Erosion in air-carriers’ financials not comforting for investors: Kotak report

The financials of the leading Indian airline companies have deteriorated sharply over the past two quarters as the companies have struggled to raise prices to match the increase in input (ATF) costs. According to a report by Kotak Institutional Equities, the costs have jumped sharply led by steep increase in global crude oil and ATF prices and the sharp depreciation in the rupee.

“Significant erosion in spreads is not very comforting for investors (and passengers) The spreads of the leading Indian airline companies (IndiGo, Jet Airways and SpiceJet) have collapsed over the past two quarters resulting in very weak financials for the companies,” the report said.

“Inability of the industry to raise prices to offset increase in input costs is quite surprising We are surprised by the continued softness in yields of the listed Indian airline companies despite strong growth in domestic passenger volumes,” it added.

The report said that average monthly volume growth for domestic passenger traffic has been 21 per cent over January 2015-June 2018 (CAGR of 19 per cent), which is far ahead of most consumer staple and discretionary products. “Yields have not even tracked inflation, which is quite remarkable We note that yields of the leading airline companies have continued to languish for the past few quarters and have not even kept pace with inflation, let alone the sharp increase in input costs,” it said.

Increased affordability in real terms may have contributed to the strong growth in domestic passenger volumes of the past few years. “However, we doubt that demand is so vulnerable to modest changes in prices that airlines are scared to raise prices even modestly to mitigate the impact of higher input costs,” Kotak said.

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