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What ails the aviation sector?

June 03, 2014 12:33 IST

Jet Airways and Air India's poor results show how troubled the sector is.

A SpiceJet aircraftJet Airways’ loss of Rs 2,153 crore (Rs 21.53 billion) for the three months ended March 31, 2014, is the highest ever quarterly loss recorded by an Indian carrier.

Though the company has said that it will implement a new route network and fleet strategy, as well as cost optimisation -- and that this will help it return to profits in 18 months -- it is clear that the sector is in serious pain.

State-owned Air India is reported to have made a loss of Rs 961 crore (Rs 9.61 billion) for the quarter.

Both Jet Airways and Air India are full-service carriers.

This means that their costs are almost 50 per cent higher than those of low-cost carriers.

But their fares are the same.

This explains the losses.

India perhaps is the only market in the world where full-service and low-cost fares have become one.

Everywhere else, even in the highly competitive markets of Southeast Asia, full-service fares are at least 50 per cent higher than fares offered by low-cost carriers.

Much of the blame for this must go to Air India, which, in the absence of any other strategy, slashed prices so that it could hold on to its market share.

Apart from low fares, both the airlines carry huge legacy costs, especially on the manpower front.

Unless they do something about it, the chances of a turnaround are slim.

They also seem unsure about the business class segment of the market.

At one time they increased the number of such seats, while at other times they reduced them.

The fact is that it is a lucrative segment of the market -- the average yield of a business class seat is at least three times higher than that of an economy seat – but not all routes can support it.

About 85 per cent of the air traffic in the country is accounted for by six cities, and these are the routes that can support business class travel.

To make matters worse for the two full-service carriers, Tata-Singapore International Airlines, or Tata-SIA, is entering the market with a clearly differentiated strategy and zero legacy costs.

In the first few years, it will fly only on those routes that can fill business class seats.

While others have night hubs across the country, Tata-SIA plans to have only one: Delhi.

Since it will have to maintain its service infrastructure only at one place, Tata-SIA will be able to save costs.

It is not just the full-service carriers that find themselves up against adverse market conditions; even the low-cost carriers are finding the going tough.

SpiceJet, the other carrier listed on the stock exchange after Jet Airways, reported a record net loss of Rs 321.51 crore (Rs 3.21 billion) for the quarter ended March 31, 2014.

It too wants to trim costs and optimise aircraft usage to turn around.

JetLite, the low-cost subsidiary of Jet Airways, made a loss of Rs 312 crore (Rs 3.12 billion) during the quarter.

Its parent, Jet Airways, took a hit of Rs 700 crore (Rs 7 billion) on its books during the quarter on account of JetLite’s continuing losses and erosion of its net worth.

AirAsia, which will begin its service on June 12 with disruptively low prices, could make things tougher for other low-cost carriers.

It will require them to muster all their managerial skills to survive the additional dose of competition.

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