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Airline valuations low despite free fall in crude oil prices

Airline valuations low despite free fall in crude oil prices
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First Published: Thu, Jan 01 2009. 10 27 PM IST

Updated: Thu, Jan 01 2009. 10 27 PM IST
Shares of Jet Airways (India) Ltd and Kingfisher Airlines Ltd have risen by 75% and 89% from their lows in early December and late November, respectively.
That puts them among the leaders of the bear-market rally in the past month.
While the drop in crude prices is a huge positive for the airline industry, it’s interesting to note that although global crude prices fell from over $100 (Rs4,870) a barrel to around $40 a barrel in October and November, Indian aviation stocks didn’t respond till December.
The recent surge in aviation stocks is to do with the decision of airline companies to finally cut ticket prices. High ticket prices had led to a drop in passenger load factors, worsening the operating performance of the industry.
Lower prices should lead to better demand and since there has been some rationalization in the fleet capacity of the industry in the past year, load factors should get much better.
But this is not to say that airlines will generate bumper profit in the coming year.
Many companies are still plagued with high debt and since the credit market continues to be tight, they could face pressure on the financing front. And while there has been significant consolidation in the industry and fleet rationalization, competition is still intense, and margins would be under pressure.
Having said that, the 65-75% jump in airline stocks should be seen in perspective.
The Jet Airways stock, for instance, had fallen around 90% from its highs in January and even after the jump in its share price in the past month, is 80% lower compared to its 52-week high.
The fact that valuations have dropped so sharply despite the free fall in crude prices shows that fuel costs were just one of the worries the markets had about the industry.
Write to us at marktomarket@livemint.com
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First Published: Thu, Jan 01 2009. 10 27 PM IST