Go to any Indian airport, and it\u2019ll appear that nearly all of the country\u2019s billion-plus people have decided to fly. Yet talk to shareholders of India\u2019s largest aviation businesses, and they\u2019ll tell you how miserable they are.<\/p>\n
Oxygen masks have been down since last month\u2019s 97 percent drop in quarterly profit for InterGlobe Aviation Ltd., which operates IndiGo, the budget carrier with almost two-fifths of India\u2019s domestic market. <\/p>\n
Rising fuel costs make for an even shorter runway at Jet Airways India Ltd., which is burdened with $1.2 billion in net debt in contrast to IndiGo\u2019s $1.6 billion of net cash. India\u2019s second-largest carrier was forced to postpone its fiscal first-quarter results on Thursday after the audit committee, comprising three independent directors and one representative of equity partner Etihad Airways PJSC, refused to approve the accounts. Following a one-week-old Economic Times report about a cash crunch, denied by the company as \u201cinaccurate\u201d and \u201cmalicious,\u201d Jet has now appointed a committee to improve public perception of the airline.<\/p>\n
Maybe the carrier should also consider a committee to improve investor sentiment. Including the near 7 percent drop on Friday morning in Mumbai, Jet shares have lost two-thirds of their value so far this year. Those of budget carrier SpiceJet Ltd. have dropped by almost 40 percent.<\/p>\n
Fasten Your Seat Belts<\/p>\n
Blame the woes on everything from lax hedging policies to India\u2019s exorbitant fuel taxes and overambitious fleet expansion. None of those, however, is a satisfactory explanation for why a domestic aviation market that has in just three years overtaken Australia, Japan, Russia and Brazil should be so fragile. Aside from whatever it is that\u2019s bothering Jet\u2019s audit committee, the biggest problem plaguing the industry is pricing.<\/p>\n
It\u2019s unclear as to why pricing should behave as if India\u2019s aviation industry is saddled with huge overcapacity. Unable to pay interest and wages, Kingfisher Airlines Ltd. went belly up in late 2012. In almost every month since then, revenue passenger kilometers (a measure of demand) have grown faster than available seat kilometers (a unit of supply), according to the International Air Transport Association. Even in June, when the industry was crashing, domestic air travel grew by 17.6 percent. Not only was it the fastest growth of any major market including China, it was nearly 2 percentage points quicker than India\u2019s own demand expansion in the same month last year.<\/p>\n
Yet desperate carriers are pampering fliers with promotions they can ill-afford. Jet, for instance, is currently offering a 30 percent discount on base fares to international destinations. This is when its cost of flying one passenger-kilometer, excluding fuel, was 3.17 rupees last fiscal year, according to SBICAP Securities Ltd., compared with 2.53 rupees for SpiceJet and 2.04 rupees for IndiGo. Revenue per available seat kilometer has exceeded all-in costs in just three of the past 14 quarters.<\/p>\n
Losing Altitude<\/p>\n
The obvious point is that it may be pointless to run a full-service carrier like Jet if it can\u2019t even hold on to a better premium over budget airlines like SpiceJet and Indigo. The other message is that operational efficiencies alone aren\u2019t enough. IndiGo \u2013 whose reputation for ruthless cost management makes it Asia\u2019s biggest budget airline by market capitalization \u2013 is also getting thwacked by the Indian consumer\u2019s legendary unwillingness to pay.<\/p>\n
From transport to communication and investment banking, the motto of every Indian business seems to be: \u201cLet\u2019s get volumes today, pricing power will come tomorrow.\u201d For tycoon Mukesh Ambani, it means feeding his countrymen 3.4 billion hours of video content every month, and hoping that his telecom service\u2019s less than $2-a-month revenue per user will turn into a bigger number tomorrow.<\/p>\n
Ikea, which opened its first Indian stores this week after a 12-year wait, may be able to win over the price-sensitive consumer with extreme localization of its product offerings. However, it\u2019s not a game everyone can play. Since Apple Inc. can\u2019t halve handset prices in India without jeopardizing its global franchise, it may have to stay content with a 1 percent share of phone sales in the world\u2019s fastest-growing telecom market.<\/p>\n
India’s Pricing Challenge<\/p>\n
Ultimately, the problem boils down to this: In 1970, the average Chinese and the average Indian were equally poor. Since then, both countries have narrowed the gap with the Americans, but the Chinese have been more successful.<\/p>\n
India\u2019s per capita income gap with the U.S. in 2014 was the same as China\u2019s was in 2002. But while back then aggregate Chinese prices were 24 percent of U.S. levels, the figure for India is already 29 percent. Unless New Delhi can create opportunities for faster catch-up in incomes, further economy-wide price increases will only erode competitiveness.<\/p>\n
This is why Indians won\u2019t pay a premium of even 1 rupee per kilometer for hot meals and cold towels. After all, they\u2019re paying 2 rupees for a pilot, aren\u2019t they?<\/p>\n","protected":false},"excerpt":{"rendered":"
Go to any Indian airport, and it\u2019ll appear that nearly all of the country\u2019s billion-plus people have decided to fly. Yet talk to shareholders of India\u2019s largest aviation businesses, and they\u2019ll tell you how miserable they are. Oxygen masks have been down since last month\u2019s 97 percent drop in quarterly profit for InterGlobe Aviation Ltd., which operates IndiGo, the budget carrier with almost two-fifths of India\u2019s domestic market. Rising fuel costs make for an even shorter runway at Jet Airways India Ltd., which is burdened with $1.2 billion in net debt in contrast to IndiGo\u2019s $1.6 billion of net cash. […]<\/p>\n","protected":false},"author":40,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[229],"tags":[],"class_list":["post-175509","post","type-post","status-publish","format-standard","hentry","category-civil-aviation"],"acf":[],"_links":{"self":[{"href":"https:\/\/infralive.com\/web\/wp-json\/wp\/v2\/posts\/175509","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/infralive.com\/web\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/infralive.com\/web\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/infralive.com\/web\/wp-json\/wp\/v2\/users\/40"}],"replies":[{"embeddable":true,"href":"https:\/\/infralive.com\/web\/wp-json\/wp\/v2\/comments?post=175509"}],"version-history":[{"count":0,"href":"https:\/\/infralive.com\/web\/wp-json\/wp\/v2\/posts\/175509\/revisions"}],"wp:attachment":[{"href":"https:\/\/infralive.com\/web\/wp-json\/wp\/v2\/media?parent=175509"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/infralive.com\/web\/wp-json\/wp\/v2\/categories?post=175509"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/infralive.com\/web\/wp-json\/wp\/v2\/tags?post=175509"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}