Jet fuel, excess capacity could hurt airline profitability: Icra

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New Delhi: Increasing jet fuel prices and any excess capacity could be of concern for airline profitability in the ongoing quarter, according to ratings company Icra Ltd.

“While on one hand, the passenger traffic growth is witnessing moderation on the back of increased efforts by airlines to strengthen the yields, on the other, the aviation turbine fuel (ATF) prices are on a sequential uptrend from August 2017 to October 2017. In such a scenario, the industry might need to relook at various strategies including pricing, discounting and cost efficiency measures.

“Though moderate capacity addition on the domestic routes in the current fiscal has supported the passenger load factors (PLFs) of the airlines, any acceleration in the capacity addition will intensify the competition, thereby putting pressure on profitability of the airlines,” Kinjal Shah, vice president and co-head, Corporate Sector Ratings, Icra said in a report on Monday.

Though Icra said it does not expect any “sizeable impact on profitability” of the airlines during Q2 FY2018, the Q3 FY2018 performance remains to be seen considering the quarter being important for airlines due to peak season.

The domestic passenger traffic growth remained range-bound during the current fiscal as reflected in 16.2% year on year growth during the first five months of FY2018. This is marginally higher than year on year traffic growth of 15.7% for the month of August 2017, it added.

The moderation in passenger traffic growth after two years of 20% plus growth is primarily on account of lower-than-expected capacity addition, airlines’ efforts to strengthen yields and high base, Icra said.

The capacity addition has remained moderate during the five months of the current fiscal, primarily on account of below average capacity addition by the market leader, IndiGo.

Apart from technical issues with new Airbus A320 neo aircraft and delays in deliveries of new aircraft, increased focus on international routes is also one of the key reasons for lower than expected domestic capacity deployment by IndiGo, it said.

IndiGo’s international capacity has grown at 71.6% this fiscal reflecting the increasing focus.

“Nevertheless, the domestic industry capacity addition in the near to medium term is likely to be healthy due to sizeable planned capacity addition by various airlines and start of regional operations by some of the leading airlines,” Icra said.

Airlines have announced several sales during the ongoing quarter led by a slight economic slow down. Typically, such sales are reserved for the fourth quarter of the fiscal which is considered lean.

IndiGo, SpiceJet, Jet Airways are expected to announce their fiscal second quarter earnings over the coming weeks.