Unless and until airlines can edge ticket prices upward, India’s turbulent airline industry is likely to fly into even stormier weather
IATA’s just-published 2019 world airline forecast paints an optimistic picture despite continued pressure from the price of oil and the squeeze on airfares. The aggressive capacity growth to match strong passenger demand of 2018 is expected to be tempered as carriers absorb the effects of new aircraft deliveries and manage cut-throat, low-fare competition. Profits are holding steady in all world regions with two exceptions - the African continent and India.
NORTH AMERICA LEADS THE TOP THREE REGIONS
Globally, IATA estimates that carriers will report $35.5 billon in profits in 2019, US$3 billion more compared to 2018. Airlines in North America will lead, generating profits that are nearly $2 billion higher. Well-managed capacity that produces high load factors, healthy ancillary revenues, and an absence of fuel hedging should yield an average 6 per cent margin for airlines in the region and $16.6 in aggregate profit.
Profits for airlines in Asia-Pacific will increase by 8 per cent in 2019 to $10.4 billion and deliver an average 3.8 per cent net margin per passenger. IATA recognises the diversity of the region and sees “strong growth from new LCC entrants ... lower fuel costs, low levels of fuel hedging and strong regional economic growth.”
European carriers are expected to maintain their overall $7.5 billion profit contribution, nearly the same as 2018. Ticket prices remain stubbornly low because of intense competition. ATC delays are increasing costs.
REGIONS ON THE RISE
Two regions that are expected to show substantial improvement in 2019 are the Middle East and Latin America. Carriers in the Middle East have slowed the rate of capacity growth after “more than a decade of double-digit” expansion. Capacity only grew 6.7 per cent in 2017, half the rate of 2016, and then dropped again to 4.7 per cent in 2018. With only 4.1 per cent growth planned in 2019, IATA forecasts airlines in the region to report a profit of $800 million, up 33 per cent from $600 million in 2018.
Profits should rise dramatically, approximately 75 per cent, among Latin America carriers - $700 million in 2019 compared to $400 million in 2018. IATA cites economic recovery in Brazil and “significant restructuring and joint ventures” that will improve performance.
STILL IN THE RED
Even though IATA expects airlines in Africa to report a net loss of $300 million in 2019, the number is an improvement from their $400 million cumulative loss in 2018. Lower fuel prices, higher-than-average yields, and reduced operating costs will contribute to the turnaround. However, IATA attributes the 2019 loss to overcapacity, noting that “few airlines in the region are able to achieve adequate load factors to generate profits.”
AND THEN THERE IS INDIA
History seems to be repeating itself. The dismal 2018 financial performance of the nation’s carriers, expected to post a combined fiscal year loss of $1.9 billion according to CAPA India, is reminiscent of the state of the industry not more than a decade ago. After years of steady, double-digit growth in passenger enplanements, (almost double since 2014), new aircraft orders, new entrants, and nearly 90 per cent seat load factors, profits remain elusive.
At first glance, it may appear that external forces are to blame.
THE COST OF FUEL
CAPA India notes that taxes are the culprit for the high jet fuel price. It reports that “aircraft fuel expenses jumped more than 44 per cent from last year in a country where aviation fuel is among the costliest in Asia.” Indian oil marketing companies hiked the aviation turbine fuel (ATF) price by 7.25 per cent on October 1 as a result of rising international rates. Prices in Mumbai and New Delhi are at the same levels as March 2014, around 74,500 per kiloliter.
It may get worse in 2019. CRISIL Ratings reports that “with ATF prices expected to average 28 per cent higher on-year compared with fiscal 2018, the impact will be significant.” Since fuel is charged in US Dollars, a depreciating Rupee compounds the problem. Analysts believe a recent 300 basis point cut to the excise duty on jet fuel will do little to offset the expense.
THE FALLING RUPEE
CAPA India identifies “upward pressure on global crude oil prices, a widening current account deficit, fears of international trade wars ... and foreign investors withdrawing $9.7 billion from the markets” as factors reducing the value of the Rupee.
The Rupee has depreciated some 13 per cent since March and hit a low for the year at 74.60 Rupees to the US Dollar on October 10. Sachin Gupta, Senior Director at CRISIL, says that “almost two-thirds of an airline’s cost, and therefore profitability, is susceptible to fluctuations in forex rates and ATF prices.”
FUEL EXPENSES IN INDIA JUMPED MORE THAN 44 PER CENT FROM LAST YEAR IN A COUNTRY WHERE AVIATION FUEL IS AMONG THE COSTLIEST.
The impact is punishing. For example, IndiGo, which posted its first loss in three years for the quarter ended September, 652 crore ($89 million), saw its July-September fuel expense jump 84 per cent compared to the same quarter last year. Jet Airways reported a $186 million loss last quarter and is embarking on a cost-reduction program.
Notwithstanding the never-ending mission to reduce operating costs, there are other forces contributing to red ink on airline balance sheets.
CHRONICALLY DEPRESSED TICKET PRICES
Two factors are keeping India’s domestic airfares among the lowest in the world - the government-imposed mandatory $35 fare cap on short-haul flights, and the reluctance of airlines to pass on their rising costs to consumers.
Discounting is still rampant, partially because of pricing schemes that offer value fares priced only slightly above no-frills tickets. It’s not difficult to find a $100 round-trip fare between New Delhi and Mumbai on most flights on any day of the week. That’s the all-inclusive, bargain cost for four hours of flying. The ticket prices may be great for passengers, but too many seats at that price is not sustainable for airlines.
Fare stagnation also stems from price elasticity of demand and the classic battle for market share. With a glut of seats from hundreds of new jets flooding the domestic market, carriers are scrambling to fill them, seemingly at any price. Consumers become accustomed to a market price, often remembering what they paid on their previous trip. That benchmark fare is difficult to raise, especially if competitors don’t follow suit. Instead of paying higher fares, those price-sensitive travelers can simply take the train.
Yet with losses mounting, capacity growing, and fares stuck where they are, the battle for share has a no-win outcome, as the industry saw some ten years ago. CAPA puts it bluntly, “airlines have completely lost pricing power as a result of the rapid influx of capacity.” And with such weak balance sheets, “most carriers are ill-equipped to withstand cyclical downturns.”
NOWHERE TO GO BUT UP
Ashish Nainan, a research analyst with CARE Ratings, believes Indian carriers are focused on share rather than making money. “Indian aviation companies have been unable to value sustainability over volumes. Choosing profitable routes would have made losses less pinching. If you have a sizeable market share, why should you haggle for an extra 1-2 per cent?”
In the meantime, carriers are in survival mode. IndiGo is deferring aircraft purchases to preserve cash and Jet Airways is pruning its route network, pulling out of markets, reducing frequencies, and monetizing its frequent flyer programme.
But until airlines can edge ticket prices upward, India’s turbulent airline industry is likely to fly into even stormier weather.
The writer is a 35-year airline industry veteran. He was a former domestic airline pricing director for Air Canada and global marketing director at Bombardier and Embraer.