The third quarter results announced by leading airlines were anything but promising. The numbers clearly showed that the sector is going downhill due to rise in aviation turbine fuel (ATF) prices, intensifying competition, and falling yields. In fact, most players were able to post profits only due to income from non-core areas, that is, activities other than selling tickets.
Market leader IndiGo, with 39.3 per cent passenger traffic share in 2016, reported a 26 per cent drop in net profit in the third quarter of 2016/17 compared with the corresponding period of the previous year. Revenues grew 16 per cent during the period.
Jet Airways, the second-largest player in terms of market share, reported a 69.5 per cent decline in (standalone) net profit; revenues grew just 0.6 per cent. Gurgaon-based SpiceJet reported a 24.5 per cent drop in net profit and 12.5 per cent increase in revenues.
The dip in profits has come in spite of the airlines earning higher revenues, albeit marginally, on account of the overall increase in passenger traffic, which grew 23.18 per cent in 2016. Still, bottom lines felt the pressure, as average fares fell for most carriers. IndiGo's yield went down to Rs3.48 in the December 2016 quarter from Rs4.14 in the December 2015 quarter. Yield is average fare per passenger per kilometre. This means if IndiGo was charging Rs4,753 for a Delhi-to-Mumbai ticket in the December 2015 quarter, it charged Rs3,995 for the same flight in the December 2016 quarter.
Ratings agency ICRA, in a December 2016 report, said that "addition of capacity by new airlines and rapid expansion of capacity by existing ones have resulted in an intensely competitive market and prompted airlines to resort to a variety of fare promotions to improve PLFs [passenger load factors]." It is these fare wars that cost airlines dearly.
In a call with analysts, IndiGo CFO Rohit Philip said that "unfortunately, the traffic growth has not brought higher yielding traffic. So, while you saw significant load factor, the higher yielding buckets were replaced by tickets that we sold in the lower yielding buckets" IndiGo has added around 3,780 seats between since March 2016.
The airlines were able to post profits due to "other income" from non-core operations. Take Jet Airways. It earned Rs130.13 crore from sale and leaseback of aircraft. Several Indian carriers follow the sale and leaseback model under which they sell their new aircraft to lessors - at a premium, sometimes - and lease them back. Around half the aircraft in India operate on this model. Jet also earned Rs 62.30 crore from sale of its Jet Privilege programme. In 2014, Jet had hived off its loyalty programme - Jet Privilege - and transferred it to a new entity, Jet Privilege Private Ltd. When combined, this "other income" of Rs192.43 crore is higher than its last quarter's net profit - Rs142.38 crore. An email sent to Jet Airways seeking details about "other income" went unanswered till the time of going to press.
IndiGo reported "other income" from sale and leaseback (Rs 151.4 crore) and Rs 152.2 crore finance income, which is interest earned on cash reserves. The reserves were Rs8,455 crore in December 2016. Together, the "other income" amounted to Rs303.6 crore, over 62 per cent of its third quarter net profit.
An IndiGo spokesperson says "the airline doesn't make any income from the sale and leaseback model. Since IndiGo is selling aircraft to lessors at a profit, leasing costs go up for us. We try to bring leasing rates down to the actual level."
Analysts predict that things are going to become tough. One reason is the rise in ATF prices over the past few months. Low ATF prices had, over the past few quarters, provided a generous cushion to the carriers, bringing down their fuel expenses from about 50 per cent of the cost in March 2014 to about 37 per cent in December 2016. ATF prices have risen nearly 50 per cent between February 2016 and January 2017.
Also, the fact that demonetisation coincided with the peak season (October to January) also hit them hard. They are expecting further pressure on yields during the lean period starting February. Over the next few years, the airlines will have to increasingly focus on expanding yields, while keeping costs under control, to protect themselves from periodical shocks of rise in fuel prices and drop in air travel demand.