Mumbai: Soaring airfares have not won the Indian airline industry too many friends among regulators and passengers, but equity analysts seem pleased that the industry is poised to close this fiscal with record profits.
Aviation analysts are advising clients to buy airline stocks they once shunned, despite the loads of debt that continue to weigh down the industry. Meanwhile, airlines such as Jet Airways (India) Ltd and Kingfisher Airlines Ltd plan to tap domestic and international investors to raise funds and pare their debt.
According to consultancy Centre for Asia Pacific Aviation (Capa), private airlines are expected to post a profit of $300 million (Rs1,350 crore today) in the current fiscal. The industry had posted a net loss of Rs7,000-8,000 crore in fiscal 2010, including the Rs5,551 crore loss by Air India.
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In October, the industry reported passenger traffic growth of 16.2% year-on-year to 4.61 million travellers and domestic brokerage IDFC Securities Ltd said “the sector is on track to achieve 15% growth in FY11”. IDFC Securities analyst Nikhil Vora estimates that private carriers, excluding Kingfisher Airlines, and Air India will make a combined profit of Rs1,700 crore this fiscal.
Owing to an economic slowdown, excess capacity and high costs, Indian carriers incurred a collective loss of $2 billion in fiscal 2009, the same as in 2008, causing them to default on payments to the Airports Authority of India and oil marketing companies.
According to a September report by Capa, over-ambitious expansion plans, combined with the downturn in 2008-09, have left the three major airline groups—Air India, Jet Airways and Kingfisher Airlines (representing 65% of domestic capacity and 100% of Indian international capacity) with debt of $11 billion and an annual interest burden of $1.05 billion.
A further $10-12 billion will need to be raised over the next two-three years in order to finance scheduled aircraft deliveries.
“Post hitting the peak traffic levels in financial year 2010, the Indian aviation sector is expected to see continued traction in passenger growth. With calibrated increase in capacity and traffic expected to grow twofold, supply, yields, and loads for the Indian aviation industry are expected to remain robust. With the cost curve of the industry at its bare bones, we expect the industry to report its most profitable year in the current fiscal,” wrote Vora and Varun Kejriwal, analysts at IDFC Securities, in a November report.
Domestic brokerage Kotak Securities Ltd backs that view, assuming that airlines don’t encourage capacity addition.
“The aviation sector is poised for a sustained turnaround with rising profitability after battling headwinds for three years on account of excess capacity. We believe the upturn will be backed by rising yields and improving cash flowing. After significant capacity rationalizations in the industry in the past two years and strong passenger growth, capacity is perfectly aligned to demand,” wrote Jasdeep Walia, an analyst at Kotak Securities on 18 November.
IDFC Securities revised its target price for Jet Airways from Rs700 as on 1 November to Rs900 on 26 November.
Similarly, international brokerage CLSA Asia-Pacific Markets revised the target price for the same stock from Rs850 as on 29 October to Rs950 on 2 November.
Most recently, domestic brokerages have started to track listed airline stocks such as Kingfisher Airlines and SpiceJet Ltd.
The earnings recovery will aid cash flow generation and help airline companies cut debt, say analysts.
For instance, Walia of Kotak Securities expects Jet Airways to generate an estimated free cash flow of Rs5,500 crore in fiscal years 2011-13. The carrier had a total debt of Rs13,737 crore as on 30 September.
However, some sceptics said that ambitious plans to add to fleet strength could be a threat to sustained profitability.
“Gross overcapacity in the making can be the main villain for Indian airlines’ profitability prospects,” said Hormuz P. Mama, an expert in the aviation business who writes for leading international aviation magazines.
He said IndiGo alone would be adding some 15 planes a year to its fleet while rival airline SpiceJet has also opted for 30 more Boeing 737s and 15 Bombardier Q4 planes with 15 options.
On 2 December, Mint had reported that Air India has unexpectedly decided to augment its 148-strong fleet by leasing 57 planes as it pushes to boost capacity amid a boom in the country’s air travel market.
Jet Airways is adding six smaller planes and two mid-sized planes in this fiscal while it is looking at having six mid-sized planes to its fleet by leasing in.
Kingfisher Airlines is also in the process of adding capacity, bringing all of its 13 grounded planes back in flying before April 2011.
“Possibly, this fiscal will be profitable year for Indian airlines. The market would be flooded if airlines opt for adding more,” Mama said.