Better pricing power largely driven by consolidation, not-so-high aggression from players, and strict focus on cost-efficiency are some factors that are likely to improve the industry’s normalised operating profit before tax (Ebitda) in the medium term, analysts said.
In a capital-intensive sector like aviation, a change in a business situation is driven largely by demand, cheap crude, low competition, and exit, entry or emergence of a player after consolidation.
In the case of an exit, historically it has been observed that existing players gain market share and valuation premium. The grounding of Jet Airways in 2019 is a case in point. In the early months after the grounding of the airline’s aircraft, the sector’s yield had jumped to 23% month-on-month basis in April 2019 and analysts estimated at least two times growth in earnings before tax and rentals (Ebitdar) of well-placed airlines. The entry of a new player, if backed by a strong promoter, changes the dynamics, as it mostly leads to price wars.
But the acquisition of a few airlines by an existing airline that is backed by one of the most well-managed and top-notch promoters is a different ball game.
Analysts ET spoke with said the Tatas would probably not want to kill the competition by flooding the market with capacity or slashing ticket prices. Instead, they said, the Tata Group which now has close to 25% market share in the domestic aviation industry with the acquisition of Air India – it already operates Vistara and Air Asia as joint ventures – would focus on a sound strategy of controlling its costs and reducing its leverage to attain a certain scale of profitable operations.
Hence, they said, the likelihood is low that there will be extreme aggression in the pricing of tickets. This will not lead to a price war situation in the industry.
According to analysts, in the medium-term, players would have better bargaining power, which would increase their yields. Besides, the reduction of Air India’s debt also reduces the industry’s debt. As a consequence, the industry’s base of breakeven and Ebitda would grow in the medium term. Analysts estimate that the listed airlines – InterGlobe Aviation (57.6% market share) and SpiceJet (8.9%) – may get higher valuations compared with their historical average in the medium term. But the street will accord premium valuation only to the company that shows cost discipline.
An analyst with a leading broking firm said, “It is important to understand that in the coming quarters, the same story will play out, with the difference being the emergence of a formidable player. Premium in valuation to an airline will be largely linked to its ability to control costs and not just to the languishing or weakening of its peers.”
