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Airlines - India
Time to alight
„Cut Jet & SpiceJet to Underperform
Fundamentals for the airline sector have peaked, and we expect (a) traffic growth
to moderate to 12%-13% from 18%, (b) supply growth to exceed demand over
FY12-13E, (c) load factors to decline and (d) yields to remain restricted due to
competition, regulatory noise and taxes. We believe YTD stock performance
factors in the impact of high fuel costs, but not the key supply-related issues and,
hence, we downgrade ratings on both Jet Airways (JTAIF, Rs453.50) and SpiceJet
(MDLFF, Rs34.10) to Underperform from Buy.
Demand trends to slow
After strong 18% growth in domestic traffic in FY11, we expect traffic growth to
slow to a more modest 12%-13% over the next two years on account of (a)
slowing economic growth, (b) airport constraints at key metros such as Mumbai
and (c) possible cuts in corporate travel.
Supply to outgrow demand
After muted 10% capacity growth in FY11, Indian carriers, led by the low-cost
carriers (LCCs), are expected to register c.12%-15% capacity growth over FY12-
13E. LCCs, led by Indigo and SpiceJet, are expected to add c.30 aircraft, and
legacy carriers (including Jet Airways) are expected to another c.10 aircraft. Also,
due to higher seat density and aircraft utilization of LCCs, capacity addition is
even more accentuated.
Competitive pressures to restrict yields
We expect a restricted 3-4% yield expansion (including fuel surcharges) for the
industry. This is largely because of (a) higher capacity growth compared to
demand growth, (b) irrational pricing by the struggling legacy carriers, (c) high
price elasticity due to significant LCC segment growth and (d) a hike in the service
tax and user development fee (UDF) at some airports.
Downgrade Jet & SpiceJet to Underperform
We believe the worsening domestic environment will likely push the stocks further
down. Therefore, we downgrade Jet Airways and SpiceJet to Underperform with
reduced POs or Rs400 (from Rs650) and Rs25 (from Rs76), respectively.
Key risks: Decline in JetKero price/regulatory changes
A sharp decline in JetKero prices would be the biggest risk to our stance,
especially stock sentiment. Fuel accounts for c.45% of revenue for Jet Airways
and c.52% for SpiceJet. Also, regulatory changes, especially in FDI norms, can
be positive for the sector.
Trouble ahead: Supply to exceed
demand
The Indian aviation sector was in a sweet spot for the last 18-24 months, when
demand was outgrowing supply. This prompted Indian carriers to add capacity
aggressively over the last six months. Even though the scheduled deliveries are
still less in number, carriers have added capacity using open-market leases. We
expect supply to be evenly matched in FY12 and to outgrow demand in FY13. This
would likely intensify the competition and lead to (a) a fall in load factors and (b) a fall
in yields. We expect both Jet and SpiceJet to post losses in FY12.
Traffic still strong, but growth may moderate…
Growth in Indian domestic traffic has remained strong over the past two years,
showing c.18% CAGR over FY09-11. However, year-to-date FY12, growth has
slowed to less than 15%. We expect traffic growth to moderate to a more modest
c.12% over the next two years. Apart from the higher base, this is due to (a)
slowing economic growth, (b) airport constraints at key metros like Mumbai and
(c) possible cuts in corporate travel.
…and not be enough to match domestic supply
After a sluggish capacity addition, Indian carriers led by the LCCs grew their fleet
modestly in FY11, which was lower than demand growth. However, over the past
six months, domestic airlines have added significant capacity. We expect the
capacity growth to be evenly matched in FY12 and exceed demand in FY13. Over
the next 12 months, LCCs led by Indigo and SpiceJet are expected to add c.30
planes. Legacy carriers led by Jet Airways are expected to another 10-12 aircraft.
Load factors to moderate
As a result of higher supply growth, load factors for most carriers have been
coming off from the recent peaks. We expect load factors for Indian carriers to fall
by c.2%-3% over FY12-13.
Yields to stagnate on increasing competition
Yields in recent months have witnessed pressure on account of increasing
competition, resulting in irrational pricing by the struggling carriers. Despite higher
fuel costs and a subsequent increase in the fuel surcharge, we expect yields to
grow by 2-3% over FY12-13. Secondly, a large part of the growth is coming from
the price-sensitive LCC segment, where carriers have limited pricing power.
