Friday, June 26, 2020

Weak demand to keep up pressure on aviation sector; IndiGo better placed

After the lockdown starting from March 25 due to COVID-19 impact, the domestic aviation industry resumed its operations from May 25.

The sector, which was already struggling due to shrinking revenues and margins, is among one of the worst-hit sectors by the pandemic.

Experts point out that the aviation sector globally operates at very thin margins due to high competition from low-cost carriers (LCC) and higher fixed cost.

While the operations have begun with restrictions, the sky for aviation players continues to look hazy.
Domestic civil air operations commenced from May 25, 2020, with the Ministry of Civil Aviation (MoCA) permitting airlines to operate at one-third of their approved summer schedule capacity.

"Despite the resumption of operations, the capacity utilisation remained low at about 40 percent with weak demand and cautious view of public and corporates. We expect the demand situation to be weak for the next couple of months given the increasing COVID-19 case across the country," said Vinod Nair, Head of Research at Geojit Financial Services.

Nair expects that in the near-term, the travel and tourism activities will be limited due to fear of pandemic spread which will hit the companies' profitability.

"Given hit on profitability, we expect consolidation in fleet operators in the short-term. Though airlines enjoyed some respite in terms of ATF prices, given the high fixed cost it is not helping the situation," said Nair.

Nair expects the situation to gradually improve starting from August to September 2020.
"We continue to have a positive long term growth story of the aviation sector in India but considering near-term demand headwinds and likelihood of higher losses, we have a 'neutral' view on the sector," said Nair.
26/06/20 Nishant Kumar/
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