Airline consolidation may not ease pricing pressures; Jet stock falls

Higher capacity addition would leave little room for rate rationalisation

A possible consolidation triggered by weak operating metrics of leading airlines is expected to benefit strong players such as market leader InterGlobe Aviation (IndiGo). The Street is looking at a potential acquisition of Jet Airways, which could bring down competitive intensity and therefore lead to lowering of passenger fares.

Garima Mishra of Kotak Institutional Equities said a consolidation, such as the one involving Vistara and Jet Airways, would be a positive development for the industry as it should result in network consolidation in key metro routes, and drive an improvement in yields. Yields have languished mainly because of forward sale of tickets at discounted rates. However, given the extent of capacity addition, the planned improvement in yields may not come anytime soon unless there is rationalisation. An analyst at a domestic brokerage said it was cutting capacity rather than reducing the number of players through mergers and acquisitions, which would help improve pricing. This is unlikely to happen anytime soon.

Unlike Jet Airways and SpiceJet, which saw low capacity additions in the recent past, Indigo has increased its aircraft induction to 190 currently, as compared to 159 aircraft as of March 2018. Higher capacity addition and a lean season saw both IndiGo and Jet Airways offer attractive fares on 1-2.5 million seats. This is expected to put pressure on passenger fares, leading to an estimated 44 per cent decline in operating profit before rentals in the September quarter for the sector.

The decline in sector fortunes will hit Jet Airways the most as it is sitting on a consolidated net debt of Rs 73.6 billion. While SpiceJet and IndiGo will report losses ranging from Rs 2.7 billion to Rs 7 billion in the September quarter, Jet’s performance will be affected more, with losses to widen to Rs 14.40 billion in the quarter from Rs 13.23 billion in the June quarter.  Recently, ICRA, which downgraded Jet Airways’ loan ratings, indicated that its credit profile will continue to remain stretched in the medium term until the sector is able to pass on the increase in jet fuel prices or the company raises funds to ease liquidity pressures. 

The extent of the pressure on the financials is reflected in the stock prices of the listed entities. Since its highs over the last year, the Jet Airways stock has lost over 75 per cent of its value as compared to 55 per cent for SpiceJet and 47 per cent for InterGlobe. Though the price correction has been steep, investors should not bottom fish in aviation stocks as mounting costs and capacity additions mean there are no positive triggers in the near term.