Coronavirus: Aviation stocks may descend further as traffic dwindles

SpiceJet and InterGlobe Aviation (IndiGo), the two listed carriers, could see further correction in their share prices.
 
The development comes as passenger growth — which has been slowing down on account of the economic slowdown — has taken further hit due to the outbreak of coronavirus. While the IndiGo stock has slumped 36 per cent from its highs over the past year, that of SpiceJet has nosedived 53 per cent to its 15-month low. 
 
The immediate hit for the two airlines has come in the form of fall in traffic on international routes, which account for about a quarter of their revenues. While traffic to China constitutes less than 4 per cent of the international traffic to and from India, spread of the virus to South-East Asia and West Asia could have a bigger impact, as the corresponding figure for these regions is 30 per cent.
 

Both airlines have been placing higher share of incremental capacity on international routes, given the domestic slowdown.
 
The expected dip in traffic could put pressure on fares as well as yields. Fares on domestic routes have been under pressure.
 
Analysts at JM Financial estimate that the average air fare for four key routes has seen an over 20 per cent year-on-year fall in January and February 2020. The brokerage says this will lead to moderation in yields, and subsequently a hit on March quarter earnings.
 
Passenger growth in January was muted at 2.2 per cent. Year-to-date passenger growth stands at 3.3 per cent, compared to 16.6 per cent a year ago, on the back of low demand and Jet Airways’ exit.
 
While managements had guided for elevated costs due to the delay in induction of new aircraft, the fall in crude oil prices is expected to offer some relief. Crude oil prices have come off by a third from their January highs.
 
Analysts at Ambit Capital say every $1 reduction per barrel of crude oil leads to a 7-per-cent improvement in earnings before interest and taxes. While this is a positive, a sharp fall in load factors, which have held steady so far, could offset gains on account of lower crude oil prices. 
 
Investors should await an uptick in passenger traffic and yields before considering the sector.