Airlines are flying in a ‘comfort zone'

After flying low in the initial months of this year, airlines are gradually gaining altitude as yield — or net revenue per seat — and demand situation improve.

This trend is reflected in the International Air Transport Association’s (IATA) Airlines Financial Monitor for October-November published on Tuesday, which said in the third quarter — July-September — 75 major airlines turned a loss of $3.4 billion in the same quarter last year into a profit of $0.7 billion.

However, despite improved financial performance of some carriers over last year, the Geneva-based air transport body has maintained its earlier forecast for an industry of $11 billion this year.

The domestic airline industry is also upbeat about the improving market condition and expecting the next two quarters to be better than last year’s.

Samyukth Sridharan, chief commercial officer (CCO) of SpiceJet Ltd, said going by the environment in the last four months, the industry was optimistic about coming months too.
“If you look at the past four months, demand is back and that there is no reason to think otherwise. “The past few months have been encouraging and we can be optimistic about the same (financial performance in the next two quarters),” he said.

M Thiagarajan, managing director of Paramount Airways, said most local carriers have performed better in the last two quarters of this year compared to the same quarters last years.  And he believes they would be able maintain the good numbers in the coming two quarters too with prevailing favourable market conditions.

“All (local) Airlines are flying in the comfort zone. Last year during this time, jet fuel prices were around $140 per barrel, which was way above today’s $80-85 per barrel. I don’t think it will climb to last year’s peak level. I expect the impact of the winter demand in the US and Europe on the aviation turbine fuel (ATF) prices to be counter balanced by the economic trouble in the Middle East,” said the owner of Chennai-based all-business airline.

Thiagarajan feels a stronger rupee against US dollar is also beneficial for the airlines, whose 60% of the operational costs - lease rentals, salaries of expat pilots, aircraft maintenance, spare parts and others — are denominated in the US currency.

But what will really push airlines into the profit zone, he said, would be the improving yields and passenger load factor (PLF), both of which were headed north.

“I see gradual improvement in yields. I would say fares are moving in the right direction and will slowly increase by 20-25% from the current levels in the coming few months. The industry needs to get to these levels of fares for sustainable profitability,” he said.

Thiagarajan’s airline and budget carrier IndiGo were the only domestic carriers which reported profits last fiscal. As per Centre for Asia Pacific Aviation, Indian airlines lost around Rs 9,000 crore ($2 billion) last year as demand slipped and oil prices soared in an industry plagued with overcapacity.

But last year’s trend has completely reversed this year with not just the demand picking up but even the yields improving.  A senior executive with low cost airline GoAir said that all travel segments - leisure and business - were doing well this year.

“This (jump in business and leisure travel), combined with higher fares promise to take us towards better financial numbers,” he said.

An analyst with a local broking firm predicted that most airlines will see a surge in yields and PLF in the December quarter. Jitendra Bhargava, executive director of Air India, was less optimistic than his peers. “PLF has certainly improved but fares and yields are still low, making it very hard for us to make money,” he said.