Gagan Dixit, Senior Vice President, (Oil, Gas & Aviation), Elara Securities The fund avoided the collapses of the economy carrier Go First at the time (FY24) when experts and rating agencies estimated a boom in the airline business.
In an interview with ETCFO, Aviation Analyst Gagan Dixit, Senior Vice President, (Oil, Gas & Aviation), Elara Securities said, “The collapse of Go First may result in an increase in air fares of at least 8 to 10 percent.”
However, “…FY24 will be a healthy year for the industry, with demand increasing by 20% and crude oil prices falling to $70-75 per barrel,” estimated Dixit.
He also discussed the failure of Go First in terms of what went wrong and the challenges for aviation CFOs. But what will be the market cap impact for the impact on other airlines like Indigo, Air India, SpiceJet etc?
Indigo is expected to gain a market share of at least 3% in the absence of Go First. While Air India and Vistara together would also gain another 3 percent; Spicejet will benefit around 2%, Dixit estimated.
According to the aviation analyst, the next five to six months will provide an opportunity for other airlines, flying similar routes, to capture considerable market share after the failure of Go First.
Go First Collapse to Increase Airfare 8-10% and Demand 20% in FY24, Says ExpertIndustry perspectives
In any case, the aviation industry is not in a turbulent climate, in fact the conditions are favorable and prosperous for the industry to earn more money in the next five to six months, the aviation analyst said. The collapse (of Go First) seems contradictory because the next 10 months are expected to be booming for Indian airlines,” he stressed.
However, it relates to the bigger challenge than the the aviation industry is facing a lack of supply. Dixit further shared that the choice of engine and aircraft has a considerable impact on an airline’s performance. Much more than just fuel efficiency.
“If Go First is able to manage the problem with the engines, they can somehow make a lot of money this year,” he added. Follow for more in the edited excerpts below:
Q: Go First is a major airline collapse after Jet Airways, what does it mean for India’s aviation sectors? How will this affect other airlines?
Gagan said: The short-term impact will be an increase in airfare. In comparison, and since the Jet Airway case, there has been a 15 to 20 percent increase in air fare. Now Go First has half the market share compared to Jet which is around 7.8 percent market share.
Therefore, the collapse of Go First may result in an increase in airfares of at least 8 to 10 percent.
Q: Is it a turbulent time for the aviation industry? What are the prospects for fiscal year 24 for the sector?
Gagan said: These are the consequences of the Covid period liability of more than 2 billion rupees. Two airlines Go First and Spicejet were the worst affected, although the latter manages the cargo business and keeps it afloat.
Now the airlines that continuously paid their suppliers during the Covid period have priority, in terms of aircraft or engine etc. So, Indigo is leveraging this advantage. During Covid, the prices of narrow body aircraft fell. Companies making one-time payments were getting more discounts on aircraft, services, rental deals, fuel-efficient engines and aircraft. Indigo was able to capitalize on this and improve its margins by getting better deals – pre-covid, Indigo’s non-fuel cost was around Rs 2.1-2.2 per seat-km, now it is between Rs 1.8-1.9 (excluding interest). cost), that’s a 10% drop. They promptly changed the engine supplier and have a large order of over 700 engines for 310 aircraft. Indigo can continue with this advantage for the next five years.
In the case of the Tata Group it has deep pockets, which means they have the bargaining power and are at an advantage over smaller companies, especially at a time when the market is consolidating. They have Air India. Aviation is not the plot game, but also an income game. This is where Tata has an edge. Most flights operate at peak times from metro cities, this means more revenue.
However, Air India needs to be more punctual, where airlines are already progressing well. Another advantage of Tata is its international airport reach, where other companies cannot compete.
Tata is leveraging its revenue advantage while Indigo is leveraging its cost advantage. Indigo might gain market share or maintain a sustainable lead in the domestic market, but Air India, Vistara would try to expand from the international angle.
Q: When we talk about two major airline collapses, Go First and Jet Airways, economic factors like post-covid slowdown, rising fuel cost, rupee volatility was a major reason or the Was debt management the real problem?
Gagan said: Both were different cases. At that time, Jet Airways was trying to compete in the low-cost carrier space with SpiceJet, Go Air and Indigo.
Supply was not very strong due to manufacturing challenges. So if the airlines have airlines, that will be a big plus this year.
2019, when Jet Airways was facing problems, was the worst year for airlines in terms of profits. By September 2018, all carriers had suffered heavy losses, there was a sudden 20% increase in their supply, prices had fallen while crude oil prices jumped above $80 a barrel. Jet Airways was the most affected, but this is not the case for Go First. Conditions are favorable and prosperous for airlines to make more money in the next five to six months. However, the airlines have to manage the supply. If you have the plane, you can earn money.
Q: Go First cut their planes by 50% by 2022, costing them about $1.32 billion in revenue. Do you think this is not a reflection of the health of the sector? Is Go First a case?
Gagan said: Yes, it is a unique case, but it also shows that the discipline of doing business is more important. Balance sheet discipline is a long-term phenomenon that gets you the cost advantage.
Second, airlines should have a single fleet of aircraft, then you can reduce the cost. You have to take the fuel efficient airplane or engine and do that calculation while maintaining a healthy balance sheet in turbulent times.
In the aviation industry, it is not revenue, but cost management that drives business; this is where the airline survives. On the lower side of cost, one would always need more money related to others. Reserves must be kept for turbulent times.
Q: What are the aviation industry challenges in FY24 and beyond that CFOs should be aware of?
Gagan said: The biggest challenge is on the supply side. The Boeing 737 still has some certification issues. Therefore, they cannot manage the supply properly. At the same time, Airbus also has the same supply problem.
While “certainty” is a challenge, manufacturers are not able to maintain production demand from the pre-covid days and part of the problem is the war between Russia and Ukraine.
On the other hand, titanium has multiple uses in the aircraft engine. It is an important element and for aviation based titanium before covid 50% was supplied by Russia. So supply is a big problem facing this industry.
Airlines cannot plan completely in advance, if one hires the pilot and other staff in advance and the plane is not available, it will cost the company. Including airport fare and other upfront payments, these costs are difficult to manage, have no visibility into revenue, so this is the airline’s biggest headache in FY24.
There is a lack of supply, but the addition is also less. The number of aircraft may remain the same. The management of this part is very tough for this exercise.
In addition to supply management and fuel efficient engines in terms of manufacturing, it is also advantageous for airlines to have their own carriers for cost efficiency.
