Air fare war weighs heavily on Indian airlines

Protracted price battle has driven ticket prices so low that they can hardly cover costs

Uneasy outlook - Indian airline ticket price war is hammering profits. AFP

Global carriers have flocked to India, lured by a domestic travel boom and what’s expected to be the world’s third-biggest aviation market by 2025.

But India has proven an intensely competitive market, where profits are scarce and the life expectancy of weaker airlines is anything but certain.

Air India, the state carrier, is indicative of the brutal aviation landscape in India. The airline is surviving on bailouts and no bidder showed interest when the government wanted to dispose of some of its assets this year.

And in a sign that few have faith in in its survival, a fake staff email with an Air India letterhead dated August 25, 2018, saying the airline will be permanently shutdown on October 1 by government order, created panic among its 27,000 workers. It quoted what it said were comments from the Supreme Court that "due to poor profit margins and stagnant growth for years, the government is unable to bail out Air India owing to low probability of future returns". 2,513,350,439

The carrier had debt worth 48 billion rupees (Dh2.51bn), according to The Economic Times last week. Aviation group Capa India estimated the carrier would make losses of $1.5bn to $2bn over the next two years alone, adding it represented an unnecessary drain on taxpayer funds.

Analysts say while a new plan is being worked on, the government should consider selling some of Air India’s non-core assets to fund its working capital needs. Air India has six subsidiaries – three of which are loss-making – with assets worth about $4.6bn. It also has an estimated $1.24bn worth of real estate, including two hotels.

Jet Airways, meanwhile, one of the first carriers to launch after the market opened up in the early 1990s, said in a filing this month that it needs cash to meet liquidity requirements.

Indian carriers pay the world’s highest jet-fuel prices, thanks to local taxes of as much as 30 per cent, Bloomberg said. But the real killer has been a protracted fare war that’s driven ticket prices so low that they can hardly cover costs.

“It’s a buyers’ market at the moment,” says Conrad Clifford, vice president for Asia Pacific at the International Air Transport Association. “While India has experienced 46 consecutive months of double-digit [passenger] growth, it is still a challenging market for airlines to operate in.”

IndiGo, the nation's biggest carrier. Reuters

With the entry of budget carriers such as IndiGo and SpiceJet since the mid-2000’s, full-service carriers like Jet Airways that have higher overhead costs - for in-flight meals and entertainment - have been forced to offer discounts to passengers looking for a great bargain.

For instance, in 2015, SpiceJet offered base fares of as low as 2 US cents. Average ticket prices for New Delhi to Mumbai, the world’s third-busiest route, fell 15 per cent to 3,334 rupees (Dh176) in July-August from the previous year, according to online travel agent Yatra.com. Fares are down 40 per cent from 2014, according to Sanjiv Kapoor, the chief commercial officer of Vistara, Singapore Air’s local venture. That compares with a premium rail service for the same route at 4,075 rupees.

Such fares are “not sustainable” yet there’s “no choice” but to keep offering them, Rahul Bhatia, the billionaire co-founder of InterGlobe Aviation  that operates IndiGo, told analysts last month after almost all of its quarterly profits were wiped out.

To Robert Mann, the New York-based head of aviation consultancy RW Mann & Co, the Indian market now resembles that of the US three decades ago after the government freed ticket prices from federal controls in 1978, setting off a fare war.

“But in India, it has persisted for decades,” says Mr Mann. “A fragmented airline industry competes away any scant, potential profits earned.”

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Yet not all Indian carriers are losing money. IndiGo, which started in 2006 with a focus on on-time flights and ultra-cheap tickets, has managed to keep a tight lid on costs.

Commanding discounts with big plane orders and lease-back deals, IndiGo has never lost money since going public in 2015. Its fleet of planes is also newer and more fuel-efficient than many rivals.

AirAsia, which entered in 2014 with a vow to break even in four months, is still nowhere close to its goal. Vistara, Singapore Air’s joint venture with the Tata Group that started in 2015, has yet to make any money. SpiceJet almost collapsed the previous year.

“The cost of running an airline in India is not adequately compensated by fare inputs,” says Kapil Kaul, chief executive for South Asia at Sydney-based Capa. “That is the fundamental issue.”

Jet Airways is bogged down by higher costs. Besides carrying the burden of being a full-service carrier, the average age of its fleet is almost nine years, costing more to maintain.

A Jet Airways passenger aircraft. Reuters

Its stock price is down 63 per cent this year and the company’s board, which deferred announcing earnings by more than two weeks, was due to meet Monday to discuss austerity measures and a turnaround plan.

Group cash holdings at Jet Airways dwindled to $46 million at the end of March. The carrier needs as much as $500m in cash immediately and must refinance $400m of debt, backed by a guarantor, said Mr Kaul.

Still, the aviation industry is no stranger to the vicissitudes of fuel prices and fierce competition. They have landed other regional airlines in trouble as well before. Cathay Pacific Airways and Singapore Airlines, the two premium Asian carriers, are in the midst of a transformation to help bring them back to a path of sustainable profit.

It may well be time Indian carriers seriously considered the same.

Going for a song

Cheapest fares on Goibibo.com, August 27

Mumbai to New Delhi nonstop, one way, economy

SpiceJet - Dh110

IndiGo - Dh118

GoAir - Dh118

Vistara - Dh149

Air India - Dh154

Cheapest fares Mumbai to Abu Dhabi one way, economy

Jet Airways - Dh392 (direct)

Etihad - Dh396 (direct)

Emirates - Dh411 (bus from Dubai International)

Gulf Air - Dh430 (Bahrain layover)

Oman Air - Dh450 (Muscat layover)