Aviation Sector: Allowing FDI: Sentimental booster… :: ICICI Securities

Allowing FDI: Sentimental booster…
By allowing FDI from foreign carriers, the government has opened up
new avenues for fund raising by domestic carriers who are currently
finding it tough to raise money from Indian banks.
As per the rules of this new policy, 1) There will be no automatic
clearance for such FDI proposals and it has to be vetted by FIB and
security agencies. 2) The JV airline will have to be registered in India and
also have its principal place of business in India. 3) The JV must be Indian
owned and lastly 4) The chairman and two-third of directors will have to
be Indian citizens.
In our view, this bold step by the government, though it would help the
Indian carrier over the longer term in a strategic manner, would do little to
attract foreign investments over the short to medium term, unless the
sector fundamentals are set right first through further policy changes with
respect to taxes on ATF, free pricing, etc.
Looking at the fundamentals and balance sheet positions, SpiceJet and
Jet Airways are both placed better to attract investments via the FDI route
over the longer term. Hence, we continue to remain positive on both
these stocks and maintain our BUY rating.
http://content.icicidirect.com/mailimages/ICICIdirect_AviationSector_QuickComment.pdf

Airlines 1H12 leaders & laggards; forward bookings encouraging but 2H12 market estimates still look too optimistic ::JPMorgan

 Headline net profits were generally above/in line with our forecasts but
below consensus. 50% of the airlines beat our 1H12 forecasts, 31% in line and
19% below. 31% of airlines beat market forecasts, 19% in line and 50% below.
 Top line still growing. Revenue grew 10% y/y on average but was flat h/h for
the sector. SpiceJet (+52% y/y), Jet (+28%) and Virgin (+21%) were the leaders
while MAS (-4%), Tiger (flat) and China Airlines (+2%) were the laggards.
 Pax load factors quite steady but yields improved. Pax traffic (RPK) rose 8%
y/y on average, ahead of the sector’s 7% capacity (ASK) growth, resulting in a
0.4ppt improvement in PLF to 78.0%. Pax yields improved, partially passing on
the higher fuel costs. Yield rose 5% y/y on average but fell 1% h/h.

Aviation: Yields are intact in a seasonally weak quarter :: Kotak Sec, PDF link

Aviation: Yields are intact in a seasonally weak quarter
` Yields have been maintained in a seasonally weak 2Q; PLF has taken a
knock
` PLF to improve as domestic capacity is rationalized further
` Yields have been pushed to the limit; costs need to go down for next leg of
growth
` Jet has not been able to gain out of Kingfisher's capacity cuts
` Maintain BUY on SpiceJet and SELL on Jet Airways

Airlines stressing out bank assets :: Business Line

Banks have burnt their fingers by lending to the aviation sector, which is under immense pressure due to rising fuel costs, mismanagement and predatory pricing.

The turmoil in the airline sector is beginning to affect the loan books of banks. Kingfisher Airlines is liquidating assets to meet its debt obligations.

Banks have burnt their fingers by lending to this sector, which is under immense pressure due to rising fuel costs, mismanagement and predatory pricing.

According to the Financial Stability Report released recently by the RBI, 10 banks (predominantly public sector banks) accounted for around 86 per cent of the credit to the airline sector.

This indicates the disproportionate share of loans to airlines in the books of few banks.

Air India and Kingfisher are the two major airlines which have seen their loans either restructured or categorised as NPAs.

Number Crunch - In crisis, passenger traffic hit more than cargo :: Business Line

Turbulence rocks Indian carriers :: Business Line

With or without Kingfisher, India’s aviation sector may continue to face headwinds.

The anticipated shakeout in the Indian aviation industry seems to be underway. High debt levels, large accumulated losses, costly fuel, and inability to raise fares adequately have contributed to the pain in the sector.

Palliative measures such as allowing foreign airlines to invest in Indian carriers are still work-in-progress and may come too late for those which need it urgently.

The most visible casualty could be Kingfisher Airlines. Its shrunken operations have relegated it from being the second largest player to the smallest airline in the domestic skies.

Lenders are tightening the screws and the company has resorted to some asset sales to ease the pressure. But many expect the airline to shut shop sooner than later.

