The airline industry is like a black hole into which mountains of cash disappear with no trace. Last year December, we’ve put out a note on return of profitability for airline companies, especially for Interglobe Aviation and SpiceJet as they’ve got most of the slots of collapsed Jet Airways. The share price of Interglobe Aviation and SpiceJet had reached all-time highs during Cy19 (current share price corrected from all-time highs) on the back higher utilisation levels and lower crude oil prices lead to stability in margins.
Operating structure in the airline industry is 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 the full-service structure, Air India & Vistara Airways operate. Each cost structure mentioned above has different effects on the income statement & balance sheet.
The year 2017 was successful in terms for both shareholders & company’s management of airline companies. All the listed airline companies had reported a recordset of bottom-line numbers with margins improvement. Rising domestic airline passenger growth, fall in crude oil prices & stability in INR had helped the airlines to post highest ever profits in 2017.
However, 2018 started on a negative sentiment for airline company’s due to a sharp uptick in crude oil prices (which leads to a rise in ATF-Aviation Turbine Fuel) and with too much volatility, and depreciation of INR, operating expenses rose. Along with the macro-economic factors, intense competition in this industry also played a significant role in fall of profitability. Airline companies couldn’t pass rise in operating expenses to customers because of substantial pricing pressure from peer groups. On a contrasting note, domestic airline passenger growth touched the highest number of flyers in 2018.
Airline companies had reported a loss due to several operating factors for Q2Fy20. Interglobe Aviation reported a loss of Rs. 10 billion mainly due to higher maintenance cost, new higher fuel-efficient aircraft utilisation was lower due to A320 NEO engine issues and pilot training program (Indigo recruited over 600 pilots from Jet Airways, this training is costing USD 750 million per quarter). Management of Interglobe Aviation had said, temporary maintenance costs would be elevated till Fy22 mainly due to delay in replacement of old aircrafts with new ones. Currently, significant risks for Indigo going ahead are higher utilisation of older Airbus 320 CEO aircraft and any adverse movement in crude oil & foreign currency risk. On the profitability front, management of Indigo’s expects Q3Fy20 to be in line with Q3Fy19 profits but as the company starts to receive new plane deliveries, this will give additional sale and leaseback profit.
SpiceJet had reported Rs. 5 million loss for Q2Fy20 due to higher costs related to the grounding of Boeing 737 max flights. Globally many airline companies have grounded several flights of Boeing 737 max flight which had hurt the bottom-line growth albeit compensation amount paid by Boeing. The yield growth was during Q2Fy20.
Outlook:
The short-term outlook of the airline industry is turbulent as the airline companies, Indigo and SpiceJet are currently having issues with their new fuel-efficient aircrafts which is leading to higher operating expenses for both the airlines. Passenger growth has been in lower single digits compared to double-digit growth in the previous fiscal year and yield growth for airline companies has been stalled at the same rate what it was a year ago. However, the issues pertaining to aircrafts could be resolved in a couple of quarters as the problem is technical in nature but, macro issues such as lower passenger growth, INR depreciation and Crude oil prices volatility could bring pressure on bottom-line margins going forward.
In India, low cost is critical to the airline industry, which is characterised by highly price-sensitive consumers. Demand for air travel has witnessed sharp fall in the last couple of months and airfares have been increasing due to higher maintenance cost and lower capacity utilisation of fuel-efficient aircrafts by airline companies. Additional profitability pressure could arise in future if volatility spikes in spot price of INR, as several cost items including aircraft and engine lease rentals, aircraft and engine maintenance and aircraft insurance are denominated in foreign currency.
Massive debt, high operating cost structure and lack of short-term liquidity led to the vanishing of billions of Rupees of Jet Airways stakeholders wealth. In the past, this industry had witnessed some of the famous airlines to defunct because of substantial debt & rising operational expenses. Failing to pass on the rise in operational costs to consumers is costing billion of Rupees and truncate employment base.
According to the International Air Transport Association (IATA), India continued to be the fastest-growing domestic aviation market for 3 consecutive years ending 2017. But for the year 2019, India fell to third fastest going market after China and the USA. India’s domestic passenger growth has witnessed 3.86% growth (Y-o-Y) during the period Jan-Nov 2019, approximately carrying 131 million passengers.
Air travel penetration in India is the lowest when compared to China and the USA. The air travellers to population ratio is only at 14% in 2017-18. India has one of the lowest air travel penetration rates in the world, as defined by annual domestic carrier seats per capita. Penetration levels are 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 crucial catalyst to the 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:
- Expansion in Aviation Infrastructure
- 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 opening.
Key-Risk Factors:
- Non-availability of terminal space, slots and aircraft parking and the increasing cost of airport landing and departures may adversely affect our operations.
- Sharp increase in Crude Oil prices
- INR Depreciation
Operational Metrics:
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 without fuel cost to look at other operational efficiencies.
RASK (Revenue Per Available Seat Kilometre) – It is also a part of the efficiency metric of the Airline, it is calculated by dividing operating income with ASKM.
Passenger Load Factor – It is a measure of capacity utilisation of an Airline company.
