Booming Airfares: Why???..

With the New Year just around the corner and the festive season setting in amidst this wonderful winter month, everyone is busy planning that long awaited vacation with the loved ones. But there comes in the show spoiler - the 150% - 200% rise in the air tariffs in the domestic sector. The normal fare on an advance purchase of a week from Mumbai to Goa has increased to Rs. 10,000 to Rs 12,000 against Rs 3,800 to Rs 4,500 a month ago.

So why are airfares on the rise? A look into the issue shows three main causes: capacity cuts coupled with rising travel demand, higher oil prices and a changing business model for low-cost airlines.

Capacity cuts and rising demand

I remember reading a book by Dr. Stephen Leeb, “The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel”. Dr. Leeb had suggested that oil is on its way to becoming extinct which would send the global crude prices sky rocketing. That was the year 2006. Two years later in the year 2008 the Oil Crisis hit the world. This along with the recession that followed made it difficult for the airlines across the countries to maintain the fuel guzzling metallic birds. This led to the trimming of schedules and fleet and also saw the suspension of services in the least profitable routes. The Air Seat Miles (ASM) reduced.

The number of travellers has increased by 18.9% within the span of a year with 468.09 lakh people travelling trough the air route in between January and November, 2010 in comparison t0 393.53 lakh people in the corresponding duration in 2009 (DGCA Statistics). Despite resurgence in the commuters, the airlines have not increased the ASMs accordingly. The analysis of the capacity v. demand on a comparative year –to-year basis shows that although the demand has increased, the capacity has not been increased. Also poor seat factors continue to haunt Indian career. The load factor of Indian careers is 63.7% which is still very low in comparison to the global average. On the contrary, the airlines seem to be in no hurry to fly full strength in all routes which is a more preventive step against any possible future slump. This coupled with bankruptcies and consolidations in the recent past have not done any good.

Prolonged Period of High Oil Prices

Since 2008 the airlines have not been able to afford comparatively cheaper fuel. The price of oil has steadily been increasing over the past decade. Also adding pressure on the airlines is the fact that the Government has increased the sales tax on ATF (aviation turbine fuel) which has now been transferred to the airlines by the oil vendors. The airlines have subsequently passed on the burden onto the travellers.

Also, India did not have any Southwest Airlines (American). Southwest Airlines had cleverly purchased fuel hedges which allowed it to buy oil at a price which was one-fourth of the value of the current value (as it was then) of a barrel in the global market. By this way Southwest managed to keep its prices surprisingly low forcing the other competitors to offer tickets as very prices. However, the things have changed since then.

A changing business model for low-cost airlines.

Discount airlines, also known as low-cost carriers (LCCs), have changed the way we fly and altered our expectations for air travel. Over the years little has changed for the no-frill air transport services with simple base pricing and no food. This has helped the low-cost carriers to compete with the well-established much larger services like (Air India, Jet Airways). Deccan Airways was the first low cost airliner service in the country and it played the game smart: It kept costs low by operating a single aircraft type (ATRS – now moved towards Airbus) on point-to-point, short-haul routes, with quick turnaround times between flights. This stood in contrast to the expensive-to-maintain, hub-and-spoke models operated by the major network airlines.

But with the changing times so called "low-cost" airlines look more like network airlines. As these airlines mature, their operating costs are on the rise. As low-cost airlines seek to grow, they are rapidly expanding into larger hub airports. Hub airports (like New Delhi, Mumbai, Bangalore) are often plagued with congestion, resulting in increased flight delays which can wreak havoc on aircraft turnaround times and utilization schedules, further raising operating costs. Along with hub airports come business travellers who were earlier not in the flyers list of LCCs. But considering the large community of business fliers, these low cost cariers have gradually modified themselves to attract that business traveller. More sophisticated flyer means more facilities and therefore the airliners were forced to revamp their interiors and go hi-tech or acquire new aircrafts. And all these mean additional costs. These additional operating costs, combined with higher oil prices and rising travel demand outstripping capacity will contribute to upward pressure on airfares.

Now escalating airfare prices are seen only in the domestic sector. The international flyers are not bothered much as the fare in the international route has been by and large constant. This is because out of the three reasons for fare hike discussed above, increasing prices of fuel is not a matter of concern for the airliners in the international route as the The Air Transport Association (IATA) mandates that additional sales tax cannot be levied on fuel used by the airline for international travel.

You might be planning for that crazy weekend trip to Goa or looking forward to welcome the New Year on the beach. So don't be unhappy with the prices. All is not lost...you can treat yourself to a trip to Singapore or Bangkok instead and very much within the budget of your planned domestic vacation. Good Times...:)

The picture image used is courtesy www.IBNLive.com