Will aviation stocks fly in 2011?

Will aviation stocks fly in 2011?

Aviation stocks—Jet Airways (India) Ltd, Kingfisher Airlines Ltd and SpiceJet Ltd—have performed well, beating the BSE-100, since the beginning of this fiscal thanks to the improving economy and higher demand. Passenger growth has picked up and business travel has resumed.

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“Domestic passenger traffic witnessed growth for the 11th consecutive month, up by 4.3% month-on-month to 48.8 lakh (from 46.8 lakh in November 2009) passengers in November 2010," wrote analysts from Angel Broking Ltd in a note recently. But then, one of the reasons for the better performance of aviation stocks was also the fact that they were undervalued during the global crisis.

The three listed aviation companies posted operating profits for the half year ended September. SpiceJet posted an operating profit of Rs70 crore against a loss of Rs86 crore last year and Jet Airways posted an operating profit of Rs873 crore compared with Rs272 crore in the same period last year. Kingfisher, too, managed an operating profit of Rs4 crore against a loss of Rs544 crore last year.

The financial results affirm that fiscal 2011 has started on a good note and is likely to end in a similar fashion. This is because the December quarter is supposed to the strongest for the sector when load factors and average airfares are higher. Analysts expect Jet Airways to end this fiscal in the black compared with last year. For the first half of the fiscal, Jet Airways and SpiceJet have posted a net profit (SpiceJet was in the black last year as well). On the other hand, Kingfisher posted a net loss of Rs418 crore, though lower than last year. Kingfisher’s debt recast package is likely to reduce interest costs and offer comfort to the company.

So, are the good times going to continue?

There appear to be some concerns on that front. It’s not that the outlook has changed as far as demand is concerned. People are travelling, supply is less than demand and the economy is growing. But one key variable is not showing good signs for this sector and that is crude oil. If the rising trend in crude oil prices continues then it’s bad news for the sector. An improving US economy and loose monetary policy leading to more fund flows are responsible for higher crude oil prices.

Investors in the sector should, therefore, watch out for movement in crude oil prices. Another concern is the high debt on the balance sheets of Kingfisher and Jet Airways. Though, relatively, Jet Airways appears to be better placed, as it is making profits at the net level now. Given this scenario, the time may be ripe for investors to partially book profits now.

Graphic by Yogesh Kumar/Mint