Mumbai: Sonal Raj, 35, a senior fashion executive in Mumbai, was set to fly to Delhi on 18 April for the Easter weekend to spend time with her family. But little did she know that her travel plans would take a knock. On Saturday, Raj received an SMS informing that her Jet Airways (India) Ltd flight to Delhi has been cancelled. “I’m hurt by how Jet is behaving now," said Raj over the phone.

As more and more passengers cope with Jet’s increasing frequency of flight cancellations, the $1.2 billion question—the estimated funding gap for Jet Airways—is whether they would opt for the airline again if it manages to turnaround its fortunes.

But, the even bigger question is perhaps whether the 25-year-old private airline should survive at all? As we write this, Jet’s life is hanging by a thread; liquidity constraints have led the airline’s lessors to ground a majority of its fleet. Analysts and experts are now worried about who will fill the gap in capacity if Jet were to die, and the repercussions of that on the Indian aviation industry and consumers.

Moreover, there’s the human angle: In the event of a shutdown, naturally, there will be job losses. This would be awkward given that we are in the middle of general elections. The Bharatiya Janata Party (BJP) government can ill afford bad press on jobs, as its track record in job creation hasn’t been particularly encouraging. According to Jet’s FY18 annual report, the airline had 16,558 permanent employees, and 6,306 temporary employees as on 31 March 2018.

“How is it good as a country to reduce so much seat capacity," asked an analyst, requesting anonymity. The demise of Jet Airways would only make it a monopoly situation for InterGlobe Aviation Ltd, according to some analysts. InterGlobe Aviation runs budget airline IndiGo, India’s largest airline by market share with a more than 40% share of the domestic market. “More competition in an industry is always a good thing from consumers’ point of view," says Madan Sabnavis, chief economist, CARE Ratings Ltd. That’s one reason why Jet Airways should survive, he added.

Widespread cancellations because of grounding of Jet Airways planes coupled with grounding of all 737 Max 8 aircraft of SpiceJet Ltd should reduce domestic capacity resulting in a contraction in traffic growth in March, pointed out analysts from SBICAP Securities Ltd in a report on 20 March.

THE GLOBAL IMPACT

Worse still, is the outlook on the international segment of the Indian aviation market where Jet has a significant share. In fact, the airline accounted for about a third (33.5%) of total available seat kilometres or ASKs of Indian carriers on scheduled international services in 2018, according to the Directorate General of Civil Aviation (DGCA). ASK is aviation terminology for the measure of capacity. Essentially, this big chunk of international capacity is at risk if Jet were to go out of the system.

Just for perspective: In 2011, which was a relatively stable year for Kingfisher Airlines Ltd before it folded up a year later, the airline accounted for 10.8% of the overall ASK of the Indian carriers on scheduled international services. In absolute terms, Jet’s international ASK in 2018 is nearly 6.5 times Kingfisher’s international ASK in 2011. Given this backdrop, for investors, how the Indian aviation market would cope with that gap in capacity will be the most interesting development to watch out for in the coming days.

Sure, Air India and Air India Express can plug that gap.

But DGCA data shows they already operated at a passenger load factor of 79.4% and 76.5%, respectively, in their international segments in FY18. So incrementally, Air India can only take so many passengers. But, how can we be sure that passengers would choose Air India instead of other foreign carriers? What this means is that a reasonable portion of international traffic will be eaten into by other international carriers such as Emirates, Etihad Airways PJSC, Qatar Airways Ltd, British Airways Plc, Singapore Airlines Ltd and Deutsche Lufthansa AG.

Note that over the years, India has steadily grown its share of international air traffic to and from the country. In 2004-05, scheduled foreign carriers controlled a 71% share of the international traffic, with domestic carriers making up the remaining 29%, according to DGCA data. This fell to 61% in 2017-18 as the share of Indian carriers climbed to 39%.

With airlines such as IndiGo, Tata SIA Airlines Ltd-run Vistara, SpiceJet Ltd and GoAir willing to increase focus on the international market, the share of Indian carriers in the international market was expected to increase. But, if Jet goes out of the system, that can take a set back.

On Monday, SpiceJet announced the launch of a slew of non-stop flights to eight international destinations from Mumbai. “Even as some of these Indian airlines can step up their game on the international front, it is not going to happen overnight," said Praveen Sahay, assistant vice-president (equity research) at Edelweiss Broking Ltd. “Jet has bilateral rights and slots with some coveted international aviation markets and these are difficult to get," he said. “These are usually on first come, first serve basis. If a carrier has fleet, and has applied for routes, they may receive them if they are ahead in this race for slots/ bilateral rights," he added.

According to an analyst, who did not wish to be named, “Indian airlines either do not offer the similar product or currently do not have the right equipment to serve some of these markets."

To be sure, even as the current lenders-led resolution plan offers some hope for Jet’s survival, recovery from here will hardly be a cakewalk. Edelweiss Securities Ltd assumes Jet will eventually lose 50 planes to lessors, which would swerve its fleet size down to 73 in fiscal year 2021.“Even if someone comes in right now, so much of damage has been done already. The resolution process should have started six-nine months earlier," said an analyst, who did not wish to be named. “Jet needs patient equity capital and the ability to invest more if needed," according to the analyst, who however points out that Jet’s high cost structure has been a major area of pain for the airline.

