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Aviation
India
Crude jolt. Aviation Turbine Fuel (ATF) prices have increased by 15% as compared to
average price of US$98.5//bbl in 3QFY11, which would severely impact the profitability
of airlines as the increase has been too sharp to pass on despite the favorable demandsupply
dynamics in the market. We are revising our crude oil price assumptions upwards
to ($95/bbl and $98/bbl for FY2012E and FY2013E, respectively). Profitability would be
severely impacted as we are assuming that airlines would have to absorb 20% increase
in fuel costs; the rest would be passed on by way of higher fares. We reduce our target
price for Jet Airways and Spicejet to Rs650 (Rs850 previously) and Rs65 (Rs85
previously), respectively, and maintain BUY.
Sharp rise in crude oil price; severe impact on profitability despite the recent hike in fares
Political instability in the Arab countries has led to crude oil price (Brent) flaring to US$112/bbl. The
increase has been too sharp for the airline industry to offset by raising fares. Fuel forms ~40% of
total cost and ~35% of top line (as of 3QFY11) for an airline and hence such a sudden increase
would have significant negative impact on profitability. We expect the industry to report weak
results for 4QFY11E as sharp upward spike in fuel prices has come at a time when yields are under
pressure on account of: (1) Seasonality, and (2) Air India’s aggressive pricing stance in the market.
Our discussions with the industry suggest a 5-7% decline in yields (rev per RPKM) qoq in 4QFY11E.
We expect Spicejet and Jet Airways to be barely profitable at the PAT level in 4QFY11E.
Increase in fuel surcharge initiated by Jet; not enough to pass on higher costs completely
Jet Airways has increased fuel surcharge by Rs100 for routes less than 1,000 km and Rs200 for
routes more than 1,000 km. We are assuming effective increase of Rs150 on an average, which is
a ~3% increase qoq over the average fare in 3QFY11. As fuel forms ~35% of the top line, a 3%
increase in yields would neutralize ~9.5% increase in fuel price. The current increase, though
incrementally positive would not be enough to offset higher fuel expense if the crude oil price
were to sustain at the current levels.
We expect Air India to stop undercutting the market
Air India had taken an aggressive stance on pricing (mid-January 2011 onwards) by moving ticket
pricing to discount w.r.t. Jet and Kingfisher on major routes as compared to premium/parity earlier.
We note that despite lower pricing, the airline has suffered the worst decline in PLF mom from
78.5% to 69.5% in January. Also, the airline has lost 1.3% market share (mom) in January 2011.
The data points to the fact that lower pricing does not necessarily mean higher PLF if the service
levels are poor which is amply clear from the worst on time performance of Air India in January (at
67%). Since the airline has not been able to drive PLFs by lower pricing and also on account of
continuing losses and cash flows issues as reported in the media, we expect it to revert to
premium/parity versus Jet/Kingfisher sooner than later.
Reduce our estimates; maintain BUY with revised estimates
We are reducing our estimates to factor in higher crude oil price. Our new estimates factor in
crude price at US$95/bbl (ATF US$107/bbl) and US$98/bbl (ATF US$110/bbl) for FY2012E and
FY2013E, respectively. We assume that airlines would be able to pass on 80% of the increase in
fuel prices through higher fares. We maintain BUY with revised target prices of Rs650 and Rs65,
for Jet and Spicejet, respectively.
Other players in bigger problems; scope for fares to increase from here
We note that other big players in the market like Air India and Kingfisher are set for even
bigger problems on account of higher fuel prices. Air India’s plight is amply clear from the
few news reports which have appeared recently:
1) “Air India in its turnaround plan, will be asking for one time infusion of Rs175 bn
from the government. The airline has a total debt of Rs400 bn out of which Rs210
bn is on account of working capital. The airline is losing money on a daily basis. Out
of the Rs220 mn which the airline earns every day, Rs135 mn goes to the oil
companies and Rs80 mn to the airport operator and ground handlers, leaving the
airline with only Rs5 mn a day which translates into Rs150 mn a month. The
monthly wage bill and interest payment of the airline are about Rs2.5 bn and Rs1.5
bn, respectively.“ (Business Standard, February 25, 2011)
2) “Air India staff may face delays in getting salaries for April. Due to adverse cash
flow situation in the airline, payment of salaries is getting delayed, the civil aviation
minister, Mr. Valayar Ravi, told the Parliament on Thursday.” (Hindu Business Line
February 25, 2011).
