In an interesting observation, IndiGo’s load factors for Q2 FY2014-15 were found to be consistently below the average domestic load factors for the first time in its entire operational history.
The chart above (click to expand) captures IndiGo’s domestic load factors as reported to the DGCA. Plotting this against the average domestic load factors reveals 13 months out of 98 when the load factors of IndiGo have dipped below the average. Most of these below-average loads were in the first seven months of operations at IndiGo. In the last six financial years – the same years when the airline has been reporting profits – this has occurred just thrice. However, in this financial year alone, it has occurred thrice – in Q2 FY’15.
It what appears a challenge of supremacy, SpiceJet’s market stimulation was able to distort usual market dynamics in the lean season. For instance, September, which is historically – from the last three years – the weakest month for domestic travel as indicated through the lowest load factors – has this year matched the load factors as seen in May 2014. While demand still remained low, the market stimulation drive created demand, at the expense of yields but to the benefit of RASK – revenue per available seat kilometer.
While SpiceJet brainchilded and executed this, not every airline could follow its footsteps. IndiGo was unable to match SpiceJet’s market stimulation effects, which positively impacted SpiceJet in Q2, and positively impacted other airlines as well. IndiGo’s load factors also rose in sync with the average domestic load factors, but however, underperformed with below average loads.
Indigo, by following what SpiceJet did, salvaged its September. However, its loads in July and August this year were lower than its loads in the same months the previous year. This performance explains in part the Q2 loss of 100Cr incurred at IndiGo.
In short, market stimulation both surprised and helped the blue airline.
India didn’t seem ready for a taste of South East Asian proven low cost strategy. At the same time, IndiGo is ready to make a killing in the months of November and December, lapping up the excess demand due to SpiceJet’s cancellations and planned temporary capacity reduction.
SpiceJet stimulated the market with great effort, only to hand it on a platter to IndiGo in the peak season.
SpiceJet’s load factor in the May of 2014 has touched 81.4%, its highest in two years since the May of 2012, and is the first month in this calendar year to beat the load factors witnessed by the airline last year. It beats the previous year’s load factors for the same month, by 0.5%.
While this is reassuring news, it must be noted that since 2010, May has been the month when SpiceJet witnesses its highest load factors. May and June are peak months for air travel, but it is only the second best period for IndiGo, which usually sees its best load factors in the month of December.
Statistically, SpiceJet’s load factors slip after May. Loads factors for the month of July are expected to be lower, but it is not known if they are lower than the previous year’s.
Effects of SpiceJet’s most significant market stimulation drive, the Re 1 fare sale which was held for the first three days of April, for travel between 01-July-2014 to 28-March- 2015, will be seen this month. Due to the sale, load factors are expected to go up, and according to the airline’s Chief Commercial Officer Kaneswaran Avili, the stimulation has yielded positive results in terms of higher non-promo fare bookings as well.
With these multiple promotional sales, any higher bookings are a mix of promo fares and regular fares. If the market has been sufficiently stimulated, which will reflect in higher load factors, then the airline will generate additional revenue. But if even after the stimulation, if the load factors rise only slightly, or not at all, it may not generate the airline any additional revenue. If load factors drop, which is highly unlikely, it is the death bell for the airline.
For example, SpiceJet’s Super Holi sale in March for travel between 14th April and 30th June 2014, and the Super Summer Sale in February for travel between April 1 and June 30, 2014, did not seem to have had an overall positive impact on the load factors for the months of April and May. Since the load factors were lower than the corresponding period in the previous year, it only meant that lesser people filled up the aircraft on average, and among that lesser set of passengers, even lesser actually paid a regular fare.
As shown in The Flying Engineer’s analysis of SpiceJet, there is a strong correlation between load factors and operational profits. Considering that (look at the graph) the load factors in April and May have resulted in an average load factor that is 0.6% lower than last year’s load factors for the same months, and that some of that passenger set bought sale/promotional fares and not regular fares, and that the factors in June are expected to dip (based on statistical trends), it may be likely that for the Q1 for Financial Year 2014, SpiceJet may report a loss.
But with the 0.5% in load factors in May, over last year’s, mild hopes are pinned on the second quarter of FY2104, which started yesterday. We do wish the airline all the very best, and hope to see it turnaround fast and strong, before the might of aggressively expanding TATA-SIA and AirAsia India, and the increasing capacity deployed by IndiGo and GoAir possibly choke the airline.
It’s that period of the year again, when SpiceJet decides to roll out attractive fares to fill otherwise empty seats on board its airplanes. For travel between the second half of February till 15th April 2014, SpiceJet offers a 50% discount on the base fare and fuel surcharge (which constitute most of the airfare), on limited seats on direct flights.
Other airlines have followed the airline-in-the-red.
This is perceived as a much better move when compared to what was done last year (2013), when the airline was under the reigns of Neil Mills. A flat fare of INR 2013 was offered, irrespective of the sector length. This time around, the fare, though discounted, is in sync with the sector. The airline has been careful in offering very few such seats on flights that always assure a good demand: the early morning and late evening /night flights between metros.
Apparently, this move from this airline has been “well calibrated”, and the airline has “learnt from its mistakes”.
Last year’s offer did not help much, with the overall load factors.
“It’s time to find your excuse to travel, as SpiceJet is offering 50% off on all flights when you book at least 30 days prior to your travel”, says the “SpiceJet 3 Day Supersale”. Based on last year’s performance, here are thoughts on the supersale:
Assume for the early morning flights (one of the more attractive flights), the load factors hover around 90%. For a 737-800, this is 170 seats. Supposing the airline, based on statistical study, decided to offer 19 seats for this sector, with the Super Sale offer. One of two extreme possibilities exist:
1. Unplanned travelers, smitten by the offer, pick up those 19 seats, while those business travelers who would have anyways paid regular fares and flown, may pick up the remaining 170 seats. But if the ticket fares, which shoot up due to higher perceived demand, is still applicable, an estimated 5-10 seats may remain empty. The airline makes money.
