Global airlines are looking to enter India, lured by the by a domestic travel boom and what’s expected to be the world’s third-biggest aviation market by 2025.
Yet India has proven to be a highly competitive market, where profits are scarce and the life expectancy of weaker airlines is anything but certain.
The best example of this is the recent fall of Jet Airways. Jet Airways India Ltd, one of the first carriers to launch after the market opened up in the early 1990s, is struggling to handle the cost of its day to day operations and are in dire need of liquid cash.
This is the sign of financial distress in a market which struggles with high fuel prices, airfare wars and a depreciating rupee. The competition is set to intensify if Qatar Airways follows through with its proposal to start a short-haul flights in the country.
To give you a small insight into why this is happing , we did some digging around and found some interesting points.
Running The Rat Race
The Indian aviation sector is slowly heading towards reaching a scenario similar to the telecom sector, which faced immense disruption since the data pricing war started.
At present, airlines regularly offer major discounts and cashback offers on flights as they want to ‘snatch’ more passengers from the railways & their competitors to fill up more spots.
Many aviation experts say that the major problem facing the sector is a “low-cost” airfare war that is driving ticket prices unrealistically low, even to such an extent that airlines cannot cover their operating costs.
The woes faced by Jet Airways are similar to those faced by other Indian carriers that are struggling to remain profitable. This is despite filling nearly 90 percent of their seats and recording a sharp increase in domestic passenger numbers over the last four years.
Although the higher demand in the sector reflects as growth, it does not necessarily add up to profitability in terms of revenue generation. Experts have termed the growth in the airline sector as “unhealthy” and even profitless.
The Real Killer
With the entry of budget carriers such as IndiGo and SpiceJet since the mid-2000’s, full-service carriers like Jet Airways & Air India that have higher overhead costs, such as 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 Rs 65. Average ticket prices for New Delhi to Mumbai, the world’s third-busiest route, fell 15 percent to 3,334 rupees in July-August 2014.
“Such fares are “not sustainable,” yet there’s “no choice” but to keep offering them” Rahul Bhatia, the billionaire co-founder of InterGlobe Aviation Ltd. that operates IndiGo, told analysts after almost all of its quarterly profits were wiped out.
To Robert Mann, the New York-based head of aviation consultancy R.W. Mann & Co., the Indian market now resembles that of the U.S. 30 years ago after the government freed ticket prices from federal controls in 1978, setting off a fare war.
According to Mt Jagat Puri who’s a pilot by profession, “Ticket prices on key and popular routes are always under sustained pressure from various carriers”. He went on to say that, some of the prices are unreasonable and this leads to an unhealthy fare war.
India’s airlines have particularly suffered because passengers are highly price-sensitive despite
India Flying At A Loss
The Indian government also has had to prop up its loss-making national carrier Air India, pouring in taxpayer money to keep planes in the air. In July 2018, the government pumped in €261 Million to keep Air India operating.
Air India has found itself in dire financial straits over the past decade, saddled by a gigantic debt amounting to around €7 billion and having to beg the government for bailouts.
But while the government is looking at infusing fresh capital in Air India, the private airlines need to fight for themselves in a hostile market.
What Is The Solution?
With margins slipping, fuel prices not showing any signs of coming down and little likelihood of the government lowering taxation on jet fuel, the only option with airlines is to raise fares.
While airlines are now introducing measures to curb passengers from increasing flight load (recent baggage rule change), much more needs to be done to make the sector profitable again.
Other than that, industry veterans such as Kapoor feel there is a need to focus on real growth, which can only be achieved by matching global costs and not trying to compete with the Indian Railways.
However, it would be extremely hard for airlines to move away from the low-cost model as passengers may again go back to travelling on trains. This is where the airline industry lacks the pricing power and is forced to offer low prices.
There is little that can be done to change the fortunes of the sector which is facing increased stress due to rising ATF prices and pressure from depreciating rupee.
Considering that Indian airline carriers pay the highest for ATF due to local taxes to the tune of 30 per cent, the only intelligent move is to increase ticket prices and aim at real growth rather than a boost triggered by discounts.