A race to the bottom

Airlines in India, it seems, are in a race to the bottom. Over the last week, several airlines have come up with discounted fare offers. Market leader IndiGo Airlines is selling tickets for as low as ₹999 on some domestic routes. So are SpiceJet and GoAir. AirAsia India is offering fares of ₹1,299 on some domestic routes and cheap fares on international routes too. Expect others to join the bandwagon soon.

Sure, such offers are typical in the September quarter, traditionally a weak one for airlines in India. It could be argued that airlines are seeking to woo passengers and fill up seats that would otherwise have flown empty.

But cheap fares are also reflective of the dog-eat-dog competition in the country’s aviation sector that has translated into a sharp loss of pricing power. Ideally, airlines, rather than cutting fares, should have upped them to pass on steep cost increases. Their major cost component — aviation turbine fuel — has been steadily increasing, due to the double whammy of rising crude oil prices and a weakening rupee.

But airlines have been compelled to keep fares low. Blame this on the sharp increase in seat supply, a result of ramp-up in fleet capacity led by IndiGo. With yields (average fares) under pressure in a rapidly rising cost scenario, the March 2018 quarter was a washout. There is likely to be an encore in the June and the September quarters. Fuel costs and capacity additions have continued to rise at a brisk pace, while fares have been kept under the lid.

This low-pricing game could end quite badly for many players and their investors. That would be a cruel paradox because India is among the fastest growing aviation markets in the world in terms of passenger traffic. This growth potential, that has spurred massive fleet purchase orders, could quickly become a poisoned chalice — if capacity additions are not calibrated and pricing discipline is not maintained.

Rational pricing — that enables recovery of cost and more — is key for the sector to have sustainable growth. Its absence in the past eventually felled names such as Kingfisher Airlines.

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