Grounding Boeing 737 Max will hit airlines hard

The Directorate General of Civil Aviation's (DGCA) decision to ground all Boeing 737 Max 8 aircraft is likely to deepen the financial and market growth crisis currently being faced by the airline industry.

A senior executive of a leading airline, who spoke off-the-record, told DNA Money the aviation regulator's action on Boeing 737 Max 8 will further aggravate the current "situation".

He said if the "situation" did not improve in the coming months, the profitability of airlines will get hit further.

The airline executive said this scenario could play out despite rise in fares. He expected slowing demand, dwindling capacity, rising jet fuel prices and a weak rupee to offset the gains from higher fares.

According to him, the current month – March – may not see fares shoot up even after considerable capacity being pulled out of the market by two major airlines – SpiceJet and Jet Airways. March is generally a lean month for airlines.

"Right now, there is lower capacity (in the market) and it is a lean month. So it doesn't impact the fares because the capacity is more than the demand. However, if this kind situation continues and the growth comes down further, then we could see profitability getting hit despite higher fares in the peak months of April and May," he said.

According to him, the 10% hike in aviation turbine fuel (ATF) in March had already squeezed airline profits.

The DGCA's move on Boeing 737 Max 8, which were involved in the recent plane crashes of Ethiopian Airlines and Lion Air, will see 12 of SpiceJet planes being grounded. Five of Jet Airways's aircraft of the same type are already on the ground for other reasons. Close to over 45% of Naresh Goyal's airline's total fleet have been grounded as it grapples with debt issues.

The DGCA's move could result in 30-35 of SpiceJet flights getting impacted from today.

And despite the civil aviation secretary P S Kharola assuring of monitoring "predatory pricing", the airline executive is expecting prices to shoot up by 20%-25% in the coming two months against the usual 15%-20% during the peak season.

"The withdrawal of capacity will push up the fares but slowing demand may pull it down. Further, if the jet fuel prices continue to remain high, it will impact our profits adversely," he said.

As per data put out by the DGCA, domestic air passenger growth slowed to single digit in January this year at 9.10% from 19.69% in the same month last year. The aviation regulator's statistic shows passengers carried by domestic airlines in January 2019 were 125.08 lakh compared to 114.65 lakh in the corresponding period last year.

Jitendra Bhargava, former senior executive of Air India and an aviation author, estimated 4,500 fliers would be affected based by the cancellation of 30-35 round-flights and 90% flight occupancy of SpiceJet.

He believes this is a very small percentage of total number of passengers flown by domestic Indian carriers.

In January, the Ajay Singh owned airline had flown 16.66 lakh passengers and had logged an average load factor of 90.2%.

"Taking the number of flights impacted at 30-35 and working on 90% occupancy factor for SpiceJet flights, we are talking of 4,500 passengers being impacted. So, we are not talking of humongous number of passengers. It's a small percentage of total number of passengers flying every day," he said.

Bhargava said the current growth in the aviation sector, which has slackened, was not keeping pace with capacity addition.

According to him, this had made demand price inelastic. "There is large capacity induction taking place in the Indian market and so the moment you jack up the fares the growth rate goes down. The fares go beyond the affordable levels and therefore the ultimate loser is the airlines because once they add new aircraft how will they fill it up if they do not keep the market stimulated for growth".

The aviation expert does not see the profitability of the entire aviation sector getting impacted as much as SpiceJet's. He said the budget airline would be able to ward off threat to its profitability only by "enhancing" its aircraft utilisation.

"It will mean loss of revenue and profits for SpiceJet. If they are able to enhance aircraft utilisation then they can neutralise some amount of profitability," he said.

A recent report by Centre for Asia Pacific Aviation (CAPA), global airline consultancy firm, has said the current competitive dynamics of the domestic aviation industry were not aligned with a profitable structure.

Last quarter saw SpiceJet's net profit slump 77% to Rs 55 crore even as the largest domestic airline IndiGo's net profit fell 75% to Rs 190 crore in the same quarter.