1. Higher ATF to affect airlines’ Q4 profitability

Higher ATF to affect airlines’ Q4 profitability

Our 1-month forward fare tracker for 11 routes shows a flattish fare trend over a seasonally weak Q4; average fares declined y-o-y/q-o-q.

By: | New Delhi | Published: March 28, 2017 5:46 AM
Passenger growth remains strong — up 20% y-o-y in February after 25% growth in January; 31 consecutive months of double-digit growth. (Reuters)

Our 1-month forward fare tracker for 11 routes shows a flattish fare trend over a seasonally weak Q4; average fares declined y-o-y/q-o-q. Airlines’ management also suggested that fares have faced downward pressure in January and February 2017. In the seasonally strong Q3 too, there was a significant pressure on yields; IndiGo’s yield declined ~16% y-o-y and SpiceJet’s yield declined ~10% y-o-y. We believe the downward pressure on yields continues in Q4FY17.

Passenger growth remains strong — up 20% y-o-y in February after 25% growth in January; 31 consecutive months of double-digit growth. However, the strong domestic passenger growth is stimulated by lower fares, as seen in the air ticket price trend. Increased industry PLF (~83% in Q4FY15 to ~88% in Q4FY17) on a robust ASK growth (21 consecutive months of double-digit growth) has resulted in a strong RPK growth (29 consecutive months of double-digit growth).

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ATF price rose to R55.4/litre in Q4FY17 from R50 in Q3FY17 and R40 in Q4FY16. Our fare tracker shows flattish trend in Q4FY17, suggesting a limited ability of airlines to pass on the ATF price rise due to seasonal weakness and intensified competition. Continued downward pressure on yields and higher ATF prices would weigh on airlines’ profitability for Q4FY17.

As we enter a seasonally strong Q1, we expect to see some improvement in headline fares, driven by a peak travel season in April-June.

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