Air­line growth to slow as head­winds rise

DNA (Daily News & Analysis) Mumbai Edition - - FRONT PAGE - Am­ritha Pil­lay & Praveena Sharma MUM­BAI/BAN­GA­LORE

Are air­lines once again fly­ing into rough weather? Yes, say an­a­lysts. And Sha­ran Lil­laney, an­a­lyst with An­gel Broking, be­lieves if the sit­u­a­tion gets any worse from what it is to­day, it wouldn’t be very dif­fer­ent from three years back, when lo­cal car­ri­ers shed blood as sup­ply out­stripped de­mand, fuel prices soared and yields dipped on stiff competition.

“If de­mand doesn’t grow around 15-17% due to any macro or mi­cro (eco­nomic) rea­sons, we would have a 2008 re­peat,” he warned.

De­mand in the air­line in­dus­try grew at around 18% last fis­cal but an­a­lysts are not very bullish about it re­main­ing at the level.

Bank of Amer­ica Mer­rill Lynch an­a­lysts Anand Ku­mar and S Arun, in a note on Wed­nes­day, said de­mand could slow to 1213% in the cur­rent and next fis­cals.

This is “on ac­count of slow­ing eco­nomic growth, air­port con­straints at key met­ros such as Mum­bai and pos­si­ble cuts in cor­po­rate travel,” they said.

In fact, grad­ual in­crease in ca­pac­ity over the past few months has al­ready pinned down seat load fac­tors of lo­cal car­ri­ers. Al­most all air­lines have re­ported lower load fac­tors in April, May and June this year com­pared with last year.

For in­stance, legacy car­rier Jet Air­ways’ load fac­tors are down to 66%, 80% and 78% in those months as against 74%, 83% and 81% last year.

Sim­i­larly, JetLite, SpiceJet and IndiGo have also seen their load fac­tors slip from April to June this year.

Ku­mar and Arun see sup­ply grow­ing 1215% in the next two fis­cal years. “Af­ter muted 10% ca­pac­ity growth in the last fis­cal, air­lines, led by the low-cost car­ri­ers (LCC), are ex­pected to reg­is­ter 12-15% ca­pac­ity growth in this and next fis­cals,” they wrote.

In the next two years, bud­get air­lines IndiGo and SpiceJet to­gether are ex­pected to add 30 air­craft while legacy car­ri­ers would add an­other 10.

“We ex­pect a re­stricted 3-4% yield ex­pan­sion (in­clud­ing fuel sur­charges) for the in­dus­try. This is largely be­cause of higher ca­pac­ity growth com­pared to de­mand growth, ir­ra­tional pric­ing by the strug­gling legacy car­ri­ers, high price elas­tic­ity due to sig­nif­i­cant LCC seg­ment growth and a hike in the ser­vice tax and user de­vel­op­ment fee (UDF) at some air­ports,” the Mer­rill duo said.

They ex­pect load fac­tors to dip 2-3% with the sup­ply climb­ing up.

An an­a­lyst from a for­eign bro­ker­age firm, who did not wish to be named, said the air­lines are likely to see a tus­sle be­tween vol­ume and mar­gins as costs shoot up on ris­ing avi­a­tion tur­bine fuel (ATF) prices, which have al­ready touched around $115 per bar­rel. Ex­perts ex­pect it to breach $120 per bar­rel.

“ATF price is go­ing to be the key fac­tor in the com­ing months. The only way to main­tain vol­ume growth is if all air­lines main­tain fares at cur­rent lev­els and ab­sorb ATF price hike. How­ever, if oil prices in­creases it would be dif­fi­cult for air­lines to main­tain this dis­ci­pline and may hike fares, which will in turn hit vol­ume growth,” he said.

He does not ex­pect ex­cess sup­ply to be a ma­jor is­sue, as most air­lines have a flex­i­ble plan and would post­pone de­liv­ery if they found de­mand to be lack­lus­tre.

An an­a­lyst from a do­mes­tic bro­ker­age house said air­lines are likely to see the im­pact of higher ATF prices, ca­pac­ity ad­di­tion and ir­ra­tional fares in Septem­ber quar­ter it­self.

“With the re­cent ca­pac­ity ad­di­tion that we have seen, there is a lot of un­der-cut­ting. The Septem­ber quar­ter is lean and a lot of ca­pac­ity has al­ready been added. On the oil prices side, no ATF price cut is ex­pected from the oil com­pa­nies. Given the cur­rent fare war in the mar­ket, it would be dif­fi­cult to pass it on to con­sumers. Thus, air­lines will have to take a hit,” he said.

Ac­cord­ing to him, full-ser­vice car­rier King­fisher Air­lines would be worst hit due to its debt bur­den.

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