India's decision to remove the cap on last-minute flight tickets will drive up airfares even as prices may have fallen in the ongoing seasonally weak period.
The fare bands on tickets booked within 15 days of travel will go from August-end, according to a notification from the Ministry of Civil Aviation. The limits were introduced to protect airlines and travellers from extremely low or high prices.
“About 35-40% of the tickets are booked in the last 15 days,” Jagannarayan Padmanabhan, director at Crisil Ltd., told BQ Prime. As pricing power will be with airlines, the flexibility in planning new sectors and routing for existing sectors will rest with the individual carriers, and this can have a positive impact on their financials, Padmanabhan said.
The decision will ease pressure as the carriers slipped into losses after travel froze during the pandemic. And surging fuel costs only added to pain when competition in the sector is rising with the launch of Akasa Air, and Jet Airways set to resume operations under a new management.
“It will matter significantly because a majority of the airlines’ revenue comes from the metro routes,” Nripendra Singh, global director of aviation at Frost & Sullivan, told BQ Prime. A good amount of bookings come three days prior to departure on these routes, which make up a major chunk of corporate travel, Singh said.
The cap removal, however, may not help airlines in the leisure travel category, where travellers tend to book tickets one month before the flight.
Yet, the removal of capping in airfares brings relief to the entire aviation industry that will enable the airlines to regulate the airfares within their set of guidelines and can also offer discounts which might lead to lower airfares, Nishant Pitti, chief executive officer and co-founder at EaseMyTrip, said. "Earlier, the airfares were up by almost 50%. However, some airlines and OTA players did run offers and discounts to bring the rates closer to earlier which attracted many customers."
Eventually, airfares may go up for all categories of flyers, according to Singh. “Average fare will go up rather than going down, regardless of the fact that demand is going to be weaker in the current quarter."
A majority of the airlines will try to set higher fares on an average, rather than sticking with the old regime, he said.
Demand is also rising. EaseMyTrip has witnessed its August 2022 Travel Carnival Sale as the highest turnout in the company’s history, denoting a strong recovery, Pitti said. The sale crossed Rs 300 crore, he said.
According to Jyotiraditya Scindia, India’s aviation minister, the decision to remove the cap was taken "after careful analysis of daily demand and prices of air turbine fuel". “Stabilisation has set in and we are certain that the sector is poised for growth in domestic traffic in the near future,” he tweeted.
InterGlobe Aviation Ltd., however, said higher fares alone won't help. At least in the ongoing quarter.
The parent of IndiGo, India's largest airline, has posted losses in nine out of last 10 quarters. And the outlook for the current quarter is no better as it is seasonally weaker.
“The seasonal revenue decline coupled with high costs will lead to profitability challenges,” Ronojoy Dutta, the outgoing chief executive officer of InterGlobe Aviation, said in the post-results conference call for the first quarter.
The path to profitability will also depend on aviation turbine fuel prices, strength of the Indian currency, and passenger traffic.
Airlines’ profitability is linked to the load factor, among others, Crisil’s Padmanabhan said. Hence, a fine balance between demand and price needs to be maintained at all times, he said.
“If ATF prices remain elevated, then the path to profitability will get stretched. Having said that, pricing flexibility will give the airlines much-needed elbow room to focus on increasing the passenger load factor.”
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