Performance paradox in Indian aviation

Air traffic in India has been growing by leaps and bounds. But surprisingly, airlines in the country have not been doing well, financially. In the nine months from April to December 2016, nearly 7.7 crore passengers flew on the domestic airlines – that’s 23 per cent more than in the same period a year ago. All the three listed airlines saw passenger numbers grow — 34 per cent at IndiGo Airlines, 4 per cent at Jet Airways, and 26 per cent at SpiceJet.

Despite this, the profit of IndiGo in the April to December 2016 period dipped 13 per cent y-o-y while that of Jet Airways fell 55 per cent. SpiceJet’s profit grew, but just about 14 per cent, that too thanks to a good show in the six months ended September 2016. In the quarter ended December, generally considered a seasonally strong one for airlines, profit fell at all three airlines — by about 25 per cent at IndiGo and SpiceJet and 70 per cent at Jet Airways. This was despite continued passenger traffic growth. This paradox of poor financial performance despite rich air traffic growth is due to two factors — higher costs, in particular fuel, and cheaper ticket fares.

Crude oil, after its rout until January 2016, started moving north. And with it, the price of aviation turbine fuel (ATF) — the major cost of airlines — also went up. From less than ₹40,000 in January 2016, the cost of a kilolitre of ATF in Delhi exceeded ₹50,000 in November 2016. As a percentage of sales, the listed airlines spent about 4-7 percentage points more on fuel in the December 2016 quarter, compared with the year-ago period.

The effect of this higher cost could have been offset had fares been raised, but airlines did the opposite, compelled by increasing competition. Average fares in the six months ended September 2016 were down 13 per cent y-o-y in the case of IndiGo and 5 per cent for Jet Airways, SpiceJet’s yield was up just about 1 per cent.

Things got worse in the December quarter with IndiGo’s fares falling 16 per cent y-o-y, while those of SpiceJet and Jet Airways fell 10 per cent and 3 per cent respectively. This was due to an escalation of the price wars, with airlines slashing fares to offset the impact of the high-value note ban on passenger traffic. The upshot: while passenger numbers grew strongly, revenue growth lagged the increase in costs, dragging down airlines’ profit.

This poor financial show is in contrast to the strong performance by airlines in fiscal 2015-16. That year, aided by low fuel costs and rising passenger numbers, IndiGo’s profit rose 50 per cent y-o-y, SpiceJet swung from loss to a big profit and Jet Airways’ earnings more than doubled. The stocks of these airlines had gained manifold on the bourses since 2014 when the oil rout began. But the weak financial performance this year has dragged down the stock valuations.

Despite a comeback over the past month, the stocks of IndiGo and Jet Airways are down 30-40 per cent from their peaks in early 2016 while SpiceJet is down about 5 per cent. The March 2017 quarter could also be weak for airlines — ATF cost was quite low in the year-ago period and it continued its rise over the past few months.

But there are some silver linings. Since the beginning of this month, the cost of crude oil has come down from about $55 a barrel to $50 a barrel. This should hopefully see a fall in the ATF price in the coming months. Also, oil is unlikely to exceed $60 a barrel, given the expected supply increases around this level, especially from US shale oil. Also, with the effect of demonetisation wearing off, fare cuts should moderate.

On the other hand, the huge aircraft orders by several carriers including IndiGo, SpiceJet and GoAir could put a cap on airfares. This is likely reflected in IndiGo’s fares; the airline has been adding aggressively to its fleet and network and has taken the sharpest fare cuts. Rational capacity expansion plans and reasonable pricing are key for the sector to grow profitably.

The success of the proposed Regional Connectivity Scheme that seeks to put Tier II and Tier III cities on the flying map is also imperative. Infrastructure constraints in the big cities could restrict future growth at these centres.