number theory. Is there some light at the end of the tunnel for domestic aviation?

The deep pain in the Indian aviation sector was again reflected in the financial performance of the three listed airlines in the December 2018 quarter.

IndiGo and SpiceJet saw their profits crash 75-77 per cent year-on-year (y-o-y) to ₹191 crore and ₹55 crore, respectively, while Jet Airways posted a loss of ₹588 crore.

But if it was any consolation, the December quarter was much better than the September 2018 quarter when all the three airlines faced steep losses.

Yet again, the major pain-point for the sector was fuel costs — driven up by high global oil prices and a weak rupee. Though oil prices declined over the quarter, they still remained high on average ($67 a barrel).

As a percentage of sales, fuel costs in the December quarter hovered around 40 per cent for all the airlines, which is much higher than the 30 per cent or so in the year-ago period. But it was still far better than in the September quarter, when oil had rallied sharply and the rupee capitulated.

Analysts, however, are seeing some light at the end of this dark tunnel that the domestic aviation industry has been going through.

Kinjal Shah, Vice President-Corporate Sector Ratings, ICRA Ltd, puts things in perspective when she says that the increase in ATF prices and airlines’ inability to pass on this increase to customers by way of fare increases severely impacted the profitability of the airlines.

Fare hikes

What also helped, to some extent, in the December quarter was the modest fare hikes by all the airlines. Compared with the year-ago period, Indigo’s yield (passenger ticket revenue/revenue passenger kilometre) in the quarter rose about 4 per cent, while SpiceJet and Jet Airways hiked average fares by about 8 per cent. The December quarter is traditionally a strong one for airlines in terms of passenger traffic.

Hetal Gandhi, Director, CRISIL Research, takes this very small good news a little further when she says that there were some positives for the domestic aviation industry in the December 2018 quarter, including the fact that there has been some cooling in prices of crude, the closure of the runway in Mumbai for close to 40 days — which led to higher yields for airlines operating into and out of Mumbai as capacity was cut — and a better fare environment, which will help the airlines.

An industry analyst points out that Q4, generally a weak quarter, could be the surprise element for listed airlines as yields are good, capacity in terms of aircraft is being cut, with some players who plan to induct planes looking more at international routes than domestic.

Outlook

When it comes to the next quarter, the signals at the moment are mixed. IndiGo’s continued rapid expansion — 34 per cent y-o-y increase in capacity expected in the ongoing March quarter — will likely keep fares under pressure for the sector as a whole.

However, the relatively benign oil prices and a stable rupee should help airlines on the cost front in the March quarter, which is traditionally a slow one, and passenger traffic growth in January 2019 (9 per cent y-o-y) has been the slowest in many years.

According to Gandhi, the financial environment is likely to improve, going forward, because of various reasons, including the rupee-dollar exchange rate stabilising, which will have a positive impact on airlines as most of their operating costs are in dollars. She also expects better load factors. “We expect all these variables to be largely favourable in FY20,” she says.

Gandhi expects the airline industry (including listed and unlisted carriers but excluding new entrants) to report positive operating margins of 5-7 per cent in FY20 versus estimated operating margins of -2 to -4 per cent in FY19. “Nevertheless, the operating margins in FY20 will remain lower than the decadal high of about 13 per cent,” she adds.

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