BackAfter a turbulent 2020, revival won’t be easy for aviation firms in new year
While the pandemic has hit businesses hard, the aviation sector was among the worst hit in 2020 globally
PremiumWhile the pandemic has hit businesses hard, the aviation sector was among the worst hit in 2020 globally. In India, air travel was restricted when the covid-19 lockdown was imposed in March. This was followed by a gradual easing of operations from the end of May.
As we enter the new year, it goes without saying that how demand pans out would be crucial. Here, there has been a reasonable improvement in domestic passenger traffic from the nadir, though it is uncertain whether the momentum would be sustained. Varun Ginodia, an analyst at Ambit Capital Pvt. Ltd, said, “While the recovery in domestic traffic has been encouraging, it’s worth noting that the average daily passenger run-rate has started to moderate this month. Going ahead, it is possible that the recovery may turn more topsy-turvy, as seen in Europe and the US."
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He added, “As such, the recovery in domestic passenger traffic to pre-covid levels (FY20) could be prolonged." Plus, corporate travel is not expected to return in a hurry with work-from-home becoming a more prevalent trend. Having said this, a decline in the number of covid-19 cases and positive news flow around vaccine availability may boost passenger confidence and, in turn, help demand.
However, as the economic situation improves, there is a risk that crude oil prices may also start to inch up and that’s not desirable.
“We highlight that for every $5 per barrel change in crude oil prices, InterGlobe Aviation Ltd’s earnings per share changes by about 25/15% (given that fuel constitutes 30–35% of sales) for FY22/23E," said analysts from Motilal Oswal Financial Services Ltd in a report on 12 December. InterGlobe runs IndiGo, India’s largest airline.
In general, if the improvement in demand coincides with higher crude prices, there could be pressure on profitability for airlines.
In the coming year, consolidation could also be a theme to watch out for, along with progress on the Air India disinvestment. “In 2021, investors should watch for consolidation in the aviation sector in a post-covid world. Eventually, we expect three groups to survive—IndiGo, the Tatas and SpiceJet Ltd," says Ginodia.
Meanwhile, given the rough environment, both listed airlines, InterGlobe and SpiceJet reported losses for the half-year ended 30 September. Even so, market share gains have kept sentiments for InterGlobe’s shares quite upbeat.
In 2020, the InterGlobe stock has increased by 23%. The airline’s domestic market share increased to 53.9% in November from 47.9% in January, shows data from the Directorate General of Civil Aviation.
On the other hand, smaller peer, SpiceJet’s stock has declined by about 15% this calendar year, though the shares are up as much as 92% since the end of October.
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