Aviation ƒ : Q4FY12 Result Preview: ICICI Securities, PDF Link

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http://www.icicidirect.com/mailimages/ICICIdirect_ConsolidatedResultPreview_Q4FY12E.pdf


Aviation
ƒ Passenger volumes to decline sequentially although supply cuts by
Kingfisher Airlines (KFA) to bode well for other carriers
We expect total pax traffic to decline 4.7% QoQ to 1.57 crore in
Q4FY12E (up 9.5% YoY) on account of the lean season. Despite this lean
season,  the  load  factor  is  expected  to  remain  healthy  at  over  76%  for
carriers like Jet and SpiceJet due to major supply cuts by Kingfisher
Airlines (KFA). With supply rationalisation in the industry, revenue per
passenger is expected to remain healthy in Q4FY12E vs. last year as
most domestic scheduled carriers hiked their fares in February-March
2012 due to flight cancellations by KFA during the same period. Going
ahead, the fourth quarter is likely to end with airfares averaging 3.6%
higher vs. last year and marginally lower (-0.4% QoQ) compared to that
of last quarter (peak season). Overall, we expect our I-direct aviation
universe to report revenue growth of 9.7% YoY, -4.4% QoQ.
ƒ Margin to still remain negative due to higher fuel prices, weak rupee
Although an improvement in load factor would help in driving yields
upwards compared to last year, a sharp increase in ATF prices and a
weak rupee is likely to weigh down on total operating expenses. This, in
turn, would have a negative impact on operating margins. Average fuel
prices have increased by 5.7% QoQ (22.4% YoY) to | 63,997 per kl while
the rupee has continued to remain above the 50 mark vs. the dollar.
Considering this, we expect the overall aviation universe to have
negative operating margin of 3.5% for the quarter.

Aviation: Good times around the corner, courtesy Kingfisher :: Kotak Securities PDF link

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Aviation: Good times around the corner, courtesy Kingfisher
` Yields are strong in 4QFY12 versus usual seasonal trends
` Strong trend in yields to continue; Kingfisher unlikely to restore operations
` Industry capacity to grow at low single digit at best; PLFs and yields to
remain strong
` We have a BUY rating on SpiceJet
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily20032012.pdf

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. 

Aviation stocks fly high Ø :: CSEC Research

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Aviation stocks fly high

Ø   The BSE Sensex snapped its five day winning streak on account of Greece debt talks. Asian Peers remained subdued throughout the day.

Ø    Aviation stocks traded on a high note as the EGoM allows direct import for Aviation Turbine fuel. Jet Airways, Kingfisher, and Spice jet surged more than 10 percent.

Ø   Mahindra and Mahindra, Cadila, Opto Circuits declined on the back of tepid Q3 numbers. Meanwhile, BGR Energy and Hindustan Unilever extended their losses on the back of its 3rd Quarter numbers.

Ø  Manapuram Finance declined more than 15 percent after the Reserve Bank of India cautioned the company against accepting deposits from the public and threatened to take action if it continued doing so.

Outlook

Ø   The Dow Jones Industrial Average rose 33.07 points, to 12,878.20, its highest close since May 19, 2008. It had reversed higher early in the session after falling as much as 62.56 points.

Ø  In today’s trade Asian peers are trading in green and SGX Nifty is trading ~ 17 pts higher, indicating a flat opening with a positive bias.

 

Regards,

CSEC Research

Aviation 􀂃 ICICI Securities 3QFY12 preview

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Aviation
􀂃 Passenger growth to moderate, supply cuts by Kingfisher Airlines
(KFA) and Air India (AI) to bode well for other private players
Domestic passenger traffic is expected to witness an average 12% YoY
growth for Q3FY12 on account of peak season. However, the same is
expected to moderate due to last year’s high base effect. Load factors
for the quarter to remain healthy over 78% due to peak season and
supply cuts by two major carriers KFA & Air India. This would help other
carriers like Jet and Spicejet to improve their market share. With lesser
supply and peak season, revenue per passenger is also expected to
improve by 5% QoQ for Q3FY12E. Overall, we expect our I-direct
aviation universe to report revenue growth of 12.2% YoY, 4.1% QoQ.
􀂃 Margins to remain in negative territory due to weakening of rupee
Although improvement in load factor would help in driving yields
upwards, a sharp depreciation in the rupee v/s the US dollar is likely to
weigh down on fuel and other operating expenses. This in turn would
have negative impact on operating margins. Average fuel prices have
increased by 6.5% QoQ to |.63,997 per kl. While rupee has depreciated
by 11% QoQ. Considering this, we expect overall aviation universe –ve
operating margin of 7.5% for the quarter.
􀂃 Net loss to remain high, reversal of MTM loss may bring positive
surprise
We expect I-direct universe’s net loss of |.1161 crore. However, reversal
of MTM loss due to relaxation in accounting guidelines provided by the
ministry of corporate affairs on foreign currency loans may bring
positive surprise
Exhibit 6: Company specific view
Company Remarks (Q3FY12)
Jet Airways Revenues to grow by 16.0% sequentially due to ~12% rise in pax traffic and ~5%
rise in average yields. Market share to improve sequentially by 60 bps due to cut
back in supply by KFA. Margins to take a hit due to weak rupee. Reversal of MTM
loss may bring postive surprise in the bottomline.
Spicejet SpiceJet's revenues are expected to grow by 34.4% in Q3FY11E (higher than other
airlines in our coverage) due to increase in the capacity. However margins are
expected to remain negative due to rising fuel prices and other operating costs due
to weakening of rupee
Kingfisher KFA will report revenue de-growth of 15.2% YoY due to flights cancellations. Its
market share is likely to go down to 14.6% from 18.7% reported in the last quarter.
Despite cut down in size, loss is expected to remain at elevated level on account of
higher operating costs
Source: Company, ICICIdirect.com Research

