Fight for cabin crew, firm ATF prices to aggravate airlines' pain: Analysts

IndiGo's latest flight delay fiasco suggests the Indian aviation sector could be on the cusp of "the most competitive and hostile environment", fear analysts. With three new players - Air India under its new management, Rakesh Jhunjhunwala's Akasa and Jet Airways that is trying to find wings again – vying for pilots and cabin crew staff, incumbent players are set to witness ballooning employee costs along with elevated margin pressure, they said.

"The pain will be felt by IndiGo, SpiceJet, and Go Air. The by-product of increased cost and margin pressure is a given. The situation is inevitable," said Deven Choksey, managing director at KR Choksey Investment Managers.

Last week, over 50 per cent of the flights operated by IndiGo got delayed after a large number of cabin crew members of the airline did not report for duty. Reports suggest the staff went for job interviews, likely for Air India, but called-in sick at the last moment, throwing the airline's operations in  jeopardy. Tata-owned Air India, as well as Jet Airways and Akasa Air, is in the midst of a massive recruitment drive, reports suggest.

Following the development, shares of IndiGo fell 4 per cent in the intra-day trade on Monday, while those of SpiceJet and Jet Airways shed 2.5 per cent and 5 per cent, respectively.

According to analysts, the Indian aviation sector is seeing headwinds like the Information Technology (IT) sector, where higher attrition rates have forced the management to dole out benefits like double-digit pay hikes, healthcare benefits, and hiring beyond metros.
 

"Acquisition of Air India by Tata, and entry of Jet Airways and Akasa Air could start a trend in the aviation space, like the Indian IT, where we may see a sudden spike in attrition rates. Unfortunately, this is happening at a time when aviation turbine fuel (ATF) is at record high levels, airlines have stretched balance sheets due to the pandemic, and rupee is falling. One of the players has already reported negative net worth which shows elevated debt levels. It's not a good sign," highlighted G Chokkalingam, founder and chief investment officer at Equinomics Research.

During the January to March quarter of FY22 (Q4FY22), IndiGo Airlines posted a net loss of Rs 1,681.8 crore as fuel costs surged 68.2 per cent year-on-year. Fuel expenses accounted for 32.6 per cent of its total cost structure. Employee costs, which accounted for 9.4 per cent of total expenses, rose 15 per cent YoY in Q4-FY22.

SpiceJet, meanwhile, is yet to report its Q4FY22 results. During September-December period (Q3FY22), the airline's fuel expenses were 37.4 per cent of its total costs, while employee expenses were 8 per cent of total costs.

Concerns priced in?

Analysts believe this surprise dent in margin may not be completely priced in by the markets, leading to increased pressure on stock prices in the immediate future.

"Airlines are set to see increased margin pressure on account of increased fuel costs, limited elbow room to hike air fares, and now limited talent pool," said Ambareesh Baliga, an independent market analyst.

Airline crews, especially pilots, need years of training. Besides, a single aircraft needs an average of 15 crew members; thus, even if incumbents or newer airlines decide to hire new crew members, it will take time to ease talent crunch pressure, he added. 

Chokkalingam, too, expects listed players to see margin compression in the near-term, though the extent may be difficult to gauge at the moment. "Airlines may choose to pass on some part of cost pressure. Besides, air travel is also picking up. Therefore, while the margin pressure can't be ruled out, only time will tell the exact quantum," he said.