Air fares rise once again. Thank peak season, not pricing power

Tanvi Shukla & Praveena Sharma

Carriers want to firm up yields on robust demand

MUMBAI/BANGALORE: In the past fortnight, two leading airlines have announced fare hikes. Legacy carrier Jet Airways is looking at raising its average fares by Rs 200 to Rs 500.

Budget airline Air Deccan, which is seeped in losses (Rs 213 crore in the March quarter), wants to increase it by Rs 500 to Rs 1,000.

Many industry observers are viewing this as an outcome of consolidation that is taking place in the industry. Is that really what it is?

Analysts and industry players do not think so. They say the rise in the average fare is a peak season (mid-September to December) phenomenon.

"It is not that pricing power has suddenly returned to airlines. Fares, anyway, go up slightly during the third quarter (October-December quarter) compared with the second quarter (worst season). This year, though, it could be marginally higher than last year but it would not be enough to generate profit for the whole year," an analyst said. Low-cost carrier SpiceJet Ltd executive chairman and CEO Siddhanta Sharma is also emphatic that fares would be flying in the coming months only because of seasonal spurt in demand.

"Airlines are trying to strengthen their yields on peak season demand. Since they have moved from fixed fares to dynamic fares, they will be reducing capacity in the lower fare bucket. This will automatically improve their average fare," said Sharma.

Sharma is also expecting SpiceJet's average fares to soar during this period. The no-frills airline's flights for October and November are already booked 30%.

In contrast, its flight for September 1, which is only three days away, is booked just 26%.

"For the moment, the demand looks robust mid-September onwards," said a senior executive of IndiGo.

Jet Airways CEO Wolfgang Prock-Schauer said he is yet to study whether it was pricing power that was pushing up the fares or it was just the peak season demand.

Industry experts, however, were in no doubt that the industry was moving to higher fares to improve yields, which have been depressed in the last few quarters due to intense competition.

"Over the past two years, airlines were trying to create new markets by offering ridiculously low fares. Now that they have created the market, they are shifting back to rational fares," said a senior executive of an airline.

Lately, airlines have been rationalising routes and slowing down on capacity addition to improve yields. The recent consolidation moves by airlines are also expected to lead to correction in fares and improve the health of the industry.

But despite all this, many analysts continue to take a negative call on the domestic aviation industry.