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BL Research Bureau

The wide-ranging alliance between the two of the country’s leading private sector airline — Jet Airways and Kingfisher Airlines — announced this week would have had a significant positive impact on both the players had it been forged last year, amid growing demand for domestic air travel.

Now, with domestic air passenger traffic registering sharp declines over the last few months and the prospect of excess capacity looming, even an alliance between two of the leading players in the sector may not result in significantly better pricing power for domestic airlines.

The number of players in the domestic aviation sector has shrunk dramatically over the past two years with the Deccan-Kingfisher and the Jet-Sahara mergers.

Theoretically, such consolidation should lead to better pricing power for the players. Indeed, airlines were able to pass on a good portion of the fuel price hikes last year to passengers through increases in the fuel surcharge on fares. But the trends in domestic passenger traffic growth over the past three months suggest that fare increases will be much more difficult to put through now. The number of domestic air passengers has shrunk by 12.4 per cent, 17.4 per cent and 22 per cent, respectively, in the three months to September.

With players already having lined up plans to add capacity over the next couple of years, the need to maintain load factors and retain passengers may take precedence over any move to improve profitability through concerted fare hikes.

Having said this, with pricing power curtailed, the only avenue to improve margins may lie in containing costs. In this respect, the joint selling, code sharing agreements, route rationalisation, sharing of infrastructure and crew — all proposed in the recently forged alliance — may bring in cost advantages for Jet Airways and Kingfisher Airlines. How the two rivals implement their fleet expansion plans and whether they manage to recalibrate them to curtail excess capacity may hold the key to a sharp improvement in profitability over the medium term.

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