Airlines - Nov air traffic: Jet gains from Kingfisher loss; Edelweiss

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Growth in domestic aviation traffic remained robust despite the tough economic environment. With 5.4mn passengers, November witnessed a strong growth of 13.4% YoY albeit slower than high teens observed in last few months. Expectedly, Kingfisher lost the market share by 270bps MoM and 550bps YoY following its exit from several routes. Jet Airways (JAL) emerged as the key beneficiary, snapping up most of the market share gains. The average yield hike of 20%, effective from the first week of November, seems to be holding on. We maintain Buy on Jet Airways given that it is best positioned to benefit from potential weakness in oil prices. 

Strong demand continues, but downside risks remain

Domestic passenger traffic registered a growth of 13% YoY as the 5.4mn strong traffic was the second highest in the history of Indian aviation. Considering the current tough economic conditions, the growth is commendable. However, this is slower than the 17%-22% growth observed since June’11. We remain cautious on the demand outlook given the current weak economic environment.

Kingfisher’s loss is Jet’s gain, Indigo shares top slot

Kingfisher’s passenger traffic of 0.76mn (-19% YoY and -16% MoM) in Nov 2011 is a 3-year low for the company which was forced to cut down capacity to cope with mounting losses. JAL has been able to grab the opportunity with a traffic growth of 15% YoY and 13% YoY. Jet gained 220bps MoM (vs 270bps lost by KFA), clearly emerging as the biggest beneficiary of the former’s troubles. Our channel checks suggest that Jet has seen an influx of corporate bookings as a fallout of the series of flight cancellations announced by KFA. Indigo which became the largest domestic carrier in Sept 2011 shared the top slot with JAL (excluding Jetlite) with a market share of 19.8%.

High yields sustain in busy season

Most of the carriers undertook an average 20% yield increase in the first week of November which seems to be holding on. Cancellation of certain routes by Kingfisher during October 2011 was followed by its passengers shifting to other carriers which eventually helped sustain high fares. 

Maintain Buy on Jet Airways

JAL has a dominant market share among corporate travelers, a low price elastic segment. With KFA (the only other alternative apart from the national carrier) announcing a series of flight cancellations, Jet has emerged as the key beneficiary as reflected by the November market share gains. Further, a 20% rise in fares in November augurs well for the profitability in Q3. We have built in a 5% YoY fall in oil prices and a 5% rise in yields in FY13 for JAL. We maintain our target price for JAL at INR400 based on 7.25x FY13 EV/EBIDTAR.

Aviation - Air India toes the line by hiking fares :: Edelweiss

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Recent media reports suggest that Air India (AI) has raised fares. This implies that the national carrier has abandoned its earlier strategy of undercutting competition to regain market share after the recent employee strike (May 2011). The fare hike is in line with our view that post attaining its pre-strike 15-16% market share in October 2011, the airline has no incentive to keep fares artificially low. We believe this move will induce some rationality in industry fares considering the current high cost environment. We view this as a positive development and believe that 20% plus hike in fares taken by all industry players at the beginning of November 2011 is expected to sustain in the current busy season. Jet Airways (JAL), considering its 25% market share and prominence among business class passengers, stands to gain the most.

Event: Air India falls in line with industry, hikes fares

With AI’s market share at 16.6% (domestic) in October 2011 versus 15.4% in April 2011, the airline’s market share is back to the pre-strike level. Media reports suggest that as the airline’s market share has stabilized, it has also effected a hike in fares, in line with other industry players. Our analysis suggests that fares in general have increased by 20-25% across all routes/sectors. This is positive for JAL and for the industry in general considering the current high cost environment.

