Why you should care

India’s fast-growing airlines face an air pocket in the form of rising oil prices.  

India’s airlines have enjoyed their most successful few years as passenger numbers, revenues and profits have surged in an era of growing prosperity and cheap oil. But as oil prices rise, clouds are gathering. The country’s listed aviation companies lost altitude this month following news that quarterly profits at IndiGo, India’s largest private airline, had slumped 73 percent.

Since then, InterGlobe Aviation, IndiGo’s parent, and its two listed rivals, Jet and SpiceJet, have collectively lost some $1.8 billion in equity value.

Indian carriers have until recently been some of the fastest growing in the world, with passenger numbers rising 24 percent in the past year. As a result, they have emerged as key buyers for the likes of Boeing and Airbus, with more than 900 aircraft on order. Boeing forecasts India will account for 5 percent of its orders until 2036, while Airbus says it plans to sell one aircraft a week to India for the next 10 years. But analysts question whether these airlines, which have benefited as millions of Indians have abandoned trains for air travel, can continue to thrive with the price of oil above $75 a barrel.

“It is clear looking at IndiGo’s earnings this quarter that the dent caused by higher oil prices is going to be significant,” says Madhukar Ladha, an analyst at HDFC Securities.

Other global aviation companies are also feeling the squeeze of higher oil prices, but India’s airlines have always particularly suffered when costs are high because their customers are highly price sensitive.

IndiGo, which accounts for 40 percent of domestic air travel in India, said this month that full-year pretax profit climbed 46 percent to 31.3 billion rupees ($460 million). But investors took fright at the fact that profit for the final quarter that ended in March tumbled 73 percent, to 1.7 billion rupees.

IndiGo said the recent rally in oil prices meant its fuel costs had gone up about one-third during the quarter. Even more concerning, say analysts, was the fact that ticket prices were not increasing to compensate.

The problem for airlines is that if costs are higher, they become more desperate to sell every single seat and so end up discounting heavily.

Madhukar Ladha, analyst, HDFC Securities

“IndiGo’s ticket prices fell 5.5 percent last year,” says Ladha. “The problem for airlines is that if costs are higher, they become more desperate to sell every single seat and so end up discounting heavily as it gets closer to the departure date.”

IndiGo has already had a difficult year, having had to cancel dozens of flights in March because of problems with engines made by U.S.-based Pratt & Whitney.

Last month, Aditya Ghosh, IndiGo’s long-standing chief executive, announced his departure. That news was preceded by a sudden drop in the company’s share price, which Indian regulators were reportedly investigating — although IndiGo said it was not contacted by the Securities and Exchange Board of India.

Jet, meanwhile, is struggling with its own problems. The airline returned to profitability in 2015–16 following years of losses, but its market share, including low-cost subsidiary JetLite, has fallen from 21.7 percent at the end of 2014 to 16.7 percent.

Analysts say the company has not cut costs nor has it focused enough on building capacity at some of India’s fastest-growing airports.

Shakti Lumba, an independent aviation analyst, described the carrier as “financially vulnerable,” adding that it was the one company in the sector that had failed to get costs under control. Jet did not respond to a request for comment.

Of India’s three listed airlines, SpiceJet has proved most resilient. While its costs for the quarter that ended in December were marginally higher than IndiGo’s, at 87 percent of revenues compared with 85 percent, its yield on ticket sales has remained slightly higher.

It also has the fullest planes, flying at 95 percent capacity last month, compared with 89 percent for IndiGo and 86 percent for Jet.

One of SpiceJet’s biggest successes in recent years is paying down debt, having nearly gone bust in 2014. The company ended 2016–17 with 9.5 billion rupees of net debt — 1.5 times its total equity. That compares with 22 billion rupees in unpaid bills alone that Ajay Singh, the company’s founder, inherited when he stepped back in to take the reins five years ago.

“The sector is in a far better place than it was 10 years ago,” says Lumba. “Most of the debt that companies hold is related to aircraft and none or very little is in working capital. All of them have robust aircraft orders and are buoyed by the persistent domestic aviation growth of around 20 percent.”

But other analysts forecast that while the larger airlines will remain robust, smaller ones could struggle.

“Companies like SpiceJet look far more viable than they did two or three years ago. The problem will be for some of the smaller companies, which make profits, but not enough,” says Lokesh Garg, an analyst at Credit Suisse.

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By Kiran Stacey

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