Praveena Sharma

Bangalore: When the air traffic in December (Christmas and New Year traffic) saw the lowest growth over the last few years of around 15%, airlines were more than taken aback. It was a peak season when airlines were expecting to recover their losses but low loads and soaring jet fuel prices dashed all their expectations.

Jet Airways senior general manager of investor relations K G Vishwanath puts the blame for the dip in the demand on the “over-optimism” of the airlines on the price front.

He says airlines “priced themselves out of the market.” They had misread the market reality that it was not yet price inelastic. And going by the air traffic trend in January (the month has seen a 13.78% drop in demand over last year), it does not look like the airlines are out of the stormy weather.

And so even though airlines are flying towards higher fares, it may not necessarily take them to better profits. Industry experts and analysts believe Aviation Turbine Fuel (ATF) prices and capacity addition will continue to play havoc with their bottomline.

Take the instance of budget carrier SpiceJet Ltd. It was expecting huge profits in the October-December quarter but rising ATF prices pulled down its profit to just Rs 9 crore.

“It was below our expectation. More than slowdown in demand, it was the ATF prices that brought down our profits,” says SpiceJet Ltd chairman Siddhanta Sharma.

ATF prices rose by 10-15% during the third quarter 2007-2008. Since airlines levied additional fuel surcharge only in December (currently at Rs 1,650 per ticket), they did not see any impact of it on their profit in that quarter.

Analysts also believe that as long as the supply (seats) outstrips demand, aviation industry’s profits will continue to remain under pressure.

Vishwanath says that capacity addition in the domestic sector has tapered from 40-50% last year to around 20% currently.

This, he believes, is because airlines have front-ended most of the capacity addition (taken delivery of most aircraft in the beginning) or because they are “postponing, selling off or cancelling their delivery slots.”

However, despite these desperate measures, analysts say airlines will continue to hover in the turbulent zone for some time now.

“On the whole, the situation is a lot better than what it was last year. Discounted fares have more or less disappeared. Supply is inching towards demand but airlines will continue to feel pressure on profit in 2008 too,” says an aviation analyst with broking house.

Source : DNA