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Aviation sector likely to see Omicron turbulence in Q4, while Q3 numbers show sequential improvements

Abishek Law | | Updated on: Jan 13, 2022
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Despite domestic air passenger traffic witnessing a month-on-month inch-up between October and December (Q3FY22)– led by leisure travel and festive demand, the subsequent quarter (Q4FY22) could see Omicron-led turbulence for carriers.

Analysts say Q3 is seen among the best post-pandemic quarters in terms of operations per pax, the Covid-induced disruptions coupled with higher ATF price can lead to “weakness” in an otherwise “seasonally softer Q4”.

Pax refers to numbers of passengers carried per airline.

Possible Q4 hit

Traffic is witnessing deteriorating consumer sentiments over the last few days of the quarter and this added to State-wise travel restrictions - like Bengal have curtailed flights to and from Delhi and Mumbai to three days a week – have forced airlines to reschedule operations substantially. There is a reported decline 1,30,000 pax over December highs already, say sources.

IndiGo, the country’s largest low cost carrier, is anticipating not just slowdown in bookings but a 20 per cent reduction in capacity. All airlines have announced waiver of flight cancellation fees or allowed changes in travel schedule, free of cost.

In addition, crude oil prices continue to stay elevated at $80/barrel and remains major headwind for the industry, or up 49 per cent y-o-y.

“This could have detrimental impact on a seasonally soft Q4 thereby putting further strain on airline’s finances. Recapitalisation remains need of the hour,” brokerage firm Prabhudas Lilladher said in a recent report.

Ratings agency ICRA has maintained a negative outlook on the sector and raised apprehensions of State-wise curbs threatening to delay domestic passenger traffic recovery in the near term.“ Consequently, debt levels are likely to remain high for the industry and is expected to remain range bound at ₹1,20,000 crore (including lease liabilities) for FY22; with the industry requiring additional capital support of ₹45000 – 47,000 crore over FY22 to FY24,” it said.

Good Q3

The aviation industry exited 2021 with December witnessing average daily flights/pax at 89 per cent or at 85 per cent of pre-Covid levels. There was sustained improvement in load factors, up from 112 pax per flight in September to 128, in December.

The “pax traffic in Q3FY22” was on a post-Covid high, Prabhudas Lilladher said adding that India’s domestic pax traffic registered sustained momentum post unlock 2.0. “We expect Q3 ASKM (available seat per kilometer) to improve both y-o-y and q-o-q. IndiGo’s ASKM is expected to grow by 45.4 per cent y-o-y and 40.4 per cent q-o-q, while SpiceJet’s ASKM is likely to grow by 4.9 per cent y-o-y and 75.1 per cent,” it said.

On a m-o-m basis, domestic passengers saw a 27 per cent growth in October (over September); up 17 per cent in November and tapering down to 5-6 per cent in December.

For December, domestic air passenger traffic stood at 111 lakh, up 52 per cent y-o-y (73 lakh in December 2020); capacity deployment up 35 per cent y-o-y to 86,465 departures.

Losses to narrow sequentially

For airlines, high ATF continue to be a cause of concern; with fuel prices are up nearly 14 per cent q-o-q and nearly 49 per cent up y-o-y till January 2022. States are announcing reduction ATF taxes; but their impact is yet to play out in full, say analysts.

“We expect losses for the industry to narrow sequentially despite higher ATF prices. An improvement in revenue per available seat kilometer (RASK) on the back of better load factors and higher scale of operations,” analysts BusinessLine spoke to said.

IndiGo and SpiceJet to report y-o-y and q-o-q expansion in PLFs in the range 80 and 84 per cent respectively, say analysts; while yields are likely to move up in the 16-18 per cent range for the two low cost carriers.

A report by ICICI Securities said Interglobe Aviation Ltd – IndiGo’s parent company - is expected to show an improved q-o-q performance for the quarter ending December 2021 driven by “better passenger load factors (PLF) and fares” along with higher capacity flown “offset by higher crude prices”.

Both carriers are expected to report losses though, indicating pressure on the sector. SpiceJet’s loss is expected around ₹500 -550 cr0re range as per Prabhudas Lilladher; while IndiGo’s is seen at around ₹200 crore by ICICI Securities.

Published on January 13, 2022

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