Airline growth to slow as headwinds rise
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.