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Photo: Bloomberg
Photo: Bloomberg

Aviation  firms’  losses  to  lower  sequentially; demand revival is key

Domestic travel is gaining steam, but international travel remains a concern due to severe restrictions, said Edelweiss analysts. Domestic average daily passengers for December have declined by 45% year-on-year.

Airlines are still gasping for breath under the pandemic’s dark clouds. Travel demand has been underwhelming. Needless to say, this would reflect in the December quarter results (Q3FY21). SpiceJet Ltd and InterGlobe Aviation Ltd are expected to continue reporting losses, although sequentially lower. InterGlobe runs IndiGo, India’s largest airline.

Note that in the September quarter, InterGlobe and SpiceJet had reported a net loss of about 1,200 crore and 112 crore, respectively.

“Although aviation turbine fuel prices for the December quarter were up 3.5% (down by 31% year-on-year), increasing scale of operation and an appreciating rupee (1% quarter-on-quarter) are likely to enable narrowing of losses sequentially," wrote Paarth Gala, an analyst at Prabhudas Lilladher Pvt. Ltd in a report on 11 January.

No smooth landing
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No smooth landing

Understandably, revenues are expected to dip year-on-year, although analysts estimate a decent improvement on a sequential basis, driven by the festive season demand. Additionally, yields, a measure of pricing for airlines, are expected to remain strong. Gala added, “Benefitting from pricing discipline during festive season and charter flights, yields are likely to remain strong (up 4%/8% for InterGlobe/ SpiceJet)." Overall, better yields are expected to offset the impact of lower passenger load factors year-on-year. Management commentary on fares and demand environment remain monitorables.

Going ahead, the outlook on demand isn’t rosy. “The aviation sector is reviving from the slump, but we expect demand to gather significant momentum only from mid-CY21," said analysts from Edelweiss Securities Ltd in a report on 7 January. The current quarter is anyway a leaner one. Plus, business travel is not expected to improve in a hurry.

“Domestic travel is gaining steam, but international travel remains a concern due to severe restrictions," said Edelweiss analysts. Domestic average daily passengers for December have declined by 45% year-on-year.

To be sure, market leader InterGlobe finds itself in a sweet spot in these troubled times, thanks to its strong balance sheet. As of end-September, it had free cash worth almost 7,000 crore and restricted cash of nearly 11,000 crore. Plus, the airline has gained domestic market share during the pandemic. Unsurprisingly, the InterGlobe stock has gained about 25% since October-end, suggesting investors are factoring a good deal of optimism into the price. “Given the sharp run up in the stock price and valuations at around 9 times FY22 adjusted EV/ Ebitdar, we place our rating Under Review and will evaluate rating/ estimates post 3Q results," said Gala. EV is enterprise value. Ebitdar is earnings before interest, tax, depreciation, amortization and lease rentals; a key measure of profitability for airlines.

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