No-frill airlines find flight path to profit

As air travellers shift their preference to low fares, it is budget airlines such as SpiceJet, IndiGo, JetLite and others that are reaping profits while full service carriers (FSCs) like Jet Airways are struggling to keep their losses from sinking further.

An industry expert pointed to higher cost per unit of the FSCs as the reason for their tumbling bottomlines and operating revenue. “Even though they (FSCs) have increased their proportion of lower fares in their total offerings, their unit cost is still high. This is pulling them into the red,” he said.

For the June quarter, Jet’s cost per available seat kilometre (CASKM) was Rs 4.79, which is double that of low-cost airline like SpiceJet’s. Jet continues to have high CASKM even though over 50% of its offerings are in the low-fare segment.

The same quarter has seen the Delhi-based carrier move into the black with a net profit of Rs 26.3 crore compared with a loss of Rs 129.2 crore last year. Jet, on the other hand, was in the red with a loss of Rs 225.3 crore as against a profit of Rs 143.4 crore in the same quarter last year.

Interestingly, Jet’s low-cost subsidiary JetLite registered a profit of Rs 2.2 crore compared with a loss of Rs 134.77 crore last year.

Sanjay Aggarwal CEO of SpiceJet Ltd said his airline was able to turn around despite lower yields because of reduction in CASKM, higher operating revenue and better utilisation of aircraft. SpiceJet’s yield in the first quarter had slipped 6% but the no-frill airline propped up its bottomline on lower CASKM, which was down 24% mainly due to lower fuel costs. Its fuel cost between April and June was down 41.07% to Rs 182.81 crore from Rs 310.22 crore during the same period last year.

The airline’s operating revenue was also up 15% in the same quarter because of addition of 10% capacity while Jet’s was down 31.4% because it offered more low-fare service and snipped its capacity by 20%.

The full service carrier’s yield dipped 17.3% as it aggressively cut fares to fill up its aircraft.

Mihir Shah, analyst with broking firm Prabhudas Lilladher, in his report brought out on Monday said, “We expect yields to remain under pressure as the company increasingly utilises its capacity for no frill services. Jet Konnect, which currently contributes one-third of Jet’s capacity, will go up to two-third by October 2009.”

An industry expert said Jet was in the rejig mode and trying to figure out where to deploy its capacity in the current market.

“The environment has drastically changed from last year with more demand in the low fare segment. Jet is process of adapting to this change and adjusting its costs to the new market,” he said.

Ankur Bhatia, managing director of Amadeus, says low fares were beginning to stimulate demand and expected it to go up further in the coming months because of improving economic sentiment in the  country.

“Last month (June) saw demand shoot up by 5% over last year on lower fares. This month also looks like demand will move up 10% compared to last year.  The gap between demand and supply is also slowly closing. All this improve operational efficiency of the airlines in the coming months,” he said.

Bhatia, however, warned that jet fuel rates could and fare war could play spoilsport.