Q4 results of aviation firms see risk from higher oil prices
IndiGo, Jet Airways and SpiceJet are likely to see the adverse effects of higher crude oil prices on their Q4 results
Oil prices have shown no signs of cooling off. This is troublesome for aviation companies, as fuel accounts for a big share of their overall costs. With the March quarter results season on, Indian airlines—InterGlobe Aviation Ltd, Jet Airways (India) Ltd and SpiceJet Ltd—should see the adverse effects of higher crude oil prices on their numbers. However, a strong rupee is expected to offer relief.
ICICI Securities Ltd says that, during the March quarter, average aviation turbine fuel prices increased 12% year-on-year. But the cost impact will be reduced by a 4% stronger rupee.
What’s more, analysts expect a small growth in fares for the quarter. Plant load factors remained healthy, helped by slower supply growth compared to demand. Therefore, a combination of a strong rupee, modest fares and better load factors are likely to soften the blow from higher crude prices for airlines in the March quarter.
What should investors look for in the results?
InterGlobe, which runs IndiGo airlines, saw grounding of some of its aircraft owing to engine-related problems. The magnitude of disruptions due to the groundings was relatively large this time. Sure, higher load factors will offer some relief. Also, IndiGo could get reasonable OEM (original equipment manufacturer) compensation. Notwithstanding the compensation, SBICAP Securities Ltd expects IndiGo to report a 10% increase in profitability despite a 20% increase in volumes.
For Jet Airways, the performance of the international business, which has been somewhat lacklustre for a while, will be a key measure. There is a glimmer of hope though. International yields for Jet hit the lowest during the March 2017 quarter and hence, it should have an advantageous base for its international segment, points out ICICI Securities.
As for SpiceJet, the airline has often done better than expectations on the pricing front and investors should watch whether it is able to sustain that trend.
What of the stocks? Despite rising crude prices, shares of IndiGo have fared much better so far in 2018. The company has clarified its stance on Air India and that may have come as a relief to investors. Even so, firm crude prices are a reality. The rupee too is losing steam. This may keep optimism for aviation stocks in check.
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