UDF, service tax & regulatory noise to restrict yields
Yields are also expected to remain subdued on account of (a) a service tax
increase, (b) UDF rise at a few airports and (c) regulatory noise over ticket-price
increases during the busy season.
LCCs to bring competition for international segment
The profitable international segments for the legacy carriers are also set to face
increasing competition from the new LCCs. Indigo and SpiceJet have received
the nod to fly international routes. On the other hand, foreign LCCs, such as Air
Asia and Air Arabia, are also increasing their frequency to Indian destinations.
Singapore Airlines also plans to launch a LCC to fly in the region. This sudden
surge in LCCs could keep the international economy yields under check.
Higher JetKero price to erode profitability
Lack of yield expansion combined with the higher JetKero price has eroded
profitability in the industry. Based on global forecasts, we continue to expect a
higher ATF price, over the next two years, of c.US$120/bbl. Further, factoring in
our modest 3-4% yield growth, we do not expect carriers to make profits in FY12
and to only record very modest profits in FY13.
Downgrade Jet and SpiceJet to Underperform
We are downgrading both Jet and SpiceJet to Underperform from Buy due to the
worsening fundamentals of the industry. Despite the YTD sharp fall in the stock
prices of both companies, they are currently not fully pricing in the coming supply
in both domestic and international segments, in our opinion.
Key risks to our assumptions
„ Sharp fall in JetKero prices: Fuel as percentage of revenues is ~45% for
Jet Airways and ~52% for SpiceJet. Any sharp fall in JetKero prices would be
a huge positive for the sector. Our assumptions for FY12E-14E are based on
$120/bbl. Each +1% change in JetKero prices impacts the FY13E EBITDAR
by -2.6% for Jet Airways and -3.6% for SpiceJet.
„ Any regulatory change in FDI norms: Currently, foreigners are allowed to
own less than 49% of the Indian carriers. However, foreign carriers are not
allowed to take any stake in the Indian carriers. Any relaxation in these
norms could be a positive for the sector, as it would give them (a) access to
funds, (b) knowledge of global practices and (c) speedy induction of Indian
carriers into global alliances
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Airlines - India
Time to alight
„Cut Jet & SpiceJet to Underperform
Fundamentals for the airline sector have peaked, and we expect (a) traffic growth
to moderate to 12%-13% from 18%, (b) supply growth to exceed demand over
FY12-13E, (c) load factors to decline and (d) yields to remain restricted due to
competition, regulatory noise and taxes. We believe YTD stock performance
factors in the impact of high fuel costs, but not the key supply-related issues and,
hence, we downgrade ratings on both Jet Airways (JTAIF, Rs453.50) and SpiceJet
(MDLFF, Rs34.10) to Underperform from Buy.
Demand trends to slow
After strong 18% growth in domestic traffic in FY11, we expect traffic growth to
slow to a more modest 12%-13% over the next two years on account of (a)
slowing economic growth, (b) airport constraints at key metros such as Mumbai
and (c) possible cuts in corporate travel.
Supply to outgrow demand
After muted 10% capacity growth in FY11, Indian carriers, led by the low-cost
carriers (LCCs), are expected to register c.12%-15% capacity growth over FY12-
13E. LCCs, led by Indigo and SpiceJet, are expected to add c.30 aircraft, and
legacy carriers (including Jet Airways) are expected to another c.10 aircraft. Also,
due to higher seat density and aircraft utilization of LCCs, capacity addition is
even more accentuated.
Competitive pressures to restrict yields
We expect a restricted 3-4% yield expansion (including fuel surcharges) for the
industry. This is largely because of (a) higher capacity growth compared to
demand growth, (b) irrational pricing by the struggling legacy carriers, (c) high
price elasticity due to significant LCC segment growth and (d) a hike in the service
tax and user development fee (UDF) at some airports.
Downgrade Jet & SpiceJet to Underperform
We believe the worsening domestic environment will likely push the stocks further
down. Therefore, we downgrade Jet Airways and SpiceJet to Underperform with
reduced POs or Rs400 (from Rs650) and Rs25 (from Rs76), respectively.
