Aviation stocks: Turbulent journey in the December quarter
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The Indian aviation sector continues to be plagued by pricing pressures.
What stood out in the December quarter was that SpiceJet Ltd, which hadn’t succumbed to pricing woes in the September quarter, gave in. Its average fare fell 7% year-on-year (y-o-y) for the December quarter, compared with a 5% increase seen during the September quarter.
Sure, healthy load factors helped, resulting in a 12.5% rise in SpiceJet’s operating revenue. But profit growth wasn’t commensurate, thanks to higher fuel costs as a percentage of revenue.
Ebitdar declined by one-fifth, whereas earnings before tax and exceptional items dropped two-fifths. Ebitdar is earnings before interest, taxes, depreciation, amortization and aircraft lease rentals, and is an important measure of profitability for airlines.
To be fair, it’s not as if SpiceJet’s peers—InterGlobe Aviation Ltd (which runs IndiGo) and Jet Airways (India) Ltd, had a great quarter either. Airlines also had to bear the brunt of the adverse impact of demonetisation in the past quarter.
IndiGo said its yields declined 20% and 17%, respectively, in November and December, thanks to demonetisation. That decline was sharper than what analysts had expected. Overall, IndiGo’s Ebitdar fell about 14%, despite the fact that operating revenue increased 16% (helped by better volumes).
Post-results, Kotak Institutional Equities cut its fiscal 2017 earnings per share (EPS) estimate by 15% to account for a likely poor performance in the second half of the year to March. “This has resulted in a 10-12% cut in our FY2018-19E EPS (earnings per share) estimates as well,” added Kotak in a report on 31 January.
Apart from pricing issues, Jet’s financials were also affected on account of demand problems from the Gulf Cooperation Council, or GCC, countries. Consolidated December-quarter operating revenue increased by a mere 1.4% and average fare per passenger fell 1.6%. Jet’s Ebitdar was lower than analysts’ estimates. Operating costs—including fuel, employee costs, selling and distribution expenses, and other operating expenses—increased at a much faster pace. Jet’s stock has declined in the past year, whereas IndiGo and SpiceJet have seen their stocks rise. High debt continues to remain a worry for investors in Jet stock.
Meanwhile, traffic growth is strong. Passengers carried by domestic airlines in January rose 25% y-o-y, according to the Directorate General of Civil Aviation. While that augurs well, firmer crude prices are a threat as they account for a huge portion of operating costs for airlines. Also, in such an environment, fares need to improve to support profit margins, which may have an impact on volume growth.
But analysts say pricing pressures will continue for some time. That could well mean that aviation stocks may find it difficult to take off in the interim.