As airlines maintain fare discipline, bottom line improves

It is a well-coordinated balance that airlines have struck between capacity deployment and market demand. (Representative image)

Have the Indian airlines hit a purple patch? After Vistara, a full-service carrier, reported break-even for the first time in October-December 2022 quarter, Indigo, a low-cost airline reported handsome profits in the same period. An analysis of Indigo’s results for the first and third quarters of the current fiscal shows wild swings in the operational environment in the country. In the first quarter of the current fiscal, Indigo reported a loss of Rs 1,064.30 crore or Rs 11.6 crore per day. In the third quarter, it declared a profit of Rs 1,422 crore or Rs 15.45 crore per day - a swing of Rs 27 crore per day.

What has brought about this massive transformation? High load factors, with most airlines filling up more than 90 percent of the seats on a sustained basis, and relatively high fares aided by minor reductions in fuel costs.

Operating Scenarios

Airlines generally operate in four scenarios. High load factor (over 85 percent) and high fares, which are very good for the airlines, like in the last quarter. High load factor with moderate fares, which generally helps airlines break even. Moderate load factor (70-75 percent) and high fares which are again reasonably good. Moderate load factors and moderate fares, which are often disastrous for the economic viability of airlines.

Airlines in India have operated in all four scenarios at one time or the other. The question is what have the airlines done to bring about this huge transformation? Simply put, it is a well-coordinated balance that airlines have struck between capacity deployment and market demand. It is this factor alone that has helped airlines not only record high load factors but also ensure that fares are relatively high thus resulting in profitability.

This operational environment being witnessed now is distinct from the past when one airline or the other invariably accorded precedence to its quest for enhancing market share at the expense of profitability. Also, it isn’t determined by an airline alone but by all airlines collectively. Conversely put, one airline can ruin the environment by an indiscriminate deployment of capacity. The consequent fall in fare levels affects the operational viability of the industry, as the dropping of fares by one airline invariably forces every other airline to necessarily follow suit to protect their respective market share. This phenomenon has bled airlines in the past resulting in the collapse of quite a few of them.

Change in Strategy

Is this change planned or a mere coincidence forced on the airlines due to mounting losses during the pandemic, shortage of staff, etc? This question begs an answer as it wasn’t that the airlines’ promoters/managements were naive and not aware of the pitfalls while endeavouring to lure passengers by offering fares below the cost of producing a seat - only because seats are a perishable commodity that have zero value once the flight has departed.

Many airlines were even guilty of assuming the responsibility for keeping the market stimulated for growth through low fares as they had several aircraft due for induction in the following months. This thinking was driven by the philosophy of what will the airline do with additional aircraft if the growth had either plateaued or was witnessing a fall due to market vulnerability forced by external factors. Often, one airline’s interests harmed the industry as a whole. Have airline managements become wiser or is the balance between capacity and demand resulting in airlines flying with high load factors and high fares a temporary phenomenon?

As per the Director General of Civil Aviation (DGCA) statistics, airlines flew 4.11 lakh passengers on an average per day in January 2020 by operating 3,080 daily flights. Currently, the airlines are operating at least 100 flights less to fly the same number of passengers or more. On February 13, airlines flew 4,25,226 passengers in the domestic sector by operating 2,945 flights. This reduced number of flights and consequent seat availability has helped airlines garner higher load factors at relatively high fares, making the operations economically viable and profitable.

Striking a Balance

This market dynamics of striking a balance between capacity deployment and passenger numbers for resultant higher fare levels have never been accorded the supremacy it deserves.

Discipline in fiscal management is thus important and in the long-term interests of airlines. Remember the time when CEOs of both Indigo and SpiceJet, then number 1 and 2 in the domestic market on marketshare, admitted that fare levels are uneconomical without answering as to who will bell the cat on fare levels to ensure economic viability?

Air travellers in a price sensitive-market love cheaper fares but are they in the interest of airlines when they shut down due to sustained losses, resulting in job losses? Wisdom lies in airlines ensuring the economic viability of their operations rather than blindly chasing passengers. Airlines should instead allow passengers to chase seats.

Recent months have established that demand falls when fares become unaffordable but not by a huge margin that airlines should be worried about forcing them to compromise on fares and eventually sustaining losses. One sincerely hopes that for the good of the industry, the discipline being exhibited isn’t short-lived, though airlines open small windows from time to time for air travellers to buy tickets at attractive fares in advance for planned travel in subsequent months.

Jitender Bhargava is former executive director of Air India & author of The Descent of Air India. Views are personal and do not represent the stand of this publication.