Investing in airline stocks? Be nimble, take small bets, say experts

(Photo: Kamlesh Pednekar)
Given the headlines Jet Airways is making due to its debt woes, investors would be surprised to know that airline stocks — Jet Airways, SpiceJet and Interglobe Aviation — have not done too badly over a five-year period. And, it’s not because of IndiGo alone, which was listed in November 2015. An investment in SpiceJet would have risen five times in five years — from Rs 16 to Rs 80. However, Jet’s investors are not so lucky.
   
With crude oil falling to $57 per barrel, and oil companies cutting prices of aviation turbine fuel (ATF) by 14.7 per cent in January, it would seem like a ripe time to buy these stocks. But, investment advisors are still not convinced. Arun Kejriwal, an investment advisor, says: “Even if crude oil goes down, one really doesn’t know whether things will change for the airline companies.” In fact, many fund managers don’t even track them. 

The reason: The sector seems to be consistently in trouble. Some companies have debt issues, others face aircraft engine challenges. So, a fund manager, or an investment expert, does not know with certainty whether to bet or not. However, some investment advisors are seeing opportunity due to the fall in oil prices and steady passenger growth. Vineeta Sharma, head, research, Narnolia Financial Advisors, says: “The profitability and margins of airline companies are very dependent on how ATF prices move. Around 40 per cent of the revenue goes into fuel cost. And, ATF prices coming down is good news. For Indigo, the cost average seat kilometre (CASK) was 3.74 in Q2 FY19. This is expected to go up in Q3 FY19, but will fall thereafter. So, the fall in oil prices will help the companies.”

According to Sharma, rise in domestic passenger growth — 11 per cent year-on-year in November — is another positive. And, if international routes are added, there will be topline growth, and margins will also improve. Currently, high competition in the domestic sector is keeping margins low. 

Pritam Deuskar, fund manager, Bonanza Portfolio, adds: “The key parameters to look at are revenue per available seat kilometre (RASK) and CASK. In addition, check for one-time payments. For instance, one airline recently had huge forex losses. Another was involved in litigation and had to pay a huge amount. So, one has to account for such one-time costs.”

For investors, Jatin Khemani, founder and chief executive officer, Stalwart Investment Advisors has this advice: “I don't think companies from this sector, no matter how efficient, should be looked upon as buy-and-hold stocks. Just like other cyclical businesses, one should look to act contrarian, that is, buy when the sector is facing headwinds and sell when facing tailwinds. When crude crossed $80/barrel recently, the stocks crashed as much as 30-40 per cent, giving a good opportunistic and contrarian bet. The same was reversed with crude oil retracing to $50.” 

Kejriwal has similar views: When investing in these stocks, be nimble. Move in when you see an opportunity, and be equally quick to exit. These are not long-term investments. Don’t get married to them.