Our view: Fares to remain high during ongoing busy season

With all industry players upping the ante considering the ongoing high oil prices and losses suffered during Q2FY12, we believe current fare hikes will sustain for the entire ongoing busy season. We continue to value JAL at FY13E EV/EBIDTAR of 7.25x and maintain our target price of INR400. We maintain ‘BUY’ recommendation.

AIRLINES Light at the end of the tunnel :: Edelweiss

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The exit of Kingfisher Airlines (KFA) from certain routes has augured well
for the industry demand‐supply equilibrium, forcing fares to go up 20%
this month. We believe the growth in industry supply could remain under
pressure given the worsening balance sheet position of key players. While
a sharp rise in fares would be unsustainable as it may impact demand
growth, a modest rise in yields looks imminent. We believe Jet Airways
(JAL) is best placed to benefit from an improvement in industry dynamics.
Balance sheet strain forces supply cuts
KFA, having 16% of the industry capacity, has already exited certain routes and might
cut down further given the state of its balance sheet and operating losses, in our view.
As a result, we estimate the industry supply growth to limit to 5%‐11% CAGR over FY12‐
14 under various scenarios. If the demand growth sustains at 10%‐15% annually from
here on (which will push industry load factor over 80%), it would bode well for yields.
Yields moving up, but sustained high fares may dent demand
JAL and other carriers have increased fares by about 20% in November, egged on by
supply cuts by KFA in a busy season. Demand, however, has remained strong so far,
growing at nearly 18%‐20% YoY over April‐October 2011. We note that price elasticity is
high and a sustained rise in fares can damage demand. We believe that hiking fares
beyond ~5% in FY13 would be improvident if demand growth is to be sustained in high
double‐digits.
Cost rationalization to help, oil prices remain key
Industry players including JAL are taking cost cutting initiatives including staff
rationalization to tide over the crisis. One of the key cost elements (excluding fuel) is
the pilot cost which should be contained now with the exit of pilots from KFA (100
pilots have resigned as per media reports in the last few months), easing the shortage.
Possible policy initiatives from the government such as a cut in sales tax on ATF could
potentially act as a big positive. Since fuel cost comprises ~45% of sales, every 1% fall in
ATF will improve JAL’s EBIDTAR by 1.5%.
Jet Airways: Best positioned to benefit
JAL has a dominant market share among corporate travelers, a low price elastic
segment. With KFA (the only other alternative apart from the national carrier)
announcing a series of flight cancellations, Jet has seen an influx of corporate bookings.
Further, a 20% rise in fares in November augurs well for the profitability in Q3. We have
built in a 5% YoY fall in oil prices and a 5% rise in yields in FY13 for JAL. With these
assumptions, we arrive at a target price of INR400 based on 7.25x FY13 EV/EBIDTAR.

Aviation: Glimmer of hope ::Kotak Securities

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Aviation
India
Glimmer of hope. As per news articles, Kingfisher has cancelled ~40% of its daily
flights (370 per day) on account of cash flow problems. As per the management, these
were loss-making routes. This is a significant development in the sector which has been
reeling under losses. Kingfisher accounts for 19% of domestic capacity. If the company
is not able to sustain operations in the seasonally strongest quarter when cash flows are
strongest, it could get even worse in the coming months in absence of fresh fund
infusion. Evolving scenario could reduce competition in the sector and augurs well for
existing players (not strained for cash). We reiterate our BUY call on Spicejet and Jet
Airways with a price target of Rs50 and Rs500, respectively.

The churn in Indian aviation :: Business Line

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The travails of the Indian aviation sector, in general, and Kingfisher Airlines, in particular, have been in the spotlight over the past fortnight. It is a paradoxical situation.

On the one hand, India is among the countries with the fastest growing passenger traffic (in the mid to high teens). On the other, high costs (primarily that of aviation turbine fuel) and the inability to raise fares even to break-even levels has meant that all the listed players have been posting big losses over the past three quarters.

Compounding the woes for players such as NACIL, Jet Airways and Kingfisher Airlines is huge debt and massive accumulated losses. Amidst talks of an imminent shakeout, it is noteworthy that Indian aviation is not unfamiliar to churn.

The first round of consolidation happened in the mid-1990s when airlines such as Damania Airways, East-West Airlines and ModiLuft which had opened shop after the ‘open skies' policy of 1991 either shut down or sold out, due to lack of management bandwidth or financial constraints. It was an era of high fares which made air travel a luxury restricted to business executives and moneyed individuals. This scenario continued till the early part of the last decade.

