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Airlines’ problems: consolidation can help

MUMBAI: Facing the heat with spiralling fuel prices, the intensively competitive Indian aviation industry now has to contend with negative growth in domestic air traffic as well.

For the first time in three years, early July has seen domestic air traffic decline by four per cent over the year-ago period, attributed largely to higher ticket pricing-led lower passenger load factors (PLF) and a capacity cut by airlines during the last few weeks.

Average ticket prices have gone up by around 100 per cent over a year which saw PLF dip to around 60 per cent from 70-75 per cent last year. The past two months have also seen the industry cutting about 10 per cent, about 160 daily flights, of their total domestic capacity.

The rise in aviation turbine fuel (ATF) price translates into a substantial loss for airline companies and average ATF prices have risen from Rs. 43 a litre in the last fiscal to Rs. 61.70 a litre in May this year. A Crisil Research report says that fuel cost as a percentage of total operating cost has risen by 300-600 basis points. Though airlines have countered this by gradually increasing fuel surcharge, they continue to bleed.

“The incessant increase in the price of ATF and the consequent increase in ticket prices has led to a reduction in growth of passenger traffic, thereby leading to a drop in PLF,” say the report adding that at current ticket prices even if the airlines operate at 100 per cent load factor, low-cost carriers will not breakeven and full service carriers will just about breakeven at the operating level, however, assuming a 100 per cent load factor is unrealistic.

“In July, we are seeing the first signs of negative growth in domestic travel and there has also been a 10-15 per cent cancellation or withdrawal of domestic flights by several airlines,” C. V. Prasad, Chairman, Travel Agents Association of India (TAAI), told The Hindu.

The airlines’ woes do not end with high fuel prices as they may have to re-introduce cancelled flights at some stage.

About three years ago all players hiked their capacities irrationally across all routes due to competition. But the current measures undertaken seem inadequate to cover their costs so there will inevitably be a further hike in ticket rates.

Significantly, there are orders for more than 200 passenger aircraft and these are trickling in so capacity has to be used. “Given the prevailing circumstances, it would come as no surprise that most airlines with options would postpone aircraft acquisition,” said Sudhir Nair, Head, Crisil Research.

A consolidation in the airline industry is a way of adjusting the poor load factor. “How many players today have the appetite for it?” asks Mr. Nair, adding if airlines were profit making it would have been different but now we will have to wait and see till things improve.

However, travel companies like Kuoni-SOTC are more optimistic of the industry prospects. Sunil Gupta, COO, said, “July-August anyway tends to be the slack season which is when the hospitality industry offers ‘monsoon packages’ and other discounts. One will have to see how the situation evolves after September.”

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