Airlines narrow fare gap, look to trim costs further

Airlines narrow fare gap, look to trim costs further
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First Published: Sun, Jul 26 2009. 09 47 PM IST

Updated: Sun, Jul 26 2009. 09 47 PM IST
Mumbai: Indian carriers have over the past year been decreasing losses per passenger by closing the gap between the required fare per ticket and the actual price at which a flier buys it.
For example, poor passenger demand in August last year forced airlines to sell seats on the Mumbai-New Delhi route for $122 (around Rs6,000) when they actually required $192 to break even, a straight loss of $70, according to data on the India market outlook presented on Thursday by Dinesh Keskar, president of Indian unit of the US-based plane maker Boeing Co.
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“Now airlines are approaching break-even with decrease in domestic capacity and rational pricing. In June 2009, a Mumbai-Delhi ticket was typically sold at $86, when they required $106, reducing the difference to $20,” he said.
According to Keskar, the two primary reasons for this are reduced jet fuel cost and domestic capacity, which have contributed the most to the combined loss of $2 billion Indian carriers posted for the fiscal year ended March.
However, he did not give the average difference between required and actual sale prices because of exchange rate fluctuations and change in jet fuel prices.
According to representatives of Indian carriers, the civil aviation industry still has at least 20% excess capacity and jet fuel cost accounts for 35-45% of total operational expenses.
The Boeing presentation indicated that domestic capacity in June was down 11% compared with the year-ago period, and that capacity is being redeployed in international markets.
“In June 2009, Jet Airways reduced domestic capacity by 18%, Kingfisher Airlines by 24% and Paramount Airways by 9%. Only low-fare carriers such as SpiceJet and IndiGo increased the capacity by 9% and 3%, respectively,” Boeing’s Keskar said.
Wolfgang Prock-Schauer, chief executive officer of Jet Airways (India) Ltd, India’s second largest private carrier by passenger traffic, said he had reduced domestic capacity by three mid-sized Boeing 737 planes and transferred them to short-haul international routes.
The latest models of the plane can carry up to 220 passengers.
The airline is looking at more Boeing 737 planes on short-haul international routes such as Riyadh, Jeddah, Sharjah and additional frequencies to Dubai, Bangkok, Dhaka and Singapore, besides leasing larger planes to international carriers.
The Boeing presentation said Indian airlines’ fuel cost as a percentage of break-even fare has also reduced considerably.
In August 2008, for a Mumbai-New Delhi ticket, the fuel cost was $103 while the ticket was sold at $122 and the required fare was $192.
“The fuel cost has come down to $36 on a Mumbai-Delhi ticket when it was sold at $86 and the required fare was at $106,” Keskar said.
Meanwhile, airline executives are apprehensive as they enter the typically lean July to mid-September season.
“As of now, there is an average difference of Rs1,000 per ticket on the domestic routes due to competition” and the slowdown in passenger traffic, said a senior executive at a New Delhi-based low-fare carrier. “With lean season ahead and full-service carriers playing (the) low-fare card, the difference is going to be wider.”
All carriers are likely to cut ticket prices to boost passenger traffic, said the executive who declined to be identified.
According to data from the ministry of civil aviation, passengers carried by domestic airlines between January and June this year stood at 21.09 million, compared with 22.94 million in the corresponding period in 2008—a contraction of 8.05%.
For the quarter ended June, the first for the fiscal year ending March 2010, traffic fell by 5% from the corresponding period last fiscal.
Besides pulling capacity from domestic routes, airlines are also undertaking financial restructuring exercises.
A senior Kingfisher Airlines Ltd executive told Mint on condition of anonymity that the airline is in talks with bankers, vendors and other suppliers for renegotiation of contracts in an effort to bring down operating expenses. “We are attempting all measures, including rescheduling payments or making part payments, etc., to stay afloat. We are planning to raise Rs500 crore through equity instruments to tide over the situation.”
Jet Airways also plans to raise $400 million to reduce its debt, and has already initiated a comprehensive cost-reduction programme, including network restructuring, rationalizing personnel costs, restructuring aircraft leases, debt-restructuring, cash-conservation and cost-saving measures, maximizing synergies with its low-fare unit, intensifying alliances and code-share benefits and deferment of aircraft deliveries for up to two years.
“The restructuring programme will enable the company to achieve cost savings and help the company conserve cash in a difficult financial environment. The implementation of the programme is regularly monitored and the full impact of this programme will be seen in this financial year,” said Prock-Schauer of Jet Airways.
Jet Airways is aiming to save $600 million in annual costs. “Out of $600 million, total savings of $160 million is derived through network restructuring and $170 million with cost-saving programme across all departments. Lastly, cash conservation of $270 million (will be achieved) through delayed payment to banks,” Prock-Schauer said.
National Aviation Co. of India Ltd, which runs Air India, is also lobbying with the government to increase its equity strength from Rs145 crore to at least Rs5,000 crore.
SBI Capital Markets Ltd is advising Air India on the financial restructuring.
Graphics by Sandeep Bhatnagar / Mint
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First Published: Sun, Jul 26 2009. 09 47 PM IST
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