Stress levels ran high for Indian aviation companies this year. It all boiled down to three main villains: higher oil prices, a weak rupee, which increases dollar-denominated costs, and pricing pressures. The upshot: InterGlobe Aviation Ltd, which operates the biggest domestic airline IndiGo, reported a pre-tax and exceptional item loss of ₹957 crore for the half year ended September. Now, simply add Jet Airways (India) Ltd’s and SpiceJet Ltd’s losses and this number swells to a gigantic ₹3,941 crore. Jet Airways fared the worst, thanks to its high cost structure and heavy debt, resulting in huge finance costs. Note that all three listed airlines were profitable in the year-ago period.
As we enter another year, some respite seems to be on the cards. Brent crude prices have corrected from their October highs and the rupee has appreciated. These two factors will bring relief.
But it is crucial that pricing improves. Here, moderation in capacity growth would prove to be the main facilitator of a rise in fares.
“Our thesis is that undercapitalised airlines will have to moderate capacity growth in order to avoid losses,” pointed out ICICI Securities in its strategy report on 18 December.
This should result in overall capacity growth near ~15%, a level where fare hikes can take place in the system, it added. As things stand, though, there is no sign of an improvement in prices, with news reports suggesting that fares for last-minute bookings are falling below those for advance bookings, perhaps for the first time.
Another element to keep a tab on is the movement in crude oil prices. After all, fuel makes up the lion’s share of costs for airlines. The good news is that analysts don’t foresee a substantial increase in crude prices in the near-to-medium term. That is primarily because of slower-than-anticipated demand growth and oil production cuts from the Organization of the Petroleum Exporting Countries (Opec), and allies.
Meanwhile, investors have had little luck. Sure, shares of IndiGo have fared better than those of Jet Airways and SpiceJet. Still, it’s not as if the IndiGo stock is soaring. Jet’s shares have obviously underperformed by a huge margin given its financial troubles. From a near-term perspective, the announcement of the seasonally strong December quarter numbers could have a bearing on sentiments for all the three stocks. After that’s out of the way, stocks will take cues from the trajectory in crude prices and how pricing shapes up.