Losses returned to haunt private sector airlines in the second quarter of the 2012 fiscal, but the strategy of disciplined pricing of fares could see a return to profit in the next half of the fiscal, say industry observers.
During the quarter, the three listed airlines Jet Airways, SpiceJet and Kingfisher Airlines posted a combined loss of R1,017.19 crore, as Kingfishers loss alone spiralled 61% to R754 crore.
However, the focus on yields and improving passenger traffic trends in the ongoing peak season has led the Centre for Asia Pacific Aviation (CAPA) to estimate that the airline industry (excluding Air India and Kingfisher) will post profit of $120-140 million (R660-700 crore) for the third quarter.
CAPAs estimates are based on Brent crude oil prices averaging around $110/barrel and exchange rate of R52-54 to the dollar.
With the onset of the peak season in October, we expect the near-term demand and yield outlook for the industry to be decent, said Rajani Khetan, an analyst with HSBC Global Research. Although, fuel prices remain uncomfortably high, we have seen some softening.
Airlines maintained pricing discipline and were prepared to sacrifice load factors rather than compromise yields, which were higher than the corresponding period last year, said CAPA in a note released on October 24.
The airlines are hoping for a robust second half of the year, the note added. The month of October has not lived up to expectations, with most carriers breaking-even and some posting modest losses, however, November and December look encouraging with strong yields and load factors.
Analysts expect pricing power to only improve in the next two quarters.
We expect pricing power to remain with the carriers over the next 12 months, said Anand Kumar, an analyst with foreign brokerage firm Bank of America Merill Lynch in a research note published on November 15.
This is largely on the back of restricted capacity growth and a traffic recovery in the latter half.
Capacity for Q3 is expected to remain flat sequentially, despite the seasonal pick-up in traffic, Kumar added in his research note. Additionally, the international plans of Indigo and SpiceJet will likely divert most of the new capacity, keeping the domestic capacity in check.
The second quarter of the fiscal (July-September) is a traditionally weak quarter for passenger traffic. According to data from the Directorate General of Civil Aviation (DGCA), passengers flying in July, August and September were nearly 5 lakh less than the corresponding months last year.
In July, 45.37 lakh passengers flew, 43.69 lakh in August and only 40.18 lakh in September. During July, demand for air tickets also fell 8.8%, in August 4.8% and 7.7% in September.
As a result, seat factors for airlines, an indicator of passengers flown, remained low. Jet Airways had a network wide seat factor of 75% during the quarter while SpiceJet had seat factor of 66.3%. Cash-starved Kingfisher Airlines did not publish any operating data and analysts have stopped tracking the airline.
Despite the low seat factors, airlines remained focused on improving yields and pricing their fares at a sustainable level.
Jet Airways cost for providing each seat or cost per available seat kilometre stood at R4.47, while the revenue earned from each available seat or revenue per available seat kilometre stood at R4.55. In essence, before taxes and exceptional items, the airline earnt R0.08 from each seat it offered during the quarter.
For SpiceJet, a low-cost carrier, the situation was slightly worse. The airlines CASKM stood at R3.50, while RASKM stood at R3.12 and in essence lost R0.38 for each seat it offered during the quarter.