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The March 2019 quarter will likely figure among the most momentous ones in Indian aviation. It saw the unravelling of India’s first private airline Jet Airways ’ fortunes and the eventual suspension of the airline’s operations in April due to a funding squeeze.
This had, and continues to have, profound implications for the Indian aviation sector.
In the near term, Jet’s loss has been a gain for other airlines — especially the two listed players, IndiGo and SpiceJet. The Centre for Asia Pacific Aviation (CAPA) feels Vistara may be the greatest beneficiary of Jet’s exit and says that if Vistara can manage the costs and complexities of everything that it has on its plate, “this is a unique opportunity” for it to emerge as a leading full-service airline.
From prized airport slots to trained employees, Jet’s valuable assets have been up for grabs and the competition has not missed an opportunity to capitalise on this. The removal of major capacity — Jet was the second largest airline by market share in the domestic skies — also gave rival airlines much-needed pricing power, a rare commodity in the brutally competitive Indian aviation market.
In more good news for IndiGo and SpiceJet, there was a shift in passenger traffic from Jet, helping both the airlines to make a strong comeback in the March 2019 quarter, after a dismal show in the prior three quarters.
The March quarter is generally a seasonally weak one for airlines in India but IndiGo’s profits jumped five-fold year-on-year (y-o-y) in the quarter, to ₹590 crore, while SpiceJet saw its profit increase 22 per cent to ₹56 crore.
In contrast, the two airlines had posted losses or seen a sharp decline in profits in the June, September and December 2018 quarters.
The strong return of pricing power in the March quarter is reflected in the sharp 12 per cent jump in IndiGo’s yields (average fares) and 11 per cent in SpiceJet’s, compared with the year-ago period. This, of course, meant that passengers had to pay more, especially for tickets booked close to travel dates.
Also, there was a healthy jump in passenger numbers for both IndiGo (17 per cent y-o-y) and SpiceJet (13 per cent) in the March quarter, thanks to their own fleet expansions, new routes and also shift in traffic from Jet. SpiceJet managed to grow its traffic despite the grounding of its Boeing 737 Max aircraft due to global safety concerns.
Higher ticket prices and higher passenger traffic saw Indigo’s revenue from operations jump 36 per cent y-o-y to ₹7,883 crore, while SpiceJet saw a 25 per cent jump in revenue to ₹2,478 crore. The increase in revenue was faster than the increase in costs (29 per cent y-o-y in the case of IndiGo and 24 per cent for SpiceJet).
Commenting on IndiGo’s Q4 results, SBICAP securities says that a strong 12 per cent year-on-year jump in passenger yield and easing cost pressures helped the airline defy weak seasonality and lift profitability to a record high. Similarly, SBICAP securities feels that the yield uptick more than offset rising cost pressures and helped SpiceJet record a 22 per cent growth in profits.
What also helped IndiGo and SpiceJet in Q4 were relatively benign fuel costs. As a percentage of sales, fuel costs accounted for 33-35 per cent, which is lower than the 36-40 per cent or so in the year-ago period.
According to Kiran Koteshwar, SpiceJet’s Chief Financial Officer, the airline does not expect fuel prices to soar again the way they had in the first half of FY2019. “This is a cyclical phenomenon and in my close to two decades in the industry, I have not seen such a high price cycle for crude last for more than 4 to 5 months and this occurs once in 3-4 years,” he says.
Both IndiGo and SpiceJet captured more sky in the March quarter. As of March 2019, IndiGo’s domestic market share was close to 47 per cent while that of SpiceJet was nearly 14 per cent. This seems set to increase with both airlines moving in to fill the vacuum created by Jet’s exit and continuing on their aggressive fleet expansion plans.
IndiGo plans to increase its capacity by 30 per cent and SpiceJet by 80 per cent in FY 2020.
The two airlines are also pressing the throttle on international routes, moving in to occupy the space vacated by Jet which was among the largest carriers of traffic to and from India.
A study by CAPA says that in the long term, Jet’s closure will positively transform the market dynamics for Indian carriers and fiscal 2020 could mark a good turning point for the sector.It further states that in fiscal 2020, Indian airlines are likely to report a combined net profit at the industry level.
Pricing discipline
“In an optimistic scenario the industry could post a profit of $500-700 million. Even in a pessimistic scenario, airlines are likely to remain in positive territory to the tune of $250-400 million”, CAPA predicts. But it cautions that some amount of pricing discipline is required and the rupee remaining stable at about ₹70 and oil prices remaining stable are crucial for higher profits in 2020.
Kinjal Shah, Vice-President and Co-Head, Corporate Sector Ratings, ICRA, adds another word of caution when she says that while the increased air fares have supported the profitability of the airlines during Q4 FY2019 and Q1 FY2020, the impact on passenger growth does not bode well for the industry.
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