2. Planned travelers, who were yet to book their tickets, pick up the19 tickets, making the remaining, regular fare seats unattractive for unplanned travelers. This will still leave 19 seats empty. The airline loses money.
Practically, it may be a mix between options 1 and 2, leaving the carrier between 0 – 9 extra paying passengers. In this example, the incremental load factor is between 0% and 7%.
On sectors that do not usually attract good load factors, the stakes are much higher.
Comparing the load factors between years is not straightforward, as many variables exist. Yet, here is a comparison between the load factors in the 3 month period, February to April, from 2009 to 2013, for SpiceJet:
Note that when SpiceJet came out with its offer last year, the months of February and March recorded higher average load factors compared to those in 2012, but the month of April did worse than in 2012.
With Go Air, Air India, and IndiGo offering similar airfares, the potential growth in passengers in this 2 month period is distributed.
Will the gamble make airlines bleed or succeed? To be seen.
“I remember when we had very strong demand for A319s, then it shifted to the larger capacity A320 version…and we’re now seeing very, very strong demand for A321s", explained John Leahy, Airbus’ Chief Operating Officer – Customers, during the 2013-2032 Global Market Forecast press briefing in September, 2013.
Almost a month later, the US Based carrier JetBlue Airways, deferred deliveries of its 100 seat Embraer 190 aircraft, ordering instead 35 Airbus A320 family aircraft: 20 A321NEO and 15 A320CEO aircraft. The airline seeks to reduce costs with the Airbus A320 aircraft which burn less fuel per seat, but with a largr capacity: 150 passengers for the A320 and 190 passengers for the A321.
Back home, and one month before JetBlue’s decision to focus on larger capacity aircraft, the “JetBlue of India”, IndiGo, opted for 20 Airbus A321NEO aircraft, of its 180 all A320 order back in 2011, exercising the option that was inked in the deal.
Airlines, which stayed away from the A321, which accounts for 20% of all Airbus A320 family (A318, A319 CEO+NEO ,A320CEO+NEO, A321CEO+NEO) orders, are now leaning toward the A321NEO because it promises the affordable operating costs that otherwise kept airlines at bay: different aircraft sub-type, and higher operating cost. Suddenly, the A321NEO’s reduced operating costs, thanks to the fuel saving sharklets and the PW1100G Geared Turbofan Engine, make the added 20-30seats affordably attractive.
To the airlines, higher seat capacity at reduced operating costs means higher profit potential. Note potential.
Statistically, the best performing airline in the country, IndiGo, has the best load factors,: an average of 81.4% over 5 years from 2009-2013, with the highest being 83.8% in 2010. IndiGo’s added capacity, and demand has grown, but the effect on load factors has been nil; the average load factors remain more or less constant. So getting larger airplanes will not have a significant impact on load factors, but may slightly increase profits per flight on account of the reduced operating cost per seat.
Indigo’s single-type fleet of Airbus A320 aircraft can accommodate 180 passengers. 83.8% load factor corresponds to 150 seats. So why not replace the fleet with A319s?
A 150 seat airplane like the Airbus A319, or its direct competitor, the Boeing 737-700 is costlier to operate, per seat, as a shorter aircraft isn’t as optimized as the longer aircraft it was derived from. But what if you had an aircraft with a cost per seat as much as that of the A320NEO (which is claimed to be 15% more efficient than the A320 CEO), but with 150 seats? This would make the aircraft cheaper to operate, have lower capacity but push load factors closer to 100%, while keeping the fares low, or possibly lower than the competition.
The smaller, efficient aircraft, like what Bombardier claims of its CSeries CS300, has lesser seats to sell to break even, has the same cost per seat as the A320NEO, costs lesser to operate, but doesn’t have to fly with many empty seats if the tickets are priced low, or lower than the competition, and the brand marketed well.
Assuming that the breakeven load factor (BELF) for a particular, fixed operating environment is 70% for the Airbus A320NEO, and assuming that the CSeries CS300 fitted with 150 seats has a similar BELF, then with the A320NEO, the airline must sell 126 seats to break even, while sell only 105 seats on the CS300 to break even. Considering the average of 150 seats occupied, per flight, on average, the A320NEO flies 24 passengers contributing to the airline’s profits, while the CSeries CS300 flies 45 passengers contributing to the airline’s profits. Of course, if both aircraft flew with 100% load factors, on a dense route, the A320 gets 54 passengers contributing to profits, but that is only a potential, not a guarantee.
Unfortunately, airline pricing and BELF aren’t so simple, but this gives you a rough idea of what is possible with the CSeries CS300 in the Indian market.
For those who didn’t get it: What’s possible is an all CS300-fleet airline, that shoots right into profitability, defeating the competition. Is it this simple? Only IF Bombardier delivers its promise of meeting the projected costs per seat, and if Bombardier’s not-that-great image relating to aircraft dispatch reliability and maintenance issues are sorted: something that will be a challenge considering that almost everything about the aircraft, including the very design, is new, and without decades of airframe maturity like that of Airbus’s or Boeing’s narrowbody market leaders.
The conundrum: Increase capacity and increase both the profit potential as well as the risk of a loss on a route, should the loads go either ways. Decrease capacity and introduce a stronger element of predictability and control, but lowering the profit potential.