Domestic airfares to decline at lower rate in Q2

Domestic airfares may not decline much during the second quarter of the current fiscal triggered by strong traffic growth and positive momentum in economy, says a report by ICICI Securities.

"We believe the sequential decline in domestic fares in the second quarter (July-September) 2016-17 will be significantly lower than the usual 15 % which we have seen in the past," the brokerage firm said.

According to the report, airfares in domestic circuit "has been unusually stronger than expected with a recovery seen during July/August" and "the decline in airfare is likely to be much lower for July-September quarter 2016-17".

ICICI Securities noted that while the strong traffic growth and positive momentum in economy were demand side triggers, limited available slots in key airports provide supply side construct for an uptick in domestic airfares.

The brokerage has tracked domestic fares across 14 routes among 6 metros in the country and recorded fares for the next day, next week and next month to catch the temporal distribution of the fares.

As per its findings from July-end to mid-August, fares have actually increased 13.5 % on average for the fares next day, while the fares have declined by 6 % and 5 % on average for fares on next week and next month respectively.

Further, the report noted that advance booking fares are also significantly higher during the third quarter (October/November) on comparison with September fares, which is in line with a seasonally strong festive season.

With the largest committed order book, IndiGo remains to benefit the most from the strong domestic demand, while its cost structure remain most efficient.

"The current market price factors cumulative fare decline of 10 % for FY'17/18 estimates, which we believe is very pessimistic considering we already had two consecutive years of fare decline of 5 per cent and 15 % in 2014-15 and 2015-16 respectively," the report said.

ICICI noted that the supply market "has improved with the slower pace of capacity addition than expected earlier".

Additionally, it said that delay in induction in neo aircraft of IndiGo, higher realisations of international sector particularly for Jet, Air India and SpiceJet, incremental international offerings by Go Air and troubles for TrueJet and Air Costa would "serve to strengthen the domestic airfares incrementally".