5 ways in which airlines will be impacted by aviation policy

The Union Cabinet on Wednesday approved a new aviation policy with wide-ranging changes

The aviation policy has finally been cleared by the Union Cabinet, notwithstanding the aggressive stance taken by older airlines against concessions for newer ones. Aviation stocks are trading higher after the policy announcement. But will the rally sustain or will these stocks come down as the fine prints are deciphered especially since some of the measures announced are socialist in nature.

We take a look at five things in the Aviation Policy that will affect aviation stocks.

1. Subsidy element in air ticket: CNBC reports that in a bid to improve regional connectivity government will likely cap airfares for flights up to one hour at Rs 2,500 per passenger and at Rs 1,200 for those up to 30 minutes. Government will reimburse 80% of the losses to airlines. While the move will increase air traffic, markets might not like the idea of government reimbursing the subsidy element. Every sector which has a component of subsidy in them, be it fertilisers, oil and gas or power have had trouble with the government in collecting their dues. If oil prices would move higher, these companies would be severely hit as they would be need the liquidity sustains through the tough times. Unfortunately higher oil prices would also tighten government’s financial thereby increasing the liquidity crisis for the airlines.

2. Costlier air tickets: Reports say that in order to fund the subsidy element government will be imposing a two per cent cess in domestic and international air travel for the regional connectivity fund that will be set up. In a price sensitive market like India, companies might absorb these prices at the risk of volume, especially during off-season.

3.  Tightening of refund policy: Cancellation charges were a straight addition to airline company’s profits. The aviation policy seems to have taken notice of the indiscriminate policies of some domestic airlines on cancellation and refunds and has proposed a number of steps to rein them in. These include a timeline of 15 days for refunding the money and refund on all fares including promotional and special rates. But what is likely to hit airlines is the policy of enhancing of the cancellation amount of up to Rs 10,000 for flights cancelled within 24 hours of departure.

4. Increased competition on account of changes in 5/20 rule: Government has cleverly walked the middle path on the 5/20 policy which required a new airline company to have five years of experience and 20 aircrafts in the domestic market to get a license to fly abroad. The five year rule has been relaxed but the airlines will need 20 aircrafts in the domestic market. Newer airlines that are still testing water will have to increase their fleet size, thereby increasing competition which will impact airline company’s profits.

5.  Code sharing liberalised: Reports say that airlines will be free to enter into code-sharing agreement with foreign carriers for any destination within India on a reciprocal basis. Code sharing will help Indian companies in filling their seats for foreign travellers thereby improving their occupancy.

The aviation policy which has taken nearly a decade to be released has addressed many points from the travellers point of view and some from the industry’s point. Though marginally negative in the short term, the policy can increase air travel volume in the medium to long term.