Aviation: Pricier crude may shift focus to yields in 2018
Shares of aviation firms—InterGlobe Aviation Ltd (which runs IndiGo), Jet Airways (India) Ltd and SpiceJet Ltd—have flown high in 2017 with those of SpiceJet flying the highest. A relatively softer price trend in crude oil was no doubt a help. More recently, IndiGo and SpiceJet delivered decent financial results for the September quarter, too.
The near term outlook is also upbeat. The December quarter results are unlikely to disappoint, considering it is a seasonally strong quarter and it will also benefit from a favourable base, owing to demonetisation’s effect in the year ago period.
Nonetheless, as we are about to enter 2018, crude prices might play a key role but for a different reason. Brent crude prices have been on a strong footing recently, hovering over $60 a barrel. This is a key variable to evaluate the outlook for aviation firms, considering fuel costs account for a major proportion of costs. Unfortunately for airlines, efforts of the Organization of the Petroleum Exporting Countries and allies to balance the global oil markets through the extension of production cuts, are expected to offer support to crude prices in the near term. Of course, how US shale oil production shapes up will go a long way in determining oil prices.
Another important factor to watch is domestic passenger growth, which has slowed year-on-year. The half year to September 2017 (1HFY18) was characterized by higher fares and slower passenger growth. “1HFY18 domestic passenger grew 16%, compared with 23% in 1HFY17. However, the fares have been higher for most airlines in 1HFY18,” wrote Ansuman Deb of ICICI Securities Ltd in a report on 20 December. In the March 2018 quarter, the trend is expected to reverse as more capacity will enter the market. IndiGo and Go Air will ramp up with the neo aircraft addition, while Jet Airways will add eight aircraft in the second half of FY18, pointed out ICICI Securities.
Still, Binaifer Jehani, director at Crisil Research, expects domestic air passenger traffic growth slowing by 3-5 percentage points to 17-19% for fiscal 2018. The measure is further expected to slow to 15-17% in fiscal 2019.
Crippling infrastructure constraints at major airports and an uptick in fuel prices could mean growth in domestic air passenger traffic may have peaked out for the medium term, pointed out Crisil Ltd in a recent note.
Investors would also do well to keep tabs on yields (or pricing) in 2018 and needless to say, any improvement in the measure would help support the flight momentum of these shares.
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