Why air tickets in India are going cheap

Airlines say that they are keeping their fingers crossed for December - another peak period - when, based on current bookings, the air fares for those who buy early are more or less in line with last year.

Illustration: Uttam Ghosh/Rediff.com

Will airlines fighting a bitter price war even in the peak festival season suffer the same fate as telcos where a similar battle has led to closures and a consolidation of the industry?

The closure of Jet Airways was the first signal that consolidation was underway in a market with eight players in the fray.

Many analysts had hoped that, with less competition, airlines would regain their pricing power and air fares would move northwards.

But that expectation seems to have been short lived.

In October, the festival season when demand is at its peak, air fares for metro routes on an average were down by 20-25 per cent for tickets booked in the last seven days, compared with last year’s fares, according to industry estimates.

The trend has continued into November, with air fares lower by around 20 per cent on major metro routes booked between zero to seven days.

The last seven days pricing is crucial for airlines as it constitutes about 30 per cent of their ticket sales in metro routes.

This is when airlines can charge a stiff premium from customers.

Airlines say that they are keeping their fingers crossed for December - another peak period - when, based on current bookings, the air fares for those who buy early are more or less in line with last year.

But what they are waiting for is the last week of November to see if they will be able to push up air fares significantly closer to a passenger taking the flight.

“One key reason for lower fares is full service carriers bringing their fares at par or lower than low cost carriers during even peak seasons like October, forcing low cost carriers to respond.

"Some airline or the other comes out with a discounted offer even in peak season saying they cannot sell seats and we have no choice but to match,” said a chief operating officer of one of the domestic carriers.

The second reason, he says, is that the expected growth in domestic passengers  has been affected by the overall economic slowdown.

Growth of around 15 per cent annually this financial year has had to be lowered to around 5 per cent.

And that has softened air fares too.

The point is reiterated by IndiGo in its analysts’ call after the Q2 FY 20 results.

Responding to the softness in air fares, IndiGo chief executive officer Ronojoy Dutta pointed out that October is a high season with strong demand due to Dushera and Diwali.

Last quarter, Indigo had a 5.7 per cent unit revenue improvement. Now it is forecasting a flat unit revenue year over year.

The weakness is reflected in the health of airlines. IndiGo made a loss of Rs 10.7 billion in Q2 FY 2020, much higher than the Rs 6.5 billion the corresponding quarter last year. It has not been able to increase its market share.

Vistara too doubled its losses to the current Rs 831 crore in FY19 over the previous year.   

The only consolation, such as it is, is that the price war could have been even more severe if Jet had not closed, as competing airlines would still have bought in new planes based on their projected demand of growth.

The Centre for Asia Pacific Aviation, for instance, had projected that there will be an additional 90 planes in FY 2020 (which did not include any increase by Jet Airways) from around 625 planes in FY19 to 715 in FY20. It had estimated that capacity growth would be up by 20 per cent in FY20.

With Jet closing down, airlines have added additional capacity only to absorb the void created by Jet’s closure and grab a larger share of a slow growing market.  If Jet were still around, the price war would have been even more cut-throat.