Flying local capacity overseas helps a lot

Ask any aviation expert what has led to fares climbing so high in the local market and he will point to capacity constraint.
But, where has all the capacity vanished?

Industry experts believe a lot of the domestic seat supply has moved to the international sector, which is more lucrative for airlines.

“There has been a shrinkage in the domestic capacity because carriers are moving seats to the overseas routes that are more profitable than domestic routes,” said a former senior executive of Air India, who did not want to be named. 

This trend can be corroborated from rising international operations of Indian airlines. For instance, Naresh Goyal-owned Jet Airways today earns more than 50% of its revenues from overseas operations.

Rival Kingfisher Airlines has also been aggressively adding flights on overseas sectors.

“It is partially true (that local capacity has dwindled due to swelling overseas capacity). We are using some of the planes (A320 and ATR) used in the domestic market on international sectors,” said a Kingfisher official, who did not want to be named.

“This is what the game of network planning is all about. Why should I fly Mumbai to Bhuj when Kolkata to Dhaka gives me better load factor and yield? That is what Seabury Aviation and Aerospace (US-based advisory firm) is helping us do — rationalise our network.”   

Budget airline Spicejet Ltd, which recently started flying overseas, has also deployed a large part of its fleet for flights to foreign shores.

Aviation analysts Princy Singh, Dinesh S Harchandani and Corrine Png of J P Morgan wrote in their report brought out last week that Jet’s international operations contributed 95% to its total earnings before interest, tax, depreciation and amortisation (Ebidta) in FY10.

“Jet has steadily enhanced its international operations this year, which has become highly profitable. While we estimate Ebidta contribution from international operations to decline to 58% by FY12, it will nevertheless be the most profitable segment of Jet’s operations,” the trio wrote.

Today, Jet flies to 24 overseas destinations on major routes including Middle East, South Asia, New York, London, Milan, Brussels, Johannesburg and Toronto.

The legacy carrier’s revenue from overseas operations jumped more than 285% to Rs 4,283.9 crore in FY10 from Rs 1,111.2 crore in FY07.
Kapil Kaul, chief executive officer - India and Middle East, Centre for Asia Pacific Aviation, said the aviation regulatory body Directorate General of Civil Aviation should launch a probe if this (moving of local capacity to overseas sector) was indeed a trend. “It is a serious issue and should be probed by the government. The regulator should find out how much of capacity has shifted to the international sector and should apprehend the schedule airline operator,” he said.

Kaul said airlines cannot migrate capacity from local to international sectors. “That needs to be evaluated. If the capacity has moved, then the government should be aware of it and economic advisory council (of DGCA) should be apprised of it.”

According to rough estimates by industry experts, seat capacity in aviation market grew by just 9% between January and October this year compared with 18% during the same period last year.