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Home  » Business » How the new aviation policy will hurt Jet Airways' interest

How the new aviation policy will hurt Jet Airways' interest

By Aneesh Phadnis
June 17, 2016 08:41 IST
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A Jet Airways aircraftRelaxation of 5/20 would impact Jet more than other airlines.

Competition is set to increase on international routes, with the government relaxing the 5/20 rule which prevented domestic airlines from flying abroad unless they had at the least five years’ experience in domestic operations and a fleet of at least 20 aircraft.

Vistara and AirAsia India have been lobbying for the relaxation of this rule.

Their foreign expansion will impact Jet Airways more than other private airlines, as it earns 55 per cent of its revenue from international operations.

Both Vistara and AirAsia have strong partners and the opening of overseas routes will increase competition while driving down airfares.

Jet Airways had a market share of 14.47 per cent in international traffic from India in FY15, while Air India had 12 per cent and IndiGo had 3.18 per cent.

International passenger traffic from India stood at 45.7 million in FY15 and Indian carriers only have a share of 37 per cent of this traffic.

With the government liberalising the 5/20 rule, domestic airlines will start vying for this customer base by offering attractive fares, which will impact Jet and government-owned Air India from both revenues and earnings point of view.

IndiGo and SpiceJet have much smaller international play. IndiGo, the largest domestic airline by market share, earns about 9 per cent of its revenue from foreign operations, while SpiceJet earns 22 per cent.

New airlines still need to deploy 20 planes on domestic routes before being eligible to fly abroad.

In the March 2016 quarter, Jet earned 55 per cent of revenue from international operations.

The airline does not give a break-up of domestic and international profitability but experts say it earns half its profit from foreign operations.

“Relaxation of 5/20 would impact Jet more than other airlines.

"However, the extent of impact will depend on several factors such as routes chosen and capacity deployed by the new airlines, competition and traffic growth.

"Cities in West Asia and South East Asia are potential destinations for new airlines such as AirAsia and Vistara.

"Jet Airways already has a sizeable presence in these regions and we expect it to rework strategy to face new competition,” said aviation consultant and Jet Airways’ former investor relations head K G Vishwanath.

Stock market analysts too believe that the dilution of the 5/20 rule would queer the pitch for incumbent airlines and intensify competition on international routes.

“Any dilution of the 5/20 rule will enable newcomers Vistara and AirAsia India to deploy capacity on international routes possibly much earlier than anticipated.

This could lead to heightened competition and exert pressure on yields. Scrapping of this rule could queer the pitch for the incumbents with competition intensifying over medium to long term especially Jet Airways which has 60 per cent of its capacity (in Q4 FY16) deployed on international routes followed by SpiceJet (24 per cent) and IndiGo (10 per cent),” Santosh Hiredesai of Edelweiss Securities wrote in an investor note last month.

A senior SpiceJet executive said the international market is growing and there is room for more players.

“Already, we are competing with airlines like Emirates on the Dubai route and we do not see entry of new airlines on foreign routes as a challenge.

"Going forward, we will continue to have a healthy mix of domestic and international operations,” he said.

Image: A Jet Airways aircraft. Photograph: Vivek Prakash/Reuters

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Aneesh Phadnis in Mumbai
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