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High crude prices ground aviation stocks

High crude prices ground aviation stocks
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First Published: Mon, Mar 07 2011. 11 58 PM IST
Updated: Mon, Mar 07 2011. 11 58 PM IST
Aviation stocks have historically had an inverse relationship with the movement of oil prices. So it’s not surprising that these stocks have underperformed the broader markets in the past few months after a sharp rise in crude oil prices.
Share prices of Jet Airways (India) Ltd, KingfisherAirlines Ltd and SpiceJet Ltd have fallen in the range of 52-60% from their highs in November. The Bombay Stock Exchange’s benchmark Sensex index has declined 13% during the same period.
Fuel costs account for 35-40% of the operating costs for aviation firms; without doubt, the rise in oil prices will hit margins. Thankfully for Indian aviation firms, demand continues to be healthy. So, their ability to raise airfares and pass on some of the increase in costs is better.
The price of Brent crude has risen 32% since mid-November. Crude prices rose in November and December due to the improvement in the US economy and a loose monetary policy, which led to more fund flows. In the recent past, crude prices have risen mainly because of the tensions in the Middle East and North African region.
How will this impact aviation firms? The March quarter typically tends to be the slowest for the sector. Additionally, given that fuel costs have risen, operating profit margins should be under pressure. Currently, Jet Airways enjoys the highest operating margin of about 6%, based on the performance in the nine months ended December. Among the publicly traded firms, it’s followed by SpiceJet, which has an operating margin of 8.5% and then Kingfisher, which operates at a margin of about 3%. Needless to say, Kingfisher is more vulnerable than the other two firms.
Also, Kingfisher has a high debt resulting in higher interest costs. In fact, so far this fiscal, Kingfisher has posted a loss of around Rs670 crore, while Jet Airways has reported a stand-alone net profit of Rs135 crore and SpiceJet posted a net profit of Rs160 crore. That translates into net margin of 1.4% for Jet Airways and 7.4% for SpiceJet. The latter enjoys a higher net profit margin because of a relatively lower outgo on account of interest costs.
Like Kingfisher, Jet Airways, too, has high debt on the books. But the only comfort it has is that it is making enough operating profit to offset its high interest burden. Even so, a further impact on its operating margin could wipe away its wafer thin profit margin at the net profit level.
It’s no surprise that aviation firms are levying higher fuel surcharges to pass on higher crude oil prices. This should lessen the impact of the sharp rise in crude prices. Additionally, with the stocks having fallen sharply, valuations look attractive. But given the risk of a further increase in crude prices, buying these stocks may well prove to be a reckless decision.
Graphic by Sandeep Bhatnagar/Mint
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First Published: Mon, Mar 07 2011. 11 58 PM IST