39 paise. That is the loss IndiGo, India’s largest passenger airline, currently incurs for flying a passenger for a kilometer. While it charges Rs 4.69 per kilometer from a flyer, its own cost comes to Rs 5.08. It is clear that this, in no way, is a profitable proposition for IndiGo but the market leader is helpless. So are the other airlines in the Indian aviation space.
All of them have been trying to reduce that gap and are struggling with the mismatch of production cost and the offer price of tickets. The main reason behind the gulf happens to be an important factor that companies across industries wrestle with: Indians are price sensitive.
Covid-19 only seems to have heightened that sensitivity and that was reflected in a 2020 survey conducted by a leading online travel agency. It revealed that out of the 997 respondents from India, 70 per cent of travelers believed that they would be more price conscious while searching and planning a trip following the pandemic.
The pricing dilemma has left airlines in the lurch because if they increase their ticket fare, there is a possibility that flyers might avoid air travel or go for their competitors offering lower rates. And if they reduce the prices to meet the flyers’ demand, they stand to lose out on profits.
“No airline wants to lose market share. India is a price-sensitive market and people opt for an airline that offers the lowest fare. So, airlines are, in a way, compelled to keep the fares low to either protect their market share or garner additional market share,” says Jitender Bhargava, former executive director of Air India.
In contrast to Bhargava’s views, the pricing war is playing out very differently in the sector which has now decided to set its sights on profits.
Eye On Profit
As per the present fare price dynamics in the industry, every airline has increased its airfare by 50 per cent to 100 per cent as compared to the prices last year or even a few months ago. For instance, a Delhi-Chennai flight which would cost flyers Rs 4,500 in February this year, now costs them Rs 7,500. While they were eyeing to inch closer to profits, it has impacted the sale of tickets across the board.
Directorate General of Civil Aviation data shows that almost every airline has experienced a decline in passenger load factor (PLF) or the number of people traveling against the number of available seats on a flight.
For instance, In May, IndiGo carried 81.8 people against its 100 available seats which dipped to 78.6 in June—a month that generally witnesses high tourism activity. Similarly, SpiceJet saw its passenger load factor fall down to 84.1 in June from 89.1 in May.
While the airlines have not released their July data yet, it is expected to show further decline because the daily available PLF data that Outlook tracked on the Ministry of Civil Aviation’s website showed almost 25 per cent to 30 per cent of seats being vacant in almost every flight.
Against this backdrop, the Q1 results of low-cost airline IndiGo came as a slight ray of hope for the sector in the post-Covid-19 environment. Although the company has suffered a loss of Rs 1,064 crore from its operations between April and June 2022, it has managed to lower it as compared to a loss of Rs 3,174 crore in the year-ago period. In the last quarter of fiscal 2021-2022, its losses stood at Rs 1,681 crore.
The 39 paise figure mentioned above was much bigger and the airline could reduce that gap with its operational efficiency.
In the next few days, other airlines will also release their results and the outcome is going to be on expected lines.
The Competition Conundrum
While the sector is undoubtedly on the path of recovery as compared to the last few years, the huge losses that were incurred during the Covid-19 lockdown and the subsequent disruption have posed a massive challenge to the survival of some of the airlines.
Indian airlines have also been facing the heat because of the technical and safety snags that are being frequently reported across airlines. These have been denting their brand name and could possibly have an impact on their profits.
Currently, the industry is working on a very thin profit margin of 3 per cent to 4 per cent. Most airlines are in poor financial health with no cash reserves and no scope for any outside investment. The staff of several airlines, including technicians, have been staging intermittent strikes over wage and contract issues.
To deal with the financial constraints, the airlines have been looking at different options. Cash-strapped SpiceJet, for instance, is reportedly looking at the probability of selling part of its equity to survive and has been in talks with some companies.
In such a situation, trimming the prices of tickets to one up rivals and attracting more customers will only put the airlines at a bigger risk. The fall of giants like Jet Airways and Kingfisher Airlines has some lessons on the cut-throat business dynamics of the aviation sector in India. Even AirAsia had decided to move out after selling its business to the Tata Group when it realized that the business environment was unfavorable in the country.
Having said that, private airlines also argue that staying away from the competition and losing market share will lead them to shut down operations. With the entry of new players like Akasa Air and the eventual revival of Jet, the competition is only set to get murkier.
“If my fare is higher than others, why will people travel with me? If this is so, then, in any way, I am going to be out of the business,” says a senior revenue official in one of the private airlines, requesting anonymity.
Amidst this debate, Bhargava interestingly puts the onus on market leader IndiGo and says that the airline, with a commanding market share of 57.5 per cent, is in the best position to set the market right by charging a fare that is closer to the production cost of a seat.
“If IndiGo takes the lead, it will, at best, lose market share of 3 per cent or 4 per cent. But (it) will ensure the economic viability of all airlines. Other airlines do not enjoy the same luxury as they do not have a sizable market share,” Bhargava opines.
The Pain Points
At present, the price of air aviation turbine fuel (ATF), the sales tax imposed on it by state governments, and the depreciating rupee are the three major challenges plaguing India’s airlines.
According to petroldieselprice.com, on July 1, 2021, the ATF price was Rs 66,482 per kilolitre which climbed to Rs 1,40,092 per kilolitre a year later on July 1, 2022. Its current price hovers around Rs 1,20,000 kilolitre which is still quite high compared to the prices last year.
Suprio Banerjee, vice president, and sector head-corporate ratings, ICRA, explains how the rise in ATF prices has been impacting the sector: “Airlines look at strategies to expand their RASK-CASK (revenue per available seat kilometer to cost per available seat kilometer) spread, which is their core profitability metric. Given the consistent rise in ATF prices and the depreciation of the rupee against the dollar, CASK for the airlines is also on the rise, and the RASK- CASK spread has continued to worsen as airlines are unable to take proportionate fare increases.”
Given the elastic nature of service, the airlines need to be competitive in terms of pricing so that it does not impact the demand, Banerjee says. That said, airlines need to maintain a fine balance between their RASK and CASK which eventually determines their profitability, he adds.
Talking about taxation, the private airline’s revenue official quoted above says that the sales tax charged by many state governments is still 25 per cent to 30 per cent and it increases with the increase in the price of ATF. Private airports' charges are high, too. “So, all these people make money when we suffer,” he adds.
On the other end of the spectrum, Bhargava says, “Have the fares been increased in proportion to the rise in fuel prices? Not at all. To a large extent, airlines are offering fares below the cost of producing a seat, hence making the operation financially unviable.”
He says that each airline should also look from the industry’s perspective in addition to their own. "The unfortunate part is that though most CEOs acknowledge that there is a need for higher fares to sustain operations, in reality, they fix fares on the principle of ‘If I can make a profit at this rock-bottom fare, let me charge this fare even if others cannot’. If they do not do so, the first victims are the full-service carriers whose cost platforms are higher than the low-cost airlines,” Bhargava adds.
Ajay Jasra, corporate affairs director at FlyBig, a regional airline, lists some things that could help the sector and its players stay afloat: “A GST waiver on the purchase and reimport of aircraft and aircraft parts repaired or serviced abroad, \tax waiver on ATF and low rate of interest on working capital borrowings are some of the measures which can give much-needed relief to the aviation industry."