 "Aviation stocks fly as market re-rates sector")
On a day when the broader markets fell on the news of possible rate hike by the Federal Reserve in December, aviation stocks continued to hold their own. The shares of Jet Airways and InterGlobe Aviation were up by around a per cent. This, analysts believe, might be suggestive of a fundamental shift in the sector. Sector specialists believe aviation stocks are playing catch-up now as they have not participated in any of the previous rallies. In the past month, the shares of Jet have risen 26 per cent, while that of SpiceJet are up 43 per cent and InterGlobe Aviation 45 per cent, while the benchmark Sensex is down three per cent.
Several factors are coming together that will benefit the financial performance of airlines. A big contributor is the sharp fall in prices of air turbine fuel (ATF), which is driving profitability of all the players and improving passenger load factors.
Compared to last year's peak, ATF prices are down 40 per cent, while passenger fares fell 15-20 per cent for the larger players. Fuel accounts for nearly 40 per cent of operating expenditure and with the key cost coming down, profitability is on the rise for almost all players. Compared to last December, ATF prices (Delhi) are down 26 per cent year-on-year (y-o-y) to Rs 44,320 a km. The impact of lower ATF prices was more visible in the second quarter, as prices were higher in the comparable period last year.
Several factors are coming together that will benefit the financial performance of airlines. A big contributor is the sharp fall in prices of air turbine fuel (ATF), which is driving profitability of all the players and improving passenger load factors.
Compared to last year's peak, ATF prices are down 40 per cent, while passenger fares fell 15-20 per cent for the larger players. Fuel accounts for nearly 40 per cent of operating expenditure and with the key cost coming down, profitability is on the rise for almost all players. Compared to last December, ATF prices (Delhi) are down 26 per cent year-on-year (y-o-y) to Rs 44,320 a km. The impact of lower ATF prices was more visible in the second quarter, as prices were higher in the comparable period last year.
It's not only the bigger players who are seeing a traction. Even SpiceJet, which faced severe liquidity crisis last year, is now focused on growth and has a plan in place. The airline has reported profits for the past three consecutive quarters. The new management team, led by Ajay Singh, has been meeting analysts to share their growth plans. In a note, Edelweiss Securities says: "SpiceJet has managed to discharge a significant portion of its liabilities and pare payables from Rs 1,800 crore to Rs 1,100 crore. Further, conducive macroeconomic milieu has helped the new promoter turn around the airline. Though the second is a seasonally weak quarter, management is confident of a robust third quarter. While the airline is firmly on course to return to normalcy, management is now sharpening focus on growth."
Lower air fares, thanks to a fall in ATF prices, have also given a leg up to demand. Passenger load factor between January and October this year stood 82 per cent, compared to 75 per cent in the corresponding period in the previous year. Higher load factors and lower costs are expected to boost the profitability of the entire sector. Valuations, which have been beaten down so far, are beginning to play catch up now.
Jet Airways, which has seen domestic traffic plummet over the past two years, is also showing signs of improvement. ICICI Securities says in a note, "Given the improving macro factors like healthy passenger traffic growth (up 32 per cent y-o-y in the second quarter) coupled with lower ATF prices (28 per cent of revenues), we expect the company to report healthy revenue growth along with better margins during the period FY15-17." Also, Jet Airways is focused on the international market, which gives the airline a natural hedge against currency volatility. The revenue share of international operations was 59 per cent in the first six months of FY16, which is expected to cross 60 per cent in the next two years.
Jet has also managed to improve its market share in the current year thanks to a pick-up in passenger traffic. Jet's market share improved to 22 per cent during the second quarter from 20.2 per cent in the corresponding quarter last year.
If fuel prices remain soft, as analysts expect, the sector will continue see continued improvement in financials.
Lower air fares, thanks to a fall in ATF prices, have also given a leg up to demand. Passenger load factor between January and October this year stood 82 per cent, compared to 75 per cent in the corresponding period in the previous year. Higher load factors and lower costs are expected to boost the profitability of the entire sector. Valuations, which have been beaten down so far, are beginning to play catch up now.
Jet Airways, which has seen domestic traffic plummet over the past two years, is also showing signs of improvement. ICICI Securities says in a note, "Given the improving macro factors like healthy passenger traffic growth (up 32 per cent y-o-y in the second quarter) coupled with lower ATF prices (28 per cent of revenues), we expect the company to report healthy revenue growth along with better margins during the period FY15-17." Also, Jet Airways is focused on the international market, which gives the airline a natural hedge against currency volatility. The revenue share of international operations was 59 per cent in the first six months of FY16, which is expected to cross 60 per cent in the next two years.
Jet has also managed to improve its market share in the current year thanks to a pick-up in passenger traffic. Jet's market share improved to 22 per cent during the second quarter from 20.2 per cent in the corresponding quarter last year.
If fuel prices remain soft, as analysts expect, the sector will continue see continued improvement in financials.