The 25-30 per cent cut in airfares by Indian carriers may negate the advantages of the 33 per cent cut in jet fuel costs, thus increasing their operating losses.
When aviation turbine fuel (ATF) prices were at their peak in September, Indian carriers were losing as much as Rs 10 crore a day. The cuts in ATF price had brought these down to minimal levels. But most of these gains, analysts said, will now be lost with the steep airfare cuts announced in the last few days.
A report put out by brokerage house CLSA on Jet Airways said that the fall in ATF prices had brought down the load factors (flight occupancy) required for it to break even from 78 per cent to 63 per cent. And most airlines have load factors between of around 60 per cent at present. However, the airfare cuts have raised the breakeven load factors back to 70 per cent, experts said. The initial response to the airfare cuts looks positive with travel portals reporting huge traffic, but it remains to be seen if the surge will be maintained for long.
The airlines, on their part, are banking on the lower airfares to create a surge in traffic, which will help them achieve the required load actor. This might be tough to achieve as monthly domestic air traffic is estimated to come down from 3.9 million in January 2008 to 3 million next month.
Some industry experts doubt if the airfare cuts will do the trick for the airlines. Keyur Joshi, the COO of travel portal Makemytrip.com, said that globally, airlines stimulate the leisure segment of the market with low fares in advance and charge corporate travelers higher for instant tickets. Thanks to the intense competition in India, most airlines, more so the budget airlines, stick to rock bottom fares till the very last and offer very limited inventory for advance purchase. An Air India spokesperson agreed that advance bookings at low fares were minimal. However, both Jet and Jetlite today announced advance booking basic fares of Rs 250 and Rs 9 respectively.
Still, the airlines said that the current business environment gives them the elbow room to cut fares. The current fares, after the cuts, are at the same level as in January 2008. However, in the last one year, ATF prices have come down a third, average employee cost a fifth (see table) and aircraft lease rentals 10-15 per cent. Together, these three account for almost 80 per cent of an airline’s operating costs.
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To the airlines’ credit and the passengers’ disadvantage, they have not touched the fuel surcharge in the current round of airfare cuts, which still stands at around Rs 2,700-3,000 per ticket. Experts said that it was unlikely that there would be a huge decrease in the surcharge in the coming months. Earlier this month, major Indian carriers cut their fuel surcharge by Rs 200-400 per ticket.
On the other hand, airlines have quietly added capacity in the last few months, which makes breakeven load factor an even bigger challenge. After cutting capacity by around 30 per cent in September, many airlines, especially the low-cost operators, have increased flights this season. Another 13 aircraft are likely to be pressed into service in the days to come, which will raise the capacity on the domestic routes by 5-10 per cent. Also, the carriers owe Rs 1,350 crore to the airports and Rs 1,500-2,000 crore to the oil companies.