Airline industry is like a black hole into which mountains of cash disappear with no trace. Jet Airways seeks a cash injection, Air India requires fresh government handouts and SpiceJet’s balance sheet weakens due to surge in operating cost. Interglobe Aviation (IndiGo) reported its first ever quarterly loss but it is in the best position as it has the lowest costs & highest market share in the industry. During Q2Fy19 all listed airline companies had witnessed downgrading of their respective credit rating due to deterioration of profitability and raising concerns of debt principal repayments & renewal lease contracts.
Operating structure in the airline industry is primarily divided into two categories, low-cost carriers (cost driven) & full-service carriers (revenue driven). Currently, Interglobe Aviation, SpiceJet, GoAir, AirAsia and Air India Express are the operating Airlines under low-cost structure in India. Under full-service structure, Jet Airways, Air India & Vistara Airways operate.
Each cost structure mentioned above has different effects on income statement & balance sheet. By comparing employee per ASKM (description given below under operation metrics) ratio between low-cost structure & full-service structure will provide operating income per employee in respective cost-structure. Maintaining a low number of employees per ASKM, a low salary per employee, and a low fuel cost allows an airline to lower its operating expense and enhance profitability which therefore achieves a cost advantage (followed by low-cost airlines). Maintaining high revenue per passenger (RPK), a high load factor, and a longer flight stage allows an airline to increase its revenues and therefore achieve a revenue advantage (followed by full-service airlines). Compared to low-cost structure, full-service structure airline companies post lower profitability and margins due to higher operating costs.
What has Changed in 2018 for Indian Airline Industry compared to 2017?
Year 2017 was a successful year in terms for both shareholders & company’s management of airline companies. All the three listed airline companies had reported record set of bottom-line numbers with margins improvement. Rising domestic airline passenger growth, fall in crude oil prices & stability in INR had helped airline companies to post highest ever profits in 2017.
However, 2018 started on a negative sentiment for airline companies due to sharp uptick in crude oil prices (which led to rise in ATF-Aviation Turbine Fuel prices) and depreciation of INR had filliped increase in operating expenses. Along with the macro-economic factors, intense competition in this industry also played a significant role in steep fall of profitability. Airline companies couldn’t pass rise in operating expenses to consumers because of significant pricing pressure from peer groups.
Airline companies with heavy debt on their balance sheet were beaten down to their 52-week low prices which led to vanishing of billions of Rupees of shareholders wealth. In the past this industry had witnessed some of the famous airlines to defunct because of heavy debt & rising operational expenses. Failing to pass on rise in operational costs to consumers is costing billions of Rupees and truncate employment base. Following table will show key financial metrices for H1Fy18 vs H1Fy19:
In India, low cost is critical to the airline industry which is characterized by highly price-sensitive consumers. On one hand, increase in input costs such as fuel prices and aircraft landing and en-route charges have added pressure to the industry’s profitability. While on the other hand, demand for air travel continues to be robust at low fares in the domestic market. To some extent fall in INR puts an additional pressure on profitability and margins due to several cost items including aircraft and engine lease rentals, aircraft and engine maintenance and aircraft insurance are denominated in foreign currency.
According to International Air Transport Association (IATA), India continued to be the fastest growing domestic aviation market for 3 consecutive years ending 2017. Current domestic market of 117 million passengers traveling in the year 2017 & 114.63 million (till October 2018) and expects to be a market of 442 million passengers by 2035.
Air travel penetration in India stood at 0.10 trips/capita in FY17, which is 59% lower than countries with similar GDP/capita, and 76% lower than BRICS nations (barring India), according to the Directorate General of Civil Aviation (DGCA) and IMF.
Increased focus of the Indian Government in infrastructure expansion is a key catalyst to growth of India’s aviation market. In the Union Budget 2018-19, the Government has proposed to expand India’s airport capacity more than 5 times to handle one billion trips a year under its new initiative – NABH (NextGen Airports for Bharat) Nirman.
Key Growth Drivers:
- Strong Economic Growth
- Continued Working-age population growth
- Expansion in Aviation Infrastructure
- Strong growth in tourism
- Increasing aircraft penetration
In addition to these, exploring the untapped markets of Tier 2 and Tier 3 cities and the long-haul opportunity provides the added stimulus to the existing levels of opportunity.
- Non-availability of terminal space, slots and aircraft parking and increasing cost of airport landing and departures may adversely affect our operations.
- Sharp increase in Crude Oil prices
- INR Depreciation
Market Position – Market share, market standing, regional diversity
Yield – Yield is the average fare per passenger per kilometre.
ASKM (Available Seats Kilometre) – It measures Airline’s carrying capacity. Calculated by multiplying seats available per airline with number of kilometres flown.
RPK (Revenue Passenger Kilometre) – This metric shows number of kilometres travelled by paying passengers. Calculated by multiplying number of revenue passengers with number of kilometres flown.
So, basically ASKM is the supply and RPK is the demand for the Airline. An uptick in ASKM is positive only when it is supported by an adequate increase in RPK.
Passenger Revenue – It is calculated by multiplying Yield with RPK.
Block Hour – The time from the moment the aircraft door closes at departure until the moment the aircraft door opens at the arrival gate following its landing.
CASK (Cost Per Available Seat Kilometre) – This metric shows the efficiency of the Airline, it is calculated by dividing operating cost with ASKM. Since, Airline industry costs are mostly fuel expenses sometimes we use CASK metric with out fuel cost to look at other operational efficiencies.
RASK (Revenue Per Available Seat Kilometre) – It is also a part of efficiency metric of the Airline, it is calculated by dividing operating income with ASKM.
Passenger Load Factor – It is a measure of capacity utilization of an Airline company.
The Indian aviation industry is expected to continue to grow at a robust pace based on several factors as mentioned above which includes including strong economic growth, continued population growth, expansion of middle class, strong growth in tourism, increasing aircraft penetration from current levels and expansion of aviation infrastructure.
Brent Crude fell by almost 8% during intra-day on 18th December 2018 as reports show swelling inventories and forecasts of record U.S. and Russian output. OPEC and non-OPEC countries decided to cut oil production by 1.2 million barrels a day from 2019 after a recent meeting. OPEC itself will cut output by 800,000 bpd while Russia agreed to reduce production by 400,000 bpd. Iran has been granted an exemption from the cuts as it is under sanctions from the US.
It has been a turbulent journey for all airline companies in India till H1Fy19, we expect profitability to return in H2Fy19 (but lower than compared to Fy18) as prices of Brent Crude fell sharply, volatility of INR has come off and robust passenger growth will buoyant market participant sentiment for this industry.
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