In October, worried over the red marks in airline balance sheets, top officials of the government summoned airline bosses. Junk the price war and make some money was the advice given. It was a rare demand from the government which has portrayed exponential growth in air passengers as one of its achievements.
The government had a reason to worry. “Excessive competition has led to decline in tariffs affecting GST collections from the telecom and airline industries,” finance minister Arun Jaitley said in a recent interview.
The airlines did try. Faced with a creeping fuel price, they thought festival time was the ideal moment when they could earn some pennies and increased the fare by around 8 per cent. They have been proved wrong.
Data suggests that Indian flyers now used to a low fare environment are simply not ready to pay more for air travel. Passenger traffic numbers now clearly implies that growth has come at the expense of unrealistically low yields. Indians are not ready to pay more for air travel. The worry is that even in routes with people with high disposable income, the only way to generate enough demand to fill the new seats is by cutting prices
Data from aviation regulator DGCA shows that number of passengers fell in 12 out of top 15 routes in the peak traffic season of November. Passenger growth decelerated by almost 8 per cent between Mumbai- New Delhi, by 14 per cent between Mumbai-Chennai, by 15 per cent between Mumbai-Hyderabad.
“Airlines in India have been unable to commoditize air travel. The leisure travel is clearly being driven by low fares in most cases. If the last minute prices are firmed up, passengers complain and if they are not airlines are at loss. The trick will be to find a balance of managing fares without losing the demand,” said Ameya Joshi, founder of aviation blog Network Thoughts.
Airline executives are divided over this trend of passenger behaviour. Kiran Koteshwar, Chief Financial officer at SpiceJet says that in a market like India it is impossible to increase the fare beyond a point and suggests that airlines would do good in controlling their cost side. " In a market like India, there is a cap beyond which airlines will not be able to increase price. Hence it is important to keep costs in control," he said.
Some suggested that the fall in passenger numbers is in fact a positive sign as that suggests airlines are willing to sacrifice “unrealistic growth” in favour of more revenue. “Personally I don’t worry too much about the fall. I am more focused on what average fare gets us to profit. Growth at 10 per cent is also good if it brings higher revenue,” said an executive of a low cost airline.
So what is the sweet spot for airlines where they can recover costs yet not lose passengers?
An executive of a full service airline suggests that at current cost environment, the ideal ticket price between two metros like Delhi and Mumbai should be at least Rs 6,000. But he suggests that it will be impossible for airlines to command fares with the level of capacity being added. “Equilibrium will be difficult to achieve. All airlines adding capacity will not want them to fly empty. Only way to simulate demand is through low fares. Peak season is still ok. But in weak season no carrier says ‘I’d rather add capacity and try to steal share than support a fare increase across the industry, “he says. According to an estimate by brokerage firm ICICI securities, Indian airlines will add more than 12o aircraft in FY 20.
Joshi of Network Thoughts suggests that airlines will do well by not bothering about the fall in passenger numbers. “Having fewer seats filled up at higher revenue could be helpful for quicker turnarounds and having additional cargo space which is more profitable. The objective is profitability at unit level and never load factor,” he says.
The government had a reason to worry. “Excessive competition has led to decline in tariffs affecting GST collections from the telecom and airline industries,” finance minister Arun Jaitley said in a recent interview.
The airlines did try. Faced with a creeping fuel price, they thought festival time was the ideal moment when they could earn some pennies and increased the fare by around 8 per cent. They have been proved wrong.
Data suggests that Indian flyers now used to a low fare environment are simply not ready to pay more for air travel. Passenger traffic numbers now clearly implies that growth has come at the expense of unrealistically low yields. Indians are not ready to pay more for air travel. The worry is that even in routes with people with high disposable income, the only way to generate enough demand to fill the new seats is by cutting prices
Data from aviation regulator DGCA shows that number of passengers fell in 12 out of top 15 routes in the peak traffic season of November. Passenger growth decelerated by almost 8 per cent between Mumbai- New Delhi, by 14 per cent between Mumbai-Chennai, by 15 per cent between Mumbai-Hyderabad.
“Airlines in India have been unable to commoditize air travel. The leisure travel is clearly being driven by low fares in most cases. If the last minute prices are firmed up, passengers complain and if they are not airlines are at loss. The trick will be to find a balance of managing fares without losing the demand,” said Ameya Joshi, founder of aviation blog Network Thoughts.
Airline executives are divided over this trend of passenger behaviour. Kiran Koteshwar, Chief Financial officer at SpiceJet says that in a market like India it is impossible to increase the fare beyond a point and suggests that airlines would do good in controlling their cost side. " In a market like India, there is a cap beyond which airlines will not be able to increase price. Hence it is important to keep costs in control," he said.
Some suggested that the fall in passenger numbers is in fact a positive sign as that suggests airlines are willing to sacrifice “unrealistic growth” in favour of more revenue. “Personally I don’t worry too much about the fall. I am more focused on what average fare gets us to profit. Growth at 10 per cent is also good if it brings higher revenue,” said an executive of a low cost airline.
So what is the sweet spot for airlines where they can recover costs yet not lose passengers?
An executive of a full service airline suggests that at current cost environment, the ideal ticket price between two metros like Delhi and Mumbai should be at least Rs 6,000. But he suggests that it will be impossible for airlines to command fares with the level of capacity being added. “Equilibrium will be difficult to achieve. All airlines adding capacity will not want them to fly empty. Only way to simulate demand is through low fares. Peak season is still ok. But in weak season no carrier says ‘I’d rather add capacity and try to steal share than support a fare increase across the industry, “he says. According to an estimate by brokerage firm ICICI securities, Indian airlines will add more than 12o aircraft in FY 20.
Joshi of Network Thoughts suggests that airlines will do well by not bothering about the fall in passenger numbers. “Having fewer seats filled up at higher revenue could be helpful for quicker turnarounds and having additional cargo space which is more profitable. The objective is profitability at unit level and never load factor,” he says.
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