LCC CHURN

However, the low cost carrier (LCC) model introduced by Air Deccan in 2004 proved a game changer. By offering seats at rock bottom fares unheard of before, it democratised air travel in the country and catalysed rapid growth in passenger traffic. The full service carriers — Indian Airlines, Jet Airways and Sahara Airlines — who till then were operating in an oligopolistic market with high fares and plum profits found themselves at the receiving end and saw market share erode.

The advent of the LCC also set into motion some key structural changes in the sector. Perceiving a burgeoning opportunity in Indian aviation, three more LCCs (SpiceJet, GoAir and IndiGo) and a couple of full service carriers — Kingfisher Airlines and Paramount Airways opened shop during 2006 and 2007.

However, with as many as 10 carriers operating, the market soon became too crowded for comfort, and several players started feeling the heat. What followed were some high-profile mergers and acquisitions in 2007-08. Jet Airways took over Sahara Airlines (renamed JetLite) after false starts and a continuing spat; Air India and Indian Airlines merged to form NACIL — a move which has generated more pain than synergies; Kingfisher Airlines took over the original low cost warrior Air Deccan (renamed Kingfisher Red) which had high leverage and found the going unsustainable.

Finally, the growing market share of LCCs and the economic slowdown in 2008 and 2009 meant that the pure full service model was given a go-by. Full service carriers embraced the low fare model in good measure to ride out the downturn.

While Air India had its low cost arm, Air India Express, Jet and Kingfisher shifted a majority of their seats to the low fare category. Meanwhile, Paramount Airlines which was showing promise in South India was grounded in 2010 with some of its planes seized on reports of non-payment of lease dues. As things stand, the aviation market in India comprises three LCCs — SpiceJet, IndiGo and GoAir — and three full service carriers — NACIL, Jet Airways and Kingfisher Airlines —which also offer low fare seats.

Amid this comes Kingfisher's plans to do away with its low fare offering (Kingfisher Red) and focus only on the high yield segment of the market. The company claims that reconfiguration of planes towards this exercise led to the recent flight cancellation imbroglio.

UNINSPIRING FINANCIALS

Not only did LCCs chip away at market share, they also dented the financials of full service carriers by lowering yields across the board. This, even as they themselves suffered start-up pangs. Full service carriers were also badly impacted by the high debt they had taken to expand fleet capacities and at the time of acquisition of other airlines.

Data from aviation regulator, Directorate General of Civil Aviation (DGCA) shows that prior to the advent of LCCs, Jet Airways and Indian Airlines had been posting healthy operating profits in most years.

However, amidst the LCC churn, the financials of most airlines inspired little confidence. The last time Indian Airlines (now NACIL) posted operating profits was in 2006. Among private airlines, only Jet Airways managed to make an operating profit in 2006, while Paramount alone made minor operating profits in 2007.

The situation was no better in 2008 and 2009 with slowdown induced demand contraction and fleet oversupply conditions causing most players to report operating losses. Paramount and IndiGo were the only exceptions posting minor profits in 2009.

The picture however improved in 2010 with the revival in the economy, curtailed seats and relatively benign crude oil prices. Except Kingfisher, all private airlines posted operating profits, though at the net level, only the low cost carriers managed to remain in the green.

Again, it was debt which dragged down the full service carriers. The situation was similar in 2011 when buoyant demand conditions and reasonable crude oil prices for most part of the year led to a good operating performance by many airlines.

Yet, only the LCCs have managed to post profits at the net level. In essence, for most of its history, a chunk of the Indian aviation sector has been in the red.

2012 sadly is turning out to be a nightmare for the sector. Oil prices have shot up sharply beyond $100 a barrel levels. However, though demand is growing at a healthy clip, airlines are not able to hike prices to the extent needed, thanks to alleged predatory pricing by NACIL in a bid to recoup its lost market share.

If things continue as they are, this fiscal may be a washout for most airlines, including LCCs, even at the operating level. However, given their low levels of leverage (at least till now), LCCs seem better positioned to tackle the current turbulence. They, in fact, seem to be optimistic about the prospects of the sector and have placed large fleet orders.

COST CONTROL HELPING LCCS

Besides having low leverage, LCCs true to their moniker exercise tight control over cost. DGCA data for 2010 (latest available) shows the cost per revenue passenger kilometre (a key metric of cost measurement in airlines) was as low as Rs 2.9 for IndiGo, Rs 3.16 for SpiceJet and Rs 3.8 for GoAir.

Comparable numbers for Kingfisher (Rs 5.59), NACIL (Rs 5.7), Jet Airways (Rs 4.5) and JetLite (Rs 4.2) were much higher.

