Aviation: Not yet time to cheer

While Kingfisher?s capacity cuts boost yields, rising crude prices could hurt

Late last year, when Kingfisher Airline’s troubles resulted in capacity cuts, Jet Airways was seen as a major beneficiary, as it managed to corner a large part of the lucrative corporate travel market.

This, coupled with the government’s decision to allow direct imports of jet fuel and opening up of foreign direct investment up to 49 per cent in aviation sector, helped Jet Airways and SpiceJet share prices jump 77 per cent and 28 per cent, respectively, in 2012.

However, analysts say it’s too early to celebrate as reform implementation will take a long time. Also, the operating environment continues to be challenging.

While load factors and yields would improve in the near term, a segment of analysts, have a negative view on the sector, as costs remain high and air traffic moderate.

Slowing air traffic is a reality and could continue through 2012-13.

For starters, monthly air traffic growth fell to single digits (eight per cent) in January from the high double digit growth the industry clocked in 2011.

Bank of America Merrill Lynch expects domestic traffic growth to moderate to sub-10 per cent in 2012 against 16 per cent in 2011. Its report says: “This is largely due to slowing economic growth, airport constraints at key metros, such as Mumbai, and possible cuts in corporate travel.”

Thanks to Kingfisher’s faltering services, yields have jumped in recent times, which is typically a lean season for aviation. However, the increase in yields is not likely to cover costs. Also, sudden increase in yields could result in demand destruction.

Besides, international yields for Jet are likely to remain under pressure due to competition and weakening demand for premium services.

With crude oil prices rising to $122 a barrel, the pressure on profitability will only increase. Analysts say prices of jet fuel have shot up 12 per cent in 2012. Increased crude oil price will continue to remain a challenge for the industry.

Bank of America’s estimates for Jet and SpiceJet assume $120 a barrel. “We estimate each one per cent increase in crude prices would impact 2012-13 earnings before interest, taxes, depreciation, amortisation, and rentals of Jet and SpiceJet by three to four per cent.”