The great Indian aviation paradox – low fares fueled by unsustainable capacity

September 4, 2019 1 Comment 801 Views

A robust aviation industry is essential for any nation to grow and prosper. Airlines connect businesses and people both nationwide and globally. Air transport is essential for global trade, helps bring in much needed forex from tourism, provides global access to local produce and creates jobs. The economic impact and benefits of this one industry overshadow many others.

Historically, air transport globally has doubled in size every 15 years globally and has grown faster than most other industries. The advent of low-cost airlines has only hastened this growth.

India, one of the fastest growing aviation markets in the world is also undoubtedly one of the most challenging. Almost two thirds of the operating costs for Indian airlines including aircraft lease rentals and fuel, are dollar denominated. Indian airlines can end up paying over 30% more for fuel when compared to their peers in SE Asia due to the extortionate tax on ATF.

This leaves airlines in India exposed to multiple external factors which are beyond their control. Moreover, a slight change in the dollar exchange rate or price of crude impacts profitability.

What makes this extremely challenging operating environment hostile is the rampant capacity being added across airlines.

According to the Directorate General of Civil Aviation, India had 13.9 crore domestic air travelers in 2018 – up 18.6% from 11.7 crores in 2017. The growth in 2017 over 2016 was 17.3%. Growth is bound to continue as Indian airlines are to add record number of aircraft in the current financial year too.

This record growth fueled by added capacity and competition has a direct impact on airfares, driving them down. Often forcing airlines to sell below costs.

Essentially, Indian airlines have some of the highest costs in the world and zero pricing power.

Sale fares are used tactically the world over by airlines to fill seats which would go empty. These fares are also great to stimulate demand if discounting is done outside of the critical 15-day period before departure period.

The challenge all airlines in India face especially during the off-season months in Q2 and Q4 is last minute discounting done to fill unsold seats. This practice is predatory and harms everyone industry-wide. It has the potential to alter customer booking behavior, in the long term, where a customer might not book in advance knowing he will get the same deal or a better one closer to departure.

Sajiv Kapoor, Chief Commercial Officer at Vistara, a joint venture of Tata Sons Limited and Singapore Airlines Limited (SIA) echoed the views expressed in this feature on Social Media not so long ago.

Kapoor drew an interesting comparison in a follow-on tweet, of a flight of similar flying time in the US. The fare charged in India was 83% (approx.) less than the US despite the fact that almost three fourths if not more of the costs in India, just like the US are in US Dollar.

The demise of Jet Airways and the grounding of the Boeing 737 MAX of which SpiceJet had 13, had a direct impact on capacity in the Indian skies. As Jet grounded aircraft, airfares soared. Airlines quickly drew up plans to add aircraft and get hold of slots from the Jet Airways portfolio especially at Mumbai airport which is slot constrained. Leasing planes takes time and while most if not all the capacity lost is back, India has seen record airfares in the last two quarters.

SpiceJet had a marked advantage over its peers when it came to leasing aircraft as it flies the same aircraft type as Jet Airways primary fleet – the Boeing 737. They were also the most affected by the grounding of the 737 MAX. The airline was able to rapidly take over the grounded Jet fleet and deploy them on the very slots that were vacated by the grounded airline.

However, Jet had a fleet of 119 aircraft deployed on a vast network. The void created by the demise of the carrier did take some time to fill. And passengers had no choice but to pay the more realistic airfares. The result saw, all remaining airlines posting glowing numbers for the last quarter of the previous year and now for the first quarter of this year.

India’s largest airline, Indigo posted its highest ever quarterly profit at Rs. 1,203 crores in Q1 2019-20 in large part due to the higher airfares and cargo revenue, which rose 35% due to the demise of Jet Airways.

This honeymoon for the airlines is over as most if not all the capacity is back, and airfares are starting to tumble. As airlines are focused on metro routes in order to gain precious slots, some city pairs remain affected and airlines flying those routes will continue to command a premium.

This might not be great news for the airlines but is fantastic for the flying public. Let’s just say the low fare powered growth was paused momentarily by the demise of Jet Airways and the grounding of the 737 MAX.

However, cheap airfares and last-minute discounting is back. For the flying public, it’s time to celebrate the cheap airfares and take to the skies.

For the airlines however, life has come full circle as they begin firefighting for their survival, all over again. I don’t see much changing in the short term, unless of course another airline goes belly up. In a market like India, that is always a possibility.

About Vinamra Longani

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