Among the factors which help LCCs keep costs low is the limited type of aircraft in their fleet. This reduces maintenance cost. Also, the average age of their fleet is quite low which aids in curtailing costs.

Besides, LCCs sweat their aircraft better by reducing turnaround time and making optimum use of aircraft space.

FULL SERVICE CARRIERS' WOES

All of India's full service carriers are laden with heavy debt — in excess of Rs 47,000 crore for NACIL, more than Rs 14,000 crore in the case of Jet Airways and around Rs 7,500 crore for Kingfisher. The high interest burden on these loans prevents the airlines from reporting profits even when times are good.

Adding to NACIL's pain is the botched merger between Air India and Indian Airlines which is reflected in continued human resources integration issues.

THE WAY AHEAD

The aviation sector is a crucial cog in the country's infrastructure wheel. To ease its troubles, the government could consider reducing the high taxes on aviation turbine fuel. Also, allowing investment by foreign airlines in the aviation sector (reportedly being considered by the government now) would be welcome.

It is also critical for the sector players to revert to rational fares, as soon as possible. In this regard, continued shielding of NACIL by the government needs to be stopped. Also, there is little case for bailout of private airlines.

While the government should do its bit in terms of the policy framework, the sector should then be left to function on the principle of ‘survival of the fittest'. Another round of churn may be just what the doctor ordered for India's aviation sector.

Why airlines run into rough weather:: Business Line

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A massive and volatile fuel bill, maintenance-intensive aircraft, staff with high-skill level and expenses such as handling baggage, landing, take-off and docking make running airlines a challenging business.

The Indian airline space has attracted a lot of attention over the last six months. First it was the debate over how to rescue Air India. The airline was teetering on the edge following years of mismanagement, a bloated cost structure and botched merger. Now it is Kingfisher Airline's turn to face the heat.

A slew of ill-managed cancellations and losses since inception six years ago have raised the question: Are several Indian airlines such poor performers by virtue of bad regulation or inept operations? A quick history lesson illustrates that it takes intense discipline, favourable regulation and friendly governments for sustained success in this business.

Running airlines is a challenging business. You've got a massive and volatile fuel bill to manage.

A large fleet of maintenance-intensive aircraft, staff with high-skill level don't come cheap and a chock full of expenses include handling baggage, landing, take-off and docking. For every airline which has pulled off sustained success such as Southwest Airlines, Singapore Airlines or Ryan Air, there is a casket full of companies such as Delta Airlines, Continental Airlines, JAL, KLM which have been in and out of bankruptcy courts in an effort to stay afloat. It is little wonder that Warren Buffett (who had a near capital-death experience with US Air in the 1990's) once remarked: ‘The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favour by shooting Orville down.' So in a business this testy what has worked or failed?

HARD TIMES

The last decade has been trying for airlines. In 2001, the 9/11 attacks hurt demand and pushed several industry players into the red. This was followed by rising oil prices which severely dented the narrow margins of several airlines. Legacy costs which include regular, volatile tussles with unions over pay and massive pension obligations has also hurt the profitability of several airlines.

The emergence of low-cost (LCC) airlines which cut-back on the frills such as meals and business class seats in favour of single class, low-cost service also ate into the market share of full-service airlines.

Companies were forced to merge with more cash-rich counterparts. A few deals included KLM merging into Air France and Delta Airways taking over Northwest Airlines. India also saw its share of mergers with Air India-Indian Airlines, Kingfisher acquiring Deccan Airlines and Jet Airways acquiring Sahara Airlines. However, mergers were seldom the first option. Several airlines (some of which later merged) were forced into bankruptcy. At one point, 50 per cent of the US airline capacity was under bankruptcy protection! This included venerable names such as Delta Airlines, US Airlines and United Airlines.

HIGH FUEL BILLS

Jet fuel (kerosene) is one of the highest cost components with taxes accounting for a sizable chunk of selling price. Crude oil volatility takes a huge toll on the slender bottom line of airliners. Surging oil prices have also left several Indian carriers in the red over the last few years. As a result of heavy national and State taxes, India jet fuel prices are estimated to be 40-50 per cent higher than global prices.

Airlines which have been more successful in dealing with volatile crude prices include Southwest Airlines whose aggressive hedging has kept the company afloat when peers sank. ‘Legacy' issues facing several airliners include high wages for pilots, crew and handling staff. This was cited as one of the key reasons for the bankruptcy of Delta Airlines in 2005. Government-owned Air India (including Indian) has also been paralysed by cripplingly high employee costs enforced by entrenched unions. A successful example is Ryan Air's rather nimble and opportunistic approach to picking airports and managing labour has kept operating costs in check much to the chagrin of Lufthansa and other European airlines.  

