Why aviation stocks are now big on investors’ radar

ET Intelligence Group: Why has the airline sector caught institutional investors’ attention over the past one year?

Cumulative investments of institutional investors in listed airlines stocks ­­ SpiceJet, InterGlobe Aviation and Jet Airways ­­ have increased by 10% to Rs 5,695 crore in the June 2017 quarter compared with the same quarter last year.Five factors have prompted these investors to increase their investments and will sustain their interest in the sector. As regards sustained investors’ interest, InterGlobe Aviation tops the list followed by SpiceJet and Jet Airways considering key variables such as market share, cost, capacity expansion and balance-sheet strength.

Here are the five key factors:

CRUDE OIL AND DOLLAR

In the past one year, crude oil prices have remained below $50 a barrel. Fuel expenses form 37-56% of the airlines’ revenues. The outlook for crude oil prices is positive, given the excess supply in the system. Also, the rupee has appreciated against the dollar by 3.8%, which would result in savings as almost 68% of airlines’ expenses are dollar-denominated.

PASSENGER GROWTH

In the past one year, due to increasing shift to air travel and rising dominance of low-cost carriers (LCCs), passenger traffic has grown on an average by 20% almost every month. This has ensured stable revenue and LCCs like SpiceJet also saw rapid turnaround in their operations.

LCC MODEL

The dominance of LCCs has ensured a lean cost structure. In FY17, LCCs commanded a market share of 65% against 42% in FY12. In FY17, it has been observed that the top-10 key routes recorded a 15% growth and routes other than the top-10 registered a 24% traffic growth. Also, according to an IDFC Securities estimate, routes other than the top-10 generated 43% higher yields than metro routes.LCCs, which operate point-topoint destination instead of the hub-and-spoke model of full service carriers (FSCs), have benefited from this. Today, SpiceJet and IndiGo, together own 54% market share of the domestic market.

RAILWAYS LOSING MARKET SHARE

Two factors have triggered increasing preference for air travel. These are falling passenger traffic on rail and no incremental capacity by railways. In the past five years ended FY16, rail passenger growth (non-suburban) grew at a compounded annual growth rate (CAGR) of 0.3% compared with a CAGR growth of 9% between FY06 and FY11. Even in premium rail services, passenger traffic slowed down to 5% in the past three years ended FY16 compared with 14% CAGR growth between FY08 and FY13.

POSITIVE COMMENTARY

Also commentaries of aircraft manufacturers such as Airbus and Boeing about India’s passenger growth have been optimistic. Airbus foresees that passenger traffic in India will grow at 8.4% per annum over the next 20 years which is almost double than the world average of 4.6%.It points out that domestic Indian traffic itself will grow at a faster rate of 9.3% in the coming years. It foresees that Indian cities which will have over one million monthly air passengers will see the number more than treble by 2035.

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