LCC gain adds to Air Indias pain

India’s LCC sector now holds a remarkable 49% of the domestic market - one of the highest in the world. From a standing start, the sector has made significant gains in expanding its market share in recent years, and particularly this year as fuel prices – and fares – have increased. India’s LCCs had a 26% share in May-06 and a 44% share in May-07. The Indian experience could be instructive for other Asia Pacific travel markets this year as inflation impacts on the travel decisions of increasingly price sensitive consumers.

The LCC sector's almost half share of the Indian market (including Jet Airways ‘value-based’ unit, JetLite) in May-08 has come at the expense of the full service airlines, predominantly Air India.

The strain on the flag carrier – and its owner – ia showing, with the Civil Aviation Ministry last week reiterating that Air India would remain in state ownership, but would be strengthened. This hints that an emergency cash injection requested by the carrier’s new Chairman and Managing Director, Reghu Menon, could be imminent. Losses at the national carrier could account for around half of the industry’s projected USD2 billion loss this financial year.

Air India’s domestic market share has crumbled to less than 15% in May-08 – down from 19.2% in 1Q07.

Indian domestic market shares (%): 1Q07 vs 1Q08 vs May-08

Source: Centre for Asia Pacific Aviation & DGCA

Indian domestic market share by carrier (%): May-08:

Source: Indian domestic passenger numbers by Indian carries in May-08

Air India’s domestic load factor in May-08 was just 61.2% - some 8.9 ppts below the next poorest performer, Kingfisher.

Indian domestic passenger load factors by carrier (%): May-08:

Source: Centre for Asia Pacific Aviation & Indian Civil Aviation Ministry

Overall domestic traffic growth rates continue to ease, with domestic passenger numbers in the first five months of 2008 easing to 9.0% year-on-year.

The outlook is for further slowing of demand, as fares have risen twice already in Jun-08 and another increase is possible, pending the outcome of a meeting of state governments today to consider jet fuel price tax relief.

Jet Airways CEO, Wolfgang Prock-Schauer, stated another 20-30% hike in airfares would be required to offset losses, adding that traffic growth could “even be zero” in coming months, as a result of rising fares.

But the LCCs are optimistic of further market share gains. Deccan Aviation, Managing Director, Capt. GR Gopinath, stated last week, “in the past in Europe and the US, tough economic times when there’s pressure on bottomline have led to companies sending their executives on LCCs rather than full service ones to save travel costs. The same thing is happening in India now”.

SpiceJet Executive Chairman, Sidhanth Sharma, stated, “even corporate houses try to cut travel costs by boarding on budget carriers. He added, if the services of LCCs, in terms of on-time performance and safety are comparable to full service airlines, “then flyers of the latter carriers do not hesitate to switch”.

Meanwhile though, Air India's plight only deepens. With an election coming up, the carrier is again likely to be propped up. But its future does not look bright.

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