 "Airlines")
The buzz among the optimists in the aviation sector is that some airlines could report improved results for the quarter ended December, numbers for which will be out soon. Both Jet Airways and SpiceJet, the two carriers listed on the stock market, have seen a sharp rise in their share price in the last one month. While Jet Airways has soared 30.5 per cent, SpiceJet, which is in the midst of changing hands from the Maran family to a group of investors led by Ajay Singh, has recorded a gain of 17 per cent. If aviation industry executives are to be believed, the current quarter will be even better - "simply rocking". Of course, given the troubled history of the industry, it means the airlines will break even or make some money, that too unless nobody launches a foolhardy tariff war.
The biggest contributor to the turnaround is the dramatic drop in the prices of aviation turbine fuel, or ATF, which constitutes 50-55 per cent of an airline's operating costs. As oil producing countries pump out huge quantities of crude oil, apparently in a bid to finish off the nascent shale gas sector, ATF prices have fallen sharply in the last four months: from Rs 67,500 a kiloliter in October to Rs 52,000 now, a drop of 22 per cent. In the December-ended quarter, ATF, on an average, was 14.3 per cent cheaper than the year-ago quarter. In the current quarter, the expectation is that it will be 24 per cent cheaper when compared to the same quarter of the previous financial year. In January, the fall has been of the order of 30 per cent.
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Shrinking losses
For the airlines, the savings from ATF will go directly to their bottom lines. In the December-ended quarter, savings to the tune of Rs 330 crore are estimated by analysts. In the current quarter, the savings are expected to be still higher: Rs 560 crore. In other words, in the second half of 2014-15, the industry is expected to save - and gain - almost Rs 900 crore over its last year's ATF bill of Rs 18,674 crore. These projections are, of course, based on the assumption that the airlines would have bought the same amount of ATF as last year.
Still, the industry is unlikely to end the financial year with a collective profit, though experts now say that the loss could be well below the projections they had made at the beginning of the year. The Centre for Asia Pacific Aviation, or CAPA, says that the combined losses of airlines will be 20 per cent lower than its earlier forecast of $300 million to 1.4 billion for the financial year. In other words, losses won't be more than $1 billion. It has predicted that IndiGo will make good profits and so could GoAir, depending on its fourth quarter results. Jet Airways, on the other hand, will report a modest loss. IndiGo, the country's largest airline, could shave off Rs 300 crore from its 2013-14 ATF bill of Rs 5,500 crore, say industry sources. With everything else being the same, the savings could bring IndiGo's net profit margin close to the 2012-13 level - in time for its much talked about initial public offer.
Will the party last? Traditionally, the fourth quarter has always been a lean season for airlines. This could prompt some airlines to launch a tariff war to woo flyers and negate the gains on ATF. Last financial year, SpiceJet had launched a huge discount scheme in the fourth quarter in the hope of increasing plane load factor, or PLF, and improving revenues. But the strategy landed the airline in serious financial trouble, forcing it eventually to find new investors. So what stops a troubled airline from passing on the savings on fuel costs to customers and fill the plane, hoping for more revenue?
Already there are signs a full blown tariff war could erupt any moment. In the first week of January, state-owned Air India kicked off a discount war when it suddenly dropped fares across the network (just after Vistara announced its launch) by nearly half, undercutting even low-cost carriers like IndiGo. The seven-day offer forced Jet Airways and IndiGo to drop fares in order to ring-fence their market share. Even SpiceJet, just a few days after its revival plan was cleared by the government, launched a three-day sale with a fare of Rs 1,499 across the network on Wednesday.
A missed chance?
While passengers could not be happier, has the sector squandered the opportunity to turn around? Most airlines believe that while such discount sales will happen to fill empty seats, they won't completely neutralise the impact of cheaper ATF. "I see fares go down 5 per cent or at the most 10 per cent over last year. So on the whole the impact will be positive for airlines," says a senior executive of a leading low-cost carrier. The view is also endorsed by CAPA South Asia chief Kapil Kaul: "I think the net impact will be positive for the airlines even after downwards readjustments in fares in the lean season which happens every year."
There are other challenges too. In the December-ended quarter, a sudden capacity reduction due to the financial troubles of SpiceJet was advantageous to competitors. They could increase yields and PLF by picking up passengers who had booked earlier on SpiceJet. The 30-day restriction imposed by the government on SpiceJet bookings, which was withdrawn later, also helped rivals to grab SpiceJet's forward business. In fact, such was the spike in fares that the government was forced to issue a warning to the airlines.
But these factors will not be at play during the current quarter. At one level, SpiceJet is slowly stabilising its operations and is expected to expand its fleet from 35 aircraft now to 40 by March. Even otherwise, 12 new aircraft are being added by carriers like IndiGo, Vistara and AirAsia India, which could put fares under some pressure. But the good news is that the market is also expanding. CAPA had earlier predicted that the domestic traffic will grow 6 to 8 per cent in 2014-15; the numbers, so far, suggest that actual growth could be 10 to 12 per cent. That growth has helped airlines to improve their yields as well as PLF.
For the sector which is saddled with huge losses, the next three months offer a once-in-a-lifetime opportunity to leverage low ATF prices to turn around its fortunes, provided the carriers don't spoil it with a tariff war.
