Flying full service? Get ready to pay more. That seems to be the almost- unanimous opinion of experts analysing the merger between India’s largest full-service private sector airline Jet Airways (India) Ltd and Sahara Airlines Ltd.
“This consolidation will be good for the industry. The pricing power would come back to all the players to an extent,” said Kalpesh Parekh, head of institutional sales at ASK Raymond James India Pvt. Ltd. Gautam Roy Sinha of brokerage firm Edelweiss Capital Ltd also echoed the same opinion. “If Air Sahara is retained as a legacy carrier, then the pricing power of other airlines is upped. Jet can also deploy Air Sahara’s aircraft on the long haul routes since they have several wide-bodied aircraft,” he said.
Of the full-service airlines that operate in India, Air Sahara, which was anyway running with a view to sell out, was pricing its seats almost close to the fares offered by low-cost airlines. For instance, fares of Air Sahara on Mumbai-Delhi route for a ticket on 13 April 2007 cost Rs2,732, compared with Rs2,674 on Air Deccan, Rs2,899 on SpiceJet and Rs2,799 on Indigo Airlines.
A senior official at one of the largest aircraft-leasing companies in the world, said, “The deal will mitigate pricing pressure among full-service airlines as it potentially removes the one player who has been undercutting others on fares.” To make good its thousands of crores of investment on acquiring Air Sahara, Jet may be forced to up fares to curtail losses being incurred by the troubled airline.
“Jet Airways would be a more rational player and would discontinue the cheap fares, which are offered by Air Sahara at present,” said Ajay Singh, director of SpiceJet. The airline industry in India has been reeling under huge losses as flights are being sold at almost 50% less than the pricing necessary to earn a reasonable profit. Jet Airways had a loss of Rs60.07 crore while Deccan Aviation had a net loss of Rs33.3 crore for the nine months ended 31 December 2006. Similarly, SpiceJet’s losses for the latest three quarters too aggregate to Rs57.7 crore.
Also, poor infrastructure in India has planes hovering over busy metro airports burning fuel as they wait for clearance to land. Prices of aviation turbine fuel in India are among the highest in the world, adding to already high costs for airport infrastructure. Further, such delays mean fewer flights and hence lower earnings for the airlines.
The Jet-Sahara combination comes close on the heels of the proposed merger of state-owned Indian and Air India. But the mega-mergers may not stall the trend of rising market share of the budget carriers. “It is very difficult for Jet Airways to migrate Air Sahara’s passengers to the merged entity since these commuters are used to cheap fares,” said Mohan Kumar, consultant for Air Deccan.
Jet will also have to decide whether or not it wants to convert Air Sahara into a low-cost airline. Naresh Goyal, chairman of Jet, will in either case have to spend money on refurbishing or retrofitting the Sahara planes and deal with issues of aligning widely varying pay scales and seniority between the two organizations. For instance, an Air Sahara co-pilot typically earns Rs2.4 lakh per month while it is Rs1.9 lakh per month for a Jet Airways co-pilot.