We note that the problems highlighted before the OMCs have increased the price of
ATF (which would reflect the current spike in crude oil price). The ATF price would be
revised upwards from February 28, 2011.
In case of Kingfisher, we highlight the cash losses incurred by the airline in the past
three quarters. Even in the seasonally best 3QFY11, the airline burnt Rs2.5 bn of cash
which leads us to the conclusion that 4QFY11E cash loss would be even bigger and it
also points out to the fact that cash losses might sustain even in FY2012E if the
company does not reduce the leverage in its balance sheet by raising capital.
In light of adverse developments in the sector, the company has postponed its plans of
raising US$300 mn by way of GDR.
We believe the deferment of capital raising plans by major players in the
industry augurs well for the long-term fundamentals of companies which can
sustain and grow their operations with internal accruals.
Fuel surcharge hiked; would offset only a part of increase in fuel price
According to our estimates, the current increase in fuel surcharge would offset ~9.5%
increase in fuel costs. Jet fuel price is up ~15% (average at US$113.5/bbl QTD) from average
levels of US$98.5/bbl in 3QFY11. Therefore, the current increase in fuel surcharge would
offset approximately ~75% of the increase in fuel costs; while the remaining would have to
be borne by the airlines (in case the fuel prices were to sustain the current levels). Further
hikes in fuel surcharge would be required to offset higher fuel prices completely.
We would like to point out that average fare is a combination of base fare and fuel
surcharge. In our analysis we have assumed that the base fare would remain constant qoq.
According to our discussions with few of the airlines, base fares are down qoq on account
of recent aggressive pricing by Air India. Therefore, the actual average fares would increase
to a lesser extent than the increase in fuel surcharge announced.
We expect Air India to revert to premium/parity versus Jet/Kingfisher
Air India had taken an aggressive stance on pricing (mid-January 2011 onwards) by moving
ticket pricing to discount w.r.t. Jet and Kingfisher on major routes as compared to
premium/parity earlier. We note that despite lower pricing, the airline has suffered the worst
decline in PLF mom from 78.5% to 69.5% in January. Also, the airline has lost 1.3% market
share (mom) in January. The data points to the fact that lower pricing does not necessarily
mean higher PLF if the service levels are poor which is amply clear from the worst on-time
performance of Air India in January (at 67%). Since the airline has not been able to drive
PLFs by lower pricing and also on account of continuing losses and current cash flow
problems highlighted by recent news articles ; we expect it to revert to premium/parity
versus Jet/Kingfisher sooner than later.
Reducing our estimates to factor in higher crude oil price
We have reduced our earning estimates for Spicejet and Jet Airways to factor in higher
crude oil price. We are modeling US$95/bbl (ATF at $107/bbl) and US$98/bbl (ATF at
$110/bbl) versus US$90/bbl (ATF at $102/bbl) and US$93/bbl (ATF at $107/bbl), for FY2012E
and FY2013E, respectively.
Also, for Spicejet, the change is also on account of:
We have written off value of the luxury business jet (Rs2.7 bn) which would be delivered
in FY2012E from the cash balance of the company without taking into account any lease
revenue from the same. Needless to say, we find move to acquire the business jet totally
against the interests of the minority shareholders and completely out of line with the low
cost strategy of the company.
