Aviation stocks: Lower fuel costs to improve profits

Valuation discount to IndiGo to continue, unless other airlines show consistent profits

Shares of Jet Airways and SpiceJet were up between 12 and 24 per cent over the past few trading sessions, on prospects of a re-rating based on lower oil prices, sustained profitability, and expectations that the listing of IndiGo could lead to a bridging of the valuation gap between airlines.

The key trigger has been benign crude oil prices, hovering around $50 a barrel. The sharp drop in prices has given the airlines the flexibility to drop ticket prices. This has helped improve volumes. Passenger volume growth in the five months (April to August) of FY16 has been a strong 21 per cent year-on-year.

Lower prices and lower fares have helped passenger-capacity usage of the listed airlines to remain consistently high. For July and August, while Jet Airways reported an 81 per cent passenger-capacity usage, SpiceJet's number for the two months was 92 to 93 per cent.

IndiGo's and Air India's passenger-capacity usage was 77 to 79 per cent during that period. Higher passenger-capacity usage has helped the two listed entities arrest the slide of market share. The trend of healthy profits reported in the previous quarters is likely to continue in the September quarter, led by lower costs (aviation turbine fuel costs are down 33 per cent year-on-year), robust domestic and international rates, and stable yields, even though it is a seasonally weak quarter.

Jet Airways is expected to nearly double its net profit year-on-year to Rs 134 crore, on revenues of Rs 5,000 crore and operating profit of Rs 956 crore. Passenger growth for the company is expected to be 29 per cent higher than the past year. Its market share, too, is expected to increase by 260 basis points over the past year to 23 per cent.

While analysts say the passenger volume growth should moderate to 15 per cent, which is still healthy, the key continues to be the way oil prices will move. If crude oil prices stay below $70 a barrel, and growth sustains at a healthy rate, airlines will continue to make money. Crude oil prices above $80 a barrel would take away fare flexibility and the ability to play game of passenger-capacity usage. Valuation discount to the market leader, IndiGo, will continue, unless other airlines show consistent profits, say analysts.