By Prof. Rohit Prabhudesai, Assistant Professor, Program Chair (PGDM-PT & Online) at Goa Institute of Management (GIM)
Go First Airlines, which employed around 7000 people, filed for bankruptcy in May, the second after Jet Airways in recent times. The Mumbai-based airline pointed fingers at the Pratt &Whitney engines in its Airbus aircrafts, faults in which, it said, had caused half of its fleet to be grounded this year. While the allegations may or may not carry merit, Go First certainly did not seem to be on a strong footing even before this year began. Its profits after tax had progressively shrunk since Financial Year (FY) 2017 and it had posted losses since FY 2020. The engine controversy seemed to have only exacerbated a crisis rather than initiating it.
To be fair to the airlines in the country; across the globe, the profitability in airline industry has always been on the lower side. For example, Michael Porter, the father of Business Strategy, wrote an insightful article in Harvard Business Review in 2008, in which he did an analysis of over 30 industries in the United States (US) to determine the average profitability for each.
Guess which one ranked the lowest? Airlines.
The industries with highest returns, he noted, were providing more than six times the returns than the Airline industry. Does that mean, however, that the picture is all gloom and doom and that airlines are forever doomed to accept the fate that profitability is a distant dream? Not really. In the US itself, Southwest Airlines did keep posting profits year-on-year (for 48 years, that too). How?
The answer lies in having a sound strategy.
Airline industry suffers primarily because of a lack of switching cost. For example, if I flew with Indigo from Goa to Mumbai today, there is nothing that stops me from switching to SpiceJet tomorrow if I see a better deal the next time I am planning to fly. Thus, the buyers pit one competitor against another and essentially ensure that they extract maximum value, while the revenues continually get split up as none consistently caters to any buyer. Business strategy is all about recognizing these underlying factors and responding to/nullifying them. Key factor in buyer decision process in this case is price. If an airline can keep prices lower than competitors consistently, they can create a switching cost for buyers as they have no option but to choose that airline should they want the lowest price. Price need not always be the only factor however, a certain segment of buyers also looks for service, for example, and they could be catered to also by an airline.
Each airline, thus, has to occupy a unique niche for itself. Trying to straddle across multiple positions, however, is dangerous as they require contradictory actions to execute (e.g., to keep prices low service may have to be compromised and vice versa). It is all about taking up one strategic position, tailoring your actions to that position, and painstakingly foregoing the other alluring positions which may compromise your current one.
The lowest price position (consequence of keeping costs lowest in the industry so referred to
as low cost) which Go First attempted to wrestle, can only accommodate one player, the one that can keep the costs lowest in the industry. Rest must choose some other plank on which to compete. Go First’s operating costs as a percentage of sales were never lower than Indigo’s for any of the last ten financial years. Indigo seems to have caught hold of this position well (though it, too, has struggled due to strategic reasons in recent times, but not the focus of this article) and while many others try to wrestle it away, it’s a difficult proposition unless you exclusively tailor all activities to a single-minded pursuit of lowering costs as much as possible (while adhering to all legal regulations, of course).
It did put a serious attempt at wrestling away the position in recent times from Indigo when it changed its name to the current one. However, it is easier said than done and requires consistent actions. Unless airlines recognize this fact of strategic positioning and the unforgiving nature of the industry in which they compete, more might be following the GoFirst route.
*Data from CMIE Prowess.
About The Author:
Prof. Rohit Prabhudesai serves as an Assistant Professor, Program Chair (PGDM-PT & Online) at Goa Institute of Management (GIM), Sanquelim.
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