ATF price hike may delay the recovery seen by airlines recently

Raising the airfares further could hurt traffic volumes

The market was braced for a price hike across fuels but the extent of the 18 per cent hike in Aviation turbine fuel (ATF) today was a negative surprise. This is likely to impact the civil aviation sector badly, at a point of time when it looked to be just starting to recover from the terrible effect of lockdowns.

The Q3, 2021-22 saw signs of some revival in passenger traffic and better financial results. There was a fall in traffic numbers again during January 2022 when the Omicron wave hit. Domestic passenger traffic for January 2022 was down 43 per cent month-on-month (MoM) versus December 2021. February 2022 saw roughly 20 per cent rise over January 2022 and the first week of March was also better. Traffic levels are now trending at around 75 per cent of pre-Covid levels.

Before the latest ATF price hike on March 16, ATF prices were already up 50 per cent above pre-Covid levels. Airlines had raised fares as well to compensate for the increased costs. For the average airline, fuel costs can amount to close to 40 per cent of all operating costs. The latest March 16 hike will probably push costs up by 4-5 per cent for domestic airlines. They may decide to absorb costs or they might decide to hike fares again.

One key comparison for the traveller is between air tickets and 2AC / First Class Railway tickets. At the March 15 airfares versus railway tickets, air fares remain at least 20 per cent more expensive than railways even when booked several weeks out. This was not the case earlier where early bookings equalised the rail ticket to air fares, or even sent air fares below the equivalent railway fares.

As such, the higher air fares could have a negative impact on the travel plans of passengers, who may now opt for the cheaper rail option if they can plan ahead. This is quite apart from the risk that another Covid wave would lead to a generic slowdown in traffic, or even to another series of lockdowns and curfews.

In a historic context, between 2012-13 and 2013-14, air fares were hiked by around 25 per cent and traffic volumes declined 4 per cent over this period, pulling back to 2012 levels only after two years. This relationship between fare hikes and passenger traffic is not linear and of course, other circumstances that affect traffic volumes have changed a lot. But this is another indication that traffic volumes will be negatively impacted.

According to one analysis, at the current ATF prices and fares, Indigo’s yield per revenue passenger km (RPK) will still be around Rs 4.5 and this is a buffer. But if traffic volumes are seriously affected this may still not be enough to compensate.

A comparison of valuations for the listed Indian aviation players versus peers elsewhere leads to a couple of observations. Indigo and SpiceJet both have very high current enterprise value (EV)/ EBITDA ratios. Almost every airline in the world is loss-making in this current fiscal year. Forward estimates suggest that Indigo and SpiceJet would also be valued at close to 19x their estimated 2022-23 Earnings whereas other low-cost carriers are trading at around 9x of 1-year forward PE.

The sector is likely to remain under severe pressure. Interglobe (Indigo) is down 12.5 per cent in the last month and SpiceJet is down 5 per cent. However, the market may have been expecting an even larger ATF hike since it responded positively to the news. Indigo closed 3.6 per cent higher compared to yesterday while SpiceJet closed 1.8 per cent higher.