THE DOMESTIC IMPACT

IndiGo is emerging as a clear winner out of this," said Sahay of Edelweiss. Indeed, according to DGCA, the airline has seen its domestic market share increase by 3.5 percentage points in February, on a year-on-year basis.

Other airlines have gained too. IndiGo’s smaller low cost peer, SpiceJet’s domestic market share expanded 1.3 percentage points in February. Sahay elaborates IndiGo has already doubled its international market share to 8% on the short-haul routes capitalizing on Jet vacating some key markets.

IndiGo is in a good place to capitalize on Jet’s plight and give wings to its international ambitions as well. But, as mentioned earlier, any international capacity expansion will not happen in a hurry, and in the interim, international flight tickets can be expected to become pricey. Sure, when Kingfisher was grounded in 2012, Jet was in a sweet spot to take advantage of the situation but it never had the balance sheet strength.

However, IndiGo is in a different league as far as balance sheet might goes. At the end of December, IndiGo had total cash (including restricted cash) worth 14,136 crore and its debt stood at 2,476 crore. ICICI Securities estimates if IndiGo were to reach 20% market share of the international Indian traffic in the next five years, it could generate about 1,000 crore in additional earnings. For FY18, IndiGo’s overall net profit stood at 2,242 crore.

HOW THE CONSUMER LOSES

Amidst Jet’s financial woes and massive scaling down of operations, the quintessential cost conscious Indian consumer has ended up as the biggest loser. “The party is over for the Indian passenger," says Shannon Attari, partner and aviation restructuring expert at Attari Capital, reflecting on the recent surge in airfares.

Jet’s troubles come at a time when the industry is in a dire need of capacity rationalization to give a fillip to air fares. Lower fares due to intense competition are a key reason for the current dire straits of Jet Airways. While the grounding of Jet’s planes has sucked some capacity out of the market, IndiGo too has cancelled some flights due to pilot shortages. In addition, a global ban has been imposed since March on Boeing 737 Max 8 planes. The squeeze on capacity has only helped to increase fares meaningfully after a long while, restoring some pricing power to airlines. What’s more, outlook on yields (a measure of pricing), looks encouraging at least from a near-to-medium term point of view. That’s because Jet’s capacity is not expected to bounce back quickly.

“On an average, airfares on major routes have increased by almost 30% for tickets booked seven days prior to the Easter weekend, compared to last year’s same weekend," says Sharat Dhall, chief operating officer (B2C), at Yatra.com, an online travel portal. For tickets booked 15 days prior to the Easter weekend, fares have increased by about 10%, he added.

The analysts from SBICAP Securities said in their March quarter earnings preview that profitability in the seasonally weak March quarter will be the best for the year due to better yields and lower pressure on costs. Average aviation turbine fuel (ATF) prices in Delhi, according to the Indian Oil Corp. Ltd website, fell 20% lower sequentially in the March quarter, which should assist profitability.

It’s worth noting here that after the financial results were announced for the nine-month period ended 31 December, fiscal year 2018-19 was proving to be a disastrous year for Indian airlines. The villains were higher costs led by a sharp increase in crude oil prices and a weak rupee, which swelled dollar denominated costs coupled with pricing pressures. Just for perspective: IndiGo, SpiceJet and Jet posted a net loss of 433 crore, 372 crore and 3,208 crore, respectively, for 9MFY19. Now, the March quarter could well bring some respite to the full year profitability.

To be sure, green shoots of improvement in pricing were already visible in the December quarter. In a report on 4 April, SBICAP analysts said, “The industry, which has been recording healthy 18-20% CAGR (compound annual growth rate) growth in the past three-four years, is entering a phase of consolidation where companies that weathered the storm stand to benefit at the cost of Jet Airways—so the pricing environment should improve significantly."

Of course, the bigger question is whether these pricing gains are sustainable for the industry in the long run. Most likely, they will not be. That’s simply because, the Indian consumer is essentially price sensitive. What this means if fares increase sharply, people will look for cheaper options and go for road or train travel if that’s more compelling. In such a scenario, passenger load factors (PLFs) will take a hit. Already, for the December quarter, we saw IndiGo and SpiceJet sacrificed their PLFs for better yields.

“The Indian passenger will not fly if fares are too high," says Sahay of Edelweiss, adding that people can jolly well use train transport as a substitute travel mode. In the Indian aviation business, airlines have to ensure they have a pricing discipline else they end up losing in the long run," according to Sahay.

India’s fast growing domestic traffic has been a feather in the cap for the current government. Passengers carried by domestic airlines over 2014-18, increased by about 20% CAGR. But, this hasn’t translated into decent profits for all Indian airlines.

“If airlines in the country act rationally and do not dump capacity into the market, there is room for everyone to sustain and grow," said an analyst.

Pricing is crucial too. Bhaskar Bhat, chairman of full-service carrier, Vistara, told The Economic Times on Monday, “Predatory pricing has been the root cause of the issues now being faced by the sector... Jet is the seventh airline going under. The industry needs to apply themselves into what needs to be done to make it grow. The airline industry has not encouraged ideas and has been promiscuous in its approach in spite of being one of the fastest growing markets in the world."

But, if the pricing discipline doesn’t come, then who’s to say we won’t be in a similar situation again. Seven years ago, Kingfisher died. Today, Jet is on ventilator.

Who’s going to be next?

Close