Shares of Jet Airways (India) Ltd and Kingfisher Airlines Ltd have risen by 10.95% and 29.07% respectively in the past two trading sessions. While the markets have also risen on these days, shares of these airline companies have risen because of their alliance to rationalize costs.
But why should shares of Kingfisher rise much more than its alliance partner? It’s not that the deal is skewed towards one partner. For that matter, the exact details of the partnership are not even known.
But since the alliance is expected to translate into co-ordinated moves on tariffs and cost rationalization, low-cost carriers are expected to gain more. According to an analyst, low-cost carriers are in worse shape currently because of higher costs. A rationalization in tariffs would perhaps benefit them to a greater extent.
Since Kingfisher has a higher share of revenues from low-cost operations relative to Jet, the argument is that it could gain more from the deal.
Still, that doesn’t explain the large difference in the share price performance of the two companies this week. It’s important to note that based on last week’s closing share prices, Kingfisher had a market capitalization of Rs1,029 crore, less than half of Jet’s market value of Rs2,251 crore. In terms of market share, however, Kingfisher’s share of 28% is only 2 percentage points lower than that of Jet.
The large difference in market capitalization is because of huge estimates of Kingfisher’s debt. Even after this week’s outperformance, it still trades at a discount of about 46.82% in terms of market cap.
The positives of the alliance coupled with the sustained drop in oil prices could bring some interest into airline stocks, especially those of Jet and Kingfisher. Investors in Kingfisher seem to have already responded, going by the sharp jump in its share price. Needless to say, the markets would look for evidence that the measures the alliance take will result in a drop in losses before further buying interest emerges in airline stocks.
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