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Costly oil, weak rupee to hit airline revenues

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Profits at listed Indian carriers could nosedive in the three months to June due to rising fuel costs, a falling rupee and intensifying competition — factors that would cancel out the impact of 18 per cent on-year traffic growth. SpiceJet, InterGlobe Aviation and Jet Airways could, cumulatively, report a 70-75 per cent on-year drop in net profit even though revenue may climb about 15-20 per cent , roughly in kilter with the pace of passenger growth for the industry. By the end of the June 2018 quarter, Brent crude price soared 13.5 per cent to $78 per barrel and the dollar strengthened 5.3 per cent with respect to the rupee at Rs 68.47.

These two variables impact about 40 per cent of a transporter’s costs.

Furthermore, stiff competition has prompted companies to lower fares to stay relevant, and the inability to raise fares in lockstep with costs would depress profits. Among the listed entities, SpiceJet is placed better than rivals, say analysts.

SpiceJet has high exposure to routes where competition is relatively lower.

Second, it would benefit from flying from airports that have seen high passenger and airfare growth in the June quarter.

This is reflected in its high RPK— revenue passenger kilometres. SpiceJet’s RPK in May, according to Directorate General of Civil Aviation (DGCA), grew by 15 per cent while IndiGo’s rose 13 per cent .

Also, SpiceJet recorded superior load factor of close to 95 per cent in May, as against 91.5 per cent and 81 per cent , respectively for IndiGo and Jet Airways.

Given these factors, SpiceJet is expected to record superior revenues and earnings growth in the quarter.

Also, yield is expected to show superior growth, in the range of 8-10 per cent . Analysts say IndiGo would face stiff competition from Jet, which slashed fares on key routes.

This, coupled with high fuel costs, would put yields under pressure in the quarter. On the valuation front, SpiceJet’s stock, which has fallen about 18 per cent to Rs 110, looks attractive based on the high visibility of earnings.

On FY19 estimated earnings, according to Bloomberg data, the airline is trading at a P-E multiple of 10.6.

This is quite attractive compared to IndiGo’s 19.4.




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