General Images Of Indian Carriers As IndiGo May File IPO Prospectus...An Airbus SAS A320 aircraft operated by IndiGo flies past slum housing as it approaches to Chhatrapati Shivaji International Airport in Mumbai, India, on Saturday, June 27, 2015. IndiGo, owned by Interglobe Enterprises Ltd., is India's biggest airline by market share according to the Indian Aviation Ministry. Photographer: Dhiraj Singh/Bloomberg
IndiGo said the recent rally in oil prices meant its fuel costs had gone up about one third during the fourth quarter © Bloomberg

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 per cent.

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

Indian carriers have until recently been some of the fastest-growing in the world, with passenger numbers rising 24 per cent 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 per cent 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,” said 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 per cent of domestic air travel in India, said this month that full-year pre-tax profit climbed 46 per cent to Rs31.3bn ($460m). But investors took fright at the fact that profit for the final quarter that ended in March tumbled 73 per cent, to Rs1.7bn.

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

“IndiGo’s ticket prices fell 5.5 per cent last year,” said Mr 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 US-based Pratt & Whitney. 

Last month Aditya Ghosh, IndiGo’s longstanding 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 Jet Lite, has fallen from 21.7 per cent at the end of 2014 to 16.7 per cent now.

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 per cent of revenues compared with 85 per cent, its yield on ticket sales has remained slightly higher. 

It also has the fullest planes, flying at 95 per cent capacity last month, compared with 89 per cent for IndiGo and 86 per cent 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 Rs9.5bn of net debt — 1.5 times its total equity. That compares with Rs22bn in unpaid bills alone that Ajay Singh, the company’s founder, inherited when he stepped back in to take the reins five years ago.

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“The sector is in a far better place than it was 10 years ago,” said Mr 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 per cent.”

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,” said Lokesh Garg, an analyst at Credit Suisse. 

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