Aviation outlook stays cloudy despite easing of capacity restrictions

IndiGo's market share crosses 60 per cent; traffic for the sector still a fifth of pre-Covid levels

InterGlobe Aviation (IndiGo) and SpiceJet gained 4-7 per cent over the week on expectations of improvement in load factors, thanks to the easing of capacity restrictions and lifting of lockdown measures.

The new capacity guidelines were issued earlier this week, allowing airlines to operate at 60 per cent capacity, against the previous cap of 45 per cent. Capacity deployment has increased steadily from the 33 per cent in May (when the lockdown was lifted), and this is reflecting in average daily departures and traffic.

Analysts at Centrum Research say there was a sharp uptick in traffic in August, with average daily traffic growing 26.6 per cent over July to just over 86,000 passengers, with daily departures growing 14.2 per cent to 894.

Load factors, which had slipped to 59 per cent in July, increased to over 65 per cent in August. They could rise further, given the recent lifting of lockdown restrictions.

 

 

Though the increasing traffic is a positive, analysts point out this is just 20 per cent of pre-Covid volumes. Further, even as average fares have risen 11 per cent in August over July, analysts say airlines will find it difficult to break even, given the load factors. In the near term, the leisure segment is expected to recover faster than corporate travel.

In the medium-to-long term, however, there could be concerns over structural demand. Analysts at Motilal Oswal Research say the aviation sector will witness continued turbulence in terms of surplus capacity, lack of confidence among passengers to resume travel, and overall demand in passenger travel.

IndiGo has been the clear winner despite the challenges, with its market share in July crossing the 60 per cent-mark, compared to 48 per cent at the start of the year.

Though IndiGo has gained at the expense of GoAir and Air India, SpiceJet has maintained its share over the last few months, closing July with 15.7 per cent.

Notwithstanding the recent steps by the government and gradual resumption in air travel, analysts believe multiple worries still plague the sector, such as tariff caps, lower load factors, and piling pressure on cash flows.