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Aviation stocks have been flying high despite rise in crude prices in 2017. The stocks of SpiceJet and Jet Airways hit their 52-week highs on Wednesday and Thursday respectively. These two counters have today and have more than doubled in the last one year. the stock of InterGlobe Aviation has gained 40 per cent in the same period.
Even in the last three to six months, the stock prices have remained stable despite crude prices consistently inching up since July. The hike in airfare amid strong passenger growth on the one hand and limited capacity addition on the other helped the sector.
According to Kotak Institutional Equities, dated brent crude prices have gained about 23 per cent in calendar year 2017 (average $54.2) due to continued reduction in inventories amid supply cut extended by OPEC and modest increase in supply by non-OPEC.
However, domestic as well as international passenger growth remained strong and in double digits (16-21 per cent) for 2017 though the rate of growth came down after January (20-26 per cent in 2016) as the base is getting high.
Raising passenger load factor Overall, growth stood at a strong 17 per cent and 15 per cent, respectively, for domestic and international sectors in the eight months ended November.
Domestic aggregate passenger load factor (in other words capacity utilisation for aviation companies) recently touched a record high of 89.2 per cent in November, led by SpiceJet, IndiGo and GoAir (in excess of 90 per cent). Capacity growth was lowest in past two years at 10.2 per cent in November.
“The total passenger growth of IndiGo/ Spicejet/ Jet stood at 17.7 per cent/ 22.2 per cent/ 9.6 per cent year-to-date. The YTD capacity growth of IndiGo/ Spicejet/ Jet stood at 14 per cent/ 20 per cent/ 8.3 per cent,” pointed out Ansuman Deb, analyst at ICICI Securities. Favourable business dynamics is likely to continue in the second half of the fiscal too, even though the companies have lined up capacities and are expected to reduce fare, according to analysts.
“1HFY18 was marked by higher fare and lower passenger growth; Q4FY18 will reverse the trend. IndiGo and GoAir will ramp up the neo addition, while Jet Airways will add eight aircraft in 2HFY18. Regional airline capacity would also increase, driven by ATR induction of IndiGo from December,” said Deb.
The second half of the fiscal is a seasonally strong quarter for aviation companies is one reason. Besides, crude prices are expected to moderate from the current levels or remain stable due to marginal decline in global oil demand, sharp increase in non-OPEC supply, stable OPEC production and increase in global oil inventories, Kotak said. According to Binaifer Jehani, Director at Crisil Research, crude prices averaged at $53 in 2017. She expects crude prices to average at $50-55 in the next four calendar years.
This will provide cushion to companies to reduce fare, which in turn can push passenger growth higher. Aviation turbine fuel accounts for 30-40 per cent of aviation companies’ operating cost. Hence, profitability is highly sensitive to movement in crude prices.
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