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Challenges ahead
However, capacity constraints at two of the busiest airports — Mumbai and New Delhi, are expected to pose problems for domestic as well as international airlines, which are now planning to increase their flights to India, experts added.
Waterlogging, technology upgradation as well as capacity constraints at the Chatrapati Shivaji International Airport in Mumbai, which is managed and operated by GVK-led consortium — Mumbai International Airport, are some of the problems airlines face at the country’s financial capital.
“The problems in Mumbai will grow with growing traffic since the CSIA is not capable of handling rising traffic. So, the environment ministry and civil aviation ministry should come together and finalise the new airport either at the proposed Navi Mumbai site or anywhere nearby,” Vishwas Udgirkar, executive director, PricewaterhouseCoopers, said.
Healthy growth
Giovanni Bisignani, director general, International Air Transport Association (IATA), said, “Evident in the return to profits by Jet Airways and SpiceJet, the Indian aviation sector is set for a take-off with increasing traffic, improving yields and a limited supply of 6-8 per cent of the existing fleet in financial year 2010-11.”
The economy is back on track and people are beginning to travel, said Prakash Mirpuri, vice-president, corporate communications, Kingfisher Airlines. “Business travel is good and healthy. To add to that, the uncertainty over jobs and employment that existed in the previous year is no longer there and hence people are far more comfortable in spending money on holidays and vacations. We are hence seeing leisure travel also bouncing back,” he said. During the January-July period of this calendar year, passengers carried by domestic airlines grew by 20.7 per cent to 298.71 lakh, against 247.48 lakh in the corresponding period of 2009. Occupancy levels have also moved up to over 80 per cent for almost all the domestic airlines from around 70 per cent in financial year 2009-10.
“After hitting peak traffic levels in financial year 2009-10, the Indian aviation sector is expected to see continued traction in passenger growth. With calibrated increase in capacity and traffic expected to double, yields and loads for the aviation industry are expected to improve going ahead,” Nikhil Vora, aviation analyst, IDFC Securities, said.
Sharan Lillaney, aviation analyst, Angel Broking, said, SpiceJet is well placed to benefit from the revival in the economy, which has led to an increase in passenger traffic demand, and this growth is expected to remain robust over the 2010-12 period. “In case of SpiceJet, it was the only listed airline that was profitable during financial year 2009-10,” Lillaney said.
Speaking about Kingfisher, Mirpuri said, “Our outlook is very positive for coming quarters. Even in the present quarter, we have exceeded our budget expectations in spite of this being a lean season. We have seen a strong resurgence of corporate travel as well as people flying in premium cabin. The demand for international travel is also very strong.”
Commonwealth Games
The Commonwealth Games (CWG) in October in New Delhi is also expected to boost inbound tourists. It is expected that an extra 100,000 tourists will visit India during this event. “The Games are a prestigious international event for us and we will see a definite increase in demand. Of course, we would still be constrained by infrastructure-related limitations, which need to be addressed,” Mirpuri said.
Udgirkar said the delay in opening of terminal three (T3) at the Delhi International Airport is expected to affect operations of domestic as well as international carriers, who are planning to increase flights to the capital ahead of CWG 2010.
The opening of T3 has been delayed till the middle of the next month. The ministry of civil aviation has decided to hold the shifting of operations to T3 where Air India, Jet Airways, Kingfisher Airlines, including JetLite and Kingfisher Red were supposed to shift domestic operations. “The position will be reviewed in mid-September, following which a decision on the date of shifting of domestic operations to T3 will be taken,” Praful Patel, minister for civil aviation, said.
Vora said with the cost curve of the industry at its bare bones, we expect the industry to return to profitability after three years of consistent losses. We expect Jet Airways to move from Rs 400 crore loss in financial year 2009-10 to a profit of Rs 680 crore in this financial year, he added.
While Sachin Gupta, aviation analyst at HSBC Securities and Capital Markets, said in his recent report, “Jet Airways is the largest airline company in India. We expect it to be a key beneficiary of the revival in passenger traffic. Industry discipline has lowered the risk of price wars, while cost-cutting measures are leading to margin improvement.”
Meanwhile, the fund-raising plans of Jet Airways and Kingfisher Airlines which were put on hold due to a poor showing by their stocks as well as performance are now on. Jet Airways is expected to raise around $400 million, while Kingfisher is planning to raise $200 million. Also, Jet Airways has sought the Foreign Investment Promotion Board's approval to dilute promoters’ stake by 20 per cent to raise funds.
“With Jet return to profitability, funding does not remain a critical overhang. With the industry in a sweet spot (global and Indian aviation traffic crossing peak levels) and lowered funding concerns, we expect the stock to see momentum over the next few quarters,” Vora said.
The National Aviation Company of India (Nacil) that owns Air India and the erstwhile Indian Airlines, which has a total debt of over Rs 38,000 crore, including Rs 20,000 crore for aircraft financing, is also improving its performance for the past couple of quarters. The central government has so far infused around Rs 800 crore as equity in the national carrier. Another Rs 1,200 crore will also to be given by the government to Nacil in this financial year.
Nacil is expected to start a price war after traffic revenue for the April-June quarter went up by Rs 638 crore, passenger revenue was at Rs 546 crore (28 per cent growth) and cargo revenue was up by Rs 92 crore (61 per cent) over the corresponding quarter last year, thus reflecting a rebound in traffic for the national carrier.
In order to reduce operating losses, Nacil has projected an aggressive 29 per cent increase in operating revenue for this financial year over the past year.
Jet Airways, Kingfisher and Nacil account for about 60 per cent of the market share. Nacil and Kingfisher have mandated SBI Caps to undertake financial restructuring.
While Rahul Bhatia-promoted IndiGo Airlines is considered the most profitable unlisted airlines, there are reports that the airline is also expected to hit the market with an initial public offering in a couple of years.
Aviation turbine fuel
ATF, which accounts for around 40 per cent of operating costs of airlines, has declined from around $95 per barrel in April to around $79 per barrel in the past couple of months, against analysts expectations of $90 per barrel for financial year 2010-11 and thus poses an upside risk to earnings assumptions of airlines. “Key downside risks, in our view, include a sharper-than-expected rise in jet fuel price; a loss of price discipline, although slow capacity additions reduce the likelihood of such a possibility,” Gupta said.
Stock performance
Year to date, shares of Jet Airways and SpiceJet have advanced 40.75 per cent and 15.25 per cent. Kingfisher Airlines has dipped 8.39 per cent during the period mentioned.
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