IndiGo, SpiceJet stocks see a glimmer of hope
Premium- After losses in FY21, IndiGo and SpiceJet may incur losses again this year as covid hit demand
- But covid cases are decreasing, and movement curbs have gradually eased, boosting traffic
As tensions between Russia and Ukraine intensify, Brent crude oil prices are inching towards $100 per barrel. This is problematic for airlines as jet fuel forms a big chunk of their operating expenses.
According to Bloomberg, Brent crude prices averaged $108 a barrel in FY14. During that year, SpiceJet Ltd’s loss widened to ₹1,003 crore from ₹191 crore in FY13, because of continued weakness in the Indian rupee and higher fuel costs. The net profit of InterGlobe Aviation Ltd, which operates IndiGo airline, declined by 60% in FY14 from a year earlier as per its annual report.
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Indeed, there is some relief currently owing to the fuel-efficient aircraft in the fleets of SpiceJet and IndiGo, which can help save fuel costs to an extent. Even so, IndiGo and SpiceJet, which posted losses in FY21, are expected to incur losses again this year because of the pandemic’s impact on demand.
Recall that improved business conditions in the December quarter (Q3FY22) had meant that both IndiGo and SpiceJet saw a sequential rise in capacity in terms of available seat km by 45% and 78%, respectively.
However, just when things were beginning to look up for airlines, travel restrictions made their way back in the latter half of December as cases of Omicron variant surged. This led to the March quarter starting on a dull note. Directorate General of Civil Aviation data shows the total passengers carried by domestic airlines in January declined by 43% month-on-month
Nevertheless, there are some encouraging signs. Covid cases are decreasing and movement curbs have gradually eased, boosting traffic. “February has seen a sharp recovery. The number of weekly average daily fliers were 293,000 in the week ended 19 February versus 249,000 in the week ended 12 February," said ICICI Securities analysts in a report.
Further, a return to 100% of domestic capacity will augur well for both stocks. Also, eventual regularity in international flying will aid the earnings. Even so, any additional disruption is likely to have a severe impact on the stocks.
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For IndiGo, in particular, the resignation of the company’s co-founder, co-promoter and director, Rakesh Gangwal, could bode well for the airline. “We believe that net-net it could be a positive development for the company for the following reasons: It reduces dissonance and clarifies future direction and leadership status; the ensuing liquidity in the market can be absorbed; timing is reasonable given early signs of an end to the covid-19 pandemic; and we do not believe any competing venture, is being planned," said analysts at Credit Suisse Securities (India) Pvt. Ltd in a report.
The next fiscal will see the entry of new airlines, though the impact seems limited. “In the near term, competition from new airlines seems unlikely as they would not be able to grab the premium slots in airports during peak hours. The meaningful impact of competition will be seen only in the long run," said Mitul Shah, head of research at Reliance Securities.
To be sure, high taxation on jet fuel also adds to the woes. Needless to say, there will be some respite if jet fuel is brought under the ambit of the goods and services tax.
Meanwhile, expected March quarter losses could further add to the balance sheet stress of listed airlines. While IndiGo’s balance sheet is healthy, SpiceJet’s weak balance sheet remains a cause for concern. Also, IndiGo enjoys a superior market share. Investors have taken note of these factors evident from the stocks’ returns so far in calendar year 2022. IndiGo’s shares are up 2.4%, while those of SpiceJet are down almost 11%. As such, it remains to be seen if the surge in crude oil prices sustains ahead.
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