[T.S.R:14447] AIRLINE STOCKS – TAKEN OFF!

AIRLINE STOCKS – TAKEN OFF!

 

By Ruma Dubey

 

After the huge setback which the (unpronounceable) Icelandic volcano spewed on the airlines companies, one would have expected them to be grounded for most of 2010. But apparently, the damage has not been as bad as we all had expected. As per the latest reports put out by International Air Transport Association, better recognized as IATA, the airline industry is set for a sharp bounce back. And not just a bounce back, it is expected to collectively post a profit of $2.5 billion or Rs.11,825 crore in 2010.

 

This is a complete 'about turn' from the earlier forecast of IATA in March, wherein it had stated that the sector would post a loss of $2.8 billion. And this was before the volcano. So we could help but wonder whether IATA had got the word "profit" mixed up with "loss" or was it some new method of calculating bottom lines?

 

IATA has obviously got its facts right and it has justified this turn around in it estimation on grounds of:

 

• Global traffic is back to the pre-recession levels
• Load factors is close to 80%
• Airlines have already registered a $62 billion improvement in revenue in 2010
• Bounce back of corporate travel
• Crude prices have remained range bound

 

Way back, on 24th Dec 2009, to be precise, we had done a cover story stating that 2010 could see the bounce back of air travel. At that time, there was no wind of any volcanic disruption but it was based on pure logic that with the economy bouncing back with vigour, air traffic was bound to go up.

 

The airline stocks have been on the buzz since this turnaround news by IATA came out. The three top private sector airline stocks have been up. Jet Airways is up 3.38% at Rs.503, Spicejet is up 5.63% at Rs.60 and Kingfisher is up 4.62% at Rs.45.  

 

The financial performance of these companies for FY10, has definitely shown signs of improvement, especially since the second half. Kingfisher remained in the red for FY10 but managed to reduce the losses from Rs.2,140 crore in FY09 to Rs.1,647 crore in FY10. But it registered an 11 point jump in its domestic seat factor at 71%.  Jet Airways consolidated net loss for the full year narrowed to Rs.4200 crore from a loss of Rs.9600 crore in FY09. In Q4FY10, it had a load factor of 81.6% for international and 72.9% in domestic routes. Spice Jet was the best performer, it came back into the black, with a net profit of Rs.61.45 crore v/s net loss of Rs.352.6 crore in FY09.

 

As per the data put out on the Ministry of Civil Aviation website, air passenger traffic between Jan to April 2010, grew 22.05 (YoY) while in March, MoM growth was at 26.53%. In terms of market share, Jet Airways with JetLite maintained its lead with a 26% share. Second largest airline, Kingfisher's market share was at 21.4%. Air India's share is at 18.2%, IndiGo at 15.7%, SpiceJet was at 12.6%, GoAir at 5.9% and Paramount Airways at 0.3%.

 

Why so much optimism around airline stocks at the moment? Prices are expected to remain firm and YoY, FY11 is expected to a see a price hike of minimum 10%. In FY11, if the economy grows to around 8%, the aviation sector is then expected to show a growth of around 13-14%. Also with the current poor image of Air India/Indian Airlines, most of the domestic travel is expected to flow to these private sector airlines. One man's loss is another's gain – law of nature.

 

Yet, keep in mind the fact that though performance would go up, the biggest concern is the huge debt on which these airline companies are sitting on. Unless the books are cleaned up, the high operating costs along with the interest outgo would eat away the earnings. In airline companies, a large part of the cost is uncontrolled of which aviation turbine fuel (ATF) will be a big factor. If that cost of crude rises, then pretty much everything else gets eaten away.

 

So the visibility is good right now but the risk factor  from air pockets remains high.

 

 

--
CA.RAJESH DHIRAJLAL DESAI
"Print this mail only if absolutely necessary. Save Paper. Save Trees."

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