COMMENT: How airlines gained during cash ban, and the cost they paid

Shishir Asthana

Moneycontrol Research

The media is full of reports of how demonetisation has affected different sectors, the common man’s plight underscored by photos of serpentine queues outside banks. In all this noise, one sector continued to grow: Aviation.

Data for November, the month when Prime Minister Narendra Modi announced demonetization, actually saw Indian carriers notching up the highest domestic passenger number for the year.

Domestic passenger traffic grew 22.7 per cent during the month to 9.0 million. Civil Aviation minister Ashok Gajapathi Raju proudly tweeted “Allaying all growth fears, domestic passenger traffic has again clocked record growth of 22.4 per cent YoY in the demonetisation month of November 2016.”

He has quite a bit to crow about, even if this growth is coming at a cost.

Data released by Directorate General Civil Aviation shows that all airlines improved their passenger load factor (PLF). IndiGo continues to have the lion’s share of 42.1 per cent of the market followed by Jet Airways at 14.9 per cent.

There are two main reasons for strong growth in November. First was the delayed festival season that resulted in higher traffic. But more importantly was the reduction in tariff rates. Fearing impact of demonetisation, airline companies reduced rates despite the festive season, which is normally their best time to make money. Also rising oil prices on account of OPEC cartel being re-activated failed to prevent these airlines from dropping rates.

Reports say that on an average prices dropped by 12 per cent in November while jet fuel prices increased 17 per cent during the same period. The highest price drop was on the New Delhi – Mumbai route: 30 per cent by IndiGo. Rising cost and falling prices means that airlines are operating on lower yields.

This could be why airline stocks took a beating: Indigo fell by 10.66 percent, SpiceJet fell by 8.55 percent and Jet Airways fell 20.5 percent. The BSE MidCap index, of which these stocks are not a part, fell 8.8 percent.

Airline companies will have to push for higher growth in international travel to compensate for lower yields in domestic market. However, IndiGo was the only airline which saw a marginal increase in international flights, while both Spice Jet and Jet Airways posted negative growth.

Airlines could have also benefitted in the initial days of demonetisation when it was reported that there was a surge in booking as ticket bookings were allowed in cash, though data is not available to confirm this hypothesis.

Airline momentum has been strong in the second half of 2016. An ICICI Securities report points out that the trajectory of Indian aviation has remained largely on the same course of higher traffic, higher PLF and weaker yield.

With increasing oil prices one needs to wait and see how long can airlines hold on to low prices, which in turn will affect passenger traffic. The last thing that these airlines need is holding on to prices and adding losses as aviation fuel costs rise.