 "IndiGo, Jet, SpiceJet net to fall 30-40%: CLSA")
These airlines posted strong results in 2015-16 on declining fuel prices and growing passenger traffic. These gains could now be reversed.
“We expect sector earnings to decline rapidly in 2016-17 and all airlines to see profits fall as fuel savings erode and capacity growth exerts a pressure on yields (revenue earned per passenger),” CLSA analysts Rajani Khetan and Michael Luo wrote in their report this week.
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CLSA said it expected IndiGo's 2016-17 profit to decline by 30 per cent to Rs 1,370 crore from Rs 1,989 crore in 2015-16 due to pricing pressure from capacity expansion. IndiGo's 2015-16 profits should be seen in the context of SpiceJet’s capacity reduction, the brokerage added.
“IndiGo is using the low fuel prices to grow capacity aggressively and intends to capture more market. Such rapid capacity growth will impact pricing negatively. While a rewarding strategy for the long term, IndiGo’s strong expansion plans will come with some short-term pain,” CLSA said.
It expects IndiGo to rebound with strong profit growth in FY18, with induction of Airbus A320neo planes, lowering fuel costs, and market share gains giving it pricing power.
Other brokerages, including Edelweiss Securities and Motilal Oswal, have lowered IndiGo's profit outlook for 2016-17. Edelweiss expects the airline to post flat profits of around Rs 2,060 crore.
CLSA said Jet Airways would see two years of earnings (profit) declines. In 2016-17, Jet Airways’ net profit is estimated at Rs 715 crore, a decline of 40 per cent from its 2015-16 profit of Rs 1,211 crore, as a result of pricing pressure and a higher cost base.
SpiceJet’s profits are estimated to decline 38.5 per cent to Rs 250 crore in 2016-17 from Rs 407 crore in 2015-16. “Costs will rise and sector capacity pressures will drive pricing lower, causing profitability to decline,” CLSA said referring to SpiceJet.
Aviation consultancy CAPA warned in June that profitability of domestic airlines would come under pressure in 2016-17 as airlines sacrificed yields to fill up flights. Domestic airlines are expected to induct 50-60 aircraft in this financial year.
The pressure on airline profitability was evident in the first quarter, with IndiGo's net profit declining seven per cent and Jet Airways’ 44 per cent as competition affected yields. SpiceJet doubled its profit, over year, to Rs 149 crore in the first quarter of 2016-17.
Fares are 15-20 per cent lower from a year ago for the sector as a whole and jet fuel prices are up 13.8 per cent since January.