Mumbai: Jet Airways (India) Ltd will introduce more low-fare flights, responding to a trend already visible in the Indian market, although the move will entail a change in its current business model and, according to analysts, affect its profitability.
“With growth mostly coming from the low-fare segment market in domestic volumes, we, the board and the management of the company, are urgently addressing this issue and undertaking an in-depth review of the business model, including reviewing multiplicity of ‘brands’ being offered in the marketplace, and will soon be making changes to enable us to compete more effectively and retain our dominant position in the Indian market,” said Jet chairman Naresh Goyal on the sidelines of the company’s annual general meeting in Mumbai.
Although Goyal’s comments came after market hours on Wednesday, the market seemed to have wind of it. Shares of the company ended 13.12% down at Rs 304.70 apiece on BSE on a day the benchmark Sensex rose 0.66%.
Already, almost three out of every four tickets Jet sells are in the low-cost segment.
The company operates the full-service Jet Airways; a no-frills, all-economy-class service Jet Konnect, which shares planes and staff with the full-service airline; and a low-cost subsidiary Jet Lite (India) Ltd. Jet plans to merge the two under the Jet Airways Konnect brand. Mint first reported this on 28 October.
Goyal said that under the leadership of chief executive officer Nikos Kardassis, chief commercial officer Sudheer Raghavan and executive vice-president (revenue management and network planning) Anita Goyal, the company had already started working on the changes and that it would soon implement its revised business model.
“The primary objective of this exercise is to evolve a model which is in sync with market realities,” Goyal added.
An analyst said the move could hit profits.
“In the Indian context, the low-fare airline space would mean only high-density seats. There are no separate airports for low-fare airlines. And all carry the same cost of operations,” said Mahantesh Sabarad, senior vice-president (equity research) at domestic brokerage Fortune Equity Brokers (India) Ltd, who tracks the Jet stock.
Jet Airways reported a loss of Rs 123.16 crore for the June quarter of the current fiscal against a profit of Rs 3.52 crore a year ago, on the back of low fares and high jet fuel costs. Jet’s rival Rs Kingfisher Airlines Ltd saw its net loss rise to Rs 263.54 crore from Rs 187.34 crore. Nearly four out of every five tickets sold by Kingfisher are in the low-cost segment.
Fuel costs didn’t spare low-fare airlines either. The country’s second largest budget carrier SpiceJet Ltd posted a first quarter loss of Rs 71.96 crore against a profit of Rs 55.21 crore a year ago.
The shift to low-fare seats will add to profit pressure, said Victoriano P. Dungca, director at Jet Airways.
“I can’t put a percentage to the kind of hit that we will take because of this. It depends on the demand and supply of the market. But we will be able to price it better when the volumes grow,” said Dungca, a financial adviser based in California.
Still, the move was inevitable, said Raghavan.
“One of the last bastions of the full-service airline market, Japan is also now turning to the low-fare space,” he said. “One has to see where the world is going. Low-fare airlines are growing in size. We cannot ignore the fact. Jet Airways will react to what the market wants.”
In their respective markets, Australia’s Qantas and Singapore Airlines have announced the launch of low-fare carriers.
Raghavan declined to give details about the proportion of seats the airline will convert to low-fare ones.
“From a current 73% (in the) low-fare segment, India will have at least 85-90% seats offered in the low-fare category in next five years. We have no way but to adapt to market dynamics,” he added.
In an attempt to offset lower profitability, Jet has already embarked on a cost-cutting programme. “The fares will only go down in the market. Therefore, the only option is to cut down costs,” said Raghavan, adding that the aim was to do so by 25%.
That may be difficult, said an analyst. “It is tough to do away with legacy costs for an airline like Jet Airways as many of the costs such as pilot salaries, ticket distribution expenses, and others are fixed. The carrier has very little flexibility to cut costs,” added this person, who did not want to be named.
Kardassis admitted that Jet Airways was facing challenges. “India is witnessing what Europe faced five years ago with the emergence of several low-fare carriers,” he said.