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Unfare battle

Geetanjali Shukla | Print Edition: June 26, 2011

As if the prospect of aviation fuel prices rising sky high following the prolonged crisis in West Asia was not enough, private airlines find themselves facing a new and unexpected threat. Traditionally bureaucratic and sluggish, beset by internal problems, state-owned carrier Air India has suddenly stirred and resorted to aggressive pricing.

The airline industry had been slowly recovering after a rough time in recent years, when the economic downturn coupled with rising fuel prices - and the government's unwillingness to provide any tax concessions at the time - played havoc with its financials."Until December 2010, we thought Jet Airways was well on course to show profits in the fourth quarter of 2010/11," says Kapil Kaul, CEO, South Asia, Centre for Asia Pacific Aviation, or CAPA.

"But two developments - the 50 per cent increase in fuel prices, and predatory pricing by Air India in the fourth quarter - meant we had to revise our outlook." Ultimately, Jet Airways posted a loss of Rs 125.50 crore in the fourth quarter of 2010/11, after having been profitable during the three earlier quarters.

A company release attributed the losses to increasing fuel costs as well as some one-time expenses, but during a conference call with financial analysts after the earnings announcement, the airline admitted losing out on fliers to Air India and having to lower fares in response.

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Low-cost carrier SpiceJet's fourth quarter numbers too have been dented by Air India's pricing strategy: it reported a loss of Rs 59 crore, compared to a profit of Rs 27 crore in the year-ago quarter. "The magnitude of our loss would have been smaller had the competition followed some pricing discipline," the carrier's management said in a statement.

Air India's daring gambit has already paid dividends: it is the only airline whose load factor - the ratio of passengers carried to seats available - rose in April, to touch 68 per cent against 61 per cent in March.

The spike occurred despite the fact that traditionally April is a lean month for airlines. Though officially the airline will not comment, a senior staffer, on condition of anonymity, is frank. "We would not use the term 'discount pricing' to describe our recent fare adjustments," he says. "We are merely trying to price ourselves competitively. When Air Deccan was offering fares of Rs 1 and Rs 100 some years ago, no one said anything. So why are voices raised now?" According to CAPA's Kaul, the airline's average fares were between 20 to 30 per cent lower in the last quarter of 2010/11.

Buoyed by the success of the move, Air India cut fares for a second time in early May, shortly after the 10-day strike by its pilots ended. The second reduction was a temporary, 10-day special offer - primarily aimed at winning back fliers it had lost due to the strike - but it saw Air India's average load factor rise to 80 per cent for the duration of the special fares.

Air India's daring gambit has already paid dividends: it is the only airline whose load factor - the ratio of passengers carried to seats available - rose in April, to touch 68 per cent against 61 per cent in March.
The Air India official points out that the very private airlines that are complaining about the national carrier's tactics had raised fares during the strike, knowing prospective fliers had no choice but to pay. "Private carriers increased prices in those 10 days," he says. Bringing down fares was necessary, he believes. "After the strike we had to play the role of price stabiliser," he says. "We lowered prices not only to bring back demand, but also to rationalise fares." Between April and mid-May, the airline even introduced discounts on tickets booked two or three days before the day of departure. Says Kaul: "Airlines' yields are maximum two or three days before departure, and such discounts are affecting industry-wide yields."

Most analysts tracking the sector predict a good first quarter for airlines in the new financial year, but add that the discount pricing by Air India remains a risk. They are convinced that Air India will persist along the path it has taken, since it is so deep in the red. Answering a question in Parliament in March this year, Civil Aviation Minister Vayalar Ravi said the national carrier's daily losses were Rs 19 crore in 2010/11. Its accumulated losses, he said, were around Rs 13,300 crore. Since then, in the first two months of this financial year, the airline has lost another Rs 3,000 crore.

How are the private airlines faring in the face of this new threat? Market leader (see High Fliers) Jet Airways, which has 24.8 per cent of the domestic market, is trying hard to ensure a profit in the first quarter of 2011/12. It hopes to earn around $81 million (Rs 364 crore) from developing land it owns in Mumbai's Bandra-Kurla Complex, and another $200 million from the sale and lease back of aircraft. It is also betting on its low-cost subsidiary, Jet Konnect, being able to practice flexible pricing - operate in low-cost carrier mode when demand is low but go fullservice each time it rises. At the conference call with analysts following its results' announcement, the airline acknowledged that ticket prices could increase if oil prices rose further, but added, "Pricing will depend on everybody having the same mindset".

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Vijay Mallya's Kingfisher Airlines , the second largest carrier after Jet with 20 per cent of the market, did not reveal detailed quarterly numbers, but has reported an operating profit of Rs 140 crore for 2010/11, against a loss of Rs 690 crore the previous year. It has also managed to restructure its sizeable debt by giving creditors equity in the company for a premium. It also plans a Global Depository Receipts issue later this year to raise between $250 million and $300 million.

Naresh Goyal
Naresh Goyal, Founder Chairman, Jet Airways
But the immediate future is far from rosy. The April to June quarter is traditionally a weak one for domestic airlines, when travel decreases. "Load factors are likely to drop five to 10 per cent during this period," says Himanshu Singh, Managing Director, Travelocity India, an online travel portal. "Fares will have to be cut to stimulate demand. Depending on the sector, fares are likely to fall 10 to 30 per cent." The impact of such cuts, on the back of the pricing war, is bound to be adverse on both the top and bottom lines of private airlines. So will the carefully crafted plans of the private airlines to get over their accumulated losses go on smoothly?

Fortunately there is one silver lining: the international sector. "The international sector performs better in the first quarter, and that should balance out the issues on the domestic front," says Mahalingam Shivkumar, Senior Vice President, Finance, Jet Airways. Already foreign operations contributed 58.2 per cent to Jet's total revenues in the last financial year, while profit margins too were much higher - a sizeable 16.2 per cent on international operations, compared to a mere three per cent for the same period in the domestic sector.

Having recently obtained approvals to expand its international operations to Amsterdam and Paris as well, Jet's presence in foreign skies is only set to grow. With many of the heeled holidaying abroad in summer, international flights are helping it escape the heat of the domestic market. "It is important for full-service carriers in India to have international operations as they can benefit from balancing their domestic and international revenues," says Singh of Travelocity.

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