Airlines in India are capitalising on the opportunity to add more flights and increase fares as debt-laden Jet Airways remains grounded, which could help the aviation industry turn profitable this year, analysts say.
“Indian airlines are ramping up capacities fast to make up for the supply deficit in the wake of the cessation of operations by Jet Airways,” says Garima Mishra, an analyst at Kotak Institutional Equities, based in Mumbai.
The airline was India's second largest, covering more than 60 destinations across the country and abroad, including London and Dubai, with its fleet of 119 planes. However, burdened with about $1.2 billion (Dh4.4bn) in debt, it was forced to suspend all flights in April as lenders refused to provide additional funding.
Jet’s crisis emerged as it fell into arrears in the wake of fierce competition in India's aviation sector, which forced Jet to slash fares to compete with budget carriers such as IndiGo and SpiceJet. The lower fares made it difficult for the company to cover its high operating costs, including fuel and taxes, in what has been a challenging environment for all of India's airlines. One less player to compete with on the board is a boon to other carriers, analysts say.
“The closure of Jet Airways has positively transformed market dynamics for Indian carriers,” according to a report by CAPA India, an aviation consultancy. This financial year “could mark a positive turning point for the sector”.
In “an optimistic scenario”, the consultancy predicts the industry could post a profit of as much as $700 million in the financial year, which runs from April 2019 to March 2020. “Even in a pessimistic scenario, airlines are likely to remain in positive territory to the tune of $250m to 400m”.
Such a scenario would be the first instance since CAPA started tracking the sector in 2003 of Indian airlines posting a combined net profit at an industry level. The reversal in fortunes is helped by an increase in fares, which are up as much as 12 per cent in April and May on the year for budget airlines, the consultancy’s figures show.
However, CAPA warns that while domestic routes are being filled quickly and are likely to return to normal in the next few months, “Jet’s closure leaves a notable gap in the international market”, predicting that recovery in the international sector could take one to two years.
Meanwhile, as Jet Airways' rivals benefit, lenders are still trying to find investors to revive the airline.
Founded in 1992, Jet Airways carried 15 per cent of passengers in the Indian aviation market last year, according to government data. That means its demise has created a sizeable gap in the second most populous country in the world.
Kotak's analysis of airline capacity data for April, when Jet stopped flying, reveals that even at that early stage, 2.9 billion available seat kilometres – a key industry measure of an airline's capacity - of Jet's 4.5 billion available capacity, had already been added by other airlines.
“We believe this gap may narrow further in the next two to three months as most of Jet’s fleet is absorbed by SpiceJet and Vistara and Indigo continues to add 30 per cent year-on-year capacity,” says Ms Mishra.
“Jet’s deficit can thus be fully reversed in the next four to five months,” she says. “This is much faster than the three years taken by the industry to revert to normal, post-Kingfisher’s closure of operations in 2012.”
Comparisons between Jet Airways' woes have been drawn with those of Kingfisher Airlines, which was part of flamboyant tycoon Vijay Mallya's empire. Kingfisher went out of business as it struggled with steep losses in India's competitive aviation market.
Companies have been willing to compete to win passengers because of the high stakes in the long run. India's aviation market has enormous potential and travel by plane is rapidly growing. Only a single digit percentage of the 1.3 billion population travel by air in the country, leaving an enormous pool of potential flyers.
For now, though, unlike the airlines, passengers have not benefited from Jet Airways' woes because of the fact that there are fewer flights to choose from, driving up fares.
Jet’s grounding has increased domestic fares by as much as 15 per cent in the second quarter of the year, which could “soften gradually but not before the October to December quarter this year”, says Gagan Dixit, the aviation analyst at Elara Capital, a financial services company based in Mumbai.
SpiceJet and India's largest carrier, IndiGo, are the key beneficiaries of Jet Airways' grounding, forecasting that they each stand to gain market share of 6 per cent, while international airlines are also picking up some of the routes, according to Mr Dixit.
Last month, Virgin Atlantic said it plans to relaunch its flights between London and Mumbai in October.
"Until recently we've been able to serve this important market through our partnership with Jet Airways. However, since Jet Airways has sadly suspended its operation, we now have an opportunity to provide alternative options for our customers and meet this demand,” Juha Jarvinen, the executive vice president, commercial, at Virgin Atlantic, said.
Still, there are limits to how many flights foreign carriers can snap up, which means that there could be gaps left, analysts say.
“International airlines are temporarily benefitting from higher fares, but unlike SpiceJet and IndiGo who would gain market share in the domestic market too, international carriers would not get additional slots in India as international slots allocation is based on bilateral agreements among governments,” Mr Dixit says.
The country’s flag carrier Air India is set to benefit the most in terms of long-haul overseas routes, with the other Indian carriers largely focused on domestic and short-haul flights, he adds.
Even as some consider how the landscape might change, lenders and authorities still appear hopeful that Jet Airways may return to the skies.
India's new civil aviation minister, Hardeep Singh Puri, on Friday told reporters in New Delhi that he remains confident that “we can solve the problems at the now defunct carrier”.
The minister’s comments were the first made by the government on Jet Airways since the Narendra Modi-led administration was re-elected in a landslide victory last month. This is despite the fact that unions have staged protests demanding government intervention to help revive the airline, with some employees still trying to get salary payments owed to them by the carrier. There are more than 16,000 jobs on the line with its demise.
In addition to employees, including pilots, Jet owes money to fuel suppliers and plane lessors. This has resulted in two of Jet's creditors filing insolvency petitions against the airline at the National Company Law Tribunal, with the case to be heard on June 20.
Despite the challenges, there has been interest in the carrier. Mumbai-based conglomerate Hinduja Group last month said it was “evaluating the Jet Airways opportunity”.
“There is always a chance for Jet Airways’ revival if investors are willing to pump money and restart with 30 to 40 planes on domestic routes and 10 planes on international routes, with a single type of aircraft or at the most two types to keep operating costs down” says Satish Modh, who worked on a turnaround plan for Air India before becoming the director of the VES Institute of Management Studies and Research in Mumbai.
But Mr Dixit points out “the financial crisis and [the] subsequent fleet grounding would make it difficult for a potential acquirer to ramp up operations”. He explains such a situation increases “the possibility that Jet Airways would either permanently shut down or reduce to less than 30 domestic planes”.
The airline is also facing mounting challenges. Last week, the National Stock Exchange (NSE) issued a notice saying that speculative options and futures trading in the airline's shares would be stopped from June 28. The ruling caused the stock price to plunge more than 25 per cent over the course of Thursday and Friday.
“Exchanges have been seeking clarification from the company in the recent past with respect to various rumours floating in the market,” NSE said in a statement, explaining the move. “However, the company has failed to provide prompt responses.”
Given the extent of the problems, some experts believe that the future for Jet looks bleak.
“In six months' time,” says Mr Modh, “people will forget that there was a Jet Airways in India.”
