Perspectives from ISB

Aviation in India & Vistara

Phee Teik Yeoh, CEO Vistara – Interview – July 12, 2017

In this interview, Mr. Yeoh talks about how he crafted and made Vistara the airline of choice amongst Indian consumers. He is succeeded at Vistara by Mr. Leslie Thng, and is now back in Singapore Airlines in a senior role. The interview is comprehensive, and would help give an idea of things to talk on Day 1

Q1. What makes Vistara different from other airline in India?

Vistara, when it first came to the market vowed to transform the flying experience in India forever. I’m glad my team and I have been able to fulfill the promise from day one. What makes us different is we put customer at the center of everything we do.

We aim to provide a seamless and personalized service which has eluded many travelers until the arrival of Vistara. So, it’s all about delighting our passengers with a memorable experience which will keep them coming back for more. We have differentiated ourselves from all airlines not just in terms of our product but also our service. Just to give you an anecdote – many passengers for instance, tell us that they can see the sincerity, the genuineness in the way we approach our business, in the way we deliver service to our customers. They always talk about our cabin crew smiling with their eyes. These simple gestures wow the travelers and all this is made possible because of our culture of customer centricity in everything we do.

Q2. India is the fastest growing market in the world. What are the major challenges of operating in India?

Even though the rate of growth rate has come down from the 20s to the teens, even then it is one of the fastest growing. In May, India reclaimed the spot for being the fastest growing in the world beating China.

The fastest growing market also brings the challenges of the infrastructure not being able to keep pace with the fast pace of growth. It also puts a strain on ready availability of skilled resources. One of the biggest challenges is the high cost of doing business. For instance, the ATF, and landing-parking charges at the airports. Coupled with this high cost of doing business is the extremely price sensitive nature of the market.

The challenges are not small and together with the issue of infrastructure puts an immense strain on the operators in the Indian aviation market. Profitability is one issue and the other is about how the infrastructure bottlenecks, which if not addressed promptly enough, will trim the growth of aviation in India very soon.

Q3. What were the key inputs you got from the big parent brands – Tata and Singapore Airlines, when you set upon this venture?

We are indeed blessed to have two global iconic brands as our parentage. For a start, to have come from the union of these two trusted and well respected brands, which excel in service, paves the way for Vistara’s smoother than expected entry into the market. Even after our launch, the fact that we are from Singapore airlines and Tata earns us a lot of credibility and that has been supported by delivery subsequently. This is something that is not easy to achieve in such a short span of time.

The other advantage of having two global brands is that we can easily harness the best practices from these highly successful brands to bring to bear within the organization. Without a doubt we aim to excel in service much in the same manner which has allowed Singapore airlines to be one of the best airlines when it comes to service excellence in the world.

Q4. The industry demands a lean cost structure. At the same time Vistara is trying to deliver service excellence. Can they be contradictory at times? If yes, what is the right balance between the two?

It is not a zero sum game. It may appear to be so but it need not be. If you recall, I just mentioned about how we are winning over customers simply because our cabin crew smile with their eyes. What is the cost of doing so? Nothing. It’s all part of the training and culture we imbibe within. There are many other examples whereby which you can excel in service without breaking the bank. For instance, it is about being intuitively thoughtful and anticipatory of the needs of the travelers whenever there is a flight disruption. In doing so, we delight them with pleasant surprises when they least expect in their encounter with Vistara. So, being intuitively thoughtful, sincere and genuine about wanting to delight our customers is costless.

Having said that, to succeed in the tough aviation market like India requires one to be nimble and agile, not just in the execution, but also in the way we manage our costs. This is where we focus a lot on how we can flush out inefficiencies from our process and how we could leverage more strongly on technology to bring about excellence in service. We also look at how we could flush out cost from what I term as a non-customer fronting activity and reinvest part of the cost saving into providing delights for the customer in terms of service and product.

Q5. In a market where excess capacity is being rapidly inducted into the market, it becomes necessary for airlines to keep coming up with new ancillary revenue streams to strengthen their bottom line. How does Vistara intend to innovate here? We see airlines abroad tend to get ancillary revenues to the tune of 15-20% in certain markets and in India, IndiGo gets 13% of its revenue from ancillary streams. In this industry, at a time when margins are just 5-6%, what does Vistara intend to do on this front?

Without a doubt, the huge capacity induction into the market will put pressure on the airfare (yield) making the profit margins from ticket sales, if any, to be wafer thin. Hence, it is no surprise that airlines, not just in India but across the world are increasingly looking into ancillary revenue to write out the vagaries of pricing from immense capacity induction. At the same time, I would like to look at ancillary revenues being the outcome of airlines increasingly looking at providing choices to customers. This is what Vistara is positioning itself in terms of allowing passengers to pick and choose added product and service features that make sense to them and for which they are prepared to pay a little more.

Vistara has always believed in catering to the needs of its passengers in an intuitively thoughtful way starting from when we first launched our Premium Economy class product. We were the first and remain the only Indian carrier to have the Premium Economy product today essentially to cater to the uniqueness of some of the business travelers who do not mind paying a little more for a whole lot more comfort and exclusivity whenever they travel.

In our two and a half years of operations, we have also introduced a slew of ancillary product and services. For instance, the Corporate Early Flyer gives passengers the flexibility to take an earlier flight should his or her meeting get over earlier than expected. By paying a small token amount of fee, one earns the flexibility which may be very valuable to some of the time starved frequent fliers. We also have paid lounge access and some can even purchase excess baggage in advance so that they do not have to go through the hassle of paying the excess baggage fee in a hurry before the check-in counter closes. So, it is about providing choices because no two passengers are the same and some are more willing than others to pay extra for the additional services. This allows Vistara to better manage the thin margin that one can get out of ticket sales alone.

