'Freeing up of air space can save valuable cash if implemented right; Aviation industry clearly needs much more'

Ashish Shah

The government in its relief measures for the Civil Aviation industry announced its intention to free up India's air space for civil aircraft movement. Currently only 60 percent of India's air space is freely available for civil aviation with the rest being restricted for Defence use. This often leads to airlines having to take longer routes leading to increased expenditure on fuel and crew costs due to longer flying hours. The government will work with the Defence forces and rationalise these restrictions on air space availability to make civil aviation more efficient.

The government estimates this relaxation will lead to Rs 1,000 crore per annum cost savings for the aviation industry. Assuming a large part of this is by way of fuel cost savings this should lead to around 3 percent reduction in fuel costs for the industry. More importantly, cash savings of Rs 1,000 crore annually for airlines is not an insignificant amount at this difficult juncture when the industry is staring at steep losses.

On a back of the envelope basis, cost savings for the two listed airlines IndiGo and SpiceJet should be Rs 480 crore/Rs 160 crore, respectively given their domestic market shares of 48 percent and 16 percent, respectively. However, the true extent of relief would depend upon the speed with which the Government is able to work with the Defence forces to free up the air space.

And not to forget the actual savings would also depend upon the speed with which the airlines are able to restore their operations at normal levels as government estimate of savings would likely have been estimated on such basis. Having said this, much more needs to be done for the industry given that the disruption has been severe and that air travel will take at least 12 months if not more to come back to normalcy.

We advise investors to wait for the Q1FY2021 results of IndiGo and SpiceJet before taking any investment decisions. The quarter numbers will give a clearer picture of the performance of the companies, as they would have had only marginal operations (largely cargo). At current levels, we recommend a buy on IndiGo and a reduce on SpiceJet.

The author is Aviation Analyst at Centrum Broking.

Date: May 19