Entry of new players to weaken the health of the airline sector: HSBC Global Research

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NEW DELHI : The entry of two new carriers – Akasa and Jet Airways 2.0 – is likely to weaken the health of the national airline sector due to upcoming fare wars and oversupply in a market recovering from a major pandemic, further adding pressure to incumbent load factor and returns, HSBC Global Research said in a report on Friday.

“While demand recovery may resume in Q2 CY22 (April-June 2022 quarter), causing some optimism, this may be short-lived as two new airlines plan to start operations in Q2 CY22 (July-December 2022 )”, the report titled ‘Indian Aviation, 2022: A Year in Two Halves’ said.

“Amidst all these challenges, investors are worried about the outlook for returns…we think the price war could be the obvious result of oversupply in the market. Based on our calculations, the industry could add 80 to 85 aircraft this year, which could increase the gap between demand and supply, adding pressure on load factor and yield,” he added.

Domestic air passenger traffic has declined significantly since the start of the month due to the ongoing third wave of the covid-19 pandemic. Over the past 10 days, domestic air passenger traffic has fallen by more than 45%.

The HSBC report, however, said there was optimism that the current wave could recover more quickly due to countries in Europe and Africa recording peak levels of infections for a longer period. short in the middle of a softer impact than previous waves.

“Although demand in the previous two waves of covid-19 took around 8-9 months to return to around 80% of pre-covid-19 levels, the peaks in infections in the UK and South Africa this times were sharp and brief but with a very soft impact, so the mood regarding travel is still quite optimistic in Europe,” he added.

HSBC Global Research expects the two publicly traded airlines, IndiGo and SpiceJet Limited, operated by InterGlobe Aviation Limited, to post steep losses in the December quarter.

While IndiGo should report a 310 crore loss, SpiceJet expected to report losses to the tune of 170 crores in the recently concluded quarter, according to the report.

“However, the main issues will be the business environment and the capacity outlook, which doesn’t look too optimistic at the moment,” he added.

Meanwhile, the recovery of international demand could take much longer as many countries, especially those comprising major economies, apply travel restrictions to contain the spread of the virus. However, domestic aviation should recover faster.

“Looking further down the track in Q2 CY22 (April-June 2022), while demand recovery will depend on developments around the virus and vaccination, we believe recovery could pick up… Also, generally Calendar Q2 (April-June quarter) is seasonally one of the strongest quarters for Indian Aviation,” the report added.

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