Monday, June 03, 2013

Bleeding aviation: Even in a good year, airlines will earn only $4 per passenger

Monday, June 3, 2013

by Sindhu Bhattacharya

The airline business is one of the toughest to make money from. But did you know that in 2013 airlines across the world will, on an average, earn a mere $4 per passenger – less that the cost of a sandwich in most places! This, when 2013 is the third strongest year for airlines after 2001, according to the International Air Transport Association’s latest forecast. And that airlines across the world will see net profit margin of just 1.8% at $711 billion? Yields or revenue per passenger is expected to remain flat in 2013 at 0.3% growth over previous year. So that $4 figure that airlines will earn per passenger is not in any way higher than what they earned last year.

The airline business appears glamorous, what with high flying cabin attendants, gourmet meals in business and first class cabins but airline companies more often than not are unable to cover even the cost of fuel needed to keep the aircraft in the air. This is true of airlines globally as well as for those which originate in India.

So even in a good year, airlines which continuously cut costs and add aircraft to improve operations will end up barely earning moolah.

For India, four private airlines IndiGo, Jet Airways, SpiceJet and GoAir are expected to make minuscule profits in FY14, in keeping with the global trend, but even these razon thin profits could be trimmed further if holiday travel and general economy does not improve in the second half of FY14.

In fiscal 13 (which is April 2012 to March 2013), a CAPA research estimate has pegged losses of India’s airlines at $1.65 billion on total revenue of approximately $9.5 billion. The same report has forecast that India’s private airlines (excluding Air India) could post combined profits of $250‐300 million or more in FY14. Of this, IndiGo and Jet Airways would account for over $225 million in profits; GoAir and SpiceJet would be at $10 million and $25-30 million respectively.

So what is it that airlines are not doing right that they end up making such a ridiculously low sum from each passenger even in a good year? Actually, airlines across the world are helpless against prices of jet fuel. Airlines in India are most vulnerable since taxes on jet fuel in India are the highest in the world.

Squeezed into a corner, airlines look for ways to earn every dime or every paisa in the Indian context from passengers. The IATA estimates say airlines have found new sources of value that have increased the contribution of ancillary revenues from 0.5% in 2007 to over 5% in 2013, a 10 fold growth. Ancillary revenues come from charging for e-ticket printouts, checking bags, choosing a seat on the aircraft, priority checking and meals on board.

Though India is new to this practice, low cost carriers have been using these methods globally to earn more bang for the buck for ages now. Jet fuel prices have moderated somewhat though they continue to be at highs. IATA’s Tony Tyler said in a statement today that generating even small profits with oil prices at $108/barrel and a weak economic outlook is a major achievement for airlines. “Airlines are putting more people in seats. For the first time in history, the industry load factor is expected to average above 80% for the year. And with ancillary revenues topping 5%, it is clear that airlines have found new ways to add value to the travel experience and to shore-up the bottom line.” In the current calendar. 3.3 billion people are expected to travel by air across the globe, the first time this number has crossed the three billion mark.

But this huge surge of humanity is obviously just barely meeting the cost per person an airline bears in transporting them across the globe. 


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