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IndiGo’s bottomline hit, other airlines will also suffer; why airfares should rise
ndia is one of the world’s fastest growing aviation markets, where passengers are enticed to fly with ridiculously low fares even as airlines’ costs remain among the highest due to high taxation of jet fuel. Frequent and bruising fare wars have scraped away about 7 percent from the net profit growth of market leader IndiGo for the June quarter.
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The airline now says competitive intensity on fares is hurting its bottomline and it will continue to participate in such fares wars. The truth is air fares in India are among the lowest (a Bloomberg story says base fares are as low as 2 cents) and India generates volume of air traffic on the back of affordability. To make matters worse for airlines, there was a further 11 percent decline in year-on-year average domestic air fares during the June quarter this year. The average price at which IndiGo sold a seat was Rs 4,032 in Q1 this fiscal against Rs 4,525 in the same quarter last year. This is the reason for a decline in profitability for India’s largest airline by passenger numbers.
This story shows how the fare gimmicks have continued well into the second quarter. It says the cheapest fare for Delhi-Mumbai travel during the two-month period between August and September this year across three airlines hovered between Rs 2,681 to Rs 2,688. Fares for the same route booked a week in advance in 2015 was charged anywhere between Rs 5,000 to Rs 6,000. Indigo said it would open fares from as cheap as Rs 1,005 starting 27 July to 29 July.
For IndiGo, net profit fell to Rs 592 crore (Rs 639 crore) while total income from operations rose 8.7 percent to Rs 4,579 crore. The airline reported that average yield (measure of average fare paid per mile, per passenger) fell 8 percent during the June quarter because of fall in average ticket prices.”We have posted yet another profitable quarter. However, profitability was lower than last year primarily because of competitive fare pressures,” said InterGlobe president Aditya Ghosh.
So will India’s airlines think of raising fares to improve profitability? Not just IndiGo, every other airline will likely post a decline in profitability for the June quarter due to the same fare wars. They already operate on thin margins due to warped cost dynamics, despite historic low jet fuel prices, with IndiGo the strongest bet. K.J. Wright Authentic Jersey
