Fare tweaks offer some cushion to airlines, but it may not suffice2 min read . Updated: 13 Jan 2021, 11:05 PM IST
Positive developments on the coronavirus vaccine augur well and that may increase the confidence of the passenger to fly often. On the other hand, the improvement in the macro-economic scenario could drive crude oil prices higher
The ministry of civil aviation (MoCA) has extended the restrictions on domestic airfares—floor and cap—by a little over a month to 31 March. Also, the proportion of tickets to be sold below the median fare of the band has been reduced from 40% to 20%.
This is expected to offer some relief to airlines, albeit not much. Varun Ginodia, analyst, Ambit Capital, said: “The extension of fare cap would offer a cushion to more vulnerable airlines, as it can delay a potential price war that can be kicked off by stronger players. Additionally, smaller proportion of seats sold below the median fare of the band offers some comfort on profitability. Overall, the move delays the anticipated consolidation in the aviation sector."
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Even so, the decision is not expected to be a game-changer for airlines. With more capacity being deployed and the March quarter being a leaner one, analysts don’t expect fares to be high in any case.
“It is possible that airlines will end up selling more than 20% of seats below the median fare in any case," said an analyst requesting anonymity.
From a medium-term perspective, airlines are grappling with a demand slowdown in a post-pandemic world and that remains a big worry. Domestic demand recovery to pre-covid levels is expected to be slow. For one, business-related travel is unlikely to recover quickly. Besides, rising covid-19 cases pose a risk.
“Travel demand has a negative correlation to increase in the number of covid cases. For instance, in Europe, as covid cases have spiked (over November-December) due to a second wave/new virus strain, air travel demand in the continent has dropped by 4-6 percentage points over the last two months," said analysts from Motilal Oswal Financial Services Ltd in a report on 11 January.
True, positive developments on the covid-19 vaccine front augur well, which may increase the confidence to fly often. But on the other hand, the improvement in the macroeconomic scenario could drive up crude oil prices. This can be detrimental for airlines if demand does not pick up adequately.
Going ahead, these factors remain key monitorables.
“Overall, consolidation remains an inevitable theme in the long term due to broken balance sheets," Ginodia added.
Meanwhile, shares of listed Indian aviation companies, such as InterGlobe Aviation Ltd and SpiceJet Ltd, have fared well on the bourses despite the pandemic. InterGlobe runs IndiGo, India’s largest airline.
In the past six months, shares of InterGlobe and SpiceJet have risen around 60% and 90%, respectively, with both the stocks touching fresh 52-week highs on the NSE in December.
However, considering the troubles in the sky, valuations do not appear to be factoring in the risks sufficiently.