Key risks: Decline in JetKero price/regulatory changes
A sharp decline in JetKero prices would be the biggest risk to our stance,
especially stock sentiment. Fuel accounts for c.45% of revenue for Jet Airways
and c.52% for SpiceJet. Also, regulatory changes, especially in FDI norms, can
be positive for the sector.
Trouble ahead: Supply to exceed
demand
The Indian aviation sector was in a sweet spot for the last 18-24 months, when
demand was outgrowing supply. This prompted Indian carriers to add capacity
aggressively over the last six months. Even though the scheduled deliveries are
still less in number, carriers have added capacity using open-market leases. We
expect supply to be evenly matched in FY12 and to outgrow demand in FY13. This
would likely intensify the competition and lead to (a) a fall in load factors and (b) a fall
in yields. We expect both Jet and SpiceJet to post losses in FY12.
Traffic still strong, but growth may moderate…
Growth in Indian domestic traffic has remained strong over the past two years,
showing c.18% CAGR over FY09-11. However, year-to-date FY12, growth has
slowed to less than 15%. We expect traffic growth to moderate to a more modest
c.12% over the next two years. Apart from the higher base, this is due to (a)
slowing economic growth, (b) airport constraints at key metros like Mumbai and
(c) possible cuts in corporate travel.
…and not be enough to match domestic supply
After a sluggish capacity addition, Indian carriers led by the LCCs grew their fleet
modestly in FY11, which was lower than demand growth. However, over the past
six months, domestic airlines have added significant capacity. We expect the
capacity growth to be evenly matched in FY12 and exceed demand in FY13. Over
the next 12 months, LCCs led by Indigo and SpiceJet are expected to add c.30
planes. Legacy carriers led by Jet Airways are expected to another 10-12 aircraft.
Load factors to moderate
As a result of higher supply growth, load factors for most carriers have been
coming off from the recent peaks. We expect load factors for Indian carriers to fall
by c.2%-3% over FY12-13.
Yields to stagnate on increasing competition
Yields in recent months have witnessed pressure on account of increasing
competition, resulting in irrational pricing by the struggling carriers. Despite higher
fuel costs and a subsequent increase in the fuel surcharge, we expect yields to
grow by 2-3% over FY12-13. Secondly, a large part of the growth is coming from
the price-sensitive LCC segment, where carriers have limited pricing power.
UDF, service tax & regulatory noise to restrict yields
Yields are also expected to remain subdued on account of (a) a service tax
increase, (b) UDF rise at a few airports and (c) regulatory noise over ticket-price
increases during the busy season.
LCCs to bring competition for international segment
The profitable international segments for the legacy carriers are also set to face
increasing competition from the new LCCs. Indigo and SpiceJet have received
the nod to fly international routes. On the other hand, foreign LCCs, such as Air
Asia and Air Arabia, are also increasing their frequency to Indian destinations.
Singapore Airlines also plans to launch a LCC to fly in the region. This sudden
surge in LCCs could keep the international economy yields under check.
Higher JetKero price to erode profitability
Lack of yield expansion combined with the higher JetKero price has eroded
profitability in the industry. Based on global forecasts, we continue to expect a
higher ATF price, over the next two years, of c.US$120/bbl. Further, factoring in
our modest 3-4% yield growth, we do not expect carriers to make profits in FY12
and to only record very modest profits in FY13.
Downgrade Jet and SpiceJet to Underperform
We are downgrading both Jet and SpiceJet to Underperform from Buy due to the
worsening fundamentals of the industry. Despite the YTD sharp fall in the stock
prices of both companies, they are currently not fully pricing in the coming supply
in both domestic and international segments, in our opinion.
Key risks to our assumptions
„ Sharp fall in JetKero prices: Fuel as percentage of revenues is ~45% for
Jet Airways and ~52% for SpiceJet. Any sharp fall in JetKero prices would be
a huge positive for the sector. Our assumptions for FY12E-14E are based on
$120/bbl. Each +1% change in JetKero prices impacts the FY13E EBITDAR
by -2.6% for Jet Airways and -3.6% for SpiceJet.
„ Any regulatory change in FDI norms: Currently, foreigners are allowed to
own less than 49% of the Indian carriers. However, foreign carriers are not
allowed to take any stake in the Indian carriers. Any relaxation in these
norms could be a positive for the sector, as it would give them (a) access to
funds, (b) knowledge of global practices and (c) speedy induction of Indian
carriers into global alliances
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