This nominal increase is staggering considering operating costs have doubled over the same period. Currently, airlines are spending 55% more on jet fuel and a whopping 127% more on landings at Mumbai airport compared to 2012.
While airfares saw a significant increase as travel recovered in 2022 after a two-year hiatus due to the COVID-19 pandemic, and again during this year’s summer season, marked by the suspension of Go First and SpiceJet’s grounding of numerous aircraft, industry experts claim the situation has since normalized.
In this context, ‘normality’ means the inability of airlines to increase fares above a certain threshold.
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Indigo‘s recent decision to impose an additional fuel surcharge on passenger tickets was expected to trigger a chain reaction among other airlines. Surprisingly, this expectation was unfounded as no other airline followed suit. Now, the revenue managers of India’s largest airline are faced with a dilemma: they must either cut their base fares to remain competitive or risk losing customers to rival airlines, despite their significant 60% market share.
This predicament facing IndiGo reflects Indian airlines’ broader struggle to raise ticket prices, which have been virtually stagnant for a decade.
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An IndiGo executive dismissed monopoly concerns surrounding their 60% market share and highlighted the rapid market growth. He argued that airlines must continue to offer competitive fares to compete with other modes of transport, such as trains.
IndiGo serves 520 routes, many of which connect cities with robust rail and road networks.
Despite a decade of consolidation in the Indian aviation industry, marked by three airline closures and multiple mergers, experts believe the sector has not reaped significant benefits.
The capacity lost due to Jet Airways’ closure was regained within nine months, and Indian airlines are poised to nearly double that capacity by 2024. Aviation research firm CAPA expects competition among the top three airlines to increase with new entrants, which, coupled with significant capacity expansion by market leaders like IndiGo and Air India, could offset consolidation benefits. “Capacity induction by major players like IndiGo and Air India is likely to be three times the GDP growth (of the country), which will offset the benefits of consolidation,” CAPA said.
Campbell Wilson, CEO of Air India, explained that airlines are incurring losses on tickets purchased more than 15 days in advance, prompting them to increase fares as the travel date approaches. Multiple fare bands exist for a single route, but more than half of them do not cover operational costs. This shortfall in revenue is made up for by last-minute travelers paying higher rates.
According to CAPA’s research in FY2020, more than 50% of Indian flyers purchased tickets that did not cover the operational costs of the flight. Some industry observers believe that implementing better pricing strategies could increase airlines’ profit margins because many passengers could pay higher fares.
CAPA South Asia CEO Kapil Kaul noted a notable increase in customers’ willingness to pay on the top 10 routes over the past five years. He questioned the prevailing pricing strategy and why airlines are reluctant to increase fares.
Air India’s Wilson attributed the lack of pricing discipline to airlines with weak financial positions. He explained that the sector’s pricing power was previously limited by the semi-commercial nature of state-owned Air India. Smaller, undercapitalized airlines prioritized cash flow generation due to their financial fragility.
Wilson expressed optimism about improvements through consolidation. He expected that the transition to a healthier industry would necessitate corrections in airfares. Now that there are two professionally managed, well-financed airlines in the market, he expects more robust dynamics.
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