Airlines capacity to jump to 25% over next 3-4 years: Icra

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Mumbai | December 08, 2016 8:50 PM

The airlines are set to add an additional capacity of 20-25 per cent over the next three to four years, even as mounting competition and price war are eating into their yields impacting the bottomlines, says a report.

"The industry-wide ASKMs are slated to grow at a strong CAGR of 20-25 per cent over next 2 to 4 years. This will be driven by sizeable order backlog of the market leader Indigo, and also at GoAir, Jet Airways and SpiceJet coupled with the expected fleet expansion of Vistara and AirAsia. (Reuters)“The industry-wide ASKMs are slated to grow at a strong CAGR of 20-25 per cent over next 2 to 4 years. This will be driven by sizeable order backlog of the market leader Indigo, and also at GoAir, Jet Airways and SpiceJet coupled with the expected fleet expansion of Vistara and AirAsia. (Reuters)

The airlines are set to add an additional capacity of 20-25 per cent over the next three to four years, even as mounting competition and price war are eating into their yields impacting the bottomlines, says a report.

Despite falling yields, due to increasing competition and the resultant hit on profitability, the airlines’ capacity addition is set to clip at CAGR of 20-25 per cent over the next three-four years, domestic rating agency Icra said in a report today.

“The industry-wide ASKMs are slated to grow at a strong CAGR of 20-25 per cent over next 2 to 4 years. This will be driven by sizeable order backlog of the market leader Indigo, and also at GoAir, Jet Airways and SpiceJet coupled with the expected fleet expansion of Vistara and AirAsia.

“The capacity expansion will also be boosted by the launch of two new airlines, Air Carnival and Zoom Air,” the report said.

Domestic air traffic continued its healthy growth this fiscal, with an annual growth of 22.5 per cent in the first half of current financial year, making the domestic market the fastest-growing aviation market in the world.

The comparative numbers for the second growth market of Russia is way below half of it at around 10 per cent, while China is at around 6 per cent and the US, the largest market at 3-4 per cent.

Capacity addition by new airlines and rapid capacity expansion by existing carriers have resulted in a 20.4 per cent annualised growth in available seat kilometers (ASKM) in the first half, leading to more intensification in competition, the report said.

One of the major growth drivers is the steep fall in jet fuel prices in 2015-16 had enabled airlines to reduce fares and the resultant spike in passenger growth numbers to 85 million. The industry is expecting the country to cross the century mark for the first time this financial year.

But fuel prices began to climb up again from March 2016 and has since then jumped by a whopping 41 per cent sequentially over the past nine months, which has eroded this cushion.

Though the agency believes that passenger growth potential remains high in the long-term in the country, it warned that due to the absence of any immediate support from the core growth drivers, the pricing power of airlines will remain limited in the near-term, thereby impacting profitability.

In the first half of the current fiscal year, airlines’ yields continued to remain under pressure due to increasing competition and pressure on maintaining utilisation of the enhanced capacities.

Following the massive fall in fuel prices in last fiscal year, the aggregate loss of the industry came down from around Rs 7,500 crore in 2014-15 to Rs 100 crore in 2015-16.

But, as the lower fuel cost benefit almost disappeared, the industry has seen their operating margins falling in the first half of 2016-17, which is an indication of the structural susceptibility of airlines to fuel price risks.

The agency added that still the industry will close the current financial year with a net profit of around Rs 150 crore.

“Capacity addition by incumbents and the entry of new carriers is expected to increase the competitive intensity, resulting in significant over-capacity in next two-three years if the demand growth is not sustained in the event of fare hikes due to increase in fuel prices,” Subrata Ray, a senior vice-president at the agency, said.

“This makes it crucial for airlines to remain focused on cost controls by ensuring that they strengthen their liquidity position to insulate from unforeseen shocks such as sudden spikes in jet fuel prices. The challenge to recovery and profitability due to external factors is a failure to maintain pricing discipline by offering deeply discounted fares,” he said.

In the near term, the industry balance sheet is expected to remain stressed except carriers reduce debt burden by improving operating performance or by way of equity infusion.

Also, for a sustainable growth, the government will have to address the aviation infrastructure requirements and regulatory matters, which have constrained performance of airlines.

The new civil aviation policy and the regional connectivity scheme are steps in that direction, promising to strengthen the foundation for growth in the coming years, he concluded.

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