Portfolio

Aviation Soaring to the skies

Anand Kalyanaraman | Updated on January 20, 2018

PO18_airplane.jpg

Flight eps

Plan impact eps

Cheaper fuel and rapid rise in passenger traffic have helped airlines turn around. But policy support is key to sustaining momentum



The aviation sector in India has not had it this good in years. Passengers are taking to the skies in droves. At about 8.1 crore tickets, domestic passenger traffic during January to December 2015 was up more than 20 per cent year-on-year.

The pace has only picked up in 2016 — traffic growth until February this year is more than 23 per cent. India is today the fastest growing major aviation market in the world.

Fuelled by cheaper fuel

This stellar growth has been made possible primarily by the deep cut in the cost of aviation turbine fuel (ATF), the largest operating expense for airlines in the country. The rout of crude oil since June 2014 has seen ATF following suit, even if not to the same extent.

At ₹42,157, a kilolitre of ATF in Delhi today is about 40 per cent cheaper compared with two years back and 15 per cent over a year. This has translated into big savings for airlines. For instance, the country’s largest carrier IndiGo Airlines spent about 17 per cent less on fuel in the nine months ended December 2015 compared with the year-ago period, despite increase in its fleet size. As a result, its fuel cost as a percentage of sales fell to 31 per cent from 45 per cent a year ago.

Airlines have passed on a portion of this benefit to passengers through cheaper tickets. IndiGo’s average fare per passenger, for instance, was down 12 per cent year-on-year in the nine months ended December 2015. The price-conscious Indian flier has played tango and lapped up the attractive fares and deals on offer (see “ Good times for the Indian flier”). Ergo: load factors of airlines have got a nice bump-up.

Profit, at last

Higher revenue and lower costs have translated into tidy profits for many airlines, a welcome relief after years of losses. After a disastrous 2013-14 when soaring costs, aggressive price cuts and heavy debt burden saw the sector’s loss touch a record high, things started looking up in 2014-15 with losses being curtailed. The momentum improved significantly in 2015-16 — the three listed airlines Jet Airways, SpiceJet and IndiGo have all been profitable throughout the year with record profit in the December 2015 quarter.

The March quarter results of these three airlines, expected over the next few weeks, should also be healthy, though not as strong as in the December quarter which is seasonally the best for the sector. Also, GoAir, the only carrier besides IndiGo to be consistently profitable, is expected to grow its profit significantly in 2015-16.

Even Air India, which is running on life support from the government, is expected to post an operating profit in 2015-16. Air Asia India and Vistara, which began flying over the last two years, have been lucky with their timing of entry into a highly competitive market.

These airlines are seeing good passenger traffic growth, though on a small base. It could be some time, though, before they achieve scale and breakeven, with older airlines adding to their capacity and routes in a big way. Ditto for Air Costa, Air Pegasus and Trujet — the new airlines operating on regional routes.

Stocks on a roll

In late 2014, confidence in the Indian aviation sector and airline stocks had touched its nadir, when SpiceJet looked all set to fall off the radar like Kingfisher Airlines had in 2012. But the spectacular comeback by the sector last year has seen airline stocks roar back into favour on the bourses.

Over the past year and a half, the SpiceJet stock has more than quadrupled and the Jet Airways stock nearly tripled. This is despite these stocks ceding quite some gains in recent months. IndiGo, true to style, timed its IPO perfectly in October last year to make the most of falling costs and surging traffic. Of course, being the market leader, and a highly profitable one at that, helped. The offer romped home with manifold oversubscription. After galloping more than 75 per cent in less than two months, the stock crashed below its IPO price mainly due to concerns over delay in the delivery of the A320 neo aircraft. With the aircraft delivery having started now, the stock has recouped some losses, though it still trades a quarter below its peak price.

The year gone by was great for airline stocks, but with valuations and also crude oil inching up, and higher taxes on fuel, there could be some air-pockets ahead (see “ Betting high”).

Policy push awaited

The next big trigger for the sector and airline stocks could be the delayed and much-awaited National Civil Aviation Policy. Reports indicate that the policy could be finalised by the end of this month. The draft policy tabled last October had a significant thrust on improving regional connectivity.

This could open up significant opportunities for carriers in the country, especially the low-cost ones. And it is indeed imperative if the government’s target to increase domestic ticketing to 30 crore by 2022 and to 50 crore by 2027 are to be achieved — these imply a compounded annual growth rate of about 20 per cent, similar to current growth rates.

This may not be a pie in the sky, given the highly under-penetrated air travel market in the country. But the measures proposed to achieve the outreach — caps on airfares on the targeted routes and extra 2 per cent levy on other tickets — may defeat the purpose by distorting market pricing. Will the final policy address the concerns?

Another key aspect airlines are seeking clarity on is the 5/20 rule that mandates five years of domestic operations and a fleet of 20 aircraft before an airline can start international operations.

In the draft policy, the government did not reveal its hand on this contentious rule that has split the sector down the middle. The older airlines want this rule to continue while new entrants AirAsia India and Vistara that seek to fly international soon are opposing it vehemently.

The draft policy kept all options open by suggesting that the rule could continue, or be abolished, or be replaced with a (complicated) system of domestic flying credits. Reports suggest that the 5/20 rule may be replaced by a less onerous rule, maybe 0/20. Whether the government will make it easier for more airlines, and thereby consumers, to fly abroad, will be keenly watched.

Airlines have for long been seeking reduction of high State taxes on ATF which make the fuel 50-60 per cent costlier in India than in many other countries. Only a few States have obliged so far, while those with major airport hubs continue to charge 25-30 per cent sales tax.

Meanwhile, in the recent Budget, the Centre raised excise duty on ATF steeply from 8 per cent to 14 per cent. Cheaper air fares have been the key growth driver for the Indian aviation sector in recent times. Will high taxes kill the goose that lays the golden egg?

Betting high

The sector is known to make millionaires of billionaires, and Warren Buffett famously shuns it. But investors who had the gumption to bet on Indian aviation stocks in the dreary days of late 2014 would be pleased as punch.

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Will good times continue for the Indian flier?

That the Indian flier is price-conscious is clear from the rapid growth of low cost carriers (LCCs) in the domestic skies. Over the years, LCCs such as IndiGo Airlines, SpiceJet and GoAir gained market share rapidly at the expense of the full service carriers (FSCs) — more than 60 per cent of passengers in the country now fly with LCCs. Also, except Vistara, the new carriers in the Indian skies are all LCCs. Why, even the FSCs such as Jet Airways and Air India often price their economy class tickets around levels similar to those of LCCs. Low fares have invariably attracted the Indian flier, a case in point being the ongoing rapid growth in passenger traffic.

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Published on April 17, 2016

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