The Hindu : Business : Low cost air carriers to dominate

Online edition of India's National Newspaper
Sunday, Oct 10, 2004

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Business

Low cost air carriers to dominate

By Ramnath Subbu

MUMBAI, OCT. 9. The announcement by the three major civil air carriers — Indian Airlines, Jet Airways and Air Sahara — to hike airfares by 10 per cent from October 14 to mitigate the impact of rising aviation turbine fuel (ATF) prices, seems to have spoilt the party for domestic air travellers, who, in the run-up to the festive season, were seeing attractive fares and price cuts.

Domestic airfares were hiked in June this year by 10 per cent to offset the almost 40 per cent rise in world crude prices. This time around, the effect has been a 20 per cent rise in ATF prices. The rise in ATF price has led to a one-third hike in airline companies' operating costs. Domestic ATF prices touched Rs. 30,000 a kilolitre against Rs. 26,000 in June and Rs. 21,530 a kilolitre in March this year. Fuel costs for airlines in India account, on an average, for 30 per cent of costs against 15 per cent in developed countries.

Air Deccan, the year-old low-cost airline operating with a fleet of 15 aircraft, is the only exception. Speaking to The Hindu, Capt. G. R. Gopinath, Chief Executive Officer, Air Deccan, said his airline was not resorting to any hike in fares. "Our operations are cost-effective and we will not follow what others resort to. We are not going to resort to any hike in fares for now".

Kapil Kaul, Senior Vice President-Indian Subcontinent, Centre for Asia Pacific Aviation (CAPA), said, "The current hike in fares by domestic players was inevitable given the fuel price hikes. However, in the longer term, lower prices and price cuts will prevail. It remains to be seen how long Air Deccan can postpone hiking fares if fuel costs continue northwards".

Air Deccan has some advantages, lower cost per seat, as there are more seats per aircraft. Second, aircraft are used for 1-2 hours a day longer than other carriers and their distribution model allows them to save 8-10 per cent. In effect, costs for low cost airlines are up to 40 per cent lower than full service airlines.

"The phenomenon of offering discounted fares is a reflection of the phase through which the industry is passing," said Mr. Kaul. What is evident is that there is now a fundamental change coming about and volumes are an important factor. The market is at present growing at 25 per cent and is around 16 million seats, but CAPA estimates that if the low cost airlines continue to come in, this can double over the next five years. Market dynamics will determine pricing policies.

Future access to funds for the private players should not be a problem with Jet and Air Deccan planning initial public offerings in future. Air Deccan has a modern operating model and could elicit a good investor response such as Virgin Blue and Air Asia's public offerings overseas.

On the other hand, Jet is a high cost airline and will look to retire its high cost debt and expand. It already flies to Sri Lanka and Nepal and the future focus could be on international operations with domestic operations acting as a feeder service.

"Next year onwards, when Kingfisher and Deccan are fully operational, there will be different operating structure and existing players will have to come closer to low cost airlines.

As of now, price cuts have been strategic but the real price war will commence next year and prices can go down by 20 per cent still," felt Mr. Kaul.

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