The load-factor flight to profitability in aviation

The domestic aviation industry is on the best flight ever.
In May, all the factors impacting the bottomline of an airline were positive — seat load factor at over 85% was the highest in a decade, air travel demand was robust at 22%, comparatively capacity addition was subdued and oil price at around $74 per barrel was softer than earlier years.

There was just one thing slightly off the mark. And that was yields, which is the net revenue an airline earns on a seat. Airline executives and industry experts say yields continued to grow at much slower pace than demand.

One of the reasons for this was local carriers do not want to
disturb the high seat load factor for better yields and take a further hit on their bottomline.

“We would rather go for higher seat load factor and optimise aircraft and resource utilisation for better financials than chase higher yields. This makes better commercial sense,” said a senior airline executive.

He said the current phase of smooth flight provides a breather to the carriers to consolidate their financial position.

“It would be fair to say market fundamentals have improved but I don’t see most of us jumping to raise fares. Instead, we would rather take use this opportunity to improve our balance sheet. We are not taking any major decisions based on our performance in one or two quarters,” said the executive.

His view is that airlines will not tinker with fares for the next 3 to 4 months. “If at all, we do revise fares, it would be only after mid-September, when the peak season sets in. Then, there is a scope to hike current yields by 10-15% if the today’s growth rate of 18-25% is sustained,” he said.

At present, the average industry yield is around Rs 4,200 per passenger. A 10-15% increase would take it to Rs 4,600-5,000.
Ankur Bhatia, managing director of Amadeus, believes airline were still not in position to tinker with yields as the market continues to be price sensitive.

“Any tweak in fares by them (airlines) will directly affect their seat factor, which they can ill-afford now,” he said.

Bhatia also feels the current growth rate of over 20% in air travel was a little misleading going by the slump seen in mid-2008 and early-2009.

“This growth has been achieved on a low base of last year, when demand had dipped very low,” he said.

Bhatia said controlled capacity addition has also assisted airlines in recording high load factors. “This (high load factors) was an indication of gap between demand and supply closing,” he said.

M Thiagarajan, managing director of Paramount Airways, estimated industry yield had climbed up around 10-12% over the last two years, which was lagging behind the demand growth. 

“Airlines are still cautious. They will not rashly alter yields or add capacity. We’ll have to wait and see how the demand in July, August and September is before taking any decisions on these matters,” he said.

Sachin Gupta, analyst with HSBC Securities & Capital Markets, in his report on Wednesday said the aviation industry was well on the recovery path. He feels the recent growth has come on firm prices, which indicated “strong rebound”.