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Pricing power to give wings to low-cost airlines

Cogencis, Friday, May 10

By Dev Kachari

NEW DELHI – The fortunes of low-cost airlines are set to soar, with the downfall of Jet Airways leading to consolidation in the sector and providing them much-needed pricing power.  

"We believe industry consolidation will change long-term dynamics for the better, with yields more closely reflecting cost pressure and easing earnings volatility…we expect domestic yield to improve 4-5%," UBS Global Research said in a note.

"Near-term yield trends will continue to be quite encouraging because of deceleration in capacity growth owing to Jet's shutdown, and aircraft and crew availability issues," said Edelweiss Securities. 

This would be a significant departure from recent trends, when intense competition in the market had led to cost pressures on Indian airlines, resulting in wafer-thin margins. 

GROWTH SLOWDOWN

After clocking double-digit passenger traffic growth annually for about four years, growth plateaued since the beginning of the year due to capacity constraints, though this created a window of opportunity for airlines to rationalise airfares. 

So far, growth in the sector had been artificially stimulated by low fares offered by low-cost carriers such as IndiGo, which had the cost structures required to be in the game for the long haul. Full-service carriers were forced to follow, and the Jet Airways story has shown the perils of that strategy. 

That such a pricing strategy wasn't sustainable even for low-cost carriers is another story. 

In the near to medium term, demand is unlikely to peter out despite a rise in airfares. A modest price hike of 4-5% is unlikely to see passengers shift to other modes of transport, according to UBS Global Research. 

INTERNATIONAL OPERATIONS

Keeping the expected moderate domestic passenger growth in mind, low-cost carriers such as IndiGo and SpiceJet have set their sights on international routes, primarily short-haul ones such as those to South Asia, Southeast Asia, and West Asia. 

Currently, domestic full-service and international carriers hold 29% and 60% market share, respectively, in outbound flights. But with about 83% of traffic on international routes being short-haul, domestic low-cost carriers are well positioned to deploy capacity on such routes, and increase their market share. 

IndiGo is the one best placed to expand its international operations, as domestic slot constraints at airports compels it to deploy excess capacity for outbound flights.

IndiGo's recent code-share agreement with Turkish Airlines is seen as part of its strategy to expand into the European and North American markets. Similarly, SpiceJet's code-share pact with the Dubai-based Emirates will give the airline a foothold in international markets, primarily West Asia. 

STRUCTURAL ISSUES

Mushrooming of airlines over the last decade has been the only major growth story in the aviation sector, as infrastructure, manpower and policies haven't been able to keep pace with passenger growth, making the Indian aviation growth story lopsided. 

Issues related to land acquisition have delayed the construction of major airports on the outskirts of Delhi and Mumbai, even as existing airports in these cities face constraints related to slots and expansion. 

Lack of trained pilots and qualified technicians has also emerged as a bottleneck. While hiring foreign pilots at high salaries increases costs, aircraft maintenance, repair and overhaul is negligible in India owing to lack of trained technicians and unsuitable regulatory policies, according to Prabhudas Lilladher. 

With airlines expected to rationalise airfares, this is an opportune time for them to shore up bottomlines and emerge more economically sound, what with the Indian consumer seemingly not as averse to higher fares as before.  End

Edited by Avishek Dutta

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