Airlines resist lowering fares in lean season to land profits

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SummaryThe domestic aviation industry has broken away from the tradition of lowering fares to overcome a lean demand season, which could help the industry post another quarter of profits.

Even three-day discount by SpiceJet fails to harm pricing discipline

The domestic aviation industry has broken away from the tradition of lowering fares to overcome a lean demand season, which could help the industry post another quarter of profits.

Barring a three-day discount by SpiceJet, airlines have not slashed fares, which has helped maintain yields and bodes well for airlines, say industry officials and experts.

“We are heading into a weaker quarter but the yields have remained strong,” said Sudheer Raghavan, chief operating officer, Jet Airways. “From the forward bookings that we have seen, there isn’t too much of a concern.”

A round-trip fare booked a month in advance for the popular Delhi-Mumbai route can be bought from anywhere between R8,500 and R10,000. The fares are an indication that airlines haven’t slashed fares, which threaten profitability, but attract passengers.

“We believe that the pricing discipline in the industry has significantly improved the profitability over the past nine months and should help the sector going ahead,” said Vikram Suryavanshi, aviation analyst with Mumbai-based brokerage Antique Stock Broking.

Analysts say even SpiceJet’s three-day discount has not harmed the pricing discipline of the market. “We don’t think that the market discipline has been harmed because the scheme only had a three-day booking window,” says Jasdeep Walia, an aviation analyst with Kotak Institutional Securities. “None of the other companies have followed SpiceJet with similar offers.”

Higher fares have brought down the break-even seat factor for airlines in the third quarter of fiscal 2012-13, propelling them towards profitability. Jet Airways’ break-even seat factor during the quarter was 71.3%; in essence, it needed to have its planes less than three-fourths full to break even. Jet Airways achieved an average seat factor of 76.1%, helping it post a profit of Rs 102 crore. SpiceJet did not disclose such details.

Despite lower demand that has been predicted for the current quarter, industry insiders say that airlines can still post a slim profit as the fares are high, which will lower the break-even seat factor for the fourth quarter of fiscal 2012-13 also.

“The quarter is weak but, historically, airlines have achieved around 74-75% seat factors during the fourth quarter; so if the break-even is around 70-71%, it should be enough for airlines to post some kind of a profit,” said a senior executive at one of India’s largest low-fare carriers. “With no Kingfisher Airlines this year, naturally that traffic will shift over to the other airlines; so even with higher fares, it shouldn’t be too difficult for airlines to match last year’s seat factors.”

Last year, Jet Airways had an average seat factor of 77.1% during the January-March quarter, while SpiceJet had a seat factor of 73.1%. However, the two airlines managed to achieve such seat factors due to low fares, which resulted in heavy losses. SpiceJet made a net loss of Rs 249.18 crore during the fourth quarter of 2011-12, while Jet Airways made a net loss of Rs 298.12 crore.

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