Domestic airfares have constantly risen to unaffordable levels from the beginning of 2012 since Kingfisher Airlines, India’s second largest airline by market share at one time, plunged into crisis. Fares peaked in October-December when the airline went belly up.
Now fares are headed for correction as demand for air travel is declining due to prohibitive fares, and the current lean season has added to the problem. Since airlines have made money in the October-December quarter, they are cross- subsidising in the current quarter to stimulate demand by lowering fares.
Throughout last year, rival airlines which were vying for Kingfisher’s share increased fares as the airline with a 22 per cent market share went out of business within 10 months of plunging into the financial crisis. The near-month-long pilots strike in Air India’s international operations also helped rivals jack up prices.
“Fares have gone up by 60 to 100 per cent (from January till December). We can’t blame the airlines. The cost environment is hostile and now nobody is willing to sell below cost. This is why fares have gone up across sectors and this is the real demand. A part of the demand seen in earlier years was artificial and was backed by deeply discounted fares. The exit of Kingfisher’s 66 aircraft from the 400-plus commercial fleet in India has taken excess capacity out, and the yields of all airlines have gone up,” said Amber Dubey, Partner and Head-Aviation, at global consultancy KPMG.
The demand for air travel might have declined but airlines were happy with their improved yields from high fares. “In the past quarters, there was a fair amount of stability in the market, and the momentum should not be spoiled by the destructive pricing offered by SpiceJet. Demand might have come down by 8 per cent but yield has gone up by 25 per cent, which is good,” said a senior executive of a large airline.
Explaining how fares moved up last year, Ankur Bhatia, executive director, Bird Group, said: “With Kingfisher reducing its fleet size in November 2011, almost 40 aircraft were missing from the system, leading to a sharp decrease in the inventory. While with the same number of passengers flying out, airlines leveraged the situation to raise their fares.”
“Fares shot up by 30-50 per cent in 2012, compared with the previous year, following significant removal of capacity from the market due to the gradual grounding of Kingfisher Airlines,” Mr Bhatia said.
With rising fares, many passengers started preferring rail travel, which has improved services. Superior bus services are also taking away a portion of air passengers on short haul routes.
Another alarming trend is the steepest rise in business class fares in the domestic sector. “Jet Airways has a virtual monopoly in business class as some people do not like to fly other airlines. While average economy fares have gone up by 15 per cent in the past months, the business class fare is up 25 per cent. A Delhi-Mumbai-Delhi fare is in the range of Rs. 55,000 to Rs. 70,000, which is comparable to Mumbai-Singapore-Mumbai,” said Anup Kanuga, Director, Bhatija Travels.
In the lean season, when no sharp capacity reduction has taken place, airlines are flying with more than 30 per cent empty seats. For the time being, fares are lowered to lure passengers and recover some money.
Analysts think spot fares may come down this quarter, but they do not expect heavy discounts as the cost structure will prevent airlines from going beyond a point. Both Jet Airways and Air India had taken away some capacity from the market to bridge the supply-demand gap.
Under such circumstances when high airfares are going to be a reality, passengers must be smart to book early to avail themselves of affordable fares. The 30 days apex fares are 40 per cent cheaper than spot fares, while they are 20 per cent cheaper than 14 days advance fares.
Since the fares were already up, analysts don’t see them moving up more than 5-7 per cent this year.
In the meanwhile, bargain hunting will be on. The airlines have started the year with promotions, offering deep discounted inventory to fill up seats during the lean period.