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Airline stocks soar on fuel price fall, demand boost

IndiGo zooms 42% since listing, SpiceJet gains 342% in a year

Ram Prasad Sahu  |  Mumbai 

Open-sky policy leaves out landing freedom

For a sector which routinely got a go-by from investors, the successful listing of (IndiGo) and the sharp run in the stock price of over the past year have brought it back on the Street's radar. The aviation space, which boasted of a total market capitalisation of only Rs 3,500 crore a year ago, is now worth Rs 50,000 crore and could move up further if decides to list, as is being speculated.

While accounts for a lion's share (its stock has gone up 42 per cent from its listing price to Rs 39,189 crore), the stock has soared 340 per cent in a year to Rs 4,139 crore. While the market capitalisation of is nearly 10 times that of SpiceJet, the market share of the latter is a third of IndiGo's 36.9 per cent. Jet has also seen a turnaround in its fortunes in the stock market, with its stock rising 87 per cent in a year.

Analysts say the reason for money moving into this sector has been the falling cost of crude oil prices and, therefore, (ATF). Crude oil prices are down by about 45 per cent from their peak in October 2013. accounts for a large chunk of overall costs of airlines. Dhiraj Mathur, leader - aerospace & defence, PwC India said the key reason for the re-rating has been the fall in prices in India, which, when compared to airlines operating outside the country, were 60 per cent higher. This, coupled with the fact that some states have reduced taxes, has helped rein in the single-biggest cost item for an airline. While fuel costs have fallen sharply, the airline companies have not seen the full benefit of this given the rupee depreciation and government tariffs. The fall in fuel costs, which accounted for 45-50 per cent of revenues, has helped airlines to bring down this metric to 30-35 per cent. This has, according to Santosh Hiredesai of Edelweiss Securities, in turn improved gross contribution as the carriers have only marginally passed on the benefits to consumers.

Airline stocks soar on fuel price fall, demand boost
The other reason for the optimism in the sector is the increase in demand. For the first 10 months of the year (January to October), passenger volumes have grown by 20 per cent year-on-year. At a time when almost every part of the Indian economy is struggling for growth, this is an eye-popper.

With capacity expressed in available seat kilometres growing at 10 per cent while demand is double that, it is not surprising that load factors (capacity utilisation) have remained consistently high for most operators. SpiceJet, for example, has been witnessing 90 per cent-plus load factors for six months in a row, while most other airline companies have reported numbers above the 72 per cent mark.

It is the falling fuel prices which have given the flexibility to go a bit aggressive on pricing (only 5-7 per cent reduction despite crude prices halving) that has acted as kicker to achieving high utilisation rates and better profitability.

Given the improving metrics of SpiceJet, which has been making profits for a couple of quarters now, the company's new promoter, Ajay Singh expects SpiceJet's valuations to catch up and the gap with the leader to reduce.

This is perhaps the first time that the sector dynamics have been so favourable. Falling fuel prices coinciding with the jump in demand has created a sweet spot for the sector, according to Kunj Bansal, executive director and CIO, Centrum Wealth. The last time fuel (crude oil) fell to lower levels has been in the late 90s when they were at about $20 to the barrel but the sector was not as developed, he adds.

What could add to the gains of the companies is lower taxes and volume growth on the back of the government's draft aviation policy which should improve regional connectivity. Given penetration at three per cent, the new policy should improve volumes and stimulate demand, says Mathur of PwC India. Policy relaxation in maintenance and repair operations in the country should also bring down cost of this key area leading to further improvement in profitability.

First Published: Wed, November 25 2015. 00:57 IST