Overcapacity in skies pulls down fares, hurts airlines’ bottomline
With the economy slowing, seats are going empty and losses deepening. Fares on some routes are down 52% YoY which makes airlines unable to offset losses.
According to the winter schedule, airlines have announced a high double-digit increase in capacity, filling the space created on key routes after Jet’s demise.
“Jet’s exit was a much-needed capacity correction,” said a senior airline executive who did not want to be identified. “But the government forced capacity to come back by tying slots and rights allocation to incremental aircraft addition. This, coupled with a slowing economy, has resulted in the market not being able to go through the natural correction after Jet’s exit. It has put airlines back into a doom loop, with excess capacity, not enough places to fly aircraft profitably and deep losses. Exit of another airline is quite possible.”
Overcapacity has kept fares under stress even during the festive season that sees an uptick in travel. While the number of passengers flying during October increased 4%, fares stayed lower than last year.
Data from travel aggregator ixigo showed that average fares between routes such as Delhi-Mumbai and Delhi-Kulu were down by 9% and 54%, respectively, against last year. Some routes saw growth but not enough to offset overall losses.
While some are complaining, Ronojoy Dutta, chief executive of market leader IndiGo, recently told ET, “I do not think overcapacity is a problem. We have a meeting on network every Friday and everyone has ideas on new flight connections, but then we don’t have enough planes to launch those flights.” IndiGo, however, reported record losses, widening 63% to Rs 1,062 crore, in the second quarter, which it blamed on rise in cost due to old planes, pilot training and new accounting norms.
SpiceJet, too, blamed its losses on new accounting norms.
The government is worried about lower fares and feels carriers should charge “reasonably.” A senior government official said, “Airlines should charge in a way that they are able to recover cost of operating flights,” quickly adding that the government does not plan to interfere in ticket pricing.
Overcapacity and lower economic growth are also set to take a toll on future realisations. IndiGo has predicted an almost flat revenue growth for the year ahead.