Aviation: Flying high

Higher load factors in the third quarter help airlines deal with cost pressures from higher fuel prices.

Aviation is a tough business, as many variables affect its profitability. Perhaps this is why many airlines are state-owned. Having said that, the story in India is slightly different, where there is enough potential for growth, and consequently, markets that are willing to pay for it. For instance, domestic airline passenger volumes grew 16 per cent year-on-year to 5.2 million in December last year, a record. On a monthly basis, the industry grew seven per cent, despite fare issues. What makes the growth commendable is that it comes on the back of a rather high base of the previous year — 36 per cent growth in December 2009.

What does this mean for the stocks? Numbers show that the Jet group retained its position as the market leader with a share of 25 per cent. Seat factors increased 170 basis points (bps) monthly and 240 bps yearly, driving yields. With increase in aviation turbine fuel (ATF) prices in October last year, airlines are facing cost pressures. But these are likely to be offset by healthy loads and higher yields, believe analysts.

Overall industry load factors stood at 85.2 per cent, above the already high figure of 83.5 per cent in November and 82.8 per cent in December last year. It is not surprising then that all scheduled airlines saw a sequential increase in load factors, with the exception of Kingfisher (-0.8 per cent on a monthly basis). The increase was higher for full-service carriers (+1.9-3.1 per cent monthly) and lower for low-cost carriers (+0.3-2.3 per cent). Jet and JetLite gained the most (+3.1 per cent and +2.8 per cent, respectively), while SpiceJet and GoAir lagged (+0.3 per cent and +1.6 per cent, respectively). The 13-16 per cent increase in domestic ATF prices has raised costs. However, record loads and high yields should drive airlines’ performance in the second half of financial year 2010-2011. Moreover, the outlook for financial year 2011-12 remains healthy, says a report on aviation by a foreign brokerage house.