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Sense of optimism in airline industry amidst losses

A sense of optimism is growing in the airline industry due to drop in crude prices, rising occupancies and yields, reports Ranju Sarkar.

india Updated: Jan 12, 2007 15:31 IST

There’s a sense of optimism, amidst the gloom of rising losses in 2006, returning in the airline industry. This is led by drop in crude prices, rising occupancies and yields while airlines have been able to raise money and rope in big investors and banks (aircraft financiers) are more eager to lend money to Indian carriers.

Prices for jet fuel, which is the single-biggest cost for airlines, have come down nearly 12 per cent since November after oil majors reduced prices thrice since November, only increasing it last month. With crude prices falling further from $63 to $53, expect oil companies to further reduce prices from February 1.

"The cash burn has come down while yields and occupancies are better," says Deccan Aviation CEO GR Gopinath who operates budget carrier Air Deccan. While occupancies go up in peak months like May and December, airlines like Deccan are being able to recover more in December than in May last year.

Deccan’s yields on its Airbus operations, for instance, have gone up from Rs 2800 in May 2006 to Rs 3150 to December 2006—an increase of Rs 350 or 12.5 per cent per passenger per day. Other budget carriers like SpiceJet and GoAir have also seen an increase in occupancies and yields in December 2005.

What’s heartening is that capacities are being observed. Between April 2005 and December 2006, the capacity has doubled from 70,000 seats per day to 136,000 seats per day. "The increased capacity (of 66,000 seats per day in 18 months) is being observed to the extent of 70 per cent. People are travelling more by air or are migrating from other modes of transport," says Deccan’s CFO Mohan Kumar.

The mood in the industry is best reflected in the performance of airline stocks. The Jet Airways scrip, which was hammered below Rs 500 in July 2006, has recovered since then and was quoting at Rs 680 on the Bombay Stock Exchange on Thursday. The scrip, however, still trades way below its offer price of Rs 1100.

Deccan Aviation, which owns Air Deccan, which had a disastrous listing—the scrip fell sharply on listing and touched a low of Rs 65.37 on July 24, 2006 after shares were sold for Rs 145 in May 2006—has recovered since then. The scrip was trading at Rs 155.48 on the BSE. The same goes true for SpiceJet, whose stock has recovered from 38.33 on July 21, 2006 to Rs 58.34 on Thursday.

Analysts tracking the airline industry attribute the change in sentiment to lesser negative news now, compared to first half of 2006, when every other day, there would be a report of a new player entering or buying new planes. "There’s no talk of a new airline getting in. Today, there’s less fear of an overcapacity than six months back," observed an aviation analyst, who requested anonymity.

The entry of big investors has also lifted the sentiment. SpiceJet recently raised $65 million from big investors like Tata Group, Isthimar (the private equity firm of Dubai), BNP Paribas, and Goldman Sachs. "This shows that investors are re-looking at the sector. When big investors come in, private equity follows (after Singapore Telecom invested in Bharti Telecom, Warburg Pincus followed)," says Kapil Kaul of Centre of Asia-Pacific Aviation.

This should help the fund raising plans of other airlines. Almost every airline—Jet Airways, Kingfisher, Air Sahara, GoAir and Air Deccan—is trying to raise money to fund their expansions.

Unfortunately, the good days may not last long for the airlines; traffic tends to fall by the end of January with February and March being lean months. Airlines will have to wait for a year or two to start making money.

First Published: Jan 12, 2007 15:31 IST