Fortunes have reversed for Indian airlines that had been growing at an average of 18 percent a year for the past three years. An exceedingly competitive fare environment, the adverse impact of a depreciating rupee, and increasing fuel prices have resulted in the sector showing signs of stress. “Cost pressures amidst weakness in fares are turning the operating environment adverse for operators,” Santosh Hiredesai, analyst at Mumbai-based SBICap Securities told AIN.
Fares for a two-hour flight between Delhi to Mumbai can be as low as $48.
Given the infrastructure constraints at airports and in the airspace, Hiredesai says capacity rationalization often results in sharp improvement in industry yields. He said when Kingfisher Airlines ceased operations in 2013, followed by budget SpiceJet reducing capacity, yields surged by 20 percent and passenger load factors improved by 600 basis points (bps). “While timing the next phase of industry consolidation is difficult, [if and when] it happens, the airlines with strong balance sheets will benefit with a high market share and improved profitability,” said Hiredesai.
According to a report released in August by Centre for Aviation (CAPA), the total order book by Indian carriers has passed 1,000 aircraft, making it the third largest in the world behind the U.S and China. CAPA expects that a further 100 widebodies could be ordered within the next 12 months. CAPA believes the orders are in part due to the positive outlook for the market but also the result of “a strategic compulsion to keep pace with the market leader, IndiGo…..It is possible that some orders could be rationalized as the operating environment changes. Market pressures are expected to result in the industry consolidating over the medium term around three large budget carriers and two Full Service Airlines,” says the report.
Gregory Taylor, senior advisor for IndiGo, is clear on the 429 aircraft on order by the carrier. “When we look at capacity planning, we look at it as a long-term strategy. India is an underpenetrated market and is growing….We are pursuing the right strategy.”
Meanwhile, pressures continue to mount with Indian media speculating about the sustainability of 25-year-old Jet Airways. While Vinay Dube, CEO, has called these reports “factually incorrect and malicious,” and committed to the addition of 225 Boeing 737-Maxs, 11 of which are scheduled to join the fleet by March 2019, he acknowledges in a letter to frequent fliers that the industry is “currently passing through a challenging phase.”
"Everybody is feeling the pinch as the rupee depreciates. Sixty percent of operating costs in India are dollar-driven primarily for fuel and maintenance,” Vishok Mansigh, CEO of regional TruJet told AIN. He added rationalization in fares will come once fuel and dollar prices go up.
Even IndiGo, India’s largest budget carrier, has experienced its share of drawbacks, recording its lowest yield in the quarter that ended in June. Operated by InterGlobe Aviation, IndiGo said its net income dropped 97 percent to $4 million.
“The current revenue environment continues to remain weak...We do not believe that these fare levels are sustainable, especially given the increase in input costs,” Rahul Bhatia, IndiGo co-founder and interim CEO said in a conference call to investors. Taylor added that, before the downturn, around 40 percent of bookings had fallen into the zero- to 15-day booking window that produces better yields. Now rock bottom fares have killed that advantage.