One sector that's looking up: Airlines are buying planes, slashing prices

Topics airlines | IndiGo | SpiceJet

Airlines stock photo
Airlines are bringing in dozens of new planes this winter, while they prepare to engage in an intense price war. While that would mean attractive fares for travellers, airlines —  already operating on a wafer-thin margin — may risk their profitability to fill up cabins in a slowing economy.

Capacity addition in the Indian aviation scene is in sharp contrast to other sectors such as automobile and consumer goods. Caught in a prolonged slowdown with car sales falling to a two-decade low, auto companies have resorted to a rapid cut in production.

According to an industry estimate, scheduled carriers in India will add at least 30 aircraft by the year end. Of those,  20 will come in by the first week of November. This comes in the backdrop of airlines filling up more than 85 per cent of their planes in the lean season of July to September, mostly on the back of low fares.    

 
Tata-Singapore Airline joint venture Vistara is restarting its capacity-induction plan after a lull. The airline, which expanded by an average of five aircraft per year, is adding five planes this month itself. By December, it will add five more, taking its fleet size to 41. The new acquisitions will consist of one Boeing 737 and nine Airbus 320 Neos.

That airlines are desperate to boost capacity can be gauged by the decision taken by Ajay Singh-led SpiceJet to wet lease five Boeing 737 from Turkish airline Corendon. The airline’s new capacity induction has almost stagnated as it awaits the operations of Boeing 737 Max to resume. 737 Max planes were grounded worldwide following two fatal crash.

Under the wet lease agreement, Corendon will lease both aircraft and the crew to SpiceJet. It’s costlier than normal secondary market lease but airline officials say there’s no alternative to adding capacity when others are doing so. “Given the current fare conditions, ideally airlines should grow rationally,’’ an airline executive said. But when others add capacity, no airline will want to be left out, he pointed out. The wet lease would be only for a short period of around six months.

Similarly, market leader IndiGo is resuming rapid capacity induction this month following a brief slowdown in the delivery of A320 and A321 aircraft. Its engine supplier Pratt & Whitney has been retrofitting the engines of the aircraft with a modified gear box after directions from the Indian and US aviation regulators. The airline will add at least four aircraft this month. “Our growth plan is set. We are going to grow at 30 per cent a year. We have aircraft coming and we are very comfortable and happy with the growth. If other people tend to grow faster, I guess, we will just have to deal with it,” IndiGo CEO Ronojoy Dutta said.

 
However, IndiGo will also ramp up capacity on the international front, where it can manage to get better fares.

Its low-cost peer GoAir added two aircraft on a single day last Friday and will add one more by the end of October. “Our plan is to add at least one aircraft on average every month,” Managing Director Jeh Wadia said.

Investors and industry executives are however jittery because of the growth. They believe that a scramble to fill up the planes would result in a bloodbath in the industry, hitting profitability, even during the holiday season.

“Looks like airlines are concentrating on a volume-driven growth and may squander the opportunity of pricing rationality that the vacuum of Jet Airways had offered,” said an airline executive.

Domestic air traffic grew 3 per cent between January and August and demand has been largely driven by low fares. Fares were likely to pick up for Diwali, beginning October 25. But, now airlines are holding up fare hikes. Airline executives say it’s quite impossible to maintain profitable pricing as at any point of time airlines are trying to fill up seats, consequently lowering fares and forcing others to follow. Data supports the theory. Last November, airlines had increased fare by 8 per cent but passengers fell across 12 of the top 15 routes in peak traffic season.

‘’Indian airlines operate in an environment where our costs are among the highest and our fares are amongst the lowest. Air fare on Delhi to Mumbai sector hasn’t grown for the last three years even though our operating cost has increased manifold. Unsustainable fares will lead to a decline of the aviation industry,” SpiceJet Chairman Ajay Singh cautioned.


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