Analysts bullish on airline flightpath as demand soars

With oil prices on the rise, jet fuel prices are also moving northwards.

With the increase in aviation turbine fuel (ATF) prices, full-cost airlines such as Kingfisher, Jet and Air India have already hiked ticket prices to pass on the hike. The hike is reportedly in the range of Rs100 - 200 per ticket, depending on the distance.

On the other hand, low-cost carriers such as Spicejet have not hiked ticket prices, thus absorbing the hike in fuel prices at the moment. Analysts point out that in both situations airlines are likely to perform well in the fourth quarter.

Indian Oil Corporation has increased its domestic ATF prices (Delhi) from Rs46,880.3 per kilolitre (kl) in December 2010 to Rs47,815.5 per kl on January 1, 2011.

Similarly, HPCL increased domestic ATF prices (Delhi-Palam) from Rs38,596.22 per kl in December 2010 to Rs39,378.65 per kl in January 2010. Overall, the hike in ATF prices has been in the range of 2%.

Most analysts are confident airlines, both full-cost and low-cost, would put up good numbers for the fourth quarter, inspite of an increase in fuel prices.

Around two years ago, when crude oil prices were on an upward trend and ATF prices moved in tandem, airlines had to take a massive hit. So, what’s changed this time?

Analysts point out this time airlines are enjoying a significant increase in demand, making it easy to pass on the hike to passengers.

“Till there is a demand- supply mismatch, whatever be the increase in ATF prices, profits for these airlines are unlikely to be affected. Companies would be able to pass on the hike to the passengers. Typically, in aviation, while all other factors are controllable, oil prices is the only variable factor. With all the factors in favour of airline operators, this should not be a concern.

In addition, the yield factors for the third quarter would be a better indicator to understand the impact. There would not be any negative impact even in the fourth quarter,” said an analyst, who did not wish to be named.

The analyst pointed out that while demand is growing at around 15-18%, growth in supply is only at 8-10% and full supply is not expected to come in before the end of FY12. This has placed airlines in an ideal position with more pricing power.

In addition, most airlines have reduced the overall impact an increase in oil prices will have on its total expenditure.

Speaking on condition of anonymity, an analyst from a domestic broking firms said, “Around two years ago, oil prices consisted of around 40-42% of the total expenditure on airlines. Today, most of them have managed to bring it in the 35-40% range. This has been achieved through a more fuel-efficient fleet. Some are a little more cautious about the effect a rise in oil prices will have on the aviation sector. A rise of upto $120 per barrel would be manageable for the sector.”

In a research report on aviation released on January 7, Jasdeep Walia, analyst with Kotak Institutional Equities Research, said Jet Airways is expected to have a positive impact of at least 11.5% in 4QFY11E versus 2QFY11E, which should enable higher profitability after absorbing higher fuel costs.

On low-cost carriers, Walia expects higher improvement in passenger load factor in 3QFY11 for Spicejet, as compared with Jet Airways and thus giving Spicejet additional room as compared with Jet (~7% on the top line, without incremental costs) to manage higher fuel costs and still improve operating performance quarter-on-quarter.

The research report is based on expectations that prices will remain at $104 per barrel. However, there are a few who think the rise in ATF prices will definitely pinch airlines.

Typically, a 10% increases in fuel prices, has a negative effect of around 5% on the airline’s profits.