Airlines seen reporting strong headwinds

Investors in airline stocks had better brace for turbulence, for September could well turn out to be one of the worst quarters in a long, long time.

Sharan Lillaney, analyst with Angel Broking, for one, is convinced the airlines have hit an air pocket.

“All things are bad for the industry,” said another analyst from a domestic brokerage firm, requesting anonymity.

As such, shareholder returns have been negative in all the three listed airlines over the past one year — a whopping 71% for SpiceJet and 69% each for Jet Airways and Kingfisher Airlines.
Blame it on the double whammy of high fuel costs and low ticket prices in a seasonally weak quarter, say analysts.

Within the airline universe, the low-cost carriers, or LCCs, are seen flying a touch smoother than their full-service counterparts.
The keyword is price discipline, which is seen getting better for the LCCs, though the full-service carriers, or FSCs, have a long way to go.

“Price discipline is the main concern and if this is addressed, things could improve significantly for the airlines.
Once this happens, it would be easier for the airlines to handle other individual issues at hand, such as high debt,” said Lillaney.

Air India, which sparked the latest round of low fares, could still queer the pitch. For the past few months, it has been offering lower fares on a number of domestic routes, forcing peers to follow suit. However, with a new leadership at the helm, the state-owned carrier is seen reversing course going forward. That should help infuse sanity in the ticket prices offered by the other FSCs as well, say analysts.

Meanwhile, all the three listed airlines have been hard at work to fly out of turbulence. While Kingfisher announced its exit from the low-cost segment, Jet Airways continues to increase presence in the space. SpiceJet, on the other hand, is focusing on regional routes.

Not everyone’s convinced Kingfisher’s exit has helped the low-cost segment.

“There has been significant capacity addition by Jet in the LCC space; SpiceJet has added 8 aircraft and even IndiGo has added capacity in this segment between April and September this year. This has more than negated any positive impact Kingfisher’s vacation of LCC space might have otherwise provided,” said Rashesh Shah, chairman, Edelweiss Capital.

But some believe Kingfisher’s exit is only in name. “Kingfisher hasn’t really vacated the LCC space. It has merely begun to follow the Jet Konnect model, which means cheap fares but meals to be bought on board and configuration of the aircraft may or may not be single class. We have been offering this model for quite some time now,” said a Jet official unwilling to be named.
Another Jet official pointed out that Kingfisher has already begun slashing full-service fares in a bid to retain market share in a highly competitive environment.

Analysts believe such an approach spells two key risks for Kingfisher —- customer disappointment and further financial constraint. “Any such move will end up disappointing the customer, who is expecting a full-cost kind of service,” said an analyst from a foreign brokerage.

For Jet Airways, which has increased exposure in the low-cost segment, analysts presage lower yields, though they concede it doesn’t quite have a choice. “In the current market scenario, the airline is forced to do so,”

As for SpiceJet, some analysts believe it is rightly focusing on the regional routes. Shah of Edelweiss, for one, sees SpiceJet’s regional operations using 60-70 seat turboprops benefiting it significantly. “The routes SpiceJet has picked up are new and have little competition as of now. The 60-70 seaters will unleash ideal capacity on these routes.”

But others beg to offer. “We argue that though this may indeed be the right strategy for SpiceJet, it may not necessarily be the right time for it to enter new markets. Presently, the regional markets that SpiceJet is targeting are being served by Jet Airways through its ATR fleet,” said an HSBC note on Asian airlines, released last week.

Added services at a lower cost could be a differentiator for the airline, but there’s a risk here too. “Offering low fares when fuel costs are high may only deepen losses for SpiceJet in these difficult times,” said the HSBC note.
The lone silver lining to this cloud may be that demand growth for the airline industry at large continues to be healthy at 18%, while capacity is coming in at a rate of 13-14%, said Lillaney.