All the airlines are in a quandary, to drop fares and attract passengers or to hold the slide of fares and increase average fares. What will eventually matter is the bottom line and if last quarter is anything to go by, things don’t look good.
When IndiGo announced its Q2-FY20 results last week, it warned of sustained weakness in the market after the unusual fares in the strong month of October. The second quarter has long been traditionally weak and while airlines have reported profits in this period of the year in the past, those occasions were when capacity was much lower and so were the oil prices.
Last year, Jet Airways and IndiGo reported bumper losses in Q2 which set in motion the fall of Jet Airways – with the airline suspending operations in April this year. This led to a frenzy of activities by airlines to get slots which were suddenly available, especially at Mumbai and Delhi. In this melee, Spicejet and Vistara doubled their departures at Mumbai – the most congested airport in the country.
While data for September is not yet released by the regulator, the domestic departures for August 2019 are up 0.4 percent over the same month last year. The capacity is back but it hasn’t grown, which is also reflecting the near-flat growth in passenger traffic.
However, this has led to one surprising factor – airfares which are touching new lows! In fact, ticket prices are so low than on certain sectors like Delhi–Lucknow, they are lower than fares on Regional Connectivity Scheme (RCS) – UDAN (Ude Desh ka Aam Nagrik) routes of similar stage length and duration! The RCS-UDAN fares are subsidised and capped while the fares on all other routes are dynamic and largely driven by demand and capacity.
While there was a huge hue and cry over lower fares during Diwali days, traditionally the fares have been high only on the days leading up to Diwali and then post the festivities are over. The days of festivities sees lesser travel. The VFR (visiting friends and relatives) traffic travels before Diwali and returns post Diwali, whereas the holiday crowd leaves post Diwali to return about a week later.
Airfares also tend to be higher on Monday morning and Friday evenings – especially between the metro routes but a quick look at fares on the various portals shows that even those are very low post Diwali. A Monday morning flight between Mumbai and Delhi was selling at less than Rs 3,000. Likewise, the cheapest flights between major metro cities were selling for less than Rs 4,000 for most days.
Compare that to the Delhi-Kishangarh flight of Spicejet which sells at Rs 2,520 for a duration of 1 hour and 5 minutes or a Delhi-Pathankot Air India flight which is priced at Rs 2,841 for 1 hour and 40 minutes and one gets the gravity of low fares. These flights are under the RCS-UDAN scheme and get subsidy for flying passengers between the two cities, unlike any of the flights between metro routes.
What led to this?
The fall of Jet Airways and subsequent increase in flights by airlines were largely metro routes-centric. There was a substantial increase in services on routes like Delhi-Kolkata, Mumbai-Kolkata, and Mumbai-Bengaluru. The tier II cities have seen an increase in connectivity at the onset of winter schedule or would see additional flights in next few days.
The industry was already in an overcapacity mode and was cited as one of the reasons for the failure of Jet Airways. With the capacity back at where it was, there hardly is anything which has changed and hence the additional pressure on fares.
All the airlines are in a quandary, to drop fares and attract passengers or to hold the slide of fares and increase average fares. What will eventually matter is the bottom line and if last quarter is anything to go by, things don’t look good. The blessing so far has been the relatively stable oil prices. Any negative movement with oil prices or depreciation of rupee will further give a blow to airline profitability.
Recently I came across a news article from 2006. It was about Air Sahara launching flights to Indore from New Delhi at fares starting Rs 1975 + taxes. Interestingly, the same rates are available even today, 14 years down the line! Costs have increased manifolds and so has the market size but the only thing which hasn’t seems to be the air fares and that has led to periodical fall of airlines in India.
To have a feasible balance among capacity, fares, demand and overall sustainability – airlines will have to think out of the box. To see if the country does need as much capacity as is being inducted or to focus on optimum capacity and pushing the fares up. This could lead us towards having a cap on pricing – both upper and lower and have a controlled pricing environment like few other economies and that defeats the purpose of open market!
If the airlines can do it themselves, without the intervention of government – it will be a win-win for all!