Mumbai: This was supposed to be the quarter when the aviation industry made its money. But this does not seem to be the case.

Although SpiceJet did record marginal profits, industry leader Jet Airways lost more than Rs 90 crore as compared to a profit of close to Rs 40 crore in the corresponding quarter last fiscal.

Analysts do not expecting Deccan, whose results are due in two days, to come out in the green either.

Aviation is a highly cyclical business and traditionally the third quarter gives the best results for an airline, as a result of the increase in travel during the holiday season across the globe.

However, the benefits arising from consolidation in the Indian skies, especially those due to better priced tickets, seem to have been not enough to clear the red in the books.

For Jet what seems to have hurt the most is the expenditure to get its international routes going. Wolfgang Prock-Schauer, CEO, Jet Airways, said “Of course it is not good to show losses… but no airline in the world can show a profit on international operations from day one.”

Along with such start-up costs, high fuel prices are eating into airline numbers. This despite fuel surcharges resulting in more revenue flowing into airline coffers. The growth in other income, primarily due to forex gains, seems to have masked some of the losses.

An analyst who did not want to reveal identity said, “We expected a loss from Jet and we expect a loss from Deccan. Things might remain more or less similar for the next three quarters.”

Another analyst added, “In aviation it is a balance between profitability and growth. If you are aiming for growth, like Jet and Deccan are, then you better be prepared to do so at the expense of profitability.”

It is clear that the current mandate of India’s airlines is to grow. Soon it would be time for the merged entity of Kingfisher and Deccan to fly abroad and it would also have to go the period of establishing its international operations.

Going international, while being more lucrative as compared to domestic operations, entails a longer gestation period.

On the domestic front, experts say the increasing fuel surcharge would after a point result in the price conscious traveler preferring the railways over flying. To combat this, low-fare carriers could further cut fares.

A Citibank report on the aviation industry said, “Over the short term, we see fares rising. Over the medium term, we expect fares to decline, as low-cost carriers attain critical mass, and pass on the benefits of economies of scale (lower incremental cost) to passengers. Structurally, fares will have to decline as the growth in this industry will be driven only by the highly price sensitive visiting friends and relatives traffic.”

Another analyst who did not want to be named said, “The results of consolidation are yet to be seen in the Indian aviation industry. This is globally a low margin industry with too many variables affecting profitability.” As they say aviation isn’t for the faint of heart.

 

Source : Dna