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Fuel costs account for the lion’s share of operating costs of SpiceJet and Jet Airways, and a decline in ATF prices offers some relief on costs. Photo: Mint
Fuel costs account for the lion’s share of operating costs of SpiceJet and Jet Airways, and a decline in ATF prices offers some relief on costs. Photo: Mint

Jet fuel price cut gives wings to aviation stocks

A 7% fall in the price of ATF sent stocks of SpiceJet and Jet Airways soaring by 6.75% and 3.53%, respectively

A 7% decrease in the price of aviation turbine fuel (ATF) sent stocks of SpiceJet Ltd and Jet Airways (India) Ltd soaring by 6.75% and 3.53%, respectively, on Monday. On the same day, the broader markets remained marginally lower. Fuel costs account for the lion’s share of operating costs of SpiceJet and Jet Airways, and a decline in ATF prices offers some relief on costs. For perspective, fuel costs as a percentage of revenue in the June quarter for SpiceJet and Jet Airways stood at 45.7% and 38.5%, respectively.

This will lead to 300-320 basis points improvement in operating profit margin for both companies, said Rashesh Shah, analyst at ICICI Securities Ltd.

One basis point is one hundredth of a percentage point.

In the June quarter, SpiceJet had made an operating loss on revenues of 1,691 crore while Jet Airways managed to make an operating profit of 69 crore on stand-alone revenues worth 4,685 crore.

But while average ATF prices have now declined to 67 a litre from an average of 76 a litre in 2013-14, they continue to be higher than average ATF prices in 2010-11 of about 48 a litre, said Shah. Both Jet Airways and SpiceJet had posted their best annual net profit performance in the last five years in 2010-11.

What also augurs well for the sector is the fact that the domestic operating environment is improving. Domestic air passenger traffic during January-September increased by 7.5% compared with the same period last year, according to data from the Directorate General of Civil Aviation. In 2013, passenger traffic had increased by 4.43%.

However, the September quarter financial results of both companies are likely to be lacklustre, as the quarter is a lean one for the sector in general. Also, the numbers will include the impact of low fares.

Analysts expect losses at the net profit level to persist. Investors would do well to keep a tab on the debt, which is one of the worries for the stocks of aviation companies.

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