Air­lines spread wings to es­cape fare war at home

Financial Chronicle - - MONEY - ADITI SHAH & JAMIE FREED

DO­MES­TIC air­lines are turn­ing to the in­ter­na­tional mar­ket in search of bet­ter re­turns as the in­ten­si­fy­ing fight for a big­ger share of the world’s fastest growing do­mes­tic mar­ket—where price is king—drives down profits.

While global air­lines’ profits have been strong since 2015—though with wide re­gional vari­a­tions - In­dian car­ri­ers are strug­gling to re­main prof­itable, de­spite filling nearly 90 per cent of their seats and ben­e­fit­ing from a more than dou­bling of do­mes­tic pas­sen­ger num­bers over the last four years.

“It is an in­cred­i­bly tough do­mes­tic mar­ket, very price sen­si­tive,” said Stephen Barnes, chief fi­nan­cial of­fi­cer of Sin­ga­pore Air­lines, which op­er­ates an In­dian car­rier, Vis­tara, in a joint ven­ture with the Tata Group.

“Com­mand­ing a pre­mium for a pre­mium prod­uct is hard to do. From our per­spec­tive we in­vested in or­der to see the busi­ness grow in­ter­na­tion­ally. If you look at the re­sults of In­dian air­lines their per­for­mance is bet­ter in­ter­na­tion­ally.”

Pro­mo­tions such as $50 one-way tick­ets on the twohour flight from Mum­bai to Delhi are easy to find and, with air­lines ex­pected to take de­liv­ery of more than 500 air­craft over the next five years, pres­sure on fares and profits is in­creas­ing.

In­dia is one of the cheap­est do­mes­tic air­line mar­kets in the world, with an av­er­age fare of 13 cents per kilo­me­tre flown, ac­cord­ing to data from travel firm Rome2Rio, less than half the 27 cents per km av­er­age in China and the United States.

Air­lines in­clud­ing Vis­tara, SpiceJet and In­terGlobe Avi­a­tion’s IndiGo are in talks to buy or lease wide­body air­craft as they firm up in­ter­na­tional growth plans to boost prof­itabil­ity. There is huge po­ten­tial for in­ter­na­tional travel from In­dia, where the do­mes­tic avi­a­tion mar­ket has grown about 20 per cent an­nu­ally in re­cent years. Only 0.3 per cent of the 1.3 bil­lion pop­u­la­tion cur­rently travel abroad for a hol­i­day every year, a frac­tion of the es­ti­mated 100 mil­lion In­di­ans who could po­ten­tially af­ford to do so, ac­cord­ing to an anal­y­sis of house­hold in­come by avi­a­tion con­sul­tancy, CAPA. The in­ter­na­tional mar­ket is dom­i­nated by for­eign car­ri­ers but the mar­ket share of In­dian air­lines in­clud­ing Air In­dia and Jet Air­ways has been climb­ing, helped by poli­cies that limit ac­cess by for­eign car­ri­ers, and reached about 38 per cent in 2017, up from 31 per cent a decade ear­lier.

For­eign air­lines such as Emi­rates and Hong Kong’s Cathay Pa­cific Air­ways have reached the limit of flights into In­dia al­lowed un­der bi­lat­eral agree­ments and New Delhi has not ex­tended ad­di­tional rights, cre­at­ing an open­ing for do­mes­tic carri- ers to grow, said Binit So­maia, direc­tor for South Asia at CAPA.

“De­mand is there, in­come lev­els are ris­ing and peo­ple want to travel in­ter­na­tion­ally,” he said.

Jet Air­ways is con­sid­er­ing launch­ing new flights from Mum­bai to Syd­ney, two sources with knowl­edge of the mat­ter said, while Vis­tara is plan­ning to or­der six Boe­ing Co 787 air­craft and will ex­pand its nar­row­body fleet of Air­bus A320­neos as it starts in­ter­na­tional flights, sources have said.

A Jet Air­ways spokesman said the air­line “con­tin­u­ously re­views its fleet and net­work plan... to re­alise greater syn­ergy with its busi­ness strat­egy.”

In the do­mes­tic mar­ket, which pro­vides cru­cial con­nec­tions for in­ter­na­tional flights, air­lines have been jock­ey­ing for po­si­tion at a time when one-time leader Air In­dia has been los­ing mar­ket share to ri­vals with far lower costs, such as IndiGo. The gov­ern­ment last month failed to at­tract a sin­gle bid­der by the dead­line for its 76 per cent stake sale in the loss-mak­ing na­tional car­rier. Rev­enue per avail­able seat kilo­me­tre, a mea­sure com­bin­ing air­fares and seats filled, has been fall­ing at In­dian air­lines due to stiff com­pe­ti­tion at a time when the oil price has risen nearly 50 per cent in the last year.

IndiGo last month re­ported a steep fall in quar­terly profit due to higher fuel prices and con­tin­ued pres­sure on yields, a proxy for air­fares. It has lifted the pro­por­tion of its ca­pac­ity ded­i­cated to in­ter­na­tional flights to 15 per cent, from 11 per cent, in the last year and is seek­ing reg­u­la­tory ap­provals needed to op­er­ate long-haul flights, Rahul Bha­tia, the com­pany’s chair­man, said dur­ing an an­a­lyst call.

SpiceJet is the only listed In­dian air­line to post a profit for the last 13 quar­ters con­sec­u­tively. An­a­lysts say it has achieved this by max­imis­ing its air­craft util­i­sa­tion and also fly­ing less com­pet­i­tive routes where it can have a bet­ter con­trol over fares, help­ing pro­tect yields.

Even so, it plans to ex­pand its in­ter­na­tional flights as it starts tak­ing de­liv­ery of its Boe­ing 737 MAX air­craft from Au­gust. The planes, which have a range of six hours and can reach des­ti­na­tions such as Sin­ga­pore, Hong Kong and Bangkok, will mainly be de­ployed on in­ter­na­tional routes.

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