COMPLEX CHOICES

The third crucial cost is in the choice of aircraft. Airliners have a vast choice in the size and type of aircraft they can operate. This includes employing smaller planes on shorter routes to enable higher usage or more sophisticated aircraft on ultra-long flights with limited seating yet very high fares.

The challenge is to decide what plane is best suited for which route and can make money for an airline in the long run rather than just on a seasonal basis. Several LCC's have competed effectively by choosing to purchase a single type of aircraft for their entire fleet. Ryan Air operates 275 Boeing 737-800's. This choice enables them to keep maintenance costs as low as possible considering their engineers and ground staff has only one type of plane to service and stock up spares for. Indian carrier Indigo has opted for a similar approach deploying 46 Airbus A320's (very similar to the Ryan Air Boeing's). Kingfisher Airlines, on the other hand, has eight variants to maintain and Air India maintains ten variants.

Singapore Airlines is one of the few who have managed a large and diverse fleet with sustained success. A disciplined approach which includes replacing old aircraft with new and more efficient aircraft keeps the average age and service costs low. They are nimble in cutting back on routes during slack demand.

Both of which has catapulted Singapore Airlines to the second in terms of market cap among global airlines. A lean structure on the ground to handle baggage and other services thanks to relatively lower wage bill has been among the key for Emirates (Dubai) to compete with great success against far more experienced airlines such as British Airways (another victim of unions) and Air France. Helping Emirates' cause are far lower levels of taxation both on fuel and companies at home. Both Singapore Airlines and Emirates are also beneficiaries of government largesse in the form of spanking airport infrastructure. Again much to the annoyance of European peers, Emirates is also the recipient of rather generous low-cost loans for buying new aircraft.

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The exit of Kingfisher Airlines (KFA) from certain routes has augured well for the industry demand-supply equilibrium, forcing fares to go up 20% this month. We believe the growth in industry supply could remain under pressure given the worsening balance sheet position of key players. While a sharp rise in fares would be unsustainable as it may impact demand growth, a modest rise in yields looks imminent. We believe Jet Airways (JAL) is best placed to benefit from an improvement in industry dynamics. 

Balance sheet strain forces supply cuts

KFA, having 16% of the industry capacity, has already exited certain routes and might cut down further given the state of its balance sheet and operating losses, in our view. As a result, we estimate the industry supply growth to limit to 5%-11% CAGR over FY12-14 under various scenarios. If the demand growth sustains at 10%-15% annually from here on (which will push industry load factor over 80%), it would bode well for yields.

Yields moving up, but sustained high fares may dent demand

JAL and other carriers have increased fares by about 20% in November, egged on by supply cuts by KFA in a busy season. Demand, however, has remained strong so far, growing at nearly 18%-20% YoY over April-October 2011. We note that price elasticity is high and a sustained rise in fares can damage demand. We believe that hiking fares beyond ~5% in FY13 would be improvident if demand growth is to be sustained in high double-digits.

Cost rationalization to help, oil prices remain key

Industry players including JAL are taking cost cutting initiatives including staff rationalization to tide over the crisis. One of the key cost elements (excluding fuel) is the pilot cost which should be contained now with the exit of pilots from KFA (100 pilots have resigned as per media reports in the last few months), easing the shortage. Possible policy initiatives from the government such as a cut in sales tax on ATF could potentially act as a big positive. Since fuel cost comprises ~45% of sales, every 1% fall in ATF will improve JAL’s EBIDTAR by 1.5%. 

Jet Airways: Best positioned to benefit

JAL has a dominant market share among corporate travelers, a low price elastic segment. With KFA (the only other alternative apart from the national carrier) announcing a series of flight cancellations, Jet has seen an influx of corporate bookings. Further, a 20% rise in fares in November augurs well for the profitability in Q3. We have built in a 5% YoY fall in oil prices and a 5% rise in yields in FY13 for JAL. With these assumptions, we arrive at a target price of INR400 based on 7.25x FY13 EV/EBIDTAR. 