Q6. In India, 2/3 of the market share belongs to LCCs. The biggest carrier, IndiGo has a market share of about 41%. The next best, Jet Airways is about 23% points away at about 18% share. What does it mean for the industry that there is one single airline tending to be monopolist? In future, this could mean that they have extra power over setting prices in the industry in terms of fares. They can also squeeze more fuel discounts by virtue of their scale.

With every threat, lies an opportunity. While one views dominance to be a threat, I would like to view IndiGo’s dominance as an opportunity, strange as it may be. Do not forget that IndiGo is a low cost carrier (LCC) player and 2/3rd of the market is driven by LCCs which means that Vistara being a FCC has a lot of opportunity to state its presence in the market because as you mentioned even Jet Airways has a share of around 20%. It is not an overcrowded field of players when it comes to FSCs so there lies the opportunity. Having said that, you are right to say that market dominance does a lot of harm to the industry especially to the customers who would always like to have choices. The dominance of one player alone in the market sometimes stifles creativity. Therefore, one of the many things players with a smaller market share can do is to be more creative in their efforts to differentiate themselves as much as possible. If you do not have the scale to win the market, then you have to rely on product and service. This is exactly what Vistara has been focusing on and has been achieving. We have a market share of a mere 3% but the followers that we command and the good reviews we continue to receive from the trade and travelers is much more than what our market share would speak for itself.

In the future, we have to differentiate our product and service even more sharply and focus on sustainable growth. Sometimes, being small has its advantages as well. Being small allows us to do many things that the larger players cannot do. For instance, when we decided to reconfigure our aircraft to reduce the number of seats in Business and Premium Economy class, we were able to do it in quick time because we were small. For an airline of 140 fleet size, this would be impossible to do in a few months’ time. Secondly, vowing to deliver good service is one thing and actually delivering is another and so far, being small, we have been consistent in upholding our service excellence and my job is to ensure that even when we grow big, we continue to deliver excellent customer service consistently.

Q7. Don’t you think there can be substantial benefit in terms of unit fixed cost once an airline achieves scale?

Dominance is certainly good for the dominant entity in terms of scale. Yes, that explains why IndiGo’s unit costs are lean and mean. That is in fact one of the early challenges we faced when we dint have the scale – Our unit fixed costs were way above the industry average. But as we can see, we now have 15 aircraft operating to 19 destinations operating over 600 flights a week, our unit cost is steadily trending down and that is a good thing to have. With scale, we also start to become more relevant. Although, our product and service was excellent par none, many customers in our early days were not travelling with us because we didn’t have the flight time choices to offer, but we have noticed that ever since we have grown from 5 aircraft to over 15 aircraft, the growth in our passenger base is not linear, it has been exponential due to multiplier effect which scale brings. Therefore, scale has allowed us not just to lower unit fixed cost but also enhance revenue earning capacity.

Q8. Where do you see Vistara going from here in 5 years time?

Without a doubt, judging by the growing accolades and fast growing data base of frequent travelers, Vistara will be going stronger day by day. Yes, we are certainly going to venture overseas sooner rather than later especially once we have attained the minimum 20 aircraft which is the requirement before one is granted the permission to operate overseas by the Indian government. We are going to increase our footprint further in domestic India. It is not just about channelizing all our resources overseas. To be successful, one has to have a domestic network to support the international network and vice versa. We will be growing our domestic as well as international footprint.

So, these are exciting times for the employees of Vistara. We have been working very hard on our long term – 10 year plan that will depict our fleet and network strategy. All I can say is that we are starting all over again to take the thrilling ride which many of the pioneers went through in early days in building the organization again and this time it is about focusing on our first foray in the international arena.

Q9. The competition set of Vistara from the 5-6 domestic airlines today will rise to the airlines of the world competing with Vistara. Is this thought overpowering or do you think Vistara is well prepared to succeed in the international arena?

Right from the start, our ambition has been to go overseas. We know that we have to build an organization that can overcome the challenges that one will encounter when one ventures overseas. If we are going to be a world renowned airline of choice, renowned for its excellent customer service, we will have to be competing with the best airlines in the world, not just the Indian airlines in the domestic front. So, all we have been doing from day one, albeit initially for domestic, is being geared towards our eventual operations overseas – whether it is about our product, service, even the culture we are trying to imbibe within the organization in terms of ownership – all will state us well when we venture overseas where the competition is expected to be keener. We are slowly but steadily gearing up our capabilities and deliveries in confronting the challenges that await us when we go overseas. So, exciting times certainly lie ahead – where competitors are all going to be of different shapes and sizes, some with much deeper pockets than the Indian carriers.

Q10. One last question. What do you as CEO, look for in managers when you recruit?

Everyone can be a good worker, so I reckon managers are leaders in their own shop whether it is a small department of 4, a medium size department of 10, or a larger department or even a division. I always look at managers as leaders. We all recruit employees, needless to say with the hope that many of them turn out to be leaders at the end of the day, not just good workers. To be an effective leader, one has to be ready or willing to be accountable because when you are a leader you are empowered and empowerment means nothing without the willingness to be accountable. Unlike, some industries where a lot of value is placed on individual performance, in the airline industry, it is all about team performance. So, another key attribute for the manager is to be a team player and at the same time, to have the courage to lead the team. In this industry, team work is paramount.

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