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Aviation
India
Some relief at last. Airlines have increased fares across the board to pass on higher
fuel costs. Our index of one-week forward fares (average of air fares over eight routes
from Mumbai and Delhi) is up ~10% at Rs6,000 in the first week of April from average
levels in 3QFY11. As per our estimates, the fares need to go up at least ~5% in 1QFY12
to pass on higher fuel costs and to break even at the EBITDA level. Stress in the sector
on account of weak yields (rev per RPKM) and ever higher jet fuel prices, presents an
ideal opportunity to buy, in our view. We maintain BUY and target price of Rs65 and
Rs650 for Spicejet and Jet Airways, respectively.
Some signs of sanity – airlines have increased prices to offset higher fuel expenses partially
As per our understanding, airlines across the board have increased fares to pass on the increase in
costs on account of higher fuel prices, though partially. Our index for one-week forward fares
(average of one-week forward fares on eight sectors from Mumbai and New Delhi) is up ~10%
from the average of 3QFY11. Key reasons:
Some of the bigger players can’t allow sustained losses as their balance sheets are in a
precarious state; and hence, the need to increase fares. The industry has endured stress in
4QFY11 where earnings were squeezed on account of both, higher fuel prices (20% up q-o-q)
and lower yields (down 9% q-o-q in our view). We are surprised by the fact that the decline in
yield (q-o-q) in 4QFY11E has been higher as compared to 4QFY10 (down 6.2% q-o-q) despite
higher PLF and higher fuel costs in 4QFY11 (Vs 4QFY10).
From the point of view of seasonality, 1Q is better than 4Q in terms of higher PLFs and
therefore better pricing power.
Further increase in fares is required to pass on higher fuel costs
As per our estimates, airlines would need to increase average fares by ~10% (q-o-q) in 1QFY12
just to get to break even at the EBITDA level assuming average jet fuel prices are the same as
3QFY11. If one takes into account the current jet fuel price ($140/bbl; up15% from average price
of $122/bbbl in 3QFY11), average fares need to go up further ~5% to pass on the incremental
fuel costs in 1QFY12.
We expect 4QFY11 results to be weak
We expect Spicejet to report Rs 840 mn and loss of Rs 640 mn, at the EBITDA and PBT level,
respectively in 4QFY11.
We expect Jet Airways to report Rs1.98bn and loss of Rs 2.8 bn, at the EBITDA and PBT level,
respectively in 4QFY11.
We have assumed 9% lower yields (rev per RPKM) and 20% higher Jet fuel prices q-o-q in
4QFY11. We expect 1QFY12 results to be better than 4QFY11.
We maintain BUY
We have made changes to our estimates to take into account the losses in 4QFY11. We maintain
our BUY rating with a target price of Rs65 and Rs650 for Spicejet and Jet Airways, respectively.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Aviation
India
Some relief at last. Airlines have increased fares across the board to pass on higher
fuel costs. Our index of one-week forward fares (average of air fares over eight routes
from Mumbai and Delhi) is up ~10% at Rs6,000 in the first week of April from average
levels in 3QFY11. As per our estimates, the fares need to go up at least ~5% in 1QFY12
to pass on higher fuel costs and to break even at the EBITDA level. Stress in the sector
on account of weak yields (rev per RPKM) and ever higher jet fuel prices, presents an
ideal opportunity to buy, in our view. We maintain BUY and target price of Rs65 and
Rs650 for Spicejet and Jet Airways, respectively.
Some signs of sanity – airlines have increased prices to offset higher fuel expenses partially
As per our understanding, airlines across the board have increased fares to pass on the increase in
costs on account of higher fuel prices, though partially. Our index for one-week forward fares
(average of one-week forward fares on eight sectors from Mumbai and New Delhi) is up ~10%
from the average of 3QFY11. Key reasons:
Some of the bigger players can’t allow sustained losses as their balance sheets are in a
precarious state; and hence, the need to increase fares. The industry has endured stress in
4QFY11 where earnings were squeezed on account of both, higher fuel prices (20% up q-o-q)
and lower yields (down 9% q-o-q in our view). We are surprised by the fact that the decline in
yield (q-o-q) in 4QFY11E has been higher as compared to 4QFY10 (down 6.2% q-o-q) despite
higher PLF and higher fuel costs in 4QFY11 (Vs 4QFY10).
From the point of view of seasonality, 1Q is better than 4Q in terms of higher PLFs and
therefore better pricing power.
Further increase in fares is required to pass on higher fuel costs
As per our estimates, airlines would need to increase average fares by ~10% (q-o-q) in 1QFY12
just to get to break even at the EBITDA level assuming average jet fuel prices are the same as
3QFY11. If one takes into account the current jet fuel price ($140/bbl; up15% from average price
of $122/bbbl in 3QFY11), average fares need to go up further ~5% to pass on the incremental
fuel costs in 1QFY12.
We expect 4QFY11 results to be weak
We expect Spicejet to report Rs 840 mn and loss of Rs 640 mn, at the EBITDA and PBT level,
respectively in 4QFY11.
We expect Jet Airways to report Rs1.98bn and loss of Rs 2.8 bn, at the EBITDA and PBT level,
respectively in 4QFY11.
We have assumed 9% lower yields (rev per RPKM) and 20% higher Jet fuel prices q-o-q in
4QFY11. We expect 1QFY12 results to be better than 4QFY11.
We maintain BUY
We have made changes to our estimates to take into account the losses in 4QFY11. We maintain
our BUY rating with a target price of Rs65 and Rs650 for Spicejet and Jet Airways, respectively.
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