Airlines- Dwindling demand adds to woes; sector update :: Edelweiss PDF link

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Growth in airline passenger traffic has plunged further to 4% YoY in February 2012 from 8% in December-January and high teens in the earlier part of the year. This has negated, in our view, most of the benefits that could have accrued to the industry due to the dramatic cut in Kingfisher’s operating capacity. Yields still have not risen to the extent required for earning cash profits. A fall in oil prices is a must for a turnaround in industry fortunes. We maintain ‘HOLD’ on Jet Airways, which has gained a third of the market share (at 30% now) lost by Kingfisher. 

 

Slower traffic growth offsets benefits of Kingfisher capacity cut

Passenger traffic growth of 4% YoY in February is the lowest since June 2009. YTD growth still stands at a strong 15%, driven by robust spurt in the first half. Our concern was that a sharp rise in yields could impact demand. However, yields have risen only 4-5% YoY at best during the quarter; this, despite more than two thirds of Kingfisher’s capacity having been grounded over the past few months. This much fare hike is clearly insufficient to earn cash profits given that fuel prices have zoomed 22% YoY during the current quarter.  

Sharp surge in yields highly unlikely

We estimate that with current fuel prices, fares need to rise at least 20% for Jet Airways to earn cash profits during the quarter. This, we believe, is highly unlikely given the already slackening demand scenario. Further, average fare hikes in the past few years have not been more than 2-3% annually. Moreover, fares were down 5% YoY in Q3FY12, when Kingfisher’s problems surfaced for the first time, clearly a reflection of the industry’s lack of pricing power.

Jet gains from Kingfisher loss, but only partially

Kingfisher has lost more than half of its market share since the beginning of the current fiscal (from 20% to 9.7% in February). A third of this has been gained by Jet Airways whose market share (including Jetlite) has now jumped to 30%. Indigo and SpiceJet are the other two beneficiaries, gaining a quarter of the share each. 

Outlook: Headwinds remain; maintain ‘HOLD’ on Jet Airways

We believe a fall in fuel prices is a must for a turnaround in industry fortunes. The government has permitted direct import of ATF, which could potentially help save high sales tax on domestic fuel (avg. 24%). However, possibilities of levy of entry tax by states and infrastructure bottlenecks could limit gains, at least in the near term. We recommend avoiding airline stocks for now. Maintain ‘HOLD’ on Jet Airways, which remains one of the best plays on falling oil prices.  

Airlines- Dwindling demand adds to woes; sector update