Scramble for spoils hurts airline yields

Just when it looked like airlines were flying out of the turbulence zone, they have flown right back into it.

After a profitable run over the last few quarters, yields, or net revenue per seat, of local airlines are sagging again, without much relief on the international crude oil price front — a sure shot recipe for profit erosion.

According to a senior executive of a local budget airline, who did not want to be named, yields in February and March slipped around 25-30% this year compared with the same months last year as local airlines chased market share and indulged in an intense fare war.  

“We have seen a huge drop in industry yields since mid-January. It’s down 25-30% because some airlines are fuelling fare war by selling tickets below cost just to garner more market share. Full service carriers like Kingfisher Airlines, Jet Airways and Air India have been mindlessly cutting fares over the last two months and so low cost airlines are left with no choice but to match their fares,” he said.

Ankur Bhatia, executive director of travel conglomerate Bird Group, believes yields are easing as players are trying to stimulate demand for the additional aircraft supply that has recently entered into the market.

His estimate of erosion of yields is more conservative at 2-3%.
“It’s (yields) down a little bit because some airlines are trying to buy market by providing demand stimulus in the form of lower fares,” he said.

Edelweiss Capital analysts Manav Vijay and Manish Sarawagi blamed budget carrier IndiGo for the recent squeeze in yields.

“Due to Indigo’s aggressive stance — offering one ticket free for every two tickets in January followed by one for every ticket in February — most other airlines have been forced to toe the line,” the analysts wrote in their report on Jet Airways published this week.

The duo expects the Naresh Goyal-owned airline’s domestic yield to slip 8% sequentially in the March quarter and international yields to go down by 5%. Their earlier estimate was of a 5% dip in international yields and 1% in domestic yields.

Softening of yields, accompanied with firmer prices of jet fuel, or aviation turbine fuel (ATF) — up 16% in the fourth quarter of the current fiscal against an earlier assumption of 13% — is likely to expand Jet Airways’ losses.

“As a result, we expect Jet to report consolidated loss of Rs200.1 crore in the fourth quarter (vs Rs39.9 crore loss earlier),” Vijay and Sarawagi wrote in a note.

Industry experts are baffled by the crash in the airline yields at a time when demand has been robust. “It is hard to believe that yields have come down because the domestic market has been growing at a very healthy pace of around 10-18% in recent months,” said a senior executive of an international airline body, speaking on condition of anonymity.

During the nine-month period between April and December, domestic passenger number growth of 18% outpaced the 9% supply growth, resulting in average load factors of 77.7%, highest in the past six years.

In the next fiscal, the Edelweiss duo sees demand growth slackening and supply growth picking up, which would lower load factors of airlines.

“We believe 15-16% demand growth will continue to outpace the 13-14% supply growth, resulting in industry load factors remaining in the high 70s. We have estimated a 2.5% average improvement in domestic yields in the next fiscal. We have assumed average 6% rise in oil prices over this fiscal.”