Robust demand, better pricing power and cost control set to improve margins.
Strong year-on-year volume growth numbers for the October month ahead of the peak season and a drop in crude oil prices helped stocks of Jet Airways and SpiceJet gain up to 3.5 per cent on Wednesday. While Kingfisher Airlines’ stock has been an exception, the other two have done pretty well in the last one month— they are up 12 per cent each, as against the roughly 3 per cent fall in the BSE Sensex
The market is expecting the debt-laden sector to recoup part of its losses on the back of strong demand leading to a further price increase over the quarter, capacity rationalisation and improving operational parameters.
Maintaining growth
The domestic airlines, which have consistently posted higher passenger numbers in the recent months, flew 18 per cent more passengers year-on-year in the January-October period. The sector, which has grown 16 per cent annually over the 2004-09 period, is expected to grow by 14 per cent each in 2011 and 2012, on the back of 8-9 per cent growth in GDP, wrote HSBC analysts in a recent report.
A strong demand environment is also reflecting on the load factors that have averaged 75 per cent in CY10, compared to 69 per cent in CY09. These loads are likely to sustain as supply lags the jump in demand. HSBC analysts estimate that the demand-supply gap, which will peak in CY10 at 11 per cent, will continue to be favourable for the next two years at 4-5 per cent. Given that airlines (including Kingfisher Airlines) have been in the rationalisation mode and have not expanded capacity much, coupled with a strong demand, could see ticket prices moving up in the coming quarters.
The growth is not limited to the domestic market. Jet Airways reported an 18 per cent year-on-year jump in international traffic for October, riding on higher demand ahead of the festive season.
Kingfisher Airlines, too, has seen a surge in traffic and has doubled its international flights in the September quarter over the year-ago period, aided by a 40 per cent increase in capacity over the last six months.
Costs under control
The biggest expenditure , which constitutes about 33-40 per cent of costs for airlines, is the aviation turbine fuel (ATF) price which may see a downtrend on the back of benign crude oil prices.
Crude oil is currently trading at $81.8 a barrel, compared to over $87 a week ago. While they are expected to range $75-85 in the near term, some of the gains on this count could be offset by depreciation in the rupee.
In addition to a decline in fuel costs, airlines have been able to save on maintenance and reduce personnel costs by cutting down on staff strength. Unit costs have been declining for three listed players.
Kingfisher Airlines, for example, was able to bring down its cost per available seat kilometres by 4 per cent year-on-year to Rs 3.89 for the September quarter. Similarly, cost-control measures such as trimming the excess headcount, renegotiating maintenance agreements and leasing out excess capacity have helped Jet Airways reduce non-fuel costs, believe HSBC analysts. Given that non-fuel costs will continue to fall and there will be pricing power, the company will be able to keep its costs under control, believes the analysts .
| STRONG RECOVERY | |||||||
| in Rs crore | Sales | % chg | Ebidta (%) | chg | PAT | % chg | P/E (x) |
| Jet Airways | 14,920 | 25.6 | 14.4 | 550 | 426 | LTP | 19.7 |
| Kingfisher Air. | 6,723 | 32.6 | 105.0 | ---- | 494 | --- | --- |
| Spicejet | 2,872 | 28.1 | 12.1 | 824 | 376 | 511.4 | 9.0 |
| % change is year-on-year; change for Ebidta margins is in basis points All figures are FY11 estimates, LTP=Loss to profit, Source: Analyst reports | |||||||
Valuations
Both Jet Airways and SpiceJet are likely to post profits at the net level, while Kingfisher is likely to turn around in 2011-12. While the stocks of Jet Airways and SpiceJet have gone up following improving profitability and robust passenger numbers, the Kingfisher Airlines stock too has been looking up after the company announced that it will raise $250-300 million through a GDR issue by January 2011.
That apart, while a debt restructuring package by banks is also awaited, a part of its loan (from the group holding company) is also likely to be converted into equity. These moves will help the company reduce its Rs 6,000-crore debt, which is the biggest risk for the stock. Given the robust demand environment, lower supply, cost efficiencies, better pricing power and improving profit margins, analysts see a 12-15 per cent gain from these levels for the Jet Airways and Kingfisher Airlines stocks and a 20-21 per cent gain for SpiceJet.
