While debt and fuel costs remain key issues, recent growth in passenger volumes and operational improvements can put the aviation sector on the profit track.
A series of positive news flows over the last few weeks have seen aviation stocks jump 11-30 per cent. Restructuring of loans, expansion of existing fleet, capital-raising plans, a fall in aviation turbine fuel prices and steady demand over the last two quarters have been welcomed by the Street. Also, the sector, which has been grappling with fuel costs and low demand on account of a slowdown as well as terrorist attacks and natural disasters, is clawing its way back into profitability on the back of higher volumes and operational efficiencies.
Back in demand
After a not too good 2009, passenger volumes – which have been rising since January this year – have consistently been above the four-million mark, peaking in May with traffic at 4.7 million, the highest ever. For the January to July period, domestic traffic at 30 million has been over 20 per cent higher than the corresponding period last year.
| EFFICIENCIES YIELDING RESULTS | |||
| In Rs crore | Jet Airways | Kingfisher | SpiceJet |
| Sales | 4,093 | 6,740 | 3,093 |
| % change yo-y | 18.70 | 33.90 | 38.00 |
| Ebitdar | 1,217 | 1,011 | 720 |
| % change yo-y | 1287.7 |
- | 73.1 |
| Net profit/Loss | 340 | -546 | 289 |
| P/E (x) | 19.10 |
- | |
Source: BoA-ML and other reports
For July, the last month for which data is available, passenger volumes at 4.16 million was 21 per cent more than last year. However, given the monsoon factor, volumes were sequentially down 7.6 per cent. The improvement in economic growth is positive for the sector and should help sustain traffic at healthy levels.
Improving supply, focus on profit
That the demand is strong and could play out for the near to medium term can be gauged by the fact that airline companies have been adding incremental capacity over the last seven months. Since load factors have been consistently hitting the 75-80 per cent band over the last few months, airlines are increasing their fleet size well by placing orders for new aircraft.
Low-cost carriers SpiceJet, Indigo and JetLite have recently received approval to purchase 46 aircraft at just under Rs 20,000 crore, which are likely to be delivered over the next five years.
Meanwhile, strong demand and the need to improve margins have also seen Jet Airways offering more of its full-service operations rather than the no-frills Jet Konnect version. Jet Konnect was launched last year to arrest the drop in market share, and capture the opportunity in the no-frills category.
Outlook
Aviation turbine fuel costs, which accounts for a third of the expenditure for airline companies, is down four per cent to about Rs 40 a litre from September 1 due to the softening of international prices. IATA, the international travel body, believes jet fuel prices are likely to be flat to marginally higher at $88.2 a barrel for 2010 from current levels of $87.5 to the barrel, which is good news for Indian carriers.
Going by the trends so far, expect passenger volumes to reach the 55-million mark for 2010-11, up 20 per cent from 2009-10. Given the demand outlook, analysts feel the robust June quarter numbers, both on the revenue and profitability fronts, is likely to continue into the coming quarters.
Key players
Among the listed entities, while the SpiceJet counter gained after the launch of international operations, Kingfisher Airlines was in the news for plans to raise Rs 5,000 crore from the equity route as part of its debt-restructuring programme. Analysts prefer SpiceJet (they expect 17 per cent returns from these levels) as the company is debt-free and is expected to generate Rs 300 crore in profits annually during FY11-13.
Kingfisher may have improved its operational performance in the June quarter at the earnings before interest, tax, depreciation, amortisation and rentals (Ebitdar) level, but it has a long way to go, given its large interest outgo. While it paid almost Rs 1,100 crore in 2009-10, the same stood at Rs 321 crore in the June quarter, reflecting a rise of 51.1 per cent year-on-year.
Jet Airways is best positioned, being the largest airline in India, to take advantage of improving growth prospects and such positive news triggers as good traffic growth and focus on full-service operations. These mean the upsides have been priced in.
