Aviation: Hyper-competitiveness @ loving it!

Interglobe Aviation (‘Indigo’), last week become the first Indian airline to have 200 aircrafts in its fleet. It had inducted its first 100 aircrafts in December 2015. So, while it took 9 years to get to first 100 air-crafts, it took only 3 years to double the count.

As Indigo celebrated this remarkable feat, the entire Indian domestic aviation industry stood in an extremely stressed cycle. All the domestic listed airlines, viz. Jet Airways, SpiceJet and Indigo incurred losses recently, first time ever for Indigo though.

  • Jet Airways incurred loss of INR 725 crores in FY 2018; in fact, the company has incurred losses in 8 years of the last 10 years since March 2009. The company incurred loss of INR 1,297 crores in Q2 FY 2019. I had written about it in August this year http://jaagrav.com/index.php/2018/08/12/train-to-notice-what-one-sees-jet-airways-fiasco/
  • Spicejet has had a volatile historical financial record as well, at least as far as profitability is concerned. While each of the financial years, 2016, 2017 and 2018 have been profitable for the airline, its historical record has been far from satisfactory. It has had 5 years of losses in the last 10 years. The company incurred loss of INR 389 crores in Q2 FY 2019.
  • Indigo has been profitable in each of the last 10 years until FY 2018, with cumulative Free cash flow of + INR 12,500 crores during the corresponding period. This dream run was however punctured in the Q2 of FY 2019, when the company incurred a loss of INR 652 crores for the first time in its last 10 year-history.

As the entire aviation environment is currently stressed, with all the Indian airline companies losing money, another way to look at is:

How long can this hyper-competitiveness continue?

Obviously, not long!! Eventually, some of these companies will get some incremental pricing power. The moment that were to happen, it will straightaway go to the bottomline of some of these companies, thereby making some of them either profitable or less loss-making as compared to the earlier numbers.

With increasing propensity to travel, price of crude abating a little, airlines getting increasingly cost-conscious, the aviation sector could should some signs of improvement, provided the players start eliminating the temptation to make people air-borne at any price, simply to maintain cash flow, which is a major problem faced by some companies.

While I am not a big fan of “next quarterly numbers”, some of these positive factors and rationality, if achieved could see some greener pastures ahead, at least for the better-behaved lot.

After all, as Howard Marks says: “The safest and most potentially profitable thing is to buy something when no one likes it.”

Disclaimer: Please note that these are my personal views. While, I am a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014, all investors are advised to conduct their own independent research into individual stocks or industries before making any decision. In addition, investors are advised that past stock performance is not indicative of future price action. 

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