Fresh airfare wars to trigger new set of losses

Some companies never learn, especially Indian aviation companies

The airline sector has gone back to its old tricks despite running losses through successive price wars. Taking a cue from Spicejet who announced a 50% discount on fares booked 30 days in advance, many other airlines have followed suit halving fares.
 

While Indigo and Go Air have announced a 50% discount on tickets booked 30 and 60 days in advance respectively, this was immediately followed by a similar cut for a 30 and 60 day advance booking by Indigo and Go Air. Not to be left behind Air India announced a 50 per cent cut the same evening. 

 

But there is a rationale behind this madness. With the peak festival season behind it, airline companies are looking at ways to fill their seats. Unlike earlier discount sales, where a select number of seats were offered at a discounted rate, this time around the seats on offer is approximately those that go unfilled. Thus if an airline is operating at an average load factor of 70 per cent, then 30 per cent of the seats are up for grab through the discount sale. Further, in some cases the offer is open for only a short period of time.

 

This does not mean that 100 per cent of the seats will be occupied but improvement in load factors is possible. Further, with money in the bank one month prior to the commencement of flight, airline companies have more flexibility in increasing fares at a later date. An Economic Times report says that online airline companies like Yatra has seen a 500 per cent jump in advance booking. 

 

Though airlines are offering these low prices during the lean season, it is possible that they might have to extend it at least in certain routes. This is because Air Asia intends to launch its services over the next 2-3 months and plans to introduce ‘dramatically’ low fares in the country. Air Asia chief Tony Fernandes said at the World Economic Forum in Davos that the strategy for India would be to offer cheapest possible fares. Also, the high airfare prices witnessed during the small window of festive season is unlikely to work during vacation season.

 

Very soon we might see next round of losses by airline companies if this rate war continues. At the best of times (during festive seasons) companies have made losses despite high air fares and occupancy rates, it is unlikely that they would sustain long unless someone is willing to fund their losses.

 

Both the listed airline companies – Jet Airways and SpiceJet are desperately in need for funds. While Jet Airways deal is stuck due to regulatory issues, SpiceJet has got a new lease of life with its promoters agreed to pump in more money after being unsuccessful to find a suitor. But given the changing dynamics of the sector, this funding is unlikely to keep them going on for long.

 

Even though most analysts continue to have a ‘Buy’ report on the airline companies, the stocks are trading at their year lows despite the broad market staying high. It is only a matter of time till we see them touching new multi-year lows simply because the listed players have not got the operating model right and are ill-equipped to face an aggressive player.