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Breaking even is a mirage for budget airlines

Breaking even is a mirage for budget airlines
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First Published: Mon, Feb 19 2007. 11 02 AM IST
Updated: Mon, Feb 19 2007. 11 02 AM IST
Bangalore:  Air Deccan, India’s biggest low-cost airline, is so close to breaking even that its officials can almost taste the champagne.
But right now, it seems like the cork is stuck.
All it would take , said Warwick Brady, the company’s chief operating officer, is another Rs388 a ticket on planes that are three quarters full, and overnight, the company would be in the black.
“What’s Rs380? It’s nothing,” said Brady. “But we just can’t seem to get the customers to pay even a little bit extra.”
Not that the airline hasn’t tried. On select routes, it has tried to get passengers to pay slightly higher prices, but those flights have flown half-empty, said Anurag Jain, a revenue management specialist with the company.
For Air Deccan and other budget carriers, that fact illustrates a painful reality: the airline passenger has become addicted to prices that are too low to be profitable. As the losses rack up, budget carriers across the country face the shared struggle of figuring out how to get passengers to pay a reasonable amount for flights.
“How long can airlines survive by offering ridiculous prices like Re1 and Rs10?” Ajay Prasad, former secretary for civil aviation, asked in a recent interview. “There has to be some sanity in the market and the prices.”
For the low-fare airlines, what that reasonable amount is varies greatly, depending on how effective they have been in shaving costs. The airline with the lowest break even point will consistently be able to charge lower prices in the long term, giving it an advantage over competition.
Comparing breakeven points across airlines is complicated, because different aircraft fleets have different costs and each individual flight’s profitability depends on how full it is (the load factor).
But a useful industry benchmark for India’s low-cost airlines, which mostly fly Airbus A320s, is this: how much do you need to charge a passenger on a flight that is three quarters full, to pay for the costs of keeping the airline’s fleet of A320s flying and paying all its other bills?
For comparison, consider IndiGo, a relatively young low-fare airline that uses only A320s and flies to 13 cities, including the metros. Its chief executive, Bruce Ashby, said that given the costs of keeping IndiGo’s seven A320s flying and paying all his other bills, he would need to charge a passenger in a flight that is three quarters full about Rs3,000 to break even. That includes almost Rs1,000 in surcharges, but not taxes. Right now though, IndiGo passengers pay an average of Rs2,600 per ticket across all its routes.
“We’ve always said that we would lose money in the beginning, but because our costs are lower than the other guys, we will make it up faster in the end,” said Ashby.
At Air Deccan, the math is quite exact. For every hour that one of its A320 flies, said Jain, it costs the airline about Rs2,40,000, which includes everything: salaries, office rents, airplane leases, fuel and other costs. To break even, Mohan Kumar, who recently stepped down as the company’s director of finance, estimates that passengers would have to pay an average of Rs3,500 a ticket (including surcharges, but not taxes) on a flight that’s three quarters full.
But the airline is rarely able to charge that price, with passengers paying under Rs3,000 per ticket in December 2006 for flights a little less than three-fourths full. Every time it raised prices, as it did on some Saturday flights to gauge customer response, flights were disastrously empty.
The reasons for this are not that complicated—competition and the way Air Deccan is perceived by customers. “I know that if we were to improve our operations, we could charge an extra Rs200 per ticket and customers would pay it,” said Jain.
Translation: customers may be willing to pay more for another airline’s ticket, but not for an Air Deccan one.
Air Deccan spent most of last year dealing with significant flight delays and cancellations, and a word-of-mouth reputation for bad customer service. At the same time, other airlines, even full-service heavyweights like Jet Airways, the No. 1 carrier in India, sold most of their tickets at heavy discounts, erasing much of the Bangalore-based airline’s price advantage.
Air Deccan’s estimate—down to the last rupee—shows how close the margins are, but it’s also a systemwide average. In addition to the A320s, the airline also flies 23 ATRs, a French-made turboprop airplane popular for short-hop flights. Those ATR flights, primarily because they fly on non-competitive routes, have been profitable. Passengers paid an average of Rs2,370 a ticket, with a breakeven point of Rs2,150, according to Kumar.
So essentially, it’s non-metro, turboprop operations in mostly monopoly markets that are subsidizing its Airbus flights. “That’s the only way to make money,” said Jain. “On the metro routes, its just bloodbath and mayhem.”
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First Published: Mon, Feb 19 2007. 11 02 AM IST
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