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Break-even not in sight for budget airlines

Rising losses are a worry for airlines as they fast run out of cash raised from investors, reports Ranju Sarkar.

india Updated: May 02, 2007 21:03 IST
Ranju Sarkar
Ranju Sarkar

Last week, Deccan Aviation, which runs budget carrier Air Deccan, announced a loss of Rs 213 crore for the quarter ended March 2007. Rising losses have been a worry for airlines as they fast run out of cash raised from investors.

The big question facing airlines today is how to raise yields and sustain the cash burn. Almost all budget carriers claim they are Rs 200-500 per seat away from achieving cash break-even. But given the operating environment—high infrastructure and fuel costs coupled with brutal price wars—will the budget carriers in India be able to increase yields?

‘‘I have been hearing for two years that they are Rs 500 away from making money. Budget carriers have no choice but to increase fares. Fares must go up by 15 per cent immediately,’’ said Alok Sharma, who quit as president of Sahara Airlines after Jet Airways took it over.

The low-cost warriors are more hopeful. ‘‘The present cash burn is temporary. In the next 15-18 months, demand will exceed supply; that is when airlines will start making money,’’ said Mohan Kumar, former CFO of Deccan Aviation, who still advises the airline. This financial year Deccan will fly nearly 7.5 million passengers; next year, it could fly 10 million. If it could charge Rs 500 more on every seat, it could earn a profit of Rs 500 crore.

‘‘If you extrapolate the way in which capacity is being absorbed-the number of seats on offer have increased from 90,000 a day in January 2006 to 150,000 a day in December-there will be a stage when the growth in supply will not keep pace with the growth in demand,’’ added Kumar.

To be fair, yields have been going up, but much too slowly. In January 2006, Air Deccan had an average yield of Rs 2,450 per seat at that time, the airline was flying 12,000 seats a day and selling 69 per cent of them. In January 2007, it achieved an average yield of Rs 2,750 per seat, despite flying 36,000 seats a day and reporting a higher load factor of 83 per cent.

The chances of improving yields in the near future look bleak. The industry will induct nearly 80 planes or 12,000 seats in 2007 on top of the 150,000 seats at the end of the 2006. Barring a few like GoAir, which returns planes during off season and leases them back during peak season, or SpiceJet, which recently deferred taking delivery of a couple of jets to October, airlines are not trying to cut capacity.

Similarly, they are reluctant to increase fares. Deccan learnt the lesson the hard way when it tried to raise fares on the Bangalore-Delhi sector. On an experimental basis, it began selling tickets on four flights from a higher (Rs 3,000) price level. The flights went half-empty.

ht epaper

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