Domestic airlines' losses to narrow in Q3 on strong yields, traffic growth

Average daily flights and passenger traffic were at 89% and 85% of pre-Covid level in December. Passenger per flight rose from 112 in September to 128 in December

While the third wave of pandemic has slammed the brakes on air travel once more, domestic airlines are expected to see contraction in losses in the October-December quarter due to growth in passenger traffic and strong yields.

Listed airlines IndiGo and SpiceJet, collectively, posted a loss of Rs 5,901 crore in the first half of 2021-22 (FY22) due to Covid-19 impact and higher aviation turbine fuel (ATF) cost.  

In the second quarter (Q2), IndiGo and SpiceJet posted losses of Rs 1,435 crore and Rs 562 crore, respectively.

In the third quarter (Q3), airlines have seen a rebound. According to domestic brokerage Prabhudas Lilladher, Q3FY22 was the best quarter since the onset of the pandemic as the domestic market made a swift recovery.

Average daily flights and passenger traffic was at 89 per cent and 85 per cent, respectively, of pre-Covid levels in December. Passengers per flight rose from 112 in September to 128 in December.

ATF cost though rose 12 per cent sequentially, shaving off gains from improved operating and yield environment.

Prabhudas Lilladher expects IndiGo and SpiceJet to report a net loss of Rs 470 crore and Rs 547 crore, respectively, in Q3.

The civil aviation ministry removed the cap on domestic capacity in October and airlines were allowed to operate up to 100 per cent of their scheduled flights. The ban on scheduled international passenger flights was extended. International flights under the air transport bubble agreements continue.

Centrum Institutional Research has estimated 4 per cent and 7.6 per cent sequential increase in yield for IndiGo and SpiceJet, respectively, in Q3. Cargo business, too, would have helped companies in their revenue growth.

On the top 25 routes, fares grew 5.3 per cent in the seven-day forward booking window on a quarter-on-quarter (QoQ) basis, while fares in the two-month booking window grew 7.4 per cent QoQ in the July-September period, according to Centrum Institutional Research.

The actual movement in yield would be driven by QoQ change in proportion of tickets booked in each of these booking windows, it said.

The brokerage estimates IndiGo and SpiceJet to post a  loss of Rs 380 crore and Rs 444 crore, respectively.

The key issue going forward, according to HSBC Global Research, is the yield outlook, with the launch of two new airlines (Akasa and Jet Airways 2.0) and Tatas acquiring Air India.

“While it is very difficult to foresee whether the industry will enter into a fare war resulting in decline in fares or whether the industry’s pricing will be more rational.  IndiGo management said during its Q2 results call that it expects Tata Group to be a more rational player and hence, fares could stay at the current levels. However, we think fares could fall for the simple reason that supply growth could outperform demand growth,” said HSBC Global Research.