Buying Mallya's United Spirits may not be cakewalk for Diageo
Reliance MediaWorks to part-own James Cameron's firm

Corporate Sep 24, 2012

Why Jet and Air India's discount strategy will keep investors at bay

By Firstbiz Staff

Indian airline companies, barely out of woods, may be gearing up for an undercutting war. Interestingly, it is Civil Aviation Minister Ajit Singh, who is ticking off a price war this time round.

The minister, recently exhorted state-run Air India to bolster its market share, which prompted the carrier to cut fares. Closely following its heels is Jet Airways, which just about managed to turn profitable in April-June after five straight quarters of losses.

Air India on Thursday slashed ticket prices by as much as 15% on advance purchases of 30 days. A day later, Jet introduced discounted fares on domestic routes if purchased 21 days and 30 in advance.

The aggressive move comes as the two airlines have lost market share to budget airlines IndiGo and Kingfisher Airlines. Debarika banik/Flickr

The aggressive move comes as the two airlines have lost market share to budget airlines IndiGo and Kingfisher Airlines.

Air India's market share in August was 18.2 percent , behind IndiGo (27.6 percent), Jet Airways (25.2 percent ) and SpiceJet (18.5 percent). Moreover, over the last three months, the domestic air travel market has shrunk by about seven lakh passengers.

"The idea with discounts is that after around 20 percent seats are filled, the remaining can be sold at a premium going forward. This is a great opportunity for Indian carriers to manage yields better," Travelocity MD Himanshu Singh told the Economic Times.

Jet Airways has reported that its new apex fares will go on sale effective September 22 and will offer guests attractive savings on several domestic routes. This means a ticket between Mumbai and New Delhi will now cost less than Rs 5,000 if it is bought 30 days in advance!

Given the price-sensitive market, budget carriers will not remain far behind and are bound to introduce discounts sooner or later, which will not only result in bigger losses but would also keep foreign investors away from the sector.

Higher crude oil prices and slowing passenger traffic continue to plague the sector. Jet fuel prices in India on an average are 40-50 percent higher than that sold globally due to added state sales tax. Indian carriers are losing around Rs 2,500 crore per year due to high fuel prices with a combined debt of about Rs 48,000 crore. Jet's consolidated debt stands at Rs 11,000 crore, while that of Kingfisher is Rs 8,000 crore.

India also lacks MRO facilities with many airlines flying their aircraft abroad for maintenance, as stocking of spare parts is very expensive due to high taxes.

Despite the troubles of its arch-rival Kingfisher, Jet achieved only a modest 8.9 percent increase in gross revenue per passenger on domestic routes while international gross earnings grew 11.8 percent in the first quarter of the current fiscal, which was again below expectations given that the largest operator Air India was crippled for most of the quarter due to the strike.

CAPA at the time had said for most carriers underlying profits remained modest at best after excluding sale?and leaseback and other non?operating income during Q1 despite it being the peak travel quarter and when strong yield improvements were seen. "This means that structural imbalances remain. As a result CAPA believes that significant improvements will be required in Q3 and Q4 financial performance to suggest that a sustainable recovery is underway."

This aggressive pricing strategy adopted by Air India and Jet Airways will only make matters worse. This is because the operating landscape has not changed and more discounts could increase competition and reverse the benefits of the current consolidation.

by Firstbiz Staff

Related Stories.