More gains ahead for aviation stocks SpiceJet and IndiGo

The letter of intent is for 25 Q400 turboprops and purchase rights for an additional 25 aircraft.
Aviation stocks SpiceJet and Interglobe Aviation have gained between 17 per cent and 23 per cent since the start of March, on the expectation that lower competition, higher fares, and measured capacity addition should yields high. The two airlines are expected to benefit from the problems plaguing Jet Airways, which have resulted in the grounding of half the company’s fleet. 

Both companies have gained market share at the expense of Jet Airways. While the troubled airline’s market share at the end of February fell over 530 basis points to 11 per cent as compared to the year-ago period, IndiGo’s increased by 350 basis points to 43.4 per cent. SpiceJet, which had grounded some of the 737 MAX 8 aircraft, also saw its market share increase by 133 basis points to 13.7 per cent. 

The other benefit has been on account of rising fares leading to improvement in yields. After declining 5 per cent in the first nine months of the financial year, IndiGo’s yields are expected to improve on account of capacity cuts by Jet Airways, grounding of 737 MAX 8 by SpiceJet, lower capacity addition and improving price trends in the 0-15 ticket window. 

Analysts at Kotak Institutional Equities expect IndiGo’s margins to improve, resulting in a sharp 21-84 per cent upgrade of the company’s earnings per share over the next couple of financial years. 

The worry for airline companies is passenger traffic, which has grown in low single digits for the second consecutive month. However, analysts at SBICAP Research believe that listed airlines are trading passenger load factors for better yields as was the case in the December quarter. 

There are two other factors which are supporting the airlines. The first is the 2 per cent drop in average fuel prices in the March quarter, which is expected to improve the spread (unit revenues to unit cost). Further stabilisation of the rupee will help keep costs linked to the dollar, be it maintenance or rentals lower. Thus despite the weak load factors, the March quarter is expected to be profitable for both SpiceJet and IndiGo.

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