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Decoding rising airfares in India

We all know that airfares are increasing. We can feel that we are paying much more to fly than we were a couple of years ago, or even twelve months ago. But exactly how much have airfares increased over the past couple of years, and why? We decided to try and find out by looking at some hard data, and came up with some interesting conclusions.

The one reason airlines cite most often for rising airfares is the increasing price of aviation turbine fuel (ATF). We plotted the average monthly one way fare for Delhi to Mumbai (arguably the most popular domestic sector in India) against the average monthly wholesale price index (WPI) of aviation turbine fuel, for the period between January 2009 and August 2012. And we did find a pretty strong correlation between the two, with a significant positive correlation coefficient of 0.67. But there’s more going on beneath the surface.

We found three key shifts in airfare during this period – in October 2009, November 2011 and May 2012. And they mapped pretty neatly to three key events at these times, which had a significant and long-lasting effect on airfares. In September 2009, Jet Airways suffered a 5-day strike by nearly half of its pilots. The other airlines raked in the moolah at Jet Airways’ expense, by increasing ticket prices for last-minute flyers. In October 2009, the average Delhi-Mumbai one-way fare breached the Rs 4,000 mark. And although this was not the first time it did so, airfares have never fallen below Rs 4,000 since (except very briefly in July 2011). The COO of one airline summed it up nicely, saying “All the industry needs is for one major airline to go out of business, and the rest of us will be fine.”

Those words turned out to be particularly prescient, at least as far as airfares were concerned. Just over two years later, in November 2011, Kingfisher’s debt and karma caught up with the airline, and it started cutting capacity in earnest. Once again, the other airlines decided to make hay while the sun shines, and Delhi-Mumbai one-way fare crossed Rs 5,000, never to look back. With one major airline looking likely to go out of business, the others started being fine.

The next major bump to airfares came in May 2012, this time thanks to regulators, not airlines. That’s when the Airports Economic Regulatory Authority (AERA) decided to increase the user development fee payable at IGI Airport, New Delhi by 346 per cent. As a result, average fares touched Rs 7,000, and haven’t looked back since.

So there you have it – a couple of supply shocks and a huge bump in UDF for Delhi are the biggest factors that have led to rising airfares on the Delhi-Mumbai route. We were curious about what effect, if any, these rising airfares are having on the seemingly relentless growth of air passenger traffic in India. And sure enough, we found a connection. In Jan-June 2010, total domestic air traffic in India grew by 22.67% over the corresponding period in 2009. This growth rate slipped to 17% in Jan-June 2011. And in Jan-June 2012, domestic air traffic grew by only 3.56% compared to the same period last year. Of course, correlation does not necessarily imply causation. But considering that aviation contributes as much as 1.5% of our GDP, all of this is certainly not good news for the Indian economy.