Aviation: Airlines flying low thanks to higher crude oil prices
Indian listed airlines had a turbulent flight during the March quarter, what with crude oil prices rising steadily
Indian listed airlines had a turbulent flight during the March quarter, what with crude oil prices rising steadily. Yields declined year-on-year (y-o-y) at IndiGo and Jet Airways (India) Ltd. Sure, SpiceJet Ltd saw an improvement in yields, but that didn’t help much.
IndiGo is run by InterGlobe Aviation Ltd.
In its post-results call, IndiGo had said that its fares in the 0-15 day booking window were materially lower, compared with a year ago. This is likely to have put pressure on its yields. Praveen Sahay, assistant vice-president (equity research) at Edelweiss Broking Ltd, said, “It is quite possible that IndiGo had to accommodate passengers at a much lower fare considering some of its flights were cancelled during the quarter, thus adversely affecting its yields.”
Over the last two years, airfares have remained flat while fuel prices have doubled, said Jet Airways in its results press release.
SpiceJet’s strong regional presence and variety of aircraft to size up demand according to routes remains its key strength, point out analysts from JM Financial Institutional Securities Ltd in a post results report on 11 May. However, as mentioned earlier, SpiceJet’s better yields weren’t immensely helpful.
That’s because Ebitda of all the three listed Indian airlines wasn’t enough to cover their respective cumulative depreciation and interest costs. Even so, Jet’s performance was the worst of the lot, as it posted an Ebitda loss, compared with the profit at the Ebitda level that SpiceJet and IndiGo reported. At a time when crude prices are high and yields are under pressure, Jet tends to suffer more owing to its relative high operating costs structure. According to Jet, results were also adversely affected owing to a one-time maintenance charge of Rs.253 crore and a mark-to-market adjustment of Rs.156 crore due to a weaker rupee.
Ebitda is short for earnings before interest, taxes, depreciation and amortization; and is a measure of profitability.
Jet’s pre-tax losses for the March quarter were a massive Rs.1,040 crore. In contrast, IndiGo and SpiceJet eked out a pre-tax profit of Rs.166 crore and Rs.46 crore, respectively.
After the March quarter, the journey doesn’t get any easier for Indian aviation companies. Crude oil prices remain uncomfortably high. What’s more, the outlook on crude prices is strong on the back of robust demand and a persistent decline in production from Venezuela. What this means is that unless yields improve meaningfully, profits of these three airlines are unlikely to see a dramatic improvement. Accordingly, investors would do well to keep tabs on yields for these stocks in the coming days. Specifically for Jet, debt remains a concern.