India's airlines to see higher growth

Despite rising aviation turbine fuel prices and cancellations following the volcanic eruption in Iceland, domestic airline companies are likely to witness sustained passenger volumes.

While losses from the six-day closure of European airspace are estimated at $1.5-2 billion for the global aviation sector, the impact is likely to minimal for the two listed entities, Jet Airways and Kingfisher Airlines, which diverted part of their traffic through other airports.

Analysts say Jet, which operates 12 flights daily to the US and Europe, could take a hit to the tune of Rs 4 crore per day on its top line. However, as some of its flights were routed through other centres (Athens) and it charged higher fares on resumed flights, the losses might be contained.

Jet gets 56 per cent of its revenues from international operations. While these air pockets will cause a revenue loss in the short term, analysts say the year ahead could see the same robust traffic that was witnessed in FY10.

EYEING PROFITS
FY11E	Jet Airways	Kingfisher**	Spicejet
Sales	14,230	5,035	2,849
% change yo-y	21	-4	27
Operating profit	839	-935	216.3
% change yo-y	NA	NA	187
Net profit/Loss	100	-1375	242
P/E	43.9	NA	12.0
in Rs crore,             **Kingfisher financials are estimated for FY10

Passenger traffic growth to continue

Aviation companies have been reporting consistent passenger load factors since the December quarter, considered a peak season for the sector. Passenger traffic for March, the latest month for which the numbers are available, shows a 23 per cent year-on-year jump, with volumes pegged at four million.

For the March quarter, the sector saw passenger traffic at 12 million, up 20 per cent over the March quarter in FY09. While FY09 was a forgettable year for the sector, which recorded deceleration in growth for the first time since 2002 due to the economic slowdown, FY10, according to Crisil Research, should see a 16 per cent y-o-y jump in passenger traffic to 45.8 million.

The reasons are strong demand from leisure travellers and benign ticket prices. For the current financial year, the research firm believes growth will be in the region of 15 per cent due to strong economic growth, rising incomes, and affordability, and will take total passenger traffic to 52.7 million. However, what could derail the growth story for the companies are rising crude oil and aviation turbine fuel (ATF) prices.

Concerns

ATF accounts for 35-40 per cent operational costs for an airline and its pricing depends on movement of crude oil prices. The commodity has gained 3.5-4 per cent over the last four months. Oil marketing companies increased prices of ATF by three per cent recently. The fuel currently costs about Rs 41.50 a litre.

Despite rising crude oil prices, the impact has been offset to a large extent by the hardening of the rupee vis-a-vis the dollar, says an analyst at Centrum Research. The rupee has gained 2 per cent during the last four months.

Analysts say airline companies will be forced to raise prices if crude oil crosses the $90 mark and the sector, being price-sensitive, could witness a fall in loads, which have been consistently high over the past five months. Low ATF prices helped companies such as Jet Airways report profits in the December quarter, for the first time in three quarters. In fact, airlines have been adding capacity since last July to meet the rise in demand.

Conclusion

The improved performance of the three listed entities in the December quarter and the sector's growth prospects are not lost on the Street. Jet Airways and SpiceJet have seen their prices double over the past six months.

While growth prospects look good for big players, high debt on books of Jet Airways and Kingfisher are a big concern. While Jet has debt of Rs 14,000 crore (Rs 140 billion), Kingfisher owes its bankers over Rs 6,000 crore (Rs 60 billion).

Jet has been negotiating to sell its property in Mumbai's Bandra Kurla Complex and analysts estimate this should fetch it Rs 400-500 crore (Rs 4-5 billion). This would help the company bring down debt and, subsequently, interest costs. Further, both it and Kingfisher are looking at raising Rs 2,000 crore through qualified institutional placements and other instruments to bring down debt.

Analysts say both SpiceJet and Jet Airways should turn profitable in FY11, while Kingfisher will take longer to break even. At Rs 60, SpiceJet is trading at an attractive 12 times its FY11 earnings per share estimates of Rs 5 and should fetch handsome returns.

As far as Jet Airways is concerned, the markets seem to have already discounted the gains for the stock, which at Rs 527 is quoting at an expensive 44 times its FY11 earnings estimates.