Aviation ƒ:::: Q2FY12 Result Preview::ICICI Securities

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Aviation
ƒ Passenger volume growth and capacity addition to drive topline
Domestic passenger traffic will continue to witness healthy growth of
18.7% compared to last year. However, the same is expected to decline
sequentially by 7.1% during July-September 2011 due to the lean
season. Air fares remained flat during Q1FY12. However, they started
inching up from July onwards in order to partly offset soaring fuel
prices. Still, yields per ASKM continued to remain under pressure on
account of increase in capacity. Overall, we expect our I-direct aviation
universe to report revenue growth of 17% YoY, down 5.8% QoQ.
ƒ Higher fuel costs, lower PLFs on higher capacity to dent margins
Notwithstanding a healthy growth in sales, the aviation sector’s losses
are expected to deepen in the Q2FY12. This is likely to be effected by
the inability of carriers to completely pass on higher fuel costs to its
customers, in the background of the lean season and lower load factors
due to increased capacity addition. Average fuel prices declined 4.8%
QoQ to | 60,080 per kl. However, it continued to remain higher.
Considering this, we expect the overall aviation universe’s operating
margin of negative 3% for the quarter.
ƒ Net loss to widen further despite debt restructuring
Although the debt recast and conversion of rupee loans to US dollar
loans are expected to help the sector reduce its interest outgo by
11.4%, it will not suffice in reducing net losses. The industry’s net loss
as a proportion of income is expected to widen to 9.5% in Q2FY12E
from 4.9% last year.
Exhibit : Company specific view
Company Remarks
Jet Airways Revenues are expected to grow 10.8% YoY vs. last quarter's growth of 15.4% due to
seasonal impact. Although Jet has retained its dominance by targeting the LFC
segment and reducing its expenses (ex-fuel), its operating margins are expected to
remain under pressure due to lower yields and higher fuel prices
SpiceJet Revenues are expected to grow by 42.6% in Q2FY12E (higher than other airlines in our
coverage) due to an increase in the capacity. However, margins are expected to
remain muted due to lower sales and rising fuel prices as LFCs are more susceptible
to rising fuel prices than FSCs
KFA KFA is expected to report 18% YoY air passenger growth due to the recovery of its
grounded aircraft. While margins will get impacted sharply due to soaring fuel prices,
interest cost saving of ~| 24 crore on account of debt restructuring would help it in
reducing its losses to some extent
Source: Company, ICICIdirect.com Research

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Aviation 􀂃 August: weak month :CLSA

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August: weak month
During August 2011, domestic airline passenger volumes grew by 18%
YoY but declined 5% MoM to 4.8m passengers amidst seasonal
weakness. Seat factors fell 50bps YoY and 340bps MoM even as capacity
has increased 19% YoY. Air India saw its market share increase 200bps
MoM at the cost of private carriers. Forward fares have begun to pick up
heading into the peak season in October but are still flattish on a YoY
basis despite an early festive season this year. While the demand supply
situation remains balanced, poor price discipline has prevented fares from
keeping pace with fuel and we expect a weak H2.
August 2011: pax growth healthy, load factors weak
q Passenger traffic volumes grew by 18% YoY to 4.8m (-5% MoM). This was against
a base of 10% growth in August 2010
q Industry level load factors stood at 72%, slightly below the 72.6% in August 2010
as well as the 75.4% seen in July 2011
q Capacity growth was 19% YoY, driven by the LCCs. MoM capacity was flat with
modest declines among the private carriers being offset by an increase by Air India
q Sequential load factor performance was lower across airlines. The decline was
sharpest for GoAir (-8.0%) and Indigo (-4.7%) and lowest for Air India (-0.8%)
Market shares: Air India continues to gain share
q August saw Air India (17.4% share, +2.0% MoM) gain market share at the cost of
the private carriers. Its market share has increased 420bps since May.
q Jet and Jet Lite have a combined market share of 26.3% and are 750bps ahead of
Kingfisher. Jet saw a 10bps MoM decline while JetLite saw flat market share
q Kingfisher remained the single largest airline with 18.8% share, -50bps MoM
q Indigo, Spice Jet and GoAir together had market share of 37.4%, -1.5% MoM with
GoAir -0.7%, Indigo -0.5% and SpiceJet -0.3% MoM. Combined LCC market share
has slipped 330bps since May although its still up 110 bps YoY
Fares and outlook
q Yields in the domestic market remained under pressure through August with
competitive intensity remaining high, signalling a weak 2Q performance.
q Fares have begun to pick in the second half of September as the festive season
approaches. However, YoY trends are still nearly flat despite the earlier festive
season this year and higher ATF prices, suggesting weak YoY performance in 3Q
q ATF price remain high (5% from their recent peak) and overhang profitability
q While the demand supply situation is healthy, price discipline remains poor and we
expect a weak H2. Our O-PF stance on Jet is driven by its below break-up valuation