jet would do well to stabilize its fuel expenditure that makes up more than 45% of operating costs.

With the de-facto termination of Kingfisher’s international operations later this month, Jet will have an opportunity to shore up its international operations and return them to net profitability. Promotions targeting former Kingfisher frequent flyers may be in order, as would sales and other attempts to increase the carrier’s share of this lucrative segment. Jet has been afforded an opportunity to grow a profitable business segment, now it just needs to take advantage.

Rishul Saraf is an aviation enthusiast for the last three years when not engaged as an Engineering student. He has a keen interest in Jet Airways.

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