Spike in capital costs hurts full service carriers

Bangalore: Widening capital-cost gap between the full service carriers (FSCs) and the low cost carriers (LCCs) is giving the latter better pricing power in the market without compromising on volume growth and profits.
This is in stark contrast to the situation a few years back when FSCs were trying to push budget airlines out of the market by offering fares that were at par or lower than those of the LCCs on certain routes.
Industry players and experts say the legacy carriers cannot do that anymore as no-frills airlines have enough cost cushion to adjust their fares to competition without sacrificing yields.
A senior executive with a leading budget airline, who did not want to be named, said at today’s fares and costs, budget airlines SpiceJet, IndiGo and GoAir are able to achieve breakeven load factor more easily than FSCs such as Jet Airways, Kingfisher Airlines and Air India.
“While we (budget carriers) have the usual benefit of lower distribution and infrastructure costs in comparison to the FSCs, in India our capital costs —- including interest, depreciation and lease rentals —- are also lower. This gives us huge cost advantage over them (FSCs),” he said.
A SpiceJet presentation to investors on its website puts its average cost per available seat kilometre (CASK) between April 2009 and January 2010 at Rs 2.31. This is around 35% lower than Jet’s CASK of Rs 3.60 during the same period.
A report brought out by Citi on Wednesday by analysts Jamshed Dadabhoy and Arvind Sharma says FSCs’ capital costs per passenger have jumped several fold over the last few years while those of budget airlines have remained stable or moved up marginally.
23/03/10 Praveena Sharma/Daily News & Analysis

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Categories: Indian Aviation- In General Mar 2010