IndiGo, SpiceJet stocks up as international flights resume, but crude a worry
Premium- It is to be seen to what extent the demand offsets the impact of higher fuel prices and the depreciating rupee amid the ongoing Russia-Ukraine conflict
After nearly two painful years, India has decided to resume scheduled commercial international services from 27 March. Investors in aviation stocks, InterGlobe Aviation Ltd and SpiceJet Ltd, welcomed the move. InterGlobe runs India’s largest airline IndiGo.
In Wednesday’s morning trade, shares of IndiGo and SpiceJet jumped by around 7% and 5%, respectively, on the NSE.
As such, with receding covid cases, opening up of economy, and increasing vaccination across the world, the Street was waiting for this announcement. International flying will likely aid the yields (a measure of pricing) of airlines as margins tend to be relatively higher for the segment. Moreover, the capacity deployment would see a rise with the beginning of the summer schedule as well.
Note that the scheduled international flight services have remained suspended owing to the pandemic since 23 March 2020. Since then, airlines have resorted to air bubble arrangements, which has offered some support to earnings of aviation companies.
Post two years of various v, there is a pent-up demand for travel. In its December quarter (Q3FY22) earnings call, IndiGo’s management had said, “With the gradual addition of bubble flights, international capacity deployed grew by almost 80%, quarter over quarter and bookings grew by 95%." However, this is on a much lower base. The company maintained opening up of the international segment would boost its utilization to 13-13.7 hours/day.
To be sure, this comes at a time when crude oil prices have surged significantly and that’s concerning. Aviation turbine fuel, a derivative of crude oil, forms a major chunk of airlines’ operating expenses. The benchmark Brent crude oil prices are around $130 per barrel. As airlines increase ticket prices to cope with an increase in fuel prices, some passengers may be discouraged to travel.
Historically data also suggests that airlines’ profitability takes a beating when crude prices spike. For instance, Brent crude prices had averaged $108 a barrel in FY14, according to Bloomberg data. That year, IndiGo’s net profit had declined by 60% year-on-year as per its annual report. In FY14, SpiceJet’s loss had widened to Rs1003 crore from Rs191 crore in FY13 owing to the continued weakness in the Indian rupee and higher fuel costs.
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In the current backdrop, it remains to be seen to what extent the demand offsets the impact of higher fuel prices and the depreciating rupee amid the ongoing Russia-Ukraine conflict.
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