Mumbai: The domestic aviation sector first needs sweeping policy reforms, particularly regarding jet fuel taxes and free ticket pricing, before allowing FDI into the sector, an ICICI Securities report said on Wednesday.
With passenger traffic moving into single-digit growth, due to higher ticket prices, along with last year's high base effect, the report said that developments at Air India and Kingfisher Airlines have helped other carriers maintain a healthy growth despite drop in passenger traffic last month.
Noting that the near 20 per cent drop in crude prices in the past two months was not fully reflected in aviation turbine fuel (ATF) prices, which saw a mere 5.5 per cent drop due to a falling rupee, the report has forecast a further reduction in ATF prices shortly.
"We believe that if the rupee strengthens over the medium-term, there would be more room left for oil marketing companies to cut ATF prices in line with the movement in global crude prices," the report said.
Therefore, policy action from the government and strengthening of the rupee remain crucial for the re-rating of the sector, it said.
The report is positive that concerns over slowing passenger traffic growth would be taken care of during the forthcoming lean season by rationalising capacity. Kingfisher and Air India have already curtailed their operations significantly.
The recent reduction in jet fuel prices are expected to help carriers like Jet Airways and SpiceJet to improve their margins by 1.2 and 2.7 per cent respectively, it said.
After three years of robust passenger traffic growth, it has once again come into negative territory in May, with a 0.9 per cent drop to 54.5 lakh, partially due to cyclical impact as well high base last year, the report said.
However, this will not impact SpiceJet and Jet Airways for the time being, as both have reported 29 per cent and 6 per cent growth in passenger traffic, it said.
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