Active Stocks
Mon Mar 18 2024 15:55:53
  1. Tata Steel share price
  2. 149.60 5.69%
  1. Tata Motors share price
  2. 972.20 2.75%
  1. ITC share price
  2. 417.40 -0.51%
  1. State Bank Of India share price
  2. 730.70 -0.18%
  1. ICICI Bank share price
  2. 1,082.00 0.32%
Business News/ Companies / Price war flares as airlines in India dismiss Opec deal risk
BackBack

Price war flares as airlines in India dismiss Opec deal risk

Opec deal fares up air-fare war globally while airlines in India slash air ticket price during the peak holiday travel season

IndiGo sold a ticket for New Delhi to Mumbai at an average of Rs3,784 mid-November, a 30% drop from a year earlier.Premium
IndiGo sold a ticket for New Delhi to Mumbai at an average of Rs3,784 mid-November, a 30% drop from a year earlier.

New Delhi: Air travellers globally are bracing for higher fares after Opec decided last month to cut output. Not in India, the world’s fastest-growing major aviation market.

Carriers cut fares in November, selling tickets about 12% cheaper on average for Mumbai-New Delhi flights from a year ago, according to Yatra.com, India’s No. 2 online travel agency. The steepest discounts were as much as 30% for the world’s seventh-busiest local route.

The slashing of fares during the peak holiday travel season threatens to wipe out gains accrued from cheap oil and push some of the operators back to losses. Carriers in China and India are expanding capacity with orders for hundreds of planes and luring passengers with discounts. Excess capacity combined with tickets offering base fares as low as 2 cents to first-time fliers have constrained the ability of Indian carriers to translate an increase in passenger traffic to profits.

“If capacity excess continues, airlines continue to lack pricing power, and they will be unable to efficiently and promptly recover supply-cost increases like fuel or labour," said Robert Mann, head of aviation consultancy R.W. Mann & Co. in New York. “If fares remain below full economic costs, re-investment in the business is not warranted, and slow decline occurs over a period of years as equipment is retired."

IndiGo sold a ticket for New Delhi to Mumbai at an average of Rs3,784 mid-November, a 30% drop from a year earlier, while Vistara, the local unit of Singapore Airlines that offers free food and on-board Wi-Fi streaming, slashed prices 24% to Rs4,917. Jet Airways India Ltd and SpiceJet Ltd also cut prices by 6% and 9%, according to Yatra.com. For the same month, retail jet fuel prices jumped 17% in New Delhi.

Vistara’s chief commercial officer Sanjiv Kapoor said in an e-mail that “lower fare buckets" were available after demand slowed down following a surprise government move in November to scrap high-value rupee bills from circulation. Domestic passenger traffic grew a record 22.4% in the month from a year ago despite the demonetization, according to aviation minister Ashok Gajapathi Raju.

Kapoor said fares tend to remain lower “to stimulate demand as seats are a perishable commodity, and filling seats is the best way to generating revenue." Jet Airways said in an e-mail that it offers promotions to fill more seats early and boost revenue. A spokesman for IndiGo declined to comment while a representative for SpiceJet did not respond to requests for comments.

An increase in capacity coupled with the ban on old currency notes led to a short-term dip in ticket sales in November, Sharat Dhall, chief operating officer of Yatra.com, said in an e-mail. To offset that, airlines came up with promotional fares to fill seats, driving airfares to “their lowest in November," he said.

To read about Chinese carriers squeezing global rivals, click here

India is one of the costliest aviation markets in the world, with provincial taxes of as much as 30%. Despite more than a 20% growth in passenger traffic and a decline of 1.3% in jet fuel prices in the first six months of 2016, passenger yields—a key measure of industry profitability—at the nation’s three listed carriers fell as much as 11.6%, according to ICRA Ltd, the local unit of Moody’s Investors Service. Sustainability will depend on their ability to reduce a combined debt of Rs650 billion, analysts including Subrata Ray wrote in a 8 December note.

Indian carriers, which typically refrain from hedging jet fuel, benefit most when oil prices fall. Had crude not slumped in the previous two years, the Indian aviation industry would have posted losses of Rs67 billion before interest, tax, depreciation and amortization for the year ended 31 March, according to Sydney-based CAPA Centre for Aviation. Instead, the windfall from cheaper oil was a combined Rs45 billion in Ebitda (earnings before interest, tax, depreciation and amortisation).

Kingfisher collapse

As recently as four years ago, a confluence of circumstances including rising fuel prices and competition for passengers did not end well for some of the local carriers. Kingfisher Airlines Ltd, which was owned by liquor baron Vijay Mallya, was grounded after defaulting on payments to staff, banks, lessors and airports. Budget carrier SpiceJet Ltd failed to find an investor and ran out of cash in 2014 before a co-founder bailed it out.

The fares this year are not yet “alarmingly low," and not of the same magnitude, Amber Dubey, head of aerospace and defence at KPMG in New Delhi, said in an e-mail. The government may jump in to cut “excessive taxes" to ensure that jet-fuel prices stay below Rs60 a liter, Dubey said.

The Opec deal may bring more pain. Brent prices may average $60 a barrel next year and $70 in 2018, versus $49 this year, according to Nomura Holdings Inc.

“The profitless growth in 2004-2008 was exposed as soon as the industry was faced with the fuel price spike and the global financial crisis," said Kapil Kaul, South Asia CEO at CAPA. “If India’s airlines experience another phase of rapid growth without sufficient capital, the euphoria could come crashing down when the next external shock hits." Bloomberg

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Corporate news and Updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.
More Less
Published: 20 Dec 2016, 10:00 AM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App

Chat with MintGenie