The Hindu Business Line : Post Jet-Sahara deal: Changing dynamics of low-cost carriers

Mr Ajay Singh Director of SpiceJet, believes that there is a definite trend towards consolidation in the industry and the market share of low cost carriers could go up further. "With at least one player removed from the market and some more reducing their operations, the well-entrenched LCCs can only do better," Mr Singh says.

"With the market growing at 30 per cent, we believe that it is the LCCs that are driving the growth and they will be the ones to benefit most once the consolidation starts happening," an analyst from a brokerage firm says.

Another analyst is, however, sceptical about the way some LCCs were trying to grab shares by pricing tickets cheap. "In a price-sensitive market, it is easier to grab market shares if an airline starts pricing fares at as low as Re 1," another analyst who does not wish to be named says.

He adds Jet Airways might have rescued itself out of a rather sticky situation. "Air Sahara had a better chance of winning compensation from the tribunal," the analyst says, adding it is early days yet for the airline industry to start moving towards consolidation.

Re-look at valuations?

Some also contend that the money forked out by Jet Airways for buying out Air Sahara (Rs 1,450 crore) calls for re-assessment of valuations for low cost carriers. For instance, SpiceJet, commands the same market share of 8 per cent and similar valuation of Air Sahara but the similarities stop there, says the SpiceJet's Director, Mr Ajay Singh. "We have a better brand, far better performance record financially as well as operationally. Hence our valuations should be far higher," says Mr Singh.

The other low cost carrier, Air Deccan with 21 per cent market share has a total market capitalisation of about Rs 1,000 crore. If one takes the same parameters into consideration, the stock of Deccan Aviation, which owns Air Deccan, appears to be undervalued, some analysts say. With just its charter business, higher margins from lease back operations and with the valuation of Airbus aircraft itself going up, the total valuation should, in fact, be much more than what is reflected in the market, says one of the analysts.

However, there is an alternative view that the sum forked out by Jet Airways for the Air Sahara deal may be on the higher side and therefore it may not be an appropriate benchmark to value low cost carriers.

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