Airline stocks hit multiple air pockets in March quarter; IndiGo, Jet fall

A poor March quarter (Q4) performance by InterGlobe Aviation (IndiGo) because of a spike in crude oil prices and higher competitive intensity impacted aviation stocks, as the market feared that the pressure would also reflect on other airline companies. While shares of IndiGo and Jet Airways lost 10-12 per cent each, SpiceJet shed 6 per cent at close on Thursday. Higher fuel costs has prompted analysts to cut IndiGo’s FY19 earnings estimates by 14 per cent. Though the sector is enjoying record load factors and demand which resulted in strong revenue growth for IndiGo, higher crude oil prices and severe pricing pressures have dented the company’s operating performance. 

Both operating and net profit declined by 73-74 per cent over the year-ago quarter. Operating profit margins, too, shrunk by over 800 basis points (bps) compared to the year-ago period. Analysts at IIFL believe margins could fall further. While delayed capacity addition in FY18 due to engine issues supported pricing, analysts at the brokerage believe industry capacity will increase, partly driven by a 25 per cent increase in capacity in FY19 as compared to 16 per cent growth achieved in FY18. The sharp rise in crude oil prices and rupee depreciation would put further pressure on costs, they said. 

What has caught the Street by surprise is the sharp fall in yields despite strong passenger load factors. The management indicated that the weakness in yields was because of lower fares in air travel over the next 15 days segment. While the yields are picking up, it is difficult to draw a trend. Aggressive pricing at a time when the fuel costs are high is a double whammy for the sector. Garima Mishra of Kotak Institutional Equities Research said the current yield scenario was unsustainable, especially given the weak financial status of competition. But, given the rising fuel and pricing risks, expect pressure on the financials of Jet Airways and SpiceJet in Q4. 

Despite the near-term headwinds, analysts believe IndiGo is the best-placed aviation stock. Jal Irani and Yusufi Kapadia of Edelweiss Securities say its industry-leading cost structure with unit costs 20 per cent lower than SpiceJet, a strong balance sheet with net cash of $2 billion will provide cushion against short-term stress. Most analysts have retained their year-ahead price target at Rs 1,400-1,600.


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