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The curious case of the Indian aviation industry
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Rs 3,600 crore
The aviation sector in India is expected to register an aggregate loss of around Rs 3,600 in FY19. This is a 44% rise from the Rs 2,500 crore loss during FY18 according to a report by Business Today. Higher ATF prices, lower yields and slowdown in capacity addition are the main reasons for this expected loss.
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Publish date: 10th August, 2018
Introduction
India is projected to become the third largest aviation market by 2025 according to a report by the International Air Transport Association (IATA). And by 2036, the aviation industry is expected to cater to 47.8 crore passengers. This would be more than the passenger traffic of Germany and Japan combined. With such great long term projections, the big question is: why is the Indian aviation sector in such a quagmire at the moment?
1) Passenger volumes vs. Profits
India is the fastest growing aviation market in the world. The sector has enjoyed a 21% growth in domestic passenger volume between January 2015 and June 2018. Yet, these numbers have not contributed greatly to profits. This is mainly due to two reasons:
a) steep rise in global crude oil and Aviation Turbine Fuel (ATF) prices
b) sharp depreciation of the Indian Rupee
Also read: 6 effects of rising crude oil prices on the Indian economy
2) Poor financials
The financial numbers of leading airline companies in the country have deteriorated sharply over the past two quarters. Market leader IndiGo (with a 42% market share) witnessed a 97% crash in profits to Rs 27.8 crore for the first quarter in FY2019. In comparison, the company had registered a net profit of Rs 811.1 crore during the same period last year. Jet Airways (market share of 14.5%) reported a loss of Rs 1,040 crore for the fourth quarter of FY18 and it is expected to post even higher losses for the first quarter of FY19.
Also read: Five factors to watch out when investing in airline industries
3) Inability to raise prices
Despite the high volume growth, the Indian airline companies have been unable to raise prices to offset input costs. For most companies, the fuel price is very close to the break-even price. Currently, the Indian market has been mostly profitless because on one hand, input prices are rising but on the other, companies are competing hard to provide Indians with cheaper options to travel.
4) Yields have not tracked inflation
One of the most remarkable things about the industry is that yields of leading airlines have not kept pace even with inflation. Spicejet and Indigo’s yields have remained stagnant over the past eight quarters while Jet Airways has seen a steady decline in yield during the same period. With domestic passenger volume growing at a strong rate, analysts are surprised why leading airlines have not increased ticket prices to mitigate the impact of high input costs. It is doubtful that demand is so vulnerable that modest change in ticket prices could have a great impact on passenger volume growth.
