Less hazy skies after a turbulent March quarter

With demand stable and fuel prices down from peak levels, Jet and Kingfisher are expected to report better numbers in the coming quarters.

While demand remains strong, higher fuel costs and increasing competition has dented the profitability of leading aviation companies in the March quarter. Jet Airways and Kingfisher Airlines reported losses for the quarter due to a 50 per cent year-on-year rise in jet fuel costs. However, analysts such as Jasdeep Walia of Kotak Institutional Equities believe things should improve in the current quarter of 2011-12, both on account of rising yields and falling jet fuel prices.

The research firm’s air ticket price index, covering eight sectors, indicates one-week forward fares are up 10 per cent from their average levels in the March quarter. Nikhil Vora, managing director, IDFC Securities, noted in his recent report on Jet, “With crude prices showing signs of moderation in the month of May and the full impact of the fuel surcharge impact coming in from Q1FY12, we do expect numbers (of Jet) to be better, going forward.”
 

STILL IN THE RED
	Q4, FY11 Jet Airways	FY11

KingfisherJet Airways Load factor (%)77.98178.6 Change (bps)-70900120 Fleet size 976697 % change11.5-2.011.5 Revenue/RPKM (Rs)3.64.03.6 % change-1.913.02.9 Net sales (Rs cr)3,2886,49612,951 % change14.023.022.0 Ebidtar (Rs cr)3431,1242,485 % change-50.0179.019.0 Ebidtar (%)10.617.319.5 Change (bps)-1,370970-50 Net profit(/loss)-124-1,02710 % change is y-o-y          Sensex vs Kingfisher and Jet Airways since January 1, 2011

With airlines effecting price increases and oil marketing companies cutting jet fuel prices by three per cent, average ticket realisations are likely to improve. However, continuation of discount pricing, especially from Air India to improve its load factors, could trigger a fare war and spoil the show for the private carriers. In light of the improvement in the macro situation for the sector, analysts have pegged targets for the sector leader, Jet Airways’ scrip at Rs 600-700. Investor interest in the Kingfisher Airlines scrip is likely to go up if the company manages to turn corner and report its first profits (full-year basis) in the current financial year.

WEAK QUARTER 

Lower passenger load factors and higher jet fuel costs saw Jet Airways report revenues and margins that were lower than estimates for the March quarter. While revenues grew 14 per cent year-on-year, Ebidtar (earnings before interest, depreciation, tax, amortisation and rentals) margins tanked to 10.6 per cent. Severe competition and spike in fuel costs led to loss of Rs 124 crore for the company. For 2010-11, however, the airline managed to report a small profit.

On the other hand, Kingfisher Airlines, which hasn’t provided quarterly numbers separately, also registered a loss (albeit lower) for the March quarter. However, it managed to improve its financials for 2010-11, with revenues growing at 23 per cent and Ebidtar margins improving to 17 per cent from seven per cent on lower costs (higher loads, lower capacity). Net loss was lower by 37 per cent as compared to 2009-10. The losses were largely due to interest expenses of Rs 1,313 crore in 2010-11.

However, whether the airlines will be able to improve their situation would depend on the movement of jet fuel prices, as this cost head accounts for 35-40 per cent of total expenditure. This is the key reason in addition to competitive pressures that stocks of airline companies have fallen between 18-30 per cent since the start of the year.

Jet fuel prices which had peaked at $140 to the barrel have come down and are currently trading at $125-130. Any spike from these levels (though unlikely) will put further pressure on the sector financials.

DEMAND, TRIGGERS
Though macro headwinds persist and companies continue to add capacities, demand has been steady for the March quarter and 2010-11. While capacities for the sector have increased by 16 per cent in the March quarter over the year ago one, demand has risen by 21 per cent during the same period. Jet Airways recorded a strong 15 per cent growth in passenger traffic for the quarter. Further, the passenger load factor was just 70 basis points shy of the year ago quarter’s 78.6 per cent.

While a further fall in jet fuel prices will be the biggest trigger for aviation stocks, markets will keep an eye out for settlement of the Jet Airways-Air Sahara case, as well as an announcement on the sale/joint development of its Bandra Kurla Complex (worth Rs 700 crore). For Kingfisher, the key positive will be news about its global depository receipts issue, slated to hit the market in the next two quarters. Equity infusion will go a long way in reducing its Rs 6,000 crore debt. This, along with improvement in operational performance, should help Kingfisher turn the corner.