Aviation: hazy skies in 2014
As the year progresses, an important factor to monitor would be the impact of competition as the Indian skies get more crowded
Last year was quite miserable for the Indian aviation sector. Both Jet Airways (India) Ltd and SpiceJet Ltd posted record losses in the September quarter, as the operating environment became extremely challenging with a falling local currency and higher crude oil prices.
The fact that the rupee is comparatively stable, and to that extent it will offer some relief on fuel costs, is a positive for the airlines going into 2014. Lower fuel costs plus the fact that the December quarter is generally a strong one could very well mean that the year will start with comparatively stronger quarterly financial results for the airlines.
But as the year progresses, an important factor to monitor would be the impact of competition as the Indian skies get more crowded. Etihad Airways is tying up with Jet, Singapore Airlines with the Tata group, and AirAsia is close to getting clearance to start operations. Sure, there could be delays and uncertainty about launch dates, but the consensus is that competition will intensify towards the end of 2014.
Secondly, while the US Federal Reserve taper fears have been absorbed for now and the rupee is enjoying a period of relative stability, there is no certainty on either that or crude oil price movement.
Still, passenger traffic is expected to grow in the next fiscal year. The weak macro environment and high inflation have cut consumer discretionary spending; passenger traffic is expected to growth only 3% from a year ago in the fiscal year to March, according to ICICIdirect.com equity research. However, the brokerage firm forecasts a recovery in fiscal 2015 with passenger growth of 6%.
However, only an improvement in balance sheets and profitability would turn investors’ sentiments towards listed airlines. At the end of September, Jet Airways and SpiceJet had a negative net worth of ₹ 1,734.55 crore and ₹ 603 crore, respectively. Debt (both long- and short-term borrowings) stood at ₹ 9,445 crore for Jet Airways and ₹ 1,645 crore for SpiceJet.
The Etihad deal will offer some relief to Jet Airways’ balance sheet. Investors would do well to keep a tab on how SpiceJet plans to cut its debt and whether it will announce any tie-up or an equity infusion plan.
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