Saturday, May 02, 2020

Most Airlines in India Are on the Brink, But Their Strategy to Hold on to Passenger Refunds is Flawed

To say that 2020 has been a challenging year for airlines would be an understatement. From a shutdown of skies to a complete collapse of demand, airlines that just a few months earlier were counting on growth and international expansion – now are facing threats to their very survival. India’s airlines are particularly at risk, especially because all strategies were based around explosive market growth.

As the globe finds itself at war with the coronavirus that has obliterated aviation demand and led to a fear of travelling, the marketplace changes could very well lead to airline failures.

Aviation demand is closely tied to economic growth. As a rule of thumb in growth, markets demand will grow at a factor of 1.4X – 1.7X GDP growth. But with GDP growth in a decline, aviation growth will continue to languish. That is not all, with the market capacity well ahead of demand, India’s airlines were resorting to deep discounting.

The discounting was both for cash-flow and to compete. And it made for a downward spiral. It didn’t help that airlines had fleet orders which they will now find challenging to induct.

With new social distancing norms (which the airlines are vehemently opposing), the pressure on pricing is even higher. As it stands, airlines per aircraft will have 30% lesser capacity which has to be priced in a manner to recover the cost of the flight.

Industry estimates indicate that even with fuel being drastically lower, the ticket prices would have to be twice of previous levels to make for break-even (keep in mind that ancillary sales such as onboard meals are assumed to be nil).

The current narrative is that airports and airlines pose contagion risk has set in. And multiple news stories only go to reinforce this narrative. Passengers continue to be apprehensive. Partly because the spread of the virus that has been traced back to aviation, and also because if each unplanned interaction can is classified as a random risk, then the overall travel experience aggregates to significant randomised risk. Add to that the fact that airlines have not quite engaged with passengers.

The ongoing coronavirus crisis will continue impact demand and will take a year or more to recover. This demand suppression will further force airlines across the globe, especially Asia, to drop prices.
02/05/20 Satyendra Pandey/News18
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