The past year has seen changes in the structure of the Indian aviation industry. My views on the sector remain jaundiced. Airline stocks are always disastrous for long-term investors. Very few airlines make money consistently due to extreme cyclicality.
However, precisely due to the cyclicality, it is sometimes an attractive short-term trading play. Stock prices can crash, recover and crash again in short sharp bursts of action. If the trader is on the right side of these moves, he can make quick money.
Aviation has suffered large losses in the past two years. Indigo is about the only profitable airline. Given high aviation turbine fuel (ATF) costs, poor infrastructure, high taxes and a demand recession, things aren't going to get better in a hurry. On the other hand, there has been a little consolidation due to the exit of Kingfisher. Other airlines managed to pick up market share as Kingfisher went into free fall.
The difficult situation has also forced the government to rethink absurd FDI policies. Foreign airlines are now allowed to take stakes of up to 49 per cent in Indian airlines. This could, in theory, allow loss-making airlines to pull in partners with deep pockets and high levels of sector expertise.
Two deals have come through after the new policy. One is the Tata-Air Asia-Telstra deal and the other is Jet-Etihad. It remains to be seen how these two arrangements work out. Tata-Air Asia is still seeking various permissions while Jet-Etihad is working through details of regulatory compliance.
ATF is priced at the highest-ever levels in rupee terms, due to the weak rupee. ATF sourcing also suffers from the uneven imposition of state taxes, with levels varying from nominal to extremely high. This complicates routing since airlines try to avoid refuelling in the high tax states.
Since ATF is responsible for over 40 per cent of operating costs, high prices are a serious drag. In theory, airlines can arrange direct ATF imports, avoiding sales taxes. In practice, managing the logistics is difficult and not every airline has adequate forex earnings to offset the risks of further rupee fluctuation. Despite the low traffic demand, airlines have been forced to raise fares and the market has responded positively to this.
On the ground, the ambitious plans of refurbishing airport infrastructure have been implemented slowly, or stalled. Many airport projects are stuck at various stages. This directly affects airline efficiencies. Planes spend more fuel circling airports with inadequate capacity. If airports were more efficient, airline operating costs would reduce and they could also hope to earn more by connecting more destinations.
Little of this sounds good. However, there seems some optimism that the worst is over. Most industry experts feel that traffic demand will pick up in the second half of the year. There have been speculative investments in Jet and SpiceJet, which are pretty much the only available listed options after the demise of Kingfisher. Several other airlines, looking for capital, might end up listing eventually but they'll try for an overseas partner first.
Should you contemplate buying either Jet or SpiceJet strictly as a short-term bet? Both stocks could possess a significant upside and at the moment, their moves are correlated. The financials of the sector will continue to be poor. So there's no point in even looking at the numbers.
What the trader wants is a positive share price trend linked to news events. The triggers could be good news on the Jet-Etihad front or the Tata-Air Asia front. Or, it could be a drop in crude prices, or a strengthening of the rupee, or another set of fare hikes. My guess is that there could be a 30-50 per cent upside from here. However, there is also the chance of losing large amounts. So, the trader would have to keep strict stop losses at about 10-15 per cent off the current price.
