Consolidation in airline industry likely in a year
With the war for the domestic air traveller hotting up, low-cost carriers are feeling the heat. SpiceJet, with much smaller operations, posted a Rs 17.8-crore loss for the quarter ended August 31, ’06, compared with Rs 10.8 crore for the correspon...
By Cuckoo Paul, TNN |
MUMBAI: With the war for the domestic air traveller hotting up, low-cost carriers are feeling the heat. SpiceJet, with much smaller operations, posted a Rs 17.8-crore loss for the quarter ended August 31, ’06, compared with Rs 10.8 crore for the corresponding period last year.
Since GoAir and Indigo, the two other players are unlisted, there is no information on their performance. Yet, surprisingly, analysts remain positive on the segment. Gautam Sinha Roy, an analyst of Edelweiss Capital, said that players sticking to the classic low-cost model are well suited to turn profitable as their operations mature.
LCCs have the ability to derive higher block hours (more utilisation of the aircraft per day) as well as higher passenger loads. “They are also likely to generate higher ancillary revenues in the future and will benefit from lower number of employees per aircraft and lower in-flight costs,” he said.
This saves about 7% of revenues for an LCC compared to a legacy airline. Higher use of internet booking can save 10-12% of revenues, said Sinha Roy, in a recent report on the business. Patrick Murphy, former chairman of Ryanair, the Irish low-cost airline featuring among the most successful LCCs in the world, was in India last week. He said that the control over pricing and revenue generation from non-ticket sources is the key to success.
Mr Murphy said that “the airlines must take responsibility for irrational prices”. Commenting on the difference between prices (fares) and cost for the LCCs, he said the market is a far more powerful determinant of prices than the costs. But pricing is fundamentally an art and it requires experience and professionalism from management, he said.
ADVERTISEMENT
“The golden rule is to not delegate pricing decisions down the line. This is an often committed mistake. CEOs and senior executives need to take responsibility for pricing to ensure profitability,” said Mr Murphy, currently chairman of the Geneva-based Aviation Performance Consultants. Ryanair hopes to increase ancillary revenues to 50% of its total revenues. In contrast, Air Deccan earns just 9% of its total revenues from such sources.Can legacy airlines stave off threat from LCCs? Mr Prock-Schauer said 80% of airline costs are independent of the business model. That means low-cost carriers don’t have much leverage to control costs. He said, “Passengers prefer the full service model and the cost differential between full service carriers and LCCs is so small that Jet Airways is positioned to take advantage of this opportunity.”
Yet for the moment, thanks to the price war, Jet’s yields are under tremendous pressure. For instance, average ticket prices on the Mumbai-Delhi sector have fallen from about Rs 6,500 to Rs 4,000 in the last 18 months.
So what will Jet do? Mr Prock-Schauer said his strategy is to grow with the market to retain its leading position. He believes the market will grow 20-25% per annum, down from the 50% growth rates witnessed in the first half of ’06.
“The domestic market is distorted now, but after a period of time the market will stabilise. We are best positioned with our two pillar strategy of domestic and international operations.” The bottomline: Jet will wait and watch till the seemingly irrational pricing strategies come to a halt.
So, is consolidation round the corner? There will be a bloodbath within a year, said veteran airline industry observer and the ex-chairman of Indian Airlines, air marshal Shashi Ramdas. The current situation of over capacity and low fares cannot continue for long, he said.
One indicator is the salary bill for airlines. Staff costs have gone up for most airlines, not only for pilots and engineers but also for flight dispatch officers, who are paid Rs 85,000 a month, he said. Air marshal Ramdas’ observations are borne out of Jet Airways’ operating costs.
ADVERTISEMENT
Staff costs have shot up 107% between Q1 ’05 and Q1 ’06. If the Sahara-Jet deal is any evidence, Mr Harbison said, India has flirted with the concept of consolidation unsuccessfully. However, new partnerships between airlines may emerge in the next 12 months to stop the bleeding. In fact, he’s betting on a legacy airline acquiring an LCC in the next 12 months.
Start a SIP with as low as ₹500 with ET Money App!
Download
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
ADVERTISEMENT
