Private airlines may do well this summer on Air India's woes
Munira Dongre 02 May 2011

All airlines are facing cost pressures due to a rise in ATF prices. But with fares recovering and Air India pilots on strike, the summer may prove to be better than expected for private airlines

Air India triggered an aggressive pricing war in the fourth quarter of FY11. Since April, however, fares have been rising and some of the competitive pressure seems to be letting up. This might prove to be a silver lining for the airline industry which is struggling with a huge rise in prices of aviation turbine fuel (ATF). Prices of ATF have risen about 50% since October and by 27% year-to-date. However, with the demand situation in favour of airlines, the chances are that this rise will be increasingly passed on to passengers and this would improve margins.

The other airlines are also expected to benefit from the strike by Air India pilots. About 800 pilots have been on strike since the midnight of 27th April, demanding a fixed salary, the removal of the Air India chairman and managing director and an inquiry by the Central Bureau of Investigation into alleged mismanagement of the airline. Cashing in on this situation, private airlines have already hiked fares, by up to 50% in some cases.

HSBC has calculated "the potential impact of a 15% disruption in services of (the erstwhile) Indian Airlines on Jet Airways. If the traffic lost by the state carrier as a result of the strike spills over to the private carriers in the proportion of their market share (Jet+Jetlite=25%), we estimate that all else being equal, each week of the strike would add roughly 0.7% to our current FY12 profit forecast for Jet Airways by pushing up load factors by 1.5 ppts," it has said in a recent report.

Kingfisher still remains the single largest airline in India with a market share of 20%, but Jet and Jet Lite have a combined market share of 25.4%. Air India's market share has fallen slightly to 15%. Indigo, Spice Jet and GoAir have more or less maintained their market share. However, Indigo is fast becoming a big player with a market share of 19.5%.

In March 2011, airline passenger traffic volumes grew by 23% year-on-year to 4.8 million-up about 5% month-on-month. In the first quarter of the calendar year 2011, growth was 21% year-on-year. The load factor also improved to 75% year-on-year (versus 71% in the previous corresponding period) but was still lower than the 20% load factor seen in February this year. Sequential load factor performance was not great, with Jet Airways reporting the biggest fall at 7.3% and Air India at 6.9%.

The Kingfisher Airlines stock has gone up from about Rs40 to Rs44 in the past one month. However, on a three- to six-month basis, the stock has not done too well. Jet Airways, too, has not gone up much over the period, weighed down by higher ATF prices and Air India's recent pricing war.

Recently, Kingfisher allotted 5.68% shares, valued at around Rs1.8 billion, to State Bank of India on a preferential basis under a debt recast plan. The company plans to convert about Rs13.55 billion worth of loans into shares and also convert the founders' debt of Rs6.5 billion into share capital.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).

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