Flying higher

If the sector is able to control costs and maintain higher load factors going ahead, then consistent profitability could become a reality.

The aviation sector had a good December quarter with domestic passenger traffic growing at 30 per cent year-on-year to 12.5 million. Passenger loads in the quarter which is considered a peak season, were in the mid-seventies, a breakeven point for most airlines. The improvement in passenger numbers helped companies to push up volumes while cost control measures helped improve profitability. An indicator of demand is the fact that the sector, which was cutting capacity till June 2009, started adding incremental capacity from July. Moreover, in the December quarter while airlines have added about 9 per cent to their capacity domestic traffic has surged 29 per cent, which indicates that capacity utilisation rates have been higher.

Going ahead, considering that demand is expected to improve by about 15 per cent per year and capacity addition estimated to increase by about 5 per cent a year expect loads to continue to be at 70-75 per cent levels or push higher. The biggest risk for investors in this sector, in addition to passenger demand, is the cost of fuel. Crude oil prices have been trading in the $70-$80 range for the last six months and the return to profitability for the three listed players is dependent on the movement of this commodity. A price war could be another wealth destroyer but considering the need for airlines to improve yields and the financial situation, this appears unlikely.

While these concerns remain, the airlines, aided by demand recovery, seem to be on the path to profits. The markets have recognised this and while the Sensex has barely moved from its August 2009 levels, stock prices of Spicejet and Jet Airways have gained 106 per cent and 80 per cent, respectively. Kingfisher has increased 5 per cent. We take a look at the December quarter performance of the three listed players.

Jet Airways
Passenger loads of 80 per cent and 33 per cent increase in passengers in the December quarter saw India’s largest airline post revenues of Rs 2,936 crore. To utilise its excess capacity on the international routes, the company has leased out four B777 aircrafts and is planning to lease out three more before March. This not only helped it to earn Rs 105 crore in profits, but also improved utilisation levels with loads on the international network peaking at 82.5 per cent.

Domestic capacity of Jet Airways in the December quarter improved by 13 per cent year-on-year and loads in increased to 75 per cent both in response to demand as well as due to the introduction of no-frills service Jet Konnect from May. The management says that high yields, growth in traffic and cost efficiencies have resulted in improving operating profit (Ebidtar) margins. Considering that its Jet Konnect gamble is paying off and the company expects loads to stabilise from here on, a trigger for the scrip could be the $150-$200 million QIP which will help it repay a part of its Rs 14,000 crore debt. At Rs 479, the scrip is trading at 17 times its 2010-11 estimated earnings.
 

A PROFITABLE QUARTER
in Rs crore	Jet Airways	Kingfisher	Spicejet
Passengers flown (mn)	3.4	2.7	1.6
Growth (%)	33.2	4.2	56.0
Market share (%)	26.9	20.8	12.5
Change (bps)	320	380	200
Sales	2,936	1,352	642
% change	-4.5	-6.6	36.0
Oper. profit (EBIDTAR)	714	168	200
OPM (%)	24.3	12.4	31
change (bps)	1,290.00	820	2,100.00
Net profit/loss	105	-420	108
% change	LP	1.7	LP
Debt	14,000	6,500	488*
P/E (x) FY11E	16.6	–	18.4
LP: Loss to profit; Growth and change is year-on-year; * FY09 E: Estimated Source: companies, Analyst estimates

Kingfisher
A 4.2 per cent increase in passenger traffic and higher loads helped the airline record revenues of Rs 1,352 crore for the December quarter. Though revenues were down 7 per cent year-on-year, the company managed to put up a decent show given that its domestic capacities were reduced by 21 per cent. Lower capacity helped the company cut costs on its fuel bill, employees and other operating expenses in the range of 7-22 per cent helping it to post an Ebidtar of Rs 185 crore.

Though lease rentals were down 28 per cent, higher interest costs (up 23 per cent year-on-year) of Rs 289 crore and deferred tax saw the company post losses of Rs 420 crore. In addition to lease and personnel costs, the company is planning to reduce its engineering expenses to the tune of 15 per cent going ahead and like other players use a part of its existing fleet on short haul international flights. Like its bigger rival, the trigger for the stock is news related to its plans of raising additional capital to retire a part of its Rs 6,500 crore debt. The company plans to raise $175 million through a GDR and a rights issue.

Spicejet
A 56 per cent surge in passenger traffic and passenger loads of 78 per cent in the December quarter as compared to the year ago period helped low-cost carrier Spicejet to register a 36 per cent growth in revenues to Rs 642 crore. Higher revenue and volume growth as well as lower costs (cost per available seat kilometre came down by 22 per cent year-on-year) aided in improving operating profit margins, which coupled with lower interest cost helped boost net profits to Rs 108 crore from a loss a year ago.

Though growth prospects seem better and costs such as those for fuel (38 per cent of expenditure) have stabilised, the company still has a debt burden of Rs 488 crore and accumulated losses to the tune of Rs 857 crore to overcome. With the situation improving, the company is well positioned to build on its December performance wherein it improved its market share to 12.5 per cent on the back of better aircraft utilisation. At Rs 54.95, the stock is trading at 18 times its 2010-11 estimated earnings of Rs 3.