Pandemic delayed aviation sector recovery by 6 months

Forum Gandhi Mumbai | Updated on May 06, 2021

Higher fuel prices, lower yields reasons for setback

The Indian aviation industry is staring at sustained headwinds as Covid-19 cases are rising in India. Aviation experts said that the recovery will be delayed by six months. Higher fuel prices, lower yields, and tough competition are likely to pose obstacles for the airline industry.

So far, at least 15 countries have banned flights to and from India amid rising cases, while others have issued fresh travel norms for Indians. Back home, several States have imposed stringent rules amid rising cases.

Also read: Domestic air passenger traffic in April down 29% at 55-56 lakh: ICRA

Centrum Broking has corrected its forecast of recovery. Ashish Shah, Senior Research Analyst at Centrum Broking said, “The industry recovery forecast is likely to reach only 75 per cent of pre-Covid levels in FY22 as against 85 per cent earlier recovery that was expected.” India Ratings and Research has said that the recovery in domestic and international travel has been delayed by three and six months, respectively.

Recovery in crude prices

Globally, crude prices have recovered amid soaring global demand. The Aviation Turbine Fuel (ATF) prices in April 2021 were higher by 59.8 per cent on a y-o-y basis and in May 2021, prices are substantially higher by 103.4 per cent on a y-o-y basis, ICRA said. Ambit Capital’s Varun Ginodia opined that every $1 per bbl increase in crude prices would hurt the industry operating profit by 6-7 per cent.

According to Koushik Jagathalaprathaban, Partner at AT-TV, higher ATF costs were a perfect recipe for airline failures.

“However, the government capping the lower and higher airfare thresholds seems to have saved a couple of airlines from going under.”

India Rating expects DGCA to continue to keep price controls in place till demand normalises and reaches closer to pre-Covid levels.

On the flip side, the fact that there is a cap and the jet fuel prices are rising, hurt profit margins a lot, especially at a time when yields are on the lower end, Shah said. “There is no real scramble for market share but pricing remains weak due to poor demand,” he explained.

The competitive intensity in the airline sector had declined somewhat after Jet Airways stopped its operations two years ago. For incumbents, this meant higher passenger growth, market share, and yields.

India Ratings believes that post change in the ownership, Jet Airways may re-start its operations and the Air India sale could finally be completed in late 2021.

“There remains a possibility that new shareholders may be more aggressive in acquiring market share,” it said.

Published on May 05, 2021

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