Cheap tickets to stay as India’s airlines struggle over fare increases

Top aviation bosses agreed on many things at the Wings India airshow in Hyderabad last month: taxes need to be reduced and airport capacity needs to be increased. One thing they could not rule over: whether unfair competition keeps prices artificially low in what is already a brutally competitive market.

Sunil Bhaskaran, the CEO of AirAsia India, was ahead. Indian aviation has suffered from “irresponsible competition” that keeps rates low despite high taxes and fuel prices, he said. Bhaskaran did not reveal who he was referring to. But the one carrier that is capable of dancing the whole market to its tune is IndiGo, India’s largest airline.

IndiGo, operated by InterGlobe Aviation Ltd., controls more than 50% of the domestic market. Nine other airlines compete for the rest, giving the fast-growing low-cost carrier power over fares. The competition is set to heat up even further, with two other airlines preparing to launch services later this year in a market where tickets are often sold below operating costs – a situation that has led to the death of several high-profile carriers.

However, IndiGo has not been bothered by criticism such as calls from smaller rival SpiceJet Ltd. for airlines to work together to increase fares, even if that results in a slight dip in bookings.

“I’m sorry, but this is not about collaborating to raise rates,” said Ronojoy Dutta, CEO of IndiGo, in response to a suggestion that other airlines may increase rates if IndiGo takes the lead. “Look, ultimately, IndiGo’s strategy is to provide superior customer service and get a disproportionate share of the revenue,” Dutta said, to laughter and applause.

IndiGo’s promise to remain “highly, highly competitive” is bad news for everyone, including the local subsidiary of Singapore Airlines Ltd., IPO-affiliated Go First and former state-run Air India Ltd. Cutting price has already forced many including Kingfisher Airlines Ltd. and Jet Airways India Ltd. unceremoniously fold or go through court-run bankruptcy proceedings.

IndiGo, the largest customer in the world for Airbus SE’s best-selling A320neo jets, is a rare exception, and manages to make money while keeping a tight lid on costs. It has also signed lucrative long-term maintenance and engineering contracts that were negotiated as part of major aircraft orders.

“It has to do with the sheer size they are. IndiGo is a giant revenue engine,” said Mark Martin, founder of Dubai-based Martin Consulting LLC, which advises the aviation industry. “Naivety and ignorance can be destructive and destructive in the system” and this is not a good time for IndiGo to show bravado, he said. “At some point, IndiGo will have to increase rates or balance its rates to some degree.”

The Sydney-based CAPA Center for Aviation said last year that it was “on track to describe the state of Indian airlines,” claiming the industry “is on the verge of a cliff.” Assuming oil at $ 70 per barrel and a rupee-dollar exchange rate of 75, CAPA predicts that Indian carriers could lose about $ 8 billion in the two years to March 2022.

Brent oil is now trading at more than $ 100 per barrel and the Indian rupee fell last month to a record low of 76.9812 per dollar.

There have been some signs of rising rates in recent times, but that has more to do with rising oil prices due to the war in Ukraine. For April, tickets from New Delhi to Mumbai – one of the busiest domestic routes in the world – will be sold at levels 42% higher than before the war, according to online travel agency Yatra.com.

At the same conference, SpiceJet President Ajay Singh, who is recognized for turning around a carrier that almost failed after running out of money, said that higher oil prices offer an “enormous” opportunity for airlines to generate more revenue earn. But he also said he received messages from customers complaining that SpiceJet’s price increases were “squeezed out”.

The problem is price-sensitive passengers, who are now accustomed to notoriously cheap fares, and that thinking needs to change, Singh said.

“We need to be very aware of the fact that the aviation sector has suffered enormous losses because it is a chronically ill industry, and I do not know what the hell Vinay Dube is trying to do by booking more planes and creating a new airline at the moment, “said Singh, referring to the chief executive officer of the upcoming carrier Akasa, which is backed by billionaire Rakesh Jhunjhunwala.

Prices for aviation fuel in India have been “perennial” high and moving higher, which will only compress margins further, limiting the cash flow that must be used to repay debt by Covid or forcing price increases, which could shrink travel demand, according to Robert Mann, the New York-based head of aviation consulting firm RW Mann & Co.

“That loss of demand will also put carriers at risk with the least available liquidity and some will fail,” Mann said. “It’s going to be an interesting decade in Indian aviation.”


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