Full service carriers may have aggressively shed capacity over the last one year -- Jet Airways has snipped 30% capacity in the last 12 months while Kingfisher Airlines cut back about 20% in FY09 -- but overcapacity still plagues the industry saddled with losses of over Rs 8,000 crore ($2 billion).
In the airline industry, capacity is measured by the number of seats or aircraft with an airline, or available seat multiplied by the number of kilometres it flies. As long as there is excess supply in the market, it would be difficult for airlines to wipe out the red from their
balance sheet.
Ankur Bhatia, managing director of Amadeus, said last month's average seat load factor of 70-75% indicates that demand is still lagging behind supply by 25-30%.He said the ideal seat load factor for airlines at the current yield -- net revenue per seat -- which has slipped 5-6% in the last four months, would be a high 90%.
But with the three full service carriers (FSCs) Jet, Kingfisher and state-owned Air India planning to gradually convert a large part of their business seats into economy seats, capacity situation in the market is expected to get worse in the coming months.
Citi analysts Jamshed Dadabhoy and Hitesh Goel in their report brought out last week say: "Overcapacity in an industry that has commodity characteristics has resulted in lower yields and lower profitability."
So, why are legacy carriers shifting high-yield seat inventory to low-yield inventory?
An airline expert, who did not want to be named, said it was a move to improve cash flow in the liquidity starved industry.
"Right now, they are able to sell very few business class and first class seats. This has kept their revenue per aircraft very low but once they offer more economy seats, it will bring down their yields, but their revenue per aircraft will go up," he said.
A back of the envelope calculation shows that if Jet removes business class seats to add around 50 economy seats on its Boeing 737, then, at an average fare of Rs 3,000 per passenger, it would earn additional Rs 1.5 lakh per flight.
Now, if it plans to operate 10 flights with that aircraft, it would be able to generate Rs 15 lakh more cash per day. For the whole month, the carrier's revenue would go up by Rs 4.5 crore and annually by Rs 54 crore.
So, if 10 aircraft are reconfigured in a similar manner, the airline would be able to push up yearly revenues by Rs 540 crore.
"Even at 70% load factor, it (Jet) would be able to earn Rs 380 crore more in a year," said the expert.
Air India and Kingfisher too would be able take care of their working capital needs by hawking more seats at the lower end of the fare segment.
So, is business class airline Paramount Airways consideringa similar business model change to push up cash flow? M Thiagarajan, its managing director, said he would not like to give up high yields.
He added that since he operates smaller aircraft -- Embraers with a capacity of 75 seats -- it is not very difficult to achieve break-even load factor even at higher yields. The airline has consistently been logging seat load factor of 80%.
"I have kept my capacity low for better yield and profitability," said Thiagarajan.
SpiceJet, which will not be inducting any aircraft this calendar, will be adding frequencies to improve revenues. Samyukth Shridharan, chief commercial officer, his airline is operating 125 flights compared to 95 last year with same number of aircraft -- 19.
"We have improved utilisation of our aircraft from 11-and-a-half hours to 12-and-a-half hours," he said. SpiceJet plans add to nine planes to its fleet between 2010 and 2012.
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