Tuesday, May 02, 2017

Tailwinds to get airlines rerated

Crude oil prices, after rising initially post the Organization of the Petroleum Exporting Countries (Opec) agreement to cut oil output in December 2016, has fallen little more than 10% this year. Especially last few weeks have been showing signs of further weakness in oil price as the US reported continuous increase in deployment of rigs to the highest level since April 2015 and output from Libya rebounded. Libya's biggest oil field resumed pumping last week. Opec has already reported global oil inventories still remaining above five-year average.

Protectionism in terms of trade barrier is rising across the world and the same is once again slowing down the global industrial economy. Some signs of reversal of headline inflation are also visible in some of the major economies. Hence, crude oil price, which is a crucial indicator of global deflationary fear, is likely to remain weak at least for another year or two.

Indian aviation passenger traffic growth has grown above 20% year-on-year (YoY) growth since October 2015, but decelerated to 15.7% YoY in February 2017. Still it is very impressive considering three facts: first of all, the base effect-- The base of Indian aviation passenger has grown to over 13 crore annually, becoming the fourth largest aviation market in the world. It is quite difficult to grow such a base above 20% annually for a long period. Secondly, the performance of Indian carriers on international routes continues to remain better than the industry, with 12.1% growth in traffic.

Lastly, it is better than many other sectors. While cement and fast moving consumer goods sectors are growing their sales volumes in poor single digit YoY and many large companies in the sectors like pharmaceutical, mobile telecom and IT are growing their revenues or profits in poor single digits, the volume growth for the airline industry remains in impressive double digits for the last two years.

Indian airline companies have got a lot of tailwinds in the form of cheap oil, government initiatives in promoting regional aviation, and consