Airlines must stop foolish discount air fare schemes to survive Q2 A report by aviation consultancy CAPA points out that Indian airlines are projected to lose as much as $400-450 million in the current quarter which ends in September and these could be the worst three months for Indian airlines in a long time. Who is to blame for this sorry state of Indian aviation? Prices of Aviation Turbine Fuel for sure, but also airlines’ own foolish strategy where discounts are offered for luring more flyers. This practice is not helping fill more seats but is driving up airlines’ losses further. Jet put up 7 million seats on discount recently and this was matched almost immediately by Air India. A story in Business Standard speaks of how Air India, which was historically slow to react to fare wars, is getting aggressive. AI countered the Jet scheme by offering various options on advance purchase fares; low cost carriers (LCCs) also followed suit. This strategy seems to have backfired. Jet Airways’ standalone load factor in July was the lowest among all of India’s airlines at 70.5% and fell by more than 5 percentage points from its own benchmark in June and was almost five percentage points lower than competitor Air India. Put simply, this means the discounts did not translate to more passengers. So not only did Jet not earn enough, it also ensured other airlines bled too. Almost three in 10 seats on Jet Airways’ flights were empty last month. The situation was only slightly better for Air India. Its occupancy fell to 75.6% from 82% in June, a decline of more than 5 percentage points and the airline had to fly with every fourth seat empty. CAPA says the current yield environment is particularly poor with July yields down approximately 18‐20% relative to the Q1 average and August expected to see a further 5‐8% decline. Yields mean revenue earned from each passenger so what CAPA is saying is: less people are flying and those who are actually flying are leading to lesser earning for airlines. A double whammy if there ever was one. “The discounting appears to have been in vain as it has failed to stimulate the market and Q2 is expected to see only marginal year‐on‐year traffic growth. Load factors are similarly expected to see limited improvements,” the consultancy says. Well, the bad news doesn’t end there. CAPA also seems sure about no fresh foreign airline investment coming into India in a hurry. The continuing losses, high cost environment and structural instability of the sector are “likely to drive away the very few foreign airlines that have shown interest in investing in Indian carriers as the value proposition is weakening. A foreign airline could generate value from a transaction if the deal was accompanied by significantly enhanced market access which suits its strategic interests. However, a sweeping revamp of a bilateral similar to the India‐Abu Dhabi agreement….. may be difficult to replicate.” So all that buzz about SpiceJet being close to sealing a deal with a potential suitor and Qatar Airways circling GoAir may not translate into actual inflow of funds. Anywhere between $200-230 million is the immediate funding that SpiceJet needs. Of this, $120-130 million is for future fleet commitments whereas working capital requirements as of March 2013 were between $70 and $100 million. CAPA says even IndiGo, the only profitable airline in India till date, has had a profitable Q1 but is estimated to be heading for a loss in Q2 due to the weak commercial environment. GoAir is also heading for a loss in this quarter after modest profitability in Q1, ditto for SpiceJet. The message is loud and clear. Airlines can continue to launch mindless discounting at their own peril, no knights in shining armor are around to save them just yet.
Posted on: Wed, 21 Aug 2013 07:30:26 +0000
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