Two-cent fares are killing airlines in India's cut-throat market. Is the Gulf next?

Global carriers have flocked to India, lured by a domestic travel boom. But can they survive the ruthless competition - and are there warnings for other regions?
Group cash holdings at Jet Airways, in which Etihad Airways PJSC owns a 24% stake, dwindled to $46m at the end of March, the lowest since at least 2008.
Group cash holdings at Jet Airways, in which Etihad Airways PJSC owns a 24% stake, dwindled to $46m at the end of March, the lowest since at least 2008.

Jet Airways India, one of the first carriers to launch after the market opened up in the early 1990s, said in a filing this month that it needs cash to meet liquidity requirements. Its stock price is in a free-fall and the company’s board, which deferred announcing earnings by more than two weeks, is due to meet Monday to discuss austerity measures and a turnaround plan.

It’s the latest sign of financial distress in a market beset by a crushing fare war that’s made life difficult for foreign carriers, ranging from Malaysia’s low-cost AirAsia Group to Singapore Airlines, not to mention a teeming field of domestic players. The competition is set to intensify if certain other airlines follow through with proposals to start short-haul airlines in the country soon.

The Indian commercial aviation industry has pretty much been in shakeout mode ever since the government ended a state monopoly enjoyed by Indian Airlines in 1994. Debt-burdened Kingfisher Airlines ended operations in 2012 – and 10 other domestic carriers remain locked in a largely profitless struggle for passengers, despite operating in the world’s fastest-growing market.

Tight Lid

Still, not all Indian carriers are losing money. IndiGo, which started in 2006 with a focus on on-time flights and ultra-cheap tickets, has managed to keep a tight lid on costs.

Commanding discounts with big plane orders and lease-back deals, IndiGo has never lost money since going public in 2015. Its fleet of planes is also newer and more fuel-efficient than many rivals.

In contrast, Jet Airways is bogged down by higher costs. Besides carrying the burden of being a full-service carrier, the average age of its fleet is almost nine years, costing more to maintain.

Jet Airways Chairman Naresh Goyal, who started the carrier in 1993 as a little-known ticketing agent, told shareholders on August 9 that he was “embarrassed” by the poor performance of the airline. The stock, down 67% in 2018, is headed for its worst year since 2011.

Group cash holdings at Jet Airways, in which Etihad Airways PJSC owns a 24% stake, dwindled to $46m at the end of March, the lowest since at least 2008. It needs to repay about $445m of debt coming due by March 31. Lenders are reluctant to extend additional loans, while it is in talks with Blackstone Group LP to sell a stake in its frequent-flyer loyalty program, people familiar with the matter said this month.

The market share of Jet Airways has more than halved to 15% from as high as 36% in the mid-2000s. It has reported profit in only two of the last 11 financial years, thanks to low oil prices.

The aviation industry is no stranger to the vicissitudes of fuel prices and fierce competition. They have landed other regional airlines in trouble as well before. Cathay Pacific Airways Ltd and Singapore Airlines, the two premium Asian carriers, are in the midst of a transformation to help bring them back to a path of sustainable profit.

In contrast, Air India, the state carrier, is surviving on bailouts and no bidder showed interest when the government wanted to dispose of some of its assets this year. AirAsia, which entered in 2014 with a vow to break even in four months, is still nowhere close to its goal. Vistara, Singapore Air’s joint venture with the Tata Group that started in 2015, has yet to make any money. SpiceJet almost collapsed the previous year.

The cost of running an airline in India is not adequately compensated by fare inputs,” says Kapil Kaul, chief executive officer for South Asia at Sydney-based CAPA Centre for Aviation. “That is the fundamental issue.”

Could the Gulf carriers be next?

After the US, Europe and India, the Gulf is the logical next market where low-cost price wars could disrupt the full-service carrier model that holds sway here.

As Norwegian Airlines, Wizz Air and even Indigo added operations into the UAE, Emirates president Tim Clark referred to the low-cost carrier phenomenon as the “gathering storm” in a much-publicised interview last year, adding that there was more to come. However, Emirates moved to pre-empt low-cost carriers carving out market share through its partnership with Flydubai, which also operates out its hub at Dubai International Airport.

In the six months of their partnership until April, the two had booked a combined 650,000 itineraries. Emboldened by the plans, Saudi Arabian Airlines now plans to commence hub operations in 2019 at the revamped Jeddah Airport with new low-cost subsidiary Flyadeal. Similar plans are afoot in Oman and Kuwait as well.

With foreign ownership of airlines remaining restricted in the region, the hub model – where domestically owned low-cost carriers feed into large full-service carriers – could be the best way to protect the regional industry from competition beckoning at its doorstep. And also prevent the kind of price war that is wreaking havoc in India.

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