Mumbai: Despite expectations of financial improvements for some domestic carriers in the three months ended December, civil aviation executives and experts are wondering if the industry has flown past cloudy weather.
With all its festivals and holidays, the December quarter forms the peak travelling season—and that is expected to reflect in the account books of a number of airlines affected by the aviation downturn of the past year and a half. But worries over volatile jet fuel costs and price competition have dampened some of the exuberance.
On Thursday, Kingfisher Airlines Ltd kicked off the earnings season with an operating profit of Rs11 crore for its domestic operations, although it posted a net loss of Rs419.96 crore.
SpiceJet Ltd posted a record profit of Rs108.9 crore for the same quarter. Jet Airways (India) Ltd, which will announce its results on Monday, is expected to post a profit of around Rs10 crore.
While analysts who track the industry are upbeat, airline executives remain cautiously optimistic. Some are downright sceptical about whether the numbers are an indication of better times to come. They warn that even minor changes in the business environment could scuttle any hopes of recovery.
“The airline sector is exhibiting strong recovery, with an increase in passenger traffic and bottoming of yields. This, along with stable oil prices, is expected to lead to (the) sector turning profitable by next year,” wrote S. Arun, senior director at global brokerage DSP Merril Lynch, in a report on 5 October. This was a turnaround from his earlier position.
Cautious optimism: A file photo of aircraft of various domestic airlines at the Indira Gandhi International Airport, New Delhi. SpiceJet posted a record profit of Rs108.9 crore for the quarter ended December. Harikrishna Katragadda/Mint
A December report from Nikhil Vora and Shweta Dewan, senior analysts at domestic brokerage IDFC-SSKI Securities Ltd, said that “the worst for aviation is clearly over”.
On 18 January, they wrote, “Indian aviation, too, is set to take off with domestic segment reporting peak passenger traffic.”
India is the ninth largest aviation market in the world, and fourth in terms of domestic passengers volume. The Directorate General of Civil Aviation (DGCA), India’s airline regulator, said on 13 January the domestic market expanded 7.5% in 2009 from 2008.
Nearly 3.07 million additional passengers took to the skies in 2009, taking the total number of fliers to 43.84 million, up from 40.77 million in 2008 and 42.85 million in 2007. December 2009 alone recorded 4.48 million fliers, a 35.02% increase over the 3.32 million in December 2008.
But doubters remain.
It is not real growth, said Charles Dhanaraj, associate professor of management at the Kelley School of Business at Indiana University, Indianapolis, an expert on the Indian aviation industry.
“It will take a lot more time,” he said, adding that a more accurate statement would be that losses are coming down and airlines are more likely to be able to break even.
“The state of turbulence and uncertainty for Indian airline industry has not changed much to have a different result,” said Hemant Bhattbhatt, senior director at financial advisory services firm Deloitte Touche Tohmatsu India Pvt. Ltd. “There is certain amount of revival while airlines are learning from past mistakes by cutting costs.” But he added that there was still no fundamental change except “slight tweaking…in the business model”.
Airlines bosses, too, remain divided on how the nascent recovery would play out.
“We were cautiously optimistic in 2009. Now, we are optimistic and probably (the) worst is over for Indian aviation,” said Sanjay Aggarwal, chief executive officer at Delhi-based low-fare carrier SpiceJet.
Nikos Kardassis, chief executive of Jet Airways, is also circumspect about the long-term health of the industry.
“While there have been positive signs of a revival in aviation both globally and in India on the back of a revival in the global economic environment, it would be a bit premature to suggest a return to profitability just yet,” he conceded.
According to reports by the International Air Transport Association (Iata) he said, Asia-Pacific carriers are expected to post the most dramatic financial improvements globally in 2010, as compared with the preceding year.
The sustainability of this recovery, said Kardassis, would depend in large part on the global economic scenario and “we are cautiously optimistic in this regard”.
Any increase in fuel prices, for instance, will directly affect profitability, said Saikat Chaudhuri, assistant professor of management at The Wharton School, University of Pennsylvania, making the case for continued cost cutting.
Crude price was $76.32 (Rs3,526 today) a barrel on 22 January 2010, up 74.77% from $43.67 a barrel on 22 January 2009.
Kardassis added that volatile jet fuel prices and high taxes on it could make profitability difficult. Jet fuel accounts for as much as 40% of an airline’s operating costs.
“Jet fuel prices in India are unfeasibly high as compared to global aviation hubs like Dubai and Singapore, and this needs to be corrected at the earliest to make Indian carriers more competitive,” he said.
Aggarwal also considers jet fuel price as the main threat in the flight back to profitability. “An increase (of) up to 15% in jet fuel prices can be sustained as this can be translated into ticket prices without hurting passengers,” he said, but “anything beyond that will kill the industry.” Adding any more capacity, just as airlines did before the global downturn, could have the same effect, warned Kardassis.
Wharton’s Chaudhuri agreed, saying that while the return of passengers is a good sign, “…it is important to keep in mind that the yields have not recovered and will take time to regain their earlier levels after having dropped around 20% during the crisis.”
Industry watchers, though, are worried about another round of price wars, which could bleed airlines dry. In early 2008, airlines panicked and cut ticket prices, recalled Aloke Bajpai, chief executive of Ixigo.com, a travel search engine firm. “I am expecting a similar episode this season also,” he said, predicting that airlines will resort to dropping prices once the lean season kicks in in February.