Airline operators cut airfares to stay competitive; margins likely to get impacted

Weaker demand and overcapacity is forcing airline companies to reduce fares during festive seasons: Outlook remains challenging

Oct 12, 2018 07:10 IST India Infoline News Service

According a report published by Economic Times on Oct 12, 2018, airline companies have cut airfares for the ongoing festive season, citing weaker consumer demand. As per India’s biggest online travel portal MakeMyTrip, advance purchase fares for the Dussehra weekend are down 15% compared to 2017. Online travel aggregator Cleartrip also reported a 7% decline in blended average fares for Dussehra.

Thus, soft pricing that too during the peak festive season could hurt margins for aviation players, who are already grappling with rising fuel prices, cut-throat competition and overcapacity. Current yields for the aviation sector are the weakest since 2013 and expected to remain under pressure owing to excess capacity coupled with macro headwinds. Throughout last year, the Indian airline sector has added 88 planes. In 2018, airline companies added 46 planes between April and August and are on track to add 90 more by March 2019.

Input costs have surged significantly, and the rupee has depreciated by 14% on a YTD basis, however, airline operators may not have pricing power due to stiff competition. However, airfares might find some traction and volumes may also rise going forward, but industry believes it might not be enough to cover elevated input costs.

Lower prices have potentially boosted demand, and bookings are healthy mainly for tier-1 routes. In addition, prices have also risen where capacity is constrained such as the Delhi-Mumbai route. This, supported by the reduction in excise duty cut from 14% to 11% may provide some relief to the struggling aviation industry. Share prices of airline companies, i.e., InterGlobe Aviation, Jet Airways, and SpiceJet have rallied on the back of share correction in global crude oil prices.

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