With fares starting at less than a Rs 1,000 for 10 lakh seats spread over the peak festive flying season and into the lean season, IndiGo’s sale announcement this (Monday) morning shows all that is wrong with Indian aviation. Other airlines are also offering similar fares and thus continuing the trend of red ink being splashed over airline balance sheets.
India’s airlines have been adding capacity furiously and taking fares further south in a mad rush to fill up aircraft, mostly at the cost of yields or what they earn from each passenger.
This has already threatened the survival of some airlines while squeezing each and every one of profitability as costs continue to rise while revenues shrink. But instead of looking to raise fares, the airlines are again trying to sell seats below cost, thus harming any prospects of a recovery in yields.
Airlines Defend Low Fares
Of course, the oft-repeated argument airlines put forward when defending frequent sales is this: Only a tiny percentage of total seats is put on sale and such actions merely stimulate the market, without harming overall revenue streams.
Besides, many times these sales are targeted at those sectors where capacity additions are being done, on routes where an airline did not have flights earlier. Sales help stimulate demand in these sectors while bypassing the busy routes.
But for some months now, when fares outside the sale are also languishing at lows and filling up seats seems easy enough (with decent aircraft loads), there seems little point in further stimulating the market with rock bottom fares. And it seems more an exercise in filling up additional capacity. In July, the same airlines had launched a monsoon sale with similar low fares.
This morning, IndiGo announced a sale for 59 destinations, offering customers an all-inclusive fare starting at Rs 999 across domestic sectors for 10 lakh seats, valid for travel between September 18, 2018, and March 30, 2019.
Commercial Officer William Boulter said “We are delighted to announce this four-day festive sale across our network effective September 03, 2018 till September 06, 2018. IndiGo is always keen to provide the best possible value to its customers and low fares are an essential part of our offers. We are sure that customers will quickly grab the seats we have available starting at fares as low as Rs 999.”It is pertinent to remember here that after a shock decline in profitability in the June quarter by 97 percent compared to the year-ago period, the IndiGo management had lamented the lack of pricing power in the industry.
Promoter Rahul Bhatia had said in an analyst call after the results, “The current revenue environment continues to remain weak particularly in the 0-15 day booking window. While we spoke about some signs of improvement in the last call, the fares continued to be lower in the quarter compared to the same period last year. We do not believe that these fare levels are sustainable, especially given the increase in input costs. Clearly with industry load factors in the high 80s or 90s, the industry is turning away passenger demand at current fare levels but we have no choice but to keep our fares competitive. Having said that, we believe that IndiGo is best positioned to withstand these pressures because we have the lowest cost structure and the strongest balance sheet.”
IndiGo hasn’t exactly been flying empty planes, it has had a pretty good record of bums on seats. As per data from the Directorate General of Civil Aviation (DGCA) monthly report, load factor (number of occupied seats) was 91.9 percent in April, 91 percent in May, 88.3 percent in June, 88.7 percent in July. So the airline managed to fill at least 88 percent of its seats each month this fiscal.
A note from brokerage Edelweiss post Q1 results showed how yield for IndiGo slid 5 percent from the year ago period to Rs 3.6/km in a difficult industry pricing environment due to persistent pressure in the lucrative 0–15 days booking period, which accounts for 40 percent of bookings.
Now, when IndiGo itself is lowering the bar for festive fares, yields will likely come under pressure for advance bookings on some seats too.
Coupled with a pressure on earnings per seat is IndiGo’s logic-defying rate of capacity addition – it is expected to lead the domestic airline industry in upping capacity by 25 percent this fiscal. Together, India’s airlines have close to 1,050 aircraft on order, with IndiGo leading the pack at 429.
Since IndiGo already has about 40 percent of the market, other airlines are essentially competing for share by also placing mega aircraft orders. As capacity gets added, pressure on fares and profitability will likely continue in a high-cost environment.
Worried About Fares
All airlines are worried about fares. SpiceJet’s promoter Ajay Singh had noted some days back that there has been no hike despite record high fuel prices “Fares should increase by 10 percent,” Singh had said but shrugged when asked if his airline would lead the race to higher fares. He had also said that Aviation Turbine Fuel (ATF) prices jumped 35 percent in Q1 with almost no commensurate increase in fares; input costs (fuel) have risen significantly and suddenly but even non-fuel costs are rising.
Singh referred to the Indian rupee going from 65 to 69 to a dollar (it has now crossed 70), a steep rise in costs for leasing aircraft and imported services including purchase of spares.
Analysts at brokerage Kotak Institutional Equities had said in a note to clients “We are surprised by the continued softness in yields of the listed Indian airline companies despite strong growth in domestic passenger volumes. We note that average monthly volume growth for domestic passenger traffic has been 21 percent over January 2015-June 2018 (CAGR of 19 percent), which is far ahead of most consumer staple and discretionary products.”
The analysts pointed out that IndiGo’s yields remained stagnant for nine consecutive quarters, Jet Airways’ declined continuously for the last eight quarters and SpiceJet’s remained stagnant for the same eight quarters.
As India’s airlines worry over worsening financials, part of the solution lies in pricing discipline. While cost escalation due to rising oil prices and high incidence of taxation is beyond airlines’ control, one of them should be able to bite the bullet on fares. It is a matter of time before others follow.
Sindhu Bhattacharya is a journalist based in Delhi who writes on a range of topics in business and economy.