Discounted fares by airlines kill cheaper fuel advantage

Airlines offer aggressive discounts to attract passengers but will result in more losses

Air India's s rock bottom fare of Rs 2957 on economy class between Delhi and Mumbai is surely music to the ears of fliers. It has already forced everyone – Jet Airways, Go Air and even IndiGo - to follow suit on selected routes.

Yet, its impact is equally simple: in Q4 of 2014-15 which is any case a lean period, most airlines will make huge losses, while those who are making profits will just about scrape through. The reason: Air India as well as others in the game are selling their fares below their cost of operations - even after the fall in fuel prices as they are passing much more than the mere fuel savings to the customers. And this offer comes at a time when all airlines, including Air India, Jet, and Spicejet are awash in red. 

Between July last year and now, fuel prices have gone down by 24%, which means the overall cost of operating an airline has also fallen 10-12% (it is 45% for full service carriers and 50% for low cost carriers currently). But the fare cuts have been steep: as much as an average of 20-50% the  fare AI or Jet was selling last Saturday across networks. In other words, the benefit of low fuel prices will not go to the airline's bottomlines to reduce their already bulging losses, but will merely improve the passenger load factor (PLF).   

Airlines themselves share some interesting numbers. For instance, the cost of operating a flight between Delhi and Mumbai for a low cost carrier is currently around Rs 650,000, half of which is fuel costs at current levels. With 150 paying passengers (assuming 80% PLF), it translates into Rs 4,333 per passenger just to break even. Clearly, at current fares which range from Rs 3,000 to Rs 4,000, that is not possible at all. 

The numbers for FSCs are even more worrisome. Airline experts say that a similar flight will have an operating cost that is around 25-30% more. So a Delhi-Mumbai flight operated by an FSC will cost more than Rs 800,000. With around 153 seats, or 80% capacity, the cost per passenger comes to just under Rs 5,300. 

The number of seats has been calculated from the fact that these airlines have about 156 economy and 12 business class seats. However, since the fare for one business class seat is equivalent to three economy seats, the total number of business class seats has been taken at 36 to average out the per seat operating cost.  From the discounted price that has been offered by Air India and Jet, it is clear that they won’t meet their costs. 

Kapil Kaul, head of Centre for Asia Pacific Aviation, points out that the industry might fritter away the opportunity provided by a lower fuel price environment by offering discounted fares throughout the quarter. And that is precisely what is happening.

(Surajeet Dasgupta is corporate editor, Business Standard)