Aviation: performance of yields comes to the fore

The unfavourable difference in crude prices is going to reflect adversely in the past quarter’s financial performance of airline companies


Graphic: Naveen Kumar Saini
Graphic: Naveen Kumar Saini

Brent crude oil prices averaged at about $55 a barrel in the March 2017 quarter. Now, compare that to the much lower $35 a barrel seen in the March 2016 quarter. That unfavourable difference in crude prices is going to reflect adversely in the past quarter’s financial performance of airline companies—SpiceJet Ltd, Jet Airways (India) Ltd and IndiGo’s parent InterGlobe Aviation Ltd.

Further, the March quarter tends to be a seasonally muted one for the aviation sector. In that backdrop, analysts expect net profits of these companies to decline on a year-on-year basis.

But one of the key things to evaluate would be the performance of yields (or pricing) and management commentary regarding pricing. The March quarter will provide insights to how airlines fare in a relatively adverse scenario in their ability to pass on higher costs, according to ICICI Securities Ltd.

Demonetisation had an adverse impact on yields for the December quarter wherein even SpiceJet, which had done relatively better during the September quarter, succumbed to pricing pressures. As ICICI Securities points out in a report on 3 April 2017, even if we consider a one-off demonetization effect in the December quarter, SpiceJet’s ability to show better yield management will be tested in the March quarter, especially with a higher volume base.

IndiGo’s yields are expected to decline for the March quarter. However, stronger growth in passengers should help the company report about 21% year-on-year revenue growth, according to Edelweiss Securities Ltd. But higher fuel costs should drag down operating profit margin and net profit. At the time of announcing its December quarter results, the airline had said that its yields had declined 10% year-on-year in January.

Analysts say February and March have been better months for yields. Accordingly, the overall yields performance would be a key measure to follow. In case of Jet Airways, investors should particularly watch out for the performance of the international segment, which had not done well in the December quarter.

All three stocks have performed well on the bourses so far this calendar year, though SpiceJet’s investors are sitting on higher gains, compared with the other two peers. Further outperformance will depend on improvements in yields to a great extent. The good news is that the lower base of financial year 2017 is expected to help. Moreover, the scope for a further decline in pricing appears limited after past financial year, considering the adverse impact on profitability. In general, the muted outlook on crude oil prices and rupee appreciation will keep these stocks in favour unless, of course, traffic growth plays spoilsport.

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