Why airlines are bleeding despite double-digit passenger growth

The past few months have not been easy for Indian carriers. With crude oil prices reaching new highs and rupee depreciating around 13 per cent against the US dollar since the beginning of the year, the headwinds are showing no signs of abating.

Despite 50 consecutive months of double-digit passenger traffic growth, Indian carriers are yet to pass on the burden of rising aviation turbine fuel (ATF) prices to flyers. The weaker rupee and rising oil prices are not the only factors weighing on the domestic carriers, the intense competition has also led to price war in the sector.

While there are ample reasons for travellers to rejoice the giveaway fares offered by low-cost as well as full-service carriers, the widening losses due to escalating costs have severely affected the ability domestic airlines to weather the storm.

ATF prices have risen 38 per cent from Rs 50,200 per kilolitre (KL) in September last year to Rs 69,090 per KL in August 2018. This has dented the margins of several airlines and put pressure on yields - the average fare paid per mile, per passenger. The yields at IndiGo declined 10 per cent to Rs 3.21 in the second quarter of FY19.

Flying into the red for the first time after listing on bourses in November 2015, IndiGo's parent InterGlobe Aviation posted a loss of Rs 652.1 crore in the quarter ended September as the no-frills airline was battered by spiralling costs and intense competition. The country's largest airline with over 40 per cent market share, reported a profit of Rs 551.6 crore in the year-ago period.

IndiGo's co-founder and interim CEO Rahul Bhatia said profitability was significantly impacted by costs pressure from the increases in fuel price and the depreciation of rupee as well as competitive fare environment. The airline's total income rose over 18 per cent to Rs 6,514.2 crore in the second quarter ended September 2018. In the same period a year ago, the total income stood at Rs 5,505.6 crore.

During a post-earnings call with analysts, Bhatia said IndiGo was forced to keep the fares low because of the intense competition posed by peer group. "At IndiGo, we are not leading the charge termed as low fares. We never have that policy. What you see today in the market is there are players in the industry who are really hurting and for them to raise short-term cash, they have to lower fares and we as a company have no choice but to match them," he said.

IndiGo's Chief Financial Officer Rohit Philip said the 0-15 days booking window remains weak with lower fares compared with the same period last year. This window generates higher revenue for airlines. "This has been further accentuated by the significant increase in the capacity in the market," he said.

Adding to the woes is higher capacity addition. To maintain the demand, the airlines are keeping fares low. ICRA estimates the sector-wide capacity additions of 15-17 per cent in 2018/19. "The key driver for the industry capacity growth continues to be the sizeable order backlog...approximately 1,033 aircraft of various sizes and configurations are on order by Indian airlines."

ICRA, however, says that there are some silver linings as well. The only saving grace for the sector is the robust passenger load factors (PLFs) registered on the back of adequate demand, the report says adding that "the domestic passenger traffic to grow at a healthy pace of about 15 per cent annually... due to conducive factors like relatively low penetration levels, favourable macro-economic environment, support from regulatory environment and development of new airports."

Global consultancy CAPA came out with a report that highlighted the fault lines in the sector. "Indian airlines are expected to post combined losses of up to $1.9 billion this financial year driven by rising costs and low airfares," it said. CAPA is not the only agency that has predicted heavy losses for the sector.

Jet Airways alone posted a net loss of Rs 1,323 crore in quarter-ended June 2018. The recent quarterly results of IndiGo show the rising distress in the sector.

Kinjal Shah, Vice President, ICRA told Business Today that some increase in fares would have supported the profitability of the airlines.

"Capacity additions have been high and will continue to remain high. The issue is that India is a price-sensitive market. Despite demand being high, the industry currently lacks the pricing power. Every airline says that they are in stress and this [fare war] is not sustainable but obviously there have to be steps taken to raise airfares," Shah said.