By Jitendra Bhargava
There have been rare occasions when Indian aviation has seen a slew of positive developments in rapid succession. Jet Airways 2.0 received the Air Operators Permit after successfully operating three mandatory proving flights. Akasa Airline inducting its first Boeing 737 Max aircraft amidst great fanfare, with an imminent start of commercial operations.
The Competition Commission of India accorded its consent to Air India’s proposal for acquisition of the entire stake in AirAsia India. Air India also made known its desire to place a huge order for new aircraft. These developments have one thing in common: they will all result in a surge of capacity availability compelling aviation analysts to ask: can the Indian market absorb the additional capacity planned by the existing and the two new airlines?
In normal times, one would have possibly replied in the affirmative. Considering that India is the fastest growing economy in the world; several routes remain underserved; many parts of the country are not connected whilst India endeavours to become the third largest aviation market after USA and China in the next few years. Without meaning to mar the excitement and the euphoria that usually surrounds the launch of new airlines, one cannot but be realistic to conclude that the scenario at present is not the best for entry of new airlines. There are certainly head winds to be encountered.
It is an acknowledged fact that the start of commercial operations is the result of a year or more of planning and preparation for launch of services. When these projects were conceptualised the operational environment was very different. Jet fuel, which constitutes almost 50% of the operational cost now, was available at less than half the current price. The promoters, particularly those who have committed to finance the projects, will surely be cognisant of the pitfalls involved and the history of Indian aviation, particularly the fact that almost three-fourth of the airlines that have commenced operations in the past three decades in India no longer exist, many of them going out of business in just a few months.
Currently the aviation industry remains in an unstable state globally. Even though most countries have removed all restrictions for air travel, even experienced airlines have not been able to deploy the pre-pandemic level of aircraft. Cathay Pacific Airways, battered by strict quarantine rules that led to a 98% fall in passenger numbers, is preparing to bring back more planes to rebuild Hong Kong’s hub status. The airline’s chief executive Augustus Tang said on the side lines of an airline industry gathering in Doha in mid-June, “We have about one-third of our passenger fleet still parked in the desert, not being utilised,” Singapore Airlines, likewise, operated a mere 61% of pre-COVID-19 capacity in May.
In India, the situation has been significantly better because quarantine conditions were relaxed much earlier than most countries. However, the curse of extraordinarily high jet fuel prices is taking a huge toll. Ajay Singh of Spice Jet has gone on record stating that “The sharp increase in jet fuel prices and currency depreciation have left domestic airlines with little choice but to immediately raise fares and we believe that a minimum 10-15% increase in fares is required to ensure that cost of operations are better sustained,” How long can the airlines survive if they continue to have fares below the cost of producing a seat? The unfortunate reality is that notwithstanding the precarious financial state of most airlines in India, no airline wishes to take the initiative of increasing fares on a cost-plus basis due to the fear of losing market share.
Difficult Turf For Survival
The game isn’t about how much an airline is likely to lose by not ensuring that the fares cover the cost of operations but how much competing airlines lose and which of them start battling for survival. This explains why even airlines known for providing exceptionally good services, like Kingfisher and Jet Airways, failed to survive in the past decade.
It is an established marketing fact – true for all industries – that once the fares go beyond a certain level a segment of passengers find them unaffordable and hence do not travel resulting in shrinkage of the market. As per data released by the Directorate of Civil Aviation Authority, twelve million passengers flew on domestic flights in May 2022, which was the highest since the resumption of flights post-Covid. In June, the number of passengers witnessed a substantial decline because airlines were compelled to increase fares due high jet fuel cost. The trend is likely to continue therefore numbers are going to reduce and create a capacity glut in the market. In such challenging times, all airlines invariably begin protecting market share at the expense of profitability thus affecting their own economic viability.
New airlines, in their misplaced exuberance and confidence, are tempted to maintain the hope to capture a part of the additional demand emerging from the recovery process. A fair assessment in normal circumstances but not so presently airlines are operating in abnormal times, not only do existing airlines have spare capacity but they experience challenges to maintain occupancy levels that were being managed before jet fuel prices increased astronomically.
One would hope for the new airlines to make a momentous entry and sustain operations, the fact is that the market invariably favours the fully entrenched airlines because they offer a bouquet of flights on most sectors as against limited options offered by a new emerging airline.
Vinay Dube, promoter and CEO has already said, “I am here to tell you that at Akasa, we hope to have very affordable fares for our consumers as well as a level of customer service that is warm, friendly, and comfortable.” This is a statement on expected lines as all new carriers have no option but to offer lower fares, often called introductory fares, backed by a good product to garner market share. The question is will the airline be able to break even at these affordable fares? If not, how deep are the financier’s pockets to sustain losses?
Considering that the present environment of high fares forced by high jet fuel erodes prospects of potential market growth, it may perhaps be prudent for new airlines to moderate their growth plans. This is deemed imperative to ensure that cash burn is reduced to the extent possible and finances available are sustained for a longer period while hoping that the challenging business environment eases soon.
The impact of high fares on the travelling public can best be gauged from the fact that the Finance Ministry has asked employees to opt for ‘cheapest fare available’ on their entitled travel class for official travel. One can then well evaluate the fate of the average traveller on vacation with the family or a business passenger who may have no better alternatives.
Jitender Bhargava is a former Executive Director of Air India and the author of the book ‘The Descent of Air India’