BackHigher oil prices increase turbulence for IndiGo, SpiceJet shares
Benchmark Brent crude oil prices have surpassed $90 per barrel on account of growing tensions between Russia and Ukraine as the former is one of the world’s largest oil exporters
PremiumThe landing for Indian aviation stocks, InterGlobe Aviation Ltd and SpiceJet Ltd has become tougher. Benchmark Brent crude oil prices have surpassed $90 per barrel on account of growing tensions between Russia and Ukraine as the former is one of the world’s largest oil exporters.
If the situation aggravates further, there is a risk of oil prices inching up even more. This is worrisome for investors in airline stocks as Aviation Turbine Fuel (ATF) forms a significant portion of the operating expenses.
Further, expectations from the upcoming Union Budget are running low, too. According to an analyst, who spoke under the condition of anonymity, “Reduction in value-added-tax (VAT) on ATF and decrease in custom duties on repairs are among the few wishes of the airline operators. However, these are not expected to be quenched by the government in the forthcoming budget as it continues to prioritize other more drastically affected sectors." One consistent expectation of airlines has been to bring ATF under the ambit of the goods and service tax (GST). Such a decision could provide relief in way of input tax credit.
Going ahead, demand revival and operating at full capacity will remain a primary catalyst for airline stocks. Here, the pace of recovery has slowed down in the domestic market lately. In a report on 24 January, ICICI Securities Ltd said, “The number of weekly average daily fliers stood at 168k in the week ended (W.E) 22 January 2022 versus 192k in the W.E. 15 January 2022."
In view of the looming threat of the third covid-19 wave, the Directorate General of Civil Aviation (DGCA) has extended the suspension of scheduled international commercial passenger services till the end of February 2022. Of course, it helps that the restriction will not apply to international all-cargo operations, which have been a lifesaver for airlines amidst the pandemic. Robust e-commerce growth due to pandemic led restrictions and higher demand for medicines and vaccines prompted big airlines to utilize the idle passenger aircraft to transport cargo thereby compensating the subdued passenger demand to an extent.
Even so, both IndiGo and SpiceJet have incurred losses owing to the pandemic. After incurring massive loss in FY21, IndiGo and SpiceJet’s net loss for the half year ended September stood at about Rs4,600 crore and Rs1,300 crore, respectively. As of 30 September, both airlines had negative net-worth.
As such, the December quarter is expected to better. In a report on 14 January, HSBC analysts said, “We forecast Rs310 crore net loss at IndiGo and Rs170 crore loss at SpiceJet; so, on a sequential basis the numbers should be much better."
In the last one year, shares of IndiGo have increased by 18% vis-à-vis around 20% drop in SpiceJet’s shares. Investors believe IndiGo’s stronger balance sheet hold it in good stead. But, challenging operating environment and potential rise in competitive intensity with new entrants such as Akasa Air are key near-term worries for airline stocks, which may well keep investor sentiments low.
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