Airline stocks gain as jet fuel price cut 12%

Gain 8% in intra day trade but shed initial gains to end 2-4.5% over previous close

State oil marketing companies cut jet fuel price by 11.9 per cent bringing relief to domestic airline companies.

Following the revision, jet fuel will now be sold at Rs 35,126 per kilolitre in Delhi—the lowest since October 2009. On a year-on-year (y-o-y) basis, aviation turbine fuel cost is down 24 per cent.

Aviation stock reacted positively to the cut in jet fuel price gaining eight per cent in intra-day trade but shed some of the initial gains to end 2-4.5 per cent over previous close.

Already, airline fuel expenses have reduced because of the price cut and its share in operating expenses has reduced from 46 per cent to 33.8 per cent for IndiGo, and in case of SpiceJet from 36 to 30 per cent.

The decline has also resulted in better profitability for both. IndiGo reported 24 per cent rise in its net profit to Rs 657 crore in the third quarter of financial year 2016 and the gain was negated by an increase in rentals, higher employee costs and depreciation. SpiceJet reported Rs 238 crore profit in Q3 its fourth consecutive profitable quarter in comparison to a Rs 275 crore loss in the corresponding period last year.

Aviation consultancy CAPA has revised its FY16 profitability outlook for domestic airlines. It expects industry-wide losses to reduce to around $500-550 million, down from the earlier estimated $680-750 million. This is largely expected due to better profits of low cost airlines and reduction in Air India's loss with low fuel costs, stable rupee, strong passenger growth being the key drivers for improved results.

Globally also International Air Transport Association expects improved profitability for airlines in 2015 and 2016 on the back of decline in fuel price and high demand.