Crude close to $100, but airlines are not losing hope

According to Bloomberg, Brent crude prices averaged $108 per barrel in FY14. During that year, the losses of SpiceJet Ltd increased to from 1,003 crore 191 crore in FY13, due to continued weakness in the Indian rupee and higher fuel costs. Net profit of InterGlobe Aviation Ltd, which operates the IndiGo airline, declined by 60% in FY14 as compared to a year ago, according to its annual report.

In fact, the fleet of SpiceJet and IndiGo currently have some respite due to fuel efficient aircraft, which can help save fuel cost to an extent. Nevertheless, IndiGo and SpiceJet, which posted losses in FY11, may again incur losses this year because of the impact of the pandemic on demand.

Recall that better business conditions in the December quarter (Q3FY22) meant that both IndiGo and SpiceJet saw a sequential increase in capacity by 45% and 78% respectively in terms of available seat km.

However, just when things were starting to take off for airlines, travel restrictions made their way back in late December as cases on the Omicron version spiked. Due to this, the start of the March quarter was sluggish. Data from the Directorate General of Civil Aviation shows that the total passengers carried by domestic airlines declined by 43% month-on-month in January

Still, there are some encouraging signs. The cases of covid are decreasing and the restrictions on movement have gradually eased, leading to increased traffic. “February has seen a sharp recovery. Analysts at ICICI Securities said in a report, the weekly average daily fliers stood at 293,000 in the week ended February 19, as against 249,000 in the week ended February 12.

Besides, a return of 100% of the domestic potential would augur well for both the stocks. Besides, eventual regularity in international flight will help in income. Still, any additional disruption is likely to have a severe impact on stocks.

For IndiGo, in particular, the resignation of the company’s co-founder, co-promoter and director, Rakesh Gangwal, could augur well for the airline. “We believe net-net can be a positive development for the company for the following reasons: it reduces discrepancy and clarifies future direction and leadership positions; can absorb upcoming liquidity in the market The timing is appropriate given the early signs of an end to the COVID-19 pandemic, and we do not believe any competitive ventures are being planned,” analysts at Credit Suisse Securities (India) Pvt Ltd said in a report.

There will be entry of new airlines in the next financial year, though the impact seems limited. “In the near term, competition from new airlines seems unlikely as they will not be able to secure premium slots in airports during peak hours. Mitul Shah, Head of Research, Reliance Securities said, “The meaningful impact of the competition will be seen only in the long run.”

To be sure, the high taxation on jet fuel also adds to the crisis. Needless to say, if jet fuel is brought under the ambit of the Goods and Services Tax, there will be some relief.

Meanwhile, the expected March quarter loss could further add to the balance sheet stress of the listed airlines. While IndiGo has a good balance sheet, SpiceJet’s weak balance sheet continues to be a cause for concern. In addition, IndiGo enjoys a better market share. Investors have taken note of these factors, evident from the returns of the shares in the calendar year 2022 so far. IndiGo shares are up 2.4%, while SpiceJet is down about 11%. So, it remains to be seen whether the rise in crude oil prices continues.