Airlines set to fly out of the red

After reeling under heavy losses for two years, the aviation industry is finally headed towards better days. With capacity expansion slowing substantially in FY 08, and effects of consolidation beginning to show up, industry players expect profits by the second or, at most, third quarter of the next fiscal.

In addition to the more rational approach to capacity addition by the players, more restrictive policies on handing out licences by the government have helped ameliorate the situation.

There has also been a visible economy in terms of doling out infrastructure at Delhi and Mumbai (till the modernisation is through), ensuring that the existing players look at other routes than just metros to compete with each other.

Speaking to Business Standard, Jet Airways Executive Director Saroj K Datta said: "While fares may not have gone up substantially, revenue per passenger has increased in the last three or four months. Yields are better and some of the lowest buckets of fares have vanished."

He said this was mainly due to saner pricing strategies by the airlines and consolidation in the industry. To start with, the low-cost space has seen "a tactical understanding between airlines on fares", according to Centre of Asia Pacific Aviation's CEO Kapil Kaul.

In fact, a study of low-cost carrier fares across routes on their websites reveals that there is a difference of just Rs 100-150 among airlines on the same routes, with the same fares quoted quite often.

Kaul added that the full benefits of the consolidation that took place this year (Kingfisher-Deccan, Jet-Jetlite, Air India-Indian) would show up by next year but that there had been a Rs 150-200 firming up of fares across all low cost airlines already.

"Deccan is an influencer. If Kingfisher raises Deccan's fares, the initial beneficiaries will be SpiceJet and Indigo. In other words, Deccan has the power to pull the other two out of the red," said Kaul. Since the two need a lower fare increase to earn profits, he argued that the key to low-cost airlines "" and perhaps the industry's profitability "" is in UB Chairman Vijay Mallya's hands.

Industry players say that the market's appetite to absorb slightly higher fares has improved and around Diwali and between December 15 and January 15 (traditionally peak periods), the fares will be above costs. They opined that the fare war was over and the extent of bleeding of individual players had come down.

Many players now say there is no fare war "" quite different from their refrain at the beginning of this year.

But to pull the industry out of the red, a fare increase of Rs 500 per passenger is required, which may lead to a fall in load factors in non-peak periods.

But perhaps one of the most important factors leading this recovery is the slowdown in capacity added. In 2006-07, almost six aircraft per were added per month across airlines but since this April, this is down to around three per month.

"Capacity addition this year is insignificant compared to last year. Airlines are managing yields better, cutting costs and trying to focus on improving non-aeronautical revenues. All this will help pull the industry out of the red," said an aviation ministry official.

Also, most players do not have a very aggressive expansion plan for the rest of this year. So, even if players continue to lose money for the next six months, the coming financial year holds better promise.