Airlines in tailspin after govt gives fare warning

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Indian private airlines seem to have litte choice but to give in to the clamour for lower fares, as the government cracks the whip on carriers that have raised spot fares excessively in recent months.

Domestic air fares have shot up in the past two months, with last-day fares almost doubling, on supply constraints, higher holiday season demand and airlines’ trying to maximise revenue in a competitive market, analysts said.

Should air fares be regulated?

The government’s insistence on cutting fares could cap gains from sharply higher spot fares, though overall quarterly earnings would not be severely hit.

“Extraordinary gains which were supposed to come now may not come,” said Rashesh Shah, analyst with ICICI Securities, adding his earnings projections would not be impacted as extraordinary gains were not factored in.

Airline industry should do more to lower fares: Patel

Earnings from spot tickets, or tickets bought at the last minute, typically make up 10-12 percent of an airline’s total fare on a particular flight, Shah said.

“Spot fares will rationalise in the next few days,” said Kapil Kaul, chief executive, Indian subcontinent and Middle East, Centre for Asia Pacific Aviation (CAPA), an aviation consulting firm, in an indication that airlines may finally yield.

Kaul, who is is also part of India’s Civil Aviation Economic Advisory Council, however, said average fares in Oct-Dec are up no more than 7-10 percent from a year ago, though spot fares have risen sharply. Overall fares will come back to normal by Jan. 7 as people return from holidays, he said.

Air traffic in the country has seen a steady growth in recent months, rising 18.3 percent in Jan-Oct, on a rebouding economy expected to grow at about 8.5 percent in 2010/11.

The seat factor – the percentage of available seats that are filled during a specific period – rose for all airlines in October from September, with low-cost carriers Spicejet and Indigo recording an expansion of about 14 percentage points.

CAPA does not see government pressure hitting airlines’ earnings and has kept unchanged its 2010/11 forecast of $250-300 million in earnings for private airlines and a loss of $650-700 million for state-run Air India.

The International Air Transport Association (IATA) had in September forecast a combined loss of $400 million for Indian airline companies in 2010. The sector posted a combined loss of $1.7 billion in 2009.

THE STAND-OFF

India’s Civil Aviation Minister Praful Patel has repeatedly warned airlines to slash fares over the past month. “While government does not regulate fares it cannot be a mute spectator if fares reach astronomical levels,” he said.

An alarmed aviation sector regulator last month set up a tariff analysis unit to monitor route-wise tariff across networks of local carriers at regular intervals to cap fares.

Shares in Jet Airways lost 18.4 percent, Kingfisher Airlines fell over 27 percent and SpiceJet shed 12.5 percent in the past one month, while the broader benchmark index has slipped around 1 percent.

Industry officials see no rationale in the government’s move as heavy tax on aviation fuel was already hurting margins.

“There is no case for capping airfare either up or down in a liberalised environment. However, if the government chooses to do so, it will have to look comprehensively at both sides of the equation,” said Vijay Mallya, chairman of Kingfisher Airlines.

Mallya said the government should review the tax issue.

“We are perhaps the most heavily taxed industry. An average of 27 percent sales tax on fuel is not seen anywhere in the world. Our fuel cost 60 percent higher than Dubai or Singapore. Airfares have to reflect that. Who else is going to absorb this difference?”

G.R. Gopinath, who introduced low-budget flying to India by launching Air Deccan, though endorses the government’s stand.

“The intentions are good and government did the right thing by telling airlines to fall in line. What is required is sufficient competition and a right policy which will not allow cartelisation.”
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This post was submitted by Mudit Agrawal.

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