Aviation stocks flying high but crude oil prices may be a dampener

IndiGo hits a lifetime high on expectations of recovery, market share gains

Aviation stocks were major gainers on Friday, with market leader InterGlobe Aviation (IndiGo) moving up over 11 per cent to its all-time high levels and SpiceJet gaining about 3.4 per cent. These gains came on the back of a 34 per cent increase in passenger traffic in August over the volumes in July. The Street is also bullish about strong passenger load factors and plans by the two listed entities to expand their network in the domestic market. What may help sustain the rally is the civil aviation ministry's order revising the capacity to 85 per cent of pre-Covid domestic flights (from 72.5 per cent) and reducing the fare cap restrictions to 15 days from 30 days earlier.
 
The immediate trigger has been August passenger volumes touching 6.70 million. Traffic is on an uptrend since the lows in May this year — average daily passenger volumes over 200,000, from under 50,000 four months ago. July volumes at 5 million were up 61 per cent month-on-month. Jagannarayan Padmanabhan, director, Transport & Logistics, CRISIL Infrastructure Advisory, believes the lower rate of infections, increasing vaccination, and a gradual rise in business travel led to the uptick in travel.
 
While traffic is steadily rising, it is still less than the peak in March when 7.8 million people flew and also down 50 per cent from pre-pandemic levels. The key triggers for the revival of air traffic, according to Ashutosh Somani and Sanket Kabra of JM Financial, are mass vaccinations, resumption of business travel, and improvement in leisure travel. Though business travel is inching up, given the festival season, the near term may see an uptick in leisure travel; the December quarter is usually a busy season for airline companies.
 
The uptick in travel has also prompted companies, such as IndiGo and SpiceJet, to expand their domestic network. SpiceJet on September 15 announced the launch of 38 new domestic and international flights in a phased manner. The company highlighted that the new flights shall ensure better and seamless connectivity, catering especially to the huge demand during the upcoming festive season. IndiGo has strengthened its domestic network by adding 38 flights. The company highlighted that the new flights have been added to cater to the increased demand for travel and accessibility between metro cities and tier-2 and tier-3 centres.

Higher traffic is also helping the two airlines improve on their load factors. While IndiGo’s load factors increased from 62.7 per cent in June to 74 per cent in August, SpiceJet witnessed the metric rise from 71 per cent to 79.6 per cent.
 
The market leader has seen its market share increase from 54 per cent in the first two quarters of 2021 to 57-58 per cent in the September quarter, so far. Analysts at Kotak Institutional Equities say that Indigo is leveraging the Covid-19 situation to the extent allowed by regulatory diktat on capacity and pricing. They also note how the market leader increased its share during the pandemic from 48 per cent before Covid-19. SpiceJet’s share, however, has declined from 10-12 per cent in the first two quarters to about 9 per cent in the first two months of the September quarter.
 
The positive for SpiceJet, however, is the decision by the aviation regulator to allow Boeing MAX aircraft to resume services in the country. Ansuman Deb and Ravin Kurwa of ICICI Securities say it should help the company if it can negotiate restructured deals with lessors; the company recently entered into a settlement with Avolon and CDB Aviation, major lessors of MAX aircraft. Clarity on compensation from Boeing and monetisation of cargo business are two triggers for the stock.   
 
With the regulatory go-ahead for higher capacity and pricing, the Street expects companies to have better utilisation and improving yields heading into the festive season. The key concern, however, is the rise in crude oil prices, which had crossed the $76-mark per barrel, the highest levels since July 30. Aviation turbine fuel accounts for 40 per cent of costs and may offset any gains on the capacity and pricing fronts.
 
Given the uncertainties over crude oil prices and lack of full capacity and pricing relaxations, investors should wait for clarity on the trends before considering these stocks.