Aviation: Flight to safety

Kingfisher’s troubles will not only boost Jet’s yields in Q3 but will also restrict fresh capacity addition to 5 per cent in FY13.

One man’s poison, they say, is another man’s meat. This seems to be true for India’s aviation sector. With Kingfisher Airlines (KFA) exiting certain routes, the industry’s demand-supply dynamics have improved, claim analysts. The airline has 16 per cent market share and could exit more sectors if its operating losses continue to mount. There are two positive fallouts of this development, believe industry experts. First, fares have already moved up 20 per cent, thanks to the Kingfisher Airlines exiting select routes. Secondly, as financials of key players deteriorate, fresh capacity addition will slow down. This will be good for future yields, claim analysts.

Given that one of the leading players in the sector is facing problems and is cutting flights, the load factor for other airlines would increase as would yields. Jet Airways and some others have hiked fared by 20 per cent and demand has grown at a robust 18-20 per cent between April-October annually. However, raising fares beyond five per cent in FY13 would hamper demand. According to report by Edelweiss Financial Services, “We estimate the industry supply growth to limit to five per cent to 11 per cent CAGR over FY12–14 under various scenarios. If the demand growth sustains at 10–15 per cent annually from here on (which will push industry load factor over 80 per cent), it would bode well for yields.

Another reason analysts are cheering is also an inadvertent rationalization in cost due to the Kingfisher Airlines episode. While there’s no official confirmation, reports suggest that nearly 100 pilots have quit KFA. Incidentally, pilots are the next biggest cost for airlines after jet fuel. With this, analysts believe the pilot shortage could improve and wage inflation would also remain in check.

Additionally, if the government actually decides to rationalise some of the taxes, then it would be a big positive for aviation stocks. Since fuel cost comprises nearly 45 per cent of sales, every one per cent fall in ATF will improve Jet’s earnings before interest, taxes, depreciation, amortisation and lease rentals by 1.5 per cent. Analysts are building in a five per cent year-on-year fall in oil prices and a five per cent rise in yields in FY13 for Jet Airways. With Jet controlling a large part of the corporate air travel market, the latest developments in the sector could augur well for the airline.