Pricing in the Indian aviation sector could take a while to improve. This week, InterGlobe Aviation Ltd (IndiGo), Jet Airways (India) Ltd, Go Airlines (India) Ltd (GoAir) and AirAsia (India) Ltd launched several discount schemes. Note that this comes after the combined Ebitdar for the June quarter of all the three listed airlines (IndiGo, Jet Airways and SpiceJet) in the country declined by almost a fifth compared to the March quarter. Of course, this is primarily driven by Jet Airways’ sharp increase in the consolidated loss at the Ebitdar level.
Ebitdar is earnings before interest, tax, depreciation, amortization and rent/restructuring costs, and is a key measure of profitability for airlines.
Performance may deteriorate further in the current quarter, which is anyway a lean one. This is because of the deadly combination of high crude oil prices, rupee depreciation (resulting in an increase in dollar-denominated costs) and inability of airlines to raise fares adequately.
The problem is that the sector is adding capacity at a rapid pace and that capacity needs to be filled. Fares have to be kept low to stimulate demand, especially on newer routes, but does it really have to come at the cost of profitability? Airlines have completely lost pricing power as a result of the rapid influx of capacity, pointed out CAPA India in its mid-year aviation outlook for FY19.
“This is evidenced by the significant decline in yields since April, and especially in July and August, during which period fares have been even lower than CAPA’s earlier estimates," said the CAPA report dated 3 September.
“In this competitive market, an airline with a strong balance sheet could well drop fares quite low to garner market share and wipe out competitors with weak financials," said Shannon Attari, partner and aviation restructuring expert at Attari Capital. Attari expects the blood bath in the sector to continue as yields will stay under pressure.
Given the pace of aircraft inductions over the coming months, yields are likely to remain at levels at which domestic profitability is elusive, according to CAPA India.
The shares of all three listed airlines reflect these concerns. These stocks have underperformed the BSE 500 index so far this fiscal year with Jet Airways leading the underperformance. The airline looks set to be pushed to the wall with its very high leveraged balance sheet and weak financials. For Jet Airways, investors should track the progress on debt reduction and ₹ 2,000 crore-plus cost-reduction programme over the next two years.
The long history of airline bankruptcies should alert financiers to similar risks in the Indian aviation sector and hopefully induce them to nudge the industry participants towards more rational pricing behaviour, said analysts from Kotak Institutional Equities in a report on 3 September. “We can only hope that some sanity dawns on the industry, forced or incentivised by the authorities, financiers, industry players and/or shareholders," said the report.