New aviation policy to boost demand

Restrictions on ancillary revenue streams a negative for sector

The new aviation policy is expected to help boost regional connectivity and increase competition, especially on international routes. The capping of fares on regional routes at Rs 2,500 for a one-hour flight, low cost airports and tax breaks should help improve demand.

As the aggressive pricing aided by low fuel costs, passenger volume growth for the period January-April is up 23 per cent year-on-year. Jaideep Ghosh, head of transport and logistics at KPMG India, says given the under- penetration, the new policy will lead to robust volume growth, driven by new passengers and a shift of traffic from train and road, especially on regional routes.

What, however, will not go down well with airlines are the restrictions on ancillary revenues. The policy caps cancellation charges at the base fare level and has also cut fee on excess baggage. Analysts at JM Financial say with estimated 10-15 per cent of overall revenues coming from ancillary services, comprising cancellation and excess baggage, earnings are likely to be impacted.

While this hasn’t been quantified as airlines don’t offer ancillary revenues separately, JM’s analysts believe the proposals could lead to a price increase. However, Ghosh believes upsides from traffic growth on under-utilised routes more than offset the capping of ancillary revenue.

The removal of the 5/20 rule (five years of operations and fleet size of 20 aircraft) means there will be more competition for older airlines on international routes. Given the new norms require only the 20 aircraft rule to be met, it will take some time for new airlines to scale up their fleet and be eligible to fly on international routes, say analysts.  

After gaining earlier in the day, aviation stocks corrected slightly, ending the day with gains of 0.2–3.5 per cent. The Street is relieved that there is no plan to cap overall fares or interfere in pricing.

While sub-sectors such as maintenance (MRO) and cargo also get a boost from the liberalised operational norms and tax breaks, it will take a while for this to take hold. Currently, about 90 per cent of the Rs 5,000-crore MRO sector is serviced outside India. Listed players such as Taneja Aerospace (up 4.3 per cent) stand to benefit.

The movement of crude oil prices (half of operating costs) though is crucial. Low fuel costs and record load factors had helped airlines post profits in the March quarter. While analysts are factoring oil price at $50/barrel, any sharp increase would be detrimental.