Air Fares Flew Low as Note Ban Woes Rose
Average domestic fares from Nov 1, 2016 to Jan 31 this year declined on all key routes compared with a year earlier
New Delhi: Airlines have seen as much as a 35% decline in average domestic fares in the three months to January, as demonetisation took away their pricing power at a time when they were also adding capacity.
Data compiled by Yatra.com, India’s second largest online travel portal, show that average domestic fares from November 1, 2016 to January 31 this year declined on all key domestic routes compared with a year earlier. Scrapping of the Rs ₹ 500 and Rs ₹ 1000 banknotes, announced by the Prime Minister on November 8, drained out more than 85% of the total cash in circulation. Consumers limited spending as replenishing of cash in ATMs and banks mo- ved at a slow pace, crippling demand for everything from soaps and packaged food to automobiles and real estate. The weak sentiment, airlines said, rubbed off on their performance.
IndiGo, the local market leader, blamed the “impact on consumer spending and behaviour” from demonetisation for the fall in fares. “The new monetisation policy went into effect on November 8 and for the full month of November, our yields were down 20% and in December our yields were down 17%,” IndiGo chief financial officer Rohit Philip announced during the company’s earnings call on January 31.
The situation, though, is improving. In January, the yield decline was smaller at about 10%. “Based on the January 2017 yield forecast, we are hopeful that the effects of de- monetisation are largely behind us,” Philip had said. SpiceJet chairman Ajay Singh said discretionary travel went down post demonetisation, hurting international business that accounted for about a quarter of the airline’s revenue.
Airline is an industry where digital payments had already become somewhat a norm even before demonetisation — the government cites promotion of cashless payments as one of the objectives of the note-recall. Many expected this would insulate the industry from demonetisation effect. But last-minute travel, where a chunk of payments was still in cash, took a hit as a result of the liquidity crunch, hurting the pricing power of the airlines, said experts. “Our pricing power was gone, may be, because a lot of last-minute ticket bookers – corporate travellers including from SMEs – postponed or cancelled their travel,” said a senior executive at a full-service carrier who did not want to be identified.
The executive, too, reported an improvement in January, after “a sharp dip in average fares during November and December”.
Travel industry insiders see another reason for the impact on fares. Airlines also added capacity in recent months, which led to a demand-supply mismatch.
“We believe that declining average fares are driven more due to the capacity addition by airlines. The number of domestic passengers has increased by a very healthy 23% over last year despite demonetisation, which means it never had a major impact on the aviation sector,” said Sharat Dhall, chief operating officer (B2C), at Yatra.com.