We are incorporating period end (FY2011E) fleet at 28 (Boeing-737s) versus 26 earlier.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Aviation
India
Crude jolt. Aviation Turbine Fuel (ATF) prices have increased by 15% as compared to
average price of US$98.5//bbl in 3QFY11, which would severely impact the profitability
of airlines as the increase has been too sharp to pass on despite the favorable demandsupply
dynamics in the market. We are revising our crude oil price assumptions upwards
to ($95/bbl and $98/bbl for FY2012E and FY2013E, respectively). Profitability would be
severely impacted as we are assuming that airlines would have to absorb 20% increase
in fuel costs; the rest would be passed on by way of higher fares. We reduce our target
price for Jet Airways and Spicejet to Rs650 (Rs850 previously) and Rs65 (Rs85
previously), respectively, and maintain BUY.
Sharp rise in crude oil price; severe impact on profitability despite the recent hike in fares
Political instability in the Arab countries has led to crude oil price (Brent) flaring to US$112/bbl. The
increase has been too sharp for the airline industry to offset by raising fares. Fuel forms ~40% of
total cost and ~35% of top line (as of 3QFY11) for an airline and hence such a sudden increase
would have significant negative impact on profitability. We expect the industry to report weak
results for 4QFY11E as sharp upward spike in fuel prices has come at a time when yields are under
pressure on account of: (1) Seasonality, and (2) Air India’s aggressive pricing stance in the market.
Our discussions with the industry suggest a 5-7% decline in yields (rev per RPKM) qoq in 4QFY11E.
We expect Spicejet and Jet Airways to be barely profitable at the PAT level in 4QFY11E.
Increase in fuel surcharge initiated by Jet; not enough to pass on higher costs completely
Jet Airways has increased fuel surcharge by Rs100 for routes less than 1,000 km and Rs200 for
routes more than 1,000 km. We are assuming effective increase of Rs150 on an average, which is
a ~3% increase qoq over the average fare in 3QFY11. As fuel forms ~35% of the top line, a 3%
increase in yields would neutralize ~9.5% increase in fuel price. The current increase, though
incrementally positive would not be enough to offset higher fuel expense if the crude oil price
were to sustain at the current levels.
We expect Air India to stop undercutting the market
Air India had taken an aggressive stance on pricing (mid-January 2011 onwards) by moving ticket
pricing to discount w.r.t. Jet and Kingfisher on major routes as compared to premium/parity earlier.
We note that despite lower pricing, the airline has suffered the worst decline in PLF mom from
78.5% to 69.5% in January. Also, the airline has lost 1.3% market share (mom) in January 2011.
The data points to the fact that lower pricing does not necessarily mean higher PLF if the service
levels are poor which is amply clear from the worst on time performance of Air India in January (at
67%). Since the airline has not been able to drive PLFs by lower pricing and also on account of
continuing losses and cash flows issues as reported in the media, we expect it to revert to
premium/parity versus Jet/Kingfisher sooner than later.
Reduce our estimates; maintain BUY with revised estimates
We are reducing our estimates to factor in higher crude oil price. Our new estimates factor in
crude price at US$95/bbl (ATF US$107/bbl) and US$98/bbl (ATF US$110/bbl) for FY2012E and
FY2013E, respectively. We assume that airlines would be able to pass on 80% of the increase in
fuel prices through higher fares. We maintain BUY with revised target prices of Rs650 and Rs65,
for Jet and Spicejet, respectively.
Other players in bigger problems; scope for fares to increase from here
We note that other big players in the market like Air India and Kingfisher are set for even
bigger problems on account of higher fuel prices. Air India’s plight is amply clear from the
few news reports which have appeared recently:
1) “Air India in its turnaround plan, will be asking for one time infusion of Rs175 bn
from the government. The airline has a total debt of Rs400 bn out of which Rs210
bn is on account of working capital. The airline is losing money on a daily basis. Out
of the Rs220 mn which the airline earns every day, Rs135 mn goes to the oil
companies and Rs80 mn to the airport operator and ground handlers, leaving the
airline with only Rs5 mn a day which translates into Rs150 mn a month. The
monthly wage bill and interest payment of the airline are about Rs2.5 bn and Rs1.5
bn, respectively.“ (Business Standard, February 25, 2011)
2) “Air India staff may face delays in getting salaries for April. Due to adverse cash
flow situation in the airline, payment of salaries is getting delayed, the civil aviation
minister, Mr. Valayar Ravi, told the Parliament on Thursday.” (Hindu Business Line
February 25, 2011).
