Airlines cut losses with air traffic rise

The numbers are promising. The country’s two listed airlines, IndiGo and SpiceJet, have been reducing their losses for the last two quarters.

In January, IndiGo reported a net loss of ₹620.1 crore for the quarter ended December 2020. In the September quarter, the airline’s loss was ₹1194.8 crore. SpiceJet reported a net loss of ₹57 crore for the quarter ended December 2020, against a loss of ₹112.6 crore in the September quarter.

There is little doubt that there has been an increase in domestic travel after flying restrictions were lifted in May last year. Indigo and SpiceJet control 65-70 per cent of the domestic market so the increasing number of travellers, primarily due to a revival in leisure travel and the holiday season, led to the narrowing of the airlines’ losses. In the current quarter domestic airlines were allowed to operate 80 per cent of their pre-Covid-19 level flights.

“Both airlines have introduced new routes to establish connectivity to tier II/III cities which is currently playing a big role in retrieving the Indian domestic market from the effects of the pandemic,” says Jagannarayan Padmanabhan Director & Practice Leader — Transport & Logistics, CRISIL Infrastructure Advisory.

The situation is likely to get better for the airlines as the government is planning to relax the capping of airfares and opening up international routes.

Lewis Burroughs, Head of Aviation, India, ICF Consulting India Private Ltd, points out that their analysis shows that thinner markets which were historically served via hubs have shown a strong bounce back with direct connectivity as airlines look to serve markets point-to-point rather than via hubs.

Burroughs feels that the reduction in restrictions will certainly benefit the aviation sector’s financial health.

“This won’t just hasten the financial recovery of domestic airlines but all stakeholders involved in the sector: Airlines, airports, ground handlers, and the myriad businesses associated with aviation,” he says.

But this comes with a big if. Covid-19 cases are increasing in some states and new strains of the virus are being identified — developments that may again curtail travel.

According to Kinjal Shah, Vice President ICRA Limited, recovery in domestic passenger traffic is contingent on five factors — containing the spread of the virus, consumers’ willingness to undertake leisure travel, recovery in macroeconomic growth which in turn impacts consumer sentiments, Central and various state government-mandated travel restrictions and quarantine norms and recovery in business travel.

ICRA expects the domestic passenger traffic to revert to pre-pandemic levels only in fiscal 2024, but Shah adds that in the event of a stronger vaccine rollout, domestic passenger traffic could witness a faster-than-expected recovery.

Promising though this is, profitability for airlines is still some time away.

“Even if the domestic passenger traffic revives to pre-Covid-19 levels, the road to profitability may still be a long haul for airlines. Airlines may look at turning profitable in the second quarter of fiscal 2022 but complete recovery may still be further away and reaching pre-Covid-19 levels in international traffic is only expected by fiscal 2023,” Padmanabhan says.

Burroughs expects most of the sector to take 2-3 years to recover to pre-pandemic passenger volumes.

“But there is likely to be a lag of 1-2 years for revenues as airlines allow yields to drop in the near-term,” he adds.

There is another issue. The price of Aviation Turbine Fuel (ATF), which accounts for 30-35 per cent of operating costs for Indian airlines, has been increasing over the last few quarters.

“The increase was 4.6 per cent in November 2020, 9.1 per cent in December 2020, 10.2 per cent in January 2021, and 5.4 per cent in February. But as long as the capping on airfares continues these fluctuations have to be subsumed by the airlines which may add to their losses,” Padmanabhan argues.

Burroughs agrees, pointing out that the industry is still in a vulnerable position and any changes to the cost structure will have a knock-on effect on airlines’ ability to conduct operations profitably.

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