DGCA  announced restarting of domestic air traffic from 25th May with prescribed air fare bands
DGCA announced restarting of domestic air traffic from 25th May with prescribed air fare bands

This is twice in two days now, that the government displayed its penchant for surprising the market. A day before, the entire aviation industry was woken from its slumber and assigned a task of resuming their services in three days. The onus was passed on to RBI governor today who came up with 'out of nowhere' kind of 40 bps rate cut.

The governor while announcing liquidity boosting measures, also anvil the harsh reality that was too much for the market to digest. The governor while doing his bit to infuse further liquidity also highlighted that GDP growth could remain in negative for FY21. The statement had its effect as market took a deep nosedive.

Intraday, Sensex lost 260 points to close at 30672 while Nifty lost 67 points to close at 9039. Zee Entertainment (up 7.05%), M&M (up 4.18%) and Cipla (up 3.31%) were the major gainers of the day while Axis Bank (down 5.67%), HDFC (down 5.08%) and Bajaj Finserv (down 4.93%) were the major losers of the day.

Aviation: Goes back to work with one hand tied to its back.

DGCA today announced restarting of domestic air traffic from 25th May with prescribed air fare bands. The airlines would be allowed to begin operations with 1/3rd capacity of the approved summer schedule, and gradually ramp up thereafter.

Prescription to sell ~40% of tickets below the median bucket rate is helpful to keep prices down but it sets a precedent of fair control that was largely left to market forces up until now.

As per an estimate, high operating leverage of the airlines necessitates 50% load factor to make commercial sense to fly. This remains an evolving situation with airlines optimizing routes to minimize losses. Contrary to initial speculations, the middle seat will continue to be used, as even after removing them, prescribed distancing norms won't be met.

The industry is expecting high load factors for the initial period with pent up demand from people left stranded but demand in the near term will be muted on the back of factors like risk aversion to travel in general.

Key Takeaway:

New developments are coming in thick and fast but the Governor’s serious actions have burst the bubble of many investors expecting a quick recovery post lockdown. With a fixed time period set before it reopens its shutters, the ailing airline industry now has a better clarity to navigate the rough waters but new constraints are a sign that structural changes in the industry might come in effect in the near future.

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