Urban Transport Infrastructure November 2018 Urban Transport Infra November 2018 | Page 38

Airport & Aviation
India is expected to emerge as the
third largest domestic aviation
market in the world after China and
the US. The graph below shows the
market share of Indian aviation
companies:
aviation companies are bleeding at a
time when global airlines are expected
to make net profits of $33bn, according
to IATA. There are 4 principal reasons
for the high cost structure in India.
First, most airlines end up flying less
popular routes which does not make
economic sense. Second, global fuel
prices are denominated in USD and a
strong dollar has posed to be a problem.
Third, Indian aviation companies do
not hedge fuel and dollar risk the way
global companies do, which is a major
cost. Finally, the government’s policy
of keeping oil out of GST and skimming
away most of the price fall through
higher excise duty has also hurt airlines.
Source: DGCA
The first disruption in civil aviation
came in 2004 with the launch of
Deccan Airways. Since then, low cost
airlines have become the model to
chase. This is where full-service
players like Jet Airways and Air
India with higher overheads and in-
flight catering are having a tough
time managing their costs. Take the
case of one of the busiest routes in
India (Mumbai-Delhi), where despite
the high demand, the average fares on
this sector fell by 15% to just Rs3,334
of average realization. As most
airlines admit, the price point
demanded is not viable to run an
airline with all the concomitant risks.
If you take a slightly longer
perspective from 2014 to 2018,
average fares on most trunk routes
are down by nearly 40%. As long as
Brent was falling from $115 to
$30/bbl, there was hardly a problem
and airlines were passing on lower
fuel costs to consumers. The problem
became acute when crude prices
bounced back and are now closer to
the $80/bbl mark.
Let us look at the stock price
performance of aviation stocks.
WWW.URBANTRANSPORTNEWS.COM
Take the case of one of the
busiest routes in India
(Mumbai-Delhi), where
despite the high demand, the
average fares on this sector fell
by 15% to just Rs3,334 of
average realization. As most
airlines admit, the price point
demanded is not viable to run
an airline with all the
concomitant risks.
Source: Bloomberg
As the chart above indicates, on a
year-to-date basis, the aviation stocks
have grossly underperformed the
Nifty, which is largely reflective of
the crisis that the Indian aviation
sector is exposed to.
There is a bigger worry on the cost side
To understand the magnitude of
this problem, consider the fuel cost of
Indigo Airlines, India’s largest
domestic carrier by margin. It saw a
55% increase in fuel costs just
between Apr-Jul 2018. This explains
the sharp fall in profits in the June
quarter and a net loss in the
September quarter. Ironically, Indian
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Airline companies cannot just hope to
do well when oil prices go down. A
combination of good policy and smart
hedging is the need of the hour!
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Urban Transport Infrastructure | November 2018