Passengers win but airlines lose as India’s price war grows in intensity
▶ Tickets are now so cheap that the income generated is barely enough to cover companies’ overheads
Global carriers have flocked to India, lured by a domestic travel boom and what is expected to be the world’s third-biggest aviation market by 2025. But India has proven an intensely competitive market, where profits are scarce and the life expectancy of weaker airlines is anything but certain.
Air India, the state carrier, is indicative of the brutal Indian aviation landscape. The airline is surviving on bailouts and not a single bidder showed interest when the government wanted to dispose of some of its assets this year.
And in a sign that few have faith in in its survival, a fake staff email with an Air India letterhead dated August 25, 2018, saying the airline will be permanently shut down on October 1 by government order, created panic among its 27,000 workers.
It quoted what it said were comments from the Supreme Court that “due to poor profit margins and stagnant growth for years, the government is unable to bail out Air India owing to low probability of future returns”.
The carrier had debt worth 48 billion rupees (Dh2.51bn), according to The Economic Times last week. Aviation group Capa India estimated the carrier would make losses of $1.5bn to $2bn over the next two years alone, adding it represented a drain on taxpayer funds.
Analysts say the government should consider selling some of Air India’s non-core assets to fund its working capital needs. Air India has six subsidiaries – three of which are loss-making – with assets worth about $4.6bn. It also has an estimated $1.24bn worth of real estate.
Jet Airways, meanwhile, one of the first carriers to launch after the market opened up in the early 1990s, said in a filing this month that it needs cash to meet liquidity requirements.
Indian carriers pay the world’s highest jet-fuel prices, owing to local taxes of as much as 30 per cent, Bloomberg said. But the real killer has been a protracted fare war that has driven ticket prices so low that they can hardly cover costs.
“It’s a buyers’ market at the moment,” says Conrad Clifford, vice president for Asia Pacific at the International Air Transport Association. “While India has experienced 46 consecutive months of double-digit [passenger] growth, it is still a challenging market for airlines to operate in.”
With the entry of budget carriers such as IndiGo and SpiceJet since the mid-2000s, full-service carriers like Jet Airways have been forced to offer discounts to passengers.
For instance, in 2015 SpiceJet offered base fares of as low as 2 US cents. Average ticket prices for New Delhi to Mumbai, the world’s third-busiest route, fell 15 per cent to 3,334 rupees (Dh176) in July-August from the previous year, according to online travel agent Yatra.com. Fares are down 40 per cent from 2014, according to Sanjiv Kapoor, the chief commercial officer of Vistara, Singapore Air’s local venture.
Such fares are “not sustainable” yet there is “no choice” but to keep offering them, Rahul Bhatia, the co-founder of InterGlobe Aviation that operates IndiGo, told analysts last month after almost all of its quarterly profits were wiped out.
To Robert Mann, the head of aviation consultancy RW Mann & Co in New York, the Indian market now resembles that of the US three decades ago after the government freed ticket prices from federal controls in 1978, setting off a fare war.
“But in India, it has persisted for decades,” says Mr Mann. “A fragmented airline industry competes away any scant, potential profits earned.”
Yet not all Indian carriers are losing money. IndiGo, which started in 2006, has kept a tight lid on costs. Commanding discounts with big plane orders and lease-back deals, IndiGo has never lost money since going public in 2015.
AirAsia, which entered in 2014 with a vow to break even in four months, is still nowhere close to its goal. Vistara, Singapore Air’s joint venture with the Tata Group that started in 2015, has yet to make any money. SpiceJet almost collapsed the previous year.
“The cost of running an airline in India is not adequately compensated by fare inputs,” says Kapil Kaul, South Asia chief executive at Capa in Sydney.
Jet Airways is bogged down by the costs of being full-service carrier. Group cash holdings dwindled to $46 million at the end of March. The carrier needs as much as $500m in cash immediately and must refinance $400m of debt, backed by a guarantor, said Mr Kaul.
Its stock price is down 63 per cent this year and the board was due to meet yesterday to discuss austerity measures.
Still, the aviation industry is no stranger to the vicissitudes of fuel prices and fierce competition. Cathay Pacific Airways and Singapore Airlines, the two premium Asian carriers, are in the midst of a transformation to help bring them back to a path of sustainable profit.
It may well be time Indian carriers seriously considered the same.
Air India is indicative of the brutal aviation landscape and is surviving on bailouts