Airlines need 10-15% price hike to survive: Angel Broking

Aviation analyst at Angel Broking Sharan Lillaney tells CNBC-TV18 that airlines need to hike prices by another 10-15% to make decent operating margins. going ahead. “If they cannot increase ticket prices, how will they ever make any kind of profits,” he said.

The DGCA last week warned private airlines against hiking airfares by a huge margin. This further increased the burden on airline companies that are already reeling under a ost of other negative factors. “For the nine months up to December 2011, SpiceJet lost Rs 356 crore as compared to a profit of Rs 159 crore for the nine month period up to December 2010,” said SL Narayanan, group CFO of Sun Group, which has a substantial stake in the airline.

Reacting to the DGCA directive, Lillaney says that interference from the regulator will be negative for companies. “If they cannot increase ticket prices, how will they ever make any kind of profits,” he questioned.

Below is an edited transcript of their interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: Do you think the Directorate General of Civil Aviation (DGCA) directives are restrictive in nature and unfairly so, or do you think there is merit in it because prices have gone up too much too soon?

Narayanan: With greatest respect to the regulatory authorities, we must see the state of the industry and put that in context before reacting to the so-called price increases. For the nine months up to December 2011, SpiceJet lost Rs 356 crore as compared to a profit of Rs 159 crore for the nine month period up to December 2010.

Q: What is your analysis is of the situation both in terms of what you think the quantum of price hikes has been over the course of the last month and a half and the kind of impact you are expecting to see in terms of earnings this quarter because of that for the functional companies?

Lillaney: For FY11, most of the airline companies will end up around 10% negative operating margins. In the last quarter, they have increased ticket prices by around 15% odd, but that will only make sure that they breakeven in the current year. They need to increase ticket prices by another 8-10%.

However, the DGCA has interfered which will be very negative for the private airlines. It is necessary for them to increase ticket price by around 10% to make some kind of profits going ahead.

Q: Do you think the fact that DGCA is looking to cap rates for many of the private airlines will have any kind of hangover on the sector the?

Lillaney: As I told you, they need to increase ticket prices by another 10-15% to make decent operating margins. If the DGCA continuously interferes with the ticket pricing mechanism, it will be very difficult for them to breakeven and they cannot continue to make these kinds of losses.

Recently, airport charges have also increased by around 5% of the total ticket prices so they have to pass on these kinds of charges also to the end consumer. If they cannot increase ticket prices, how will they ever make any kind of profits.

Q: What is your sense of where market share is at for two players Jet Airways and SpiceJet at this point?

Lillaney: Jet has around 26-27% market share overall and I think SpiceJet has around 16-17% market share.