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  1. Airfares don’t rise despite passenger traffic increase of 17% in the last year

Airfares don’t rise despite passenger traffic increase of 17% in the last year

Although passenger traffic has seen a fairly big increase over the past year — up by about 17% —, the keen competition in the sector together with a 15% additional capacity created has prevented airlines from raising fares.

By: | New Delhi | Updated: August 20, 2018 5:04 PM
Representative Image: Reuters

Although passenger traffic has seen a fairly big increase over the past year — up by about 17% —, the keen competition in the sector together with a 15% additional capacity created has prevented airlines from raising fares. Capacity across airlines measured in available seat kilometres is now 130 billion kilometres.

“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,” Rahul Bhatia, interim CEO, Interglobe Aviation, told analysts recently.

Consequently, yields have been under pressure as fares have stayed flat or even come down on some routes, Balu Ramachandran, head (distribution), Cleartrip, said. The average spot fare was down by over 10% in the three months to June while in the current quarter it is lower by about 20% year-on-year.

Even as top lines are under pressure, costs have gone up thanks to a steep 30% rise in the price of aviation turbine fuel (ATF), which accounts for 40% of an airline’s costs. Besides, the sharp depreciation of the rupee against the dollar has meant several costs — lease rentals, maintenance and repairs — have increased.

“India is an extremely price-sensitive market and the perception of ‘time is money’ is growing but we have a long way to go. A `500 increase in airfare may switch a budget-conscious family of four to the train or a hired cab. Airlines cannot risk flying half-empty planes during the lean July-September quarter, and hence, the abnormally low fares,” Amber Dubey, partner, KPMG, observed.

Analysts are concerned at the deteriorating financials of airlines like Interglobe Aviation and Jet Airways. As they grapple with flat prices. “…yields of the leading airline companies have not even kept pace with inflation over the past two years, let alone the sharp increase in input costs,” analysts at Kotak Institutional Equities (KIE) noted.

Global financial services firm HSBC recently downgraded aviation firms, saying IndiGo’s Q1FY19 results sent out a distress signal for the sector. The low-cost carrier posted its worst quarterly results since listing in 2015 when net profits slumped 97% y-o-y to Rs 28 crore .The management, at the largest domestic carrier, expressed helplessness over lack of bargaining power. Adjusted for one-time expenses, SpiceJet reported a profit of `25 crore in the June quarter, down 85% y-o-y. The revenues rose 18% while costs rose by 31%. SpiceJet’s yields rose 4% increase in yield on the back of high PLFs which were at 95%.

Jet Airways’ finances are precariously poised with the airline deferring its Q1FY19 results. “We are quite puzzled by the inability of the Indian aviation companies to raise prices at a time of continued strong growth in domestic passenger traffic,” KIE stated.

Some analysts say the demand for air travel so sensitive to modest price correction. Kinjal Shah, AVP, Icra, said it would appear from the financial performance of the companies that demand is vulnerable to modest price increases. “Otherwise, when demand is so strong and cost pressures so high, the airlines should have had the bargaining power to increase the fares,” Shah pointed out. Currently, the domestic airlines have a fleet of 575 aircraft, with an order book of more than 1,000 in the next eight years.

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