Despite the bankruptcy-like situation faced by SpiceJet, air ticket rates in India will not rise significantly in the next two years, rating agency CRISIL said.
SpiceJet, one of India’s biggest airlines, has seen its fleet size reduced from 58 aircrafts to 37 this year as it grapples with high debt and low profitability.
The airline’s troubles has been taken advantage of by rivals who have increased their fares substantially as a result of cancellation of flights by SpiceJet.
CRISIL, which does research on companies, does not see that as a continuing trend, and expects only a 2-4% rise in ticket rates in domestic airline sector in India over the next two years.
“With crude oil prices expected to decline sharply and the rupee remaining largely range-bound, we do not see significant cost pressures for airlines. However, with high accumulated losses and high debt burden, we believe that players will be on the lookout for an opportunity to increase ticket prices. An improvement in demand could provide that opportunity, but rising competition will keep the price increases under check as existing players look to protect their turf from the new players,” it said.
That, however, doesn’t mean that airlines will continue to bleed. A sharp increase in ticket sales will push up their operating profits as well, the agency said.
“At an aggregate level, domestic carriers are expected to post an operating profit of Rs 81 billion in fiscal 2016 — a complete U-turn from the Rs 15 billion loss posted in fiscal 2014. That translates into a spectacular 14 percentage point improvement in operating profit margin to around 11 per cent in fiscal 2016,” it said.
The reason? New and old operators alike will be more cautious this time when it comes to increasing capacities and therefore each plane will fly fuller than in the past.
“Despite the new entrants, aggregate PLFs (% of seats filled with passengers) are expected to improve by about 400-500 percentage points by 2015-16. Existing players will find it difficult to increase capacity significantly due to their financial woes…Also, we believe the new entrants will be measured and cautious initially in ramping up capacities.”
“At an aggregate level, domestic carriers are expected to post an operating profit of Rs 81 billion in fiscal 2016 — a complete U-turn from the Rs 15 billion loss posted in fiscal 2014. That translates into a spectacular 14 percentage point improvement in operating profit margin to around 11 per cent in fiscal 2016,” it said.
However, due to high debt levels, much of this operating profit will go towards paying interest costs. To get rid of the massive debt on the balance sheets, the sector needs around Rs 35,000 crore (almost $6 bln), CRISIL added.