We note that the problems highlighted before the OMCs have increased the price of
ATF (which would reflect the current spike in crude oil price). The ATF price would be
revised upwards from February 28, 2011.
In case of Kingfisher, we highlight the cash losses incurred by the airline in the past
three quarters. Even in the seasonally best 3QFY11, the airline burnt Rs2.5 bn of cash
which leads us to the conclusion that 4QFY11E cash loss would be even bigger and it
also points out to the fact that cash losses might sustain even in FY2012E if the
company does not reduce the leverage in its balance sheet by raising capital.
In light of adverse developments in the sector, the company has postponed its plans of
raising US$300 mn by way of GDR.
We believe the deferment of capital raising plans by major players in the
industry augurs well for the long-term fundamentals of companies which can
sustain and grow their operations with internal accruals.
Fuel surcharge hiked; would offset only a part of increase in fuel price
According to our estimates, the current increase in fuel surcharge would offset ~9.5%
increase in fuel costs. Jet fuel price is up ~15% (average at US$113.5/bbl QTD) from average
levels of US$98.5/bbl in 3QFY11. Therefore, the current increase in fuel surcharge would
offset approximately ~75% of the increase in fuel costs; while the remaining would have to
be borne by the airlines (in case the fuel prices were to sustain the current levels). Further
hikes in fuel surcharge would be required to offset higher fuel prices completely.
We would like to point out that average fare is a combination of base fare and fuel
surcharge. In our analysis we have assumed that the base fare would remain constant qoq.
According to our discussions with few of the airlines, base fares are down qoq on account
of recent aggressive pricing by Air India. Therefore, the actual average fares would increase
to a lesser extent than the increase in fuel surcharge announced.
We expect Air India to revert to premium/parity versus Jet/Kingfisher
Air India had taken an aggressive stance on pricing (mid-January 2011 onwards) by moving
ticket pricing to discount w.r.t. Jet and Kingfisher on major routes as compared to
premium/parity earlier. We note that despite lower pricing, the airline has suffered the worst
decline in PLF mom from 78.5% to 69.5% in January. Also, the airline has lost 1.3% market
share (mom) in January. The data points to the fact that lower pricing does not necessarily
mean higher PLF if the service levels are poor which is amply clear from the worst on-time
performance of Air India in January (at 67%). Since the airline has not been able to drive
PLFs by lower pricing and also on account of continuing losses and current cash flow
problems highlighted by recent news articles ; we expect it to revert to premium/parity
versus Jet/Kingfisher sooner than later.
Reducing our estimates to factor in higher crude oil price
We have reduced our earning estimates for Spicejet and Jet Airways to factor in higher
crude oil price. We are modeling US$95/bbl (ATF at $107/bbl) and US$98/bbl (ATF at
$110/bbl) versus US$90/bbl (ATF at $102/bbl) and US$93/bbl (ATF at $107/bbl), for FY2012E
and FY2013E, respectively.
Also, for Spicejet, the change is also on account of:
We have written off value of the luxury business jet (Rs2.7 bn) which would be delivered
in FY2012E from the cash balance of the company without taking into account any lease
revenue from the same. Needless to say, we find move to acquire the business jet totally
against the interests of the minority shareholders and completely out of line with the low
cost strategy of the company.
We are incorporating period end (FY2011E) fleet at 28 (Boeing-737s) versus 26 earlier.
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