BackAfter a turbulent 2020, recovery path for aviation firms won’t be easy in 2021
If demand improvement coincides with higher crude prices then there could be pressure on profitability for airlines
PremiumWhile the pandemic hit businesses hard, the aviation sector was amongst the worst hit in 2020 globally. In India, air travel was restricted when the covid-19 lockdown was imposed in March. This was followed by a gradual easing of operations from May-end.
As we enter the new year, it goes without saying that how demand pans out would be crucial. Here, there has been a reasonable improvement in domestic passenger traffic from the nadir, although it’s uncertain whether the momentum sustains. Varun Ginodia, analyst at Ambit Capital Pvt. Ltd, said, “While the recovery in domestic traffic has been encouraging, it’s worth noting that average daily passenger run-rate has started to moderate this month. Going ahead, it is possible that the recovery may turn more topsy-turvy as seen in Europe/ US" He added, “As such, the recovery in domestic passenger traffic to pre-covid levels (FY20) could be prolonged." Plus, corporate travel is not expected to return in a hurry with work from home becoming a more prevalent trend. Having said this, a decline in the number of covid-19 cases and positive news flow around vaccine availability may boost passenger confidence and in turn, help demand.
But as the economic situation improves, there is a risk that crude oil prices may also start to inch up and that’s not desirable. After touching a low of $19.33 a barrel in April, Brent crude prices are now trading at $51.29 a barrel. “We highlight that for every $5 per barrel change in crude oil prices, InterGlobe Aviation Ltd’s earnings per share changes by about 25/15% (given fuel constitutes 30–35% of sales) for FY22/23E," said analysts from Motilal Oswal Financial Services Ltd in a report on 12 December. InterGlobe runs the IndiGo airline, India’s largest.
In general, if demand improvement coincides with higher crude prices then there could be pressure on profitability for airlines.
In the coming year, consolidation could also be a theme to watch out for, along with progress on the Air India disinvestment. “In 2021, investors should watch for consolidation in the aviation sector in a post-covid world. Eventually, we expect three groups to survive—IndiGo, the Tatas and SpiceJet Ltd," says Ginodia.
Meanwhile, given the rough environment, both listed airlines, InterGlobe and SpiceJet reported losses for the half year ending September. Even so, market share gains have kept sentiments for InterGlobe’s shares quite upbeat. In 2020, the InterGlobe stock has increased by 23%. The airline’s domestic market share increased to 53.9% in November from 47.9% in January, shows data from Directorate General of Civil Aviation. On the other hand, smaller peer, SpiceJet’s stock has declined by about 15% this calendar year, although the shares are up as much as 92% since October end.
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