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Aviation (Rising fuel cost remains a concern) Neutral
With the shift of domestic airlines sector towards low cost services and
strong capacity rationalizations, major players have reported high load
factors (in the range of 76-80% for FSCs and 85-89% for LFCs) in H1FY11.
We believe domestic demand will remain buoyant driven by strong
macroeconomic growth and limited supply of aircraft. In our view, a higher
load factor will drive earnings growth in the sector as major capacity
additions have already been deferred by big players for the next 15-18
month s due to huge debt overhang.
⇒ Rising fuel cost remains a concern for the sector
Rising crude oil prices may pose a threat for airline companies, as it
accounts for nearly 35-40% of total operating costs. Our working
shows that if fuel cost increases by 5% then it has a negative impact
of ~150 bps in the EBITDA margin of airline companies.
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