- Wealth PMS (50L+)
The rally in share price of India’s largest airline – InterGlobe Aviation Ltd. – signal that the concerns looming over airlines due to Covid-19 are behind, but that is not the case. Though air traffic in India is recovering, airlines still face low aircraft utilisation and ticket prices.
According to the latest data provided by DGCA, air traffic in India has reported a month-on-month jump of 39% in September 2020. However, this is due to more capacity being deployed by the airlines. The average number of daily departures in the month of September increased by 43% to 1,311.
September 2020 air traffic was only one-third of what it was last year. In September 2019, more than 115 lakh passengers flew in India as compared to 39 lakh last month.
This month-on-month growth in air traffic led by more capacity being deployed has largely led to a fall in the passenger load factor – capacity utilisation – for most of the airlines in India.
Air ticket prices in India over the last two months also reflect the structurally low demand. Ticket prices in 12 major routes in India have either remained unchanged or have fallen in the last month.
Earlier, the Indian government had regulated the ticket prices by putting a fare band. This is supposed to remain till November 24. Flight operations have been divided into 7 sections based on flight durations and for each section, there is a floor price and a cap price. The airlines were also directed to sell 40% of the seats at/below the mid-point of the price range.
The price cap was mandated due to limited capacity being available at the start and a huge pent up demand while the price floor protects airlines against predatory pricing.
However, the data compiled by CapitalMind reveals that airlines are even struggling to sell tickets at the lower-point of the price range suggested by the regulator.
Generally, a mix of factors like growing air traffic, higher or stable utilisation, and stable or higher ticket prices generally result in strong financial performance for an airline. However, in the current scenario, other than growing air traffic, the other two factors are on a downtrend.
Even for India’s most cost-efficient airline – IndiGo – earning profits in a low ticket and low occupancy scenario would be difficult.
The gains in the share prices of IndiGo could be on the back of a benign crude environment, a potential favourable change in the competitive landscape, its strategy to further boost liquidity and market share gains.
The benign crude environment is supportive for the airline, but that could result in gains only if more people fly and/or ticket prices remain high. Post resumption of airline services in May 2020, Indigo did see steady growth in its market share, but the same has started to decline as other airlines have brought in more capacity.
The industry was expecting some consolidation, but nothing has changed even seven months into the pandemic. The chances of any material consolidation in the industry, except for Air India, remain slim at this point.
Despite these negatives, the share prices of IndiGo have shown no signs of weakness. Since August 2020, it’s up 36%, while comparing to November 2019 (pre-pandemic) the share prices are down only 7%.
The path forward is not very smooth for the entire airline industry as air travel is one of the slowest consumption categories, in terms of recovery from the Covid-lows. The continued rise in Covid-19 cases makes it difficult to pinpoint when normalcy would return. Commentary from corporates suggests that travel is one of the cost lines that may get cut on a sustainable basis. This implies that business travel – half of the total domestic travel – may take much longer to recover.
Thus, a weaker macro environment, grounded capacity, imbalance between demand and supply, structural changes in the sector, and softer fares indicate that break-even is still 18-24 months away.
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This article is for informational purposes only and is not a recommendation to buy or sell any stock.