Saturday, October 27, 2018

Price wars in aviation, telecom

One very bright spot in the economy is aviation. Domestic passenger traffic has been growing every month for over four years. Annual growth rates have been in double digits, often above 20 per cent, the fastest in the world. Last year, both domestic and international traffic of the Indian aviation industry grew at 17 per cent.
Of course, the number of airports, or their capacity, has not increased that much. So most airports look like bus depots, overcrowded with passengers, with no place to sit and inadequate facilities. But even though the airports seem to be bursting at the seams, the efficiency of air traffic control and the optimisation of space and facilities is unbelievable. The bulk of air traffic is still between metros, with the Mumbai-Delhi sector taking the lion’s share.
Low oil prices and a stable exchange rate were the main reasons for the airline boom of these past four years. Since over 80 per cent of the variable cost of running a flight is fuel, and that fuel is mostly imported (i.e. crude oil, which gets converted to aviation turbine fuel, or ATF), airfares were kept low. The competition was so intense that the Mumbai-Delhi airfare for a non-refundable ticket booked in advance was often cheaper than an AC train ticket.
As a result of the boom, airlines like Jet, Vistara (owned by Tatas and Singapore Airlines) and IndiGo together ordered over 1,000 new aircrafts, which will be delivered over the next eight years. But the estimated demand in the next 20 years is at least 2,000 more aircrafts. India will also double the number of airports in the next 15 years.
All this good news started souring earlier this year when oil prices started to climb. Oil went from 40 to 80, and the exchange rate became expensive by 20 per cent (i.e. 64 to 75). This double whammy has hit airlines very hard and profits have plummeted. Actually, both Jet and SpiceJet have reported losses running into thousands of crores. IndiGo is still profitable, but only just. As for Air India’s losses, the less said the better (although it has turned around from deeply negative to merely negative). Surprisingly, airfares haven’t increased sharply, despite huge increase in fuel costs. Why is that? IndiGo’s rivals allege that it has huge surplus capacity and can afford to keep prices low.
27/10/18 Ajit Ranade/Mumbai Mirror

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