Air fares signal Code Red

Y ou could call it the height of irony — despite double-digit growth in passenger traffic in India, among the fastest-growing aviation markets in the world, airlines have not been able to hike ticket fares. The result: airlines’ revenues are heading North but profits are nosediving South. Blame this dichotomy on the cut-throat price competition among the country’s airlines that seems to be driving them in a race to the bottom.

In the June 2018 quarter, IndiGo’s revenue was up 13 per cent y-o-y (year-on-year), while SpiceJet’s and Jet’s revenues were up 18 per cent and 6 per cent, respectively. But all the three airlines saw their bottom lines decimated. Indigo’s profit crashed 97 per cent y-o-y, SpiceJet slipped into the red and Jet Airways posted record losses. This washout in the June quarter, an encore of what transpired in the prior March 2018 quarter, shines the spotlight on the key pain-point that ails airlines in the country — the inability to increase ticket fares to offset rising costs.

Indigo’s yield (average fare) fell about 5 per cent y-o-y in the June quarter, while Jet’s and SpiceJet’s average fares rose a mere 1.1 per cent and 4 per cent, respectively. The June quarter saw costs, primarily that of aviation turbine fuel (ATF), shoot through the roof due to the rally in oil prices and rout of the rupee. ATF is currently close to the highs seen in 2014 in rupee terms while the average airfares are at the lowest levels in real terms, an aviation industry expert points out. Industry watchers and analysts caution that the June 2018 scorecard signals the need for drastic upward revision of airfares to prevent a crash just round the corner.

Kinjal Kirit Shah, Vice-President, Corporate Sector Ratings, ICRA Ltd, highlights the need to increase fares. Shah says, “Airfares have to go up in tandem with ATF prices, which constitute 30-40 per cent of the total cost of an airline. In the current fiscal, ATF prices have increased y-o-y by 33 per cent till date. Considering no change in other cost structures, airfares should increase in line with increase in ATF prices.”

IndiGo’s CASK (cost per available seat kilometre) rose nearly 20 per cent y-o-y in the June quarter, while that of Jet and SpiceJet increased about 9 per cent and 15 per cent, respectively. In contrast, IndiGo’s and Jet’s RASK (revenue per available seat kilometre) fell 3-4 per cent while that of SpiceJet rose just 6 per cent. In essence, these matrices show that airlines’ costs rose much faster than their revenues in the quarter — a pointer to airfares not keeping pace.

The seat of all ills

Much of the problem emanates from the huge capacity additions the sector is witnessing. The largest airline IndiGo’s capacity (available seat kilometres) shot up 18 per cent y-o-y in the June 2018 quarter, SpiceJet’s capacity rose 14 per cent and Jet saw an increase of 9 per cent — overall, capacity addition in the sector grew faster than demand growth. An analyst points out that while Vistara added five aircraft in one year, another competitor added more than eight times that number in the same period. And this competitor was just one of the airlines in the domestic sector that has inducted capacity.

The average Indian flier also has a reputation for being highly price-conscious, known to scout aggressively for cheap fares on multiple travel portals, before booking tickets. Over time, it’s come to a point where there is little difference in domestic economy fares between a full-service carrier such as Jet Airways and low-cost carriers such as IndiGo and SpiceJet. For instance, today, an economy class ticket from Chennai to Delhi on October 4 costs ₹3,171 on Jet Airways and ₹3,199 on IndiGo.

If this trend continues, it could, sooner than later, see an airline either fall under the weight of its debt or get acquired by another airline as part of consolidation in the sector.

The Indian aviation sector is no stranger to major shake-outs. Many prominent carriers of the past, such as Kingfisher Airlines, are now footnotes; and many smaller airlines have come and gone.

Sector consolidation not just affects airlines but passengers too feel the sharp pinch. For example, when Kingfisher wound up and when SpiceJet was close to near-death a few years ago, airfares shot up until capacity increased again. Reports from December 2014 say that when SpiceJet grounded many of its planes during that period, fares on some sectors shot up by as much as 80 per cent.

Ways to cut costs

Market observers point out the need to control and moderate costs. Madhukar Ladha, Aviation Analyst, HDFC Securities, says that IndiGo, the market leader with a share of 42 per cent, will need to raise its fares by at least 6 per cent to break even. He adds, “The sector needs a combination of revenue enhancement and cost reduction. The focus should be on yield improvement by pricing, and ancillary revenues. On the cost side, airlines should have better arrangements for aircraft maintenance at lower costs, and lobby for lowering of taxes on ATF and airport charges. More sale and lease back transactions could help too.”

The induction of fuel-efficient aircraft to their fleet by airlines could also help moderate costs.

ICRA’s Shah says, “This could have a benefit of 14-15 per cent of fuel cost. Some cost rationalisation will happen on this front, however, only once the entire fleet moves to these aircraft.” Non-fuel cost rationalisation measures are also essential, Shah adds.

More capacity additions

That said, continuing rapid capacity addition remains a threat. IndiGo expects capacity increase of 28 per cent in the September 2018 quarter and 25 per cent in fiscal 2018-19.

It being the largest player in the domestic skies, IndiGo’s capacity addition has a bearing on fares not only for itself but the entire sector.

Other airlines such as SpiceJet, Jet and GoAir too are adding to their fleet. These additions in capacity could keep fares under check and prevent full pass-through of costs that remain high due to elevated oil prices and a weakening rupee.

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