Sunday, December 29, 2019

Flying low: Aviation sector struggling with overcapacity amidst economic slowdown

The economic slowdown couldn’t have come at a more inopportune time for India’s aviation sector. Domestic carriers have been adding new planes rather aggressively over the past few years, as passenger growth steadily inched up over the past four years. But the slowing economic growth and poor consumer sentiment is hurting airline financials.

Data from Directorate General of Civil Aviation (DGCA) showed that passengers carried by domestic airlines grew only marginally at 3.11% between January and October 2019, compared with a 20.11% growth during the same period in 2018. Weak demand, coupled with rising capacities, have forced airlines to slash fares. India’s second-largest carrier by market share, SpiceJet, posted a loss of Rs 462.6 crore in the September quarter, owing to unsustainably low fares. Margins of domestic carriers have also been impacted by higher fuel expenses. Although crude price is lower compared to FY19 levels, averaging at around $64.11/bbl so far in FY20, it is still much higher than FY18 levels, when the average was around $57.85/bbl.

The road to recovery may not be very swift, analysts believe. With economic growth slipping to a six-year low in the second quarter of FY20, any pick up in passenger traffic will take a few more quarters. “Perhaps in six to nine months, once we see economic activity picking up, air passenger traffic may also see an uptick,” said aviation expert Dhiraj Mathur.

Passenger load factor, a parameter for measuring capacity utilisation, also remained subdued for major domestic airlines in 2019, including IndiGo and SpiceJet. SpiceJet’s load factor dropped 80 basis points year-on-year to 90% in October, while IndiGo’s load factor was marginally higher than last year at 85.1% and GoAir’s was also down y-o-y to 83%.

“Load factor dropped across airlines in October due to increase in capacity (all-time high fleet size of 616 aircraft and more to be added by year-end)… November fares so far are down around 11% year-on-year,” Axis Capital said in a report.

SpiceJet added at least 34 aircraft in FY20, but saw an 84 basis points reduction year-on-year in its average capacity utilisation in April-October. Ajay Singh, chairman, SpiceJet, has been vocal about unsustainably low fares. Last month, Singh reportedly blamed “a large monopolistic aviation player” for driving down fares. “This is ultra competition and we have an extremely strong player in the market. We need to increase fares to rational levels. Fares will largely be determined by the largest player in the market,” Singh reportedly said in November.

The largest player in the market, IndiGo, is facing additional cost pressures from an aging fleet as well. The airline recently ordered 300 Airbus A320neos. However, it will likely see a slowdown in capacity addition in the coming few quarters as a result of the recent DGCA directive – which mandated the airline to replace its A320neos with older engines with new planes that get delivered. Meanwhile, cost of maintenance for the airline, while lower than its peers, has been increasing on account of an aging fleet.
29/12/19 Anwesha Ganguly/Financial Express
To Read the News in full at Source, Click the Headline

0 comments:

Post a Comment