Icra sees better times for airlines if costs are controlled

With airlines entering into a near price-war situation once again, domestic rating agency Icra on Wednesday said they should focus on securing their bottomlines by controlling costs, though it projected a better year ahead.

"While we expect the airlines to continue to sustain the improved performance in 2016-17 on account of favourable jet fuel prices and improving growth in passenger traffic, the industry is still subject to structural challenges and intense competition and therefore must focus on cost control to remain competitive on a sustainable basis by improving structural viability," Icra Senior Vice-President Subrata Ray said in a note.

Since mid-May, airlines such as Air India, Indigo, GoAir, Spicejet and AirAsia India have come out with dirt cheap tickets despite the peak holiday season.

"Airlines need to ensure adequate liquidity position to protect themselves from unforeseen shocks such as demand slowdown or sudden spikes in jet fuel prices, which can put negative pressure on operating cash flows. The challenge is maintaining a pricing discipline under competitive pressures and possible cost headwinds," Ray said. 

It can be noted that 2015-16 was one of the best years for the aviation industry following massive drop in fuel prices.

While domestic traffic grew at a robust 16% in 2015-16 on the back of lower ticket prices, international traffic to/from the country too has grown at a steady pace over the past decade, registering a CAGR of 10.5% between FY06 and FY16, the report noted.

This led to a strong improvement in the performance of the carriers in 2015-16 despite increased competitive intensity, it said. 
 
This upsurge in traffic was driven primarily by lower ticket prices as airlines' operational cost has come down by 17-18% over the past two years. Fuel cost still accounts for almost 50% of their operational expenses, the reason why they have not passed on the entire benefit of lower fuel prices to passengers.

The average monthly revenue passenger kilometres (RPKMs) has grown at a CAGR of 12.7% from 4,700 million in FY13 to 6,750 million in FY16, although at the cost of marginally lower yields. Domestic air traffic growth in terms of RPKMs was by far the highest at 22.1% during FY16.

Similarly, the industry passenger load factor has also grown from an average level of 75 to 83% over FY13 to FY16, driven by strong traffic growth, Ray said.

It can be noted that due to the tight liquidity conditions in the past, airlines have changed their strategy of chasing market share to improving profitability through route rationalisation by scaling down operations on loss-making routes, cutting back on capacity expansions, fleet rationalisation and renegotiation of maintenance contracts.

With a few new regional carriers expected to enter the market, competitive intensity is expected to go up, and may even create some over-capacity over the next 12-24 months if the demand growth is not sustained in the event of fare hikes due to an increase in fuel prices, Ray warned.

Rigorous cost rationalisation measures, from phasing out loss-making routes to renegotiation of maintenance contracts, and rationalisation of manpower should help airlines improve their operating performance to some extent, he added. Incidentally, aviation turbine fuel or jet fuel price was today hiked by a steep 9.2%.