Aviation stocks hit air-pocket

Investors in aviation stocks may have to wait for long to get good returns and Indian carriers are expected to incur heavy losses. Lalatendu Mishra reports.

Investors in aviation stocks may have to wait for long to get good returns. With oil prices touching a record high of $119 per barrel, and rising airfares prompting some passengers to put off flying, Indian carriers are expected to incur heavy losses. In India, prices of aviation turbine fuel (ATF) has gone up by an average of 42 per cent from April 2007.

HT Image

For the year ended March 31 2008, airlines are expected to report a collective loss of Rs 4,000 crore ($1 billion). Analysts feel the financial year 2008-2009 will be no better.

Here is the first sign of an impending slowdown: Deccan Aviation, one of the listed aviation stocks, reported a net loss of Rs 199.6 crore for the third quarter ended March 2008 compared to Rs 213 crore in the corresponding period of the previous year. The airline, which runs low-cost carrier Deccan, managed to bring down losses, despite lower seat occupancy on its flights, by increasing fares and through sale and lease back arrangements. Air Deccan reported a net loss of Rs 190. 86 crore in the second quarter ended December 31, 2007 as compared to a net profit of Rs 9.6 crore in the same period previous year. The going will get tougher for airlines during the coming quarters. Jet Airways will announce the results later this month followed by Spice Jet, the other listed stock in the Indian bourses.

“Considering crude has gone up by 30 per cent in the 4th quarter of financial year 2008, the aviation industry is expected to see rising cost pressure and may not breakeven at operating levels even in financial year 2008- 2009,” said Aniket Mhatre, research analyst at brokerage firm Prabhudas Lilladher.

In December 2007, Mhatre and his team had recommended a buy for Jet Airways stock for Rs 1,495 and SpiceJet stock for Rs 84. “In December, we did not anticipate oil price rising to $118 a barrel. That time it was $90 a barrel. With rising fares, the load factor has come down causing problems for airline companies,” Mhatre said.

On Monday, Deccan Aviation stock closed with a gain of 6.48per cent at Rs 1,144.65. Jet Airways stock closed flat at Rs 550.15, while the SpiceJet scrip closed with loss of 1.86 per cent at Rs 42.25.

“Overall sentiment is down and this is for most of the other industries. Short-term investors will have a huge issue but investors will gain in the long run,” said Kapil Kaul, CEO-India of aviation consultancy Centre for Asia Pacific Aviation. CAPA expects industry fundamentals to improve in next two years and long term investors will make money, Kaul added.

Though airlines would manage to run the operations even after making losses, fund raising programmes would come under severe pressure said analysts. “US based banks are under severe financial problem and don’t want to lend any more. Normally six bankers used to visit me regularly offering loans and now nobody comes,” said a chief financial officer of a leading airline.