Cheap flight tickets are killing Jet Airways

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by Andy Mukherjee

Go to any Indian airport, and it’ll appear that nearly all of the country’s billion-plus people have decided to fly. Yet talk to shareholders of India’s largest aviation businesses, and they’ll tell you how miserable they are.

Oxygen masks have been down since last month’s 97 percent drop in quarterly profit for InterGlobe Aviation Ltd., which operates IndiGo, the budget carrier with almost two-fifths of India’s 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’s $1.6 billion of net cash. India’s 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 “inaccurate” and “malicious,” Jet has now appointed a committee to improve public perception of the airline.

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.

Blame the woes on everything from lax hedging policies to India’s 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’s bothering Jet’s audit committee, the biggest problem plaguing the industry is pricing.

It’s unclear as to why pricing should behave as if India’s 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’s own demand expansion in the same month last year.

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