Airline yields finally set to take off

Last fiscal, even when the demand was rising and airlines were registering high load factors, stiff competition in the sector had kept the average fares or airline yields — net revenue per passenger — low.

One of the reasons for the fare war was that full service carriers (FSCs) like Kingfisher Airlines, Jet Airways and state-owned Air India were migrating a lot of their seat capacity to low fares.

The market was suddenly flooded with low-fare seats, which pushed down the average fare earned by airlines from passengers. This, pretty much, remained the trend for the entire last fiscal and the first quarter of fiscal 2011.

That, however, is changing now. Airline experts and analysts believe with the sustained robust demand and lower fare rivalry, yields could inch up a little this year.

“For long, we have been waiting for the right opportunity to improve our yields but despite climbing demand and capacity rationalisation, we were not able to do it till now. Though, we will be able to firm it up by 8-10% (Rs250-300 per passenger) in the next one year,” said a senior airline executive, who did not want to be named.
He said higher yields will help air carriers to shore up revenues and eventually expand profitability if costs remain reined in.  

Rakesh Shah, analyst with ICICI Securities, in his report brought out on Monday also expects airline average yields to improve 7-10% for local airline operators during the next two years.

“The high load factors witnessed by domestic operators and rising preference towards air travel during the past few quarters have led us to believe that airfares will move northwards, going forward,” Shah wrote in his note to investors.

Such forecast of higher yields notwithstanding, the airline industry still feels the demand is not yet fully inelastic - that is the airline market will remain price-sensitive.

“Even though we are in a position to slightly improve average yields, we have not reached a situation where we can command any fare without impacting demand. The market is still price-sensitive and there is demand as long as fares are low and affordable,” said an airline executive, who did not want to be named.

According to him, demand continued to be strong in the low-fare segment. And even demand for business air travel was picking, it was not as robust as in the low-fare air travel.

Ankur Bhatia, managing director of Amadeus, also expects yields to firm up with restraint capacity addition. He said runway repair at the Mumbai airport would restrict capacity on a crowded sector, which would have a positive impact on the overall yields of the airlines.

“Yields will move up (this year) because capacity addition in the airline industry will happen at a slower pace than demand increase,” he said.

Analyst Shah of ICICI Securities expects airlines load factors to remain in the region of 75-80% in the next two years because of slow fleet expansion plans of domestic players.

“Although, LFCs (low fare carriers) such as IndiGo, SpiceJet and others have placed large aircraft orders to expand their domestic and international operations, a major supply of new aircraft is not expected before 2013,” he said in his report.
In August, the government cleared purchase of 46 new aircraft by LFCs such SpiceJet (30), IndiGo (14) and JetLite (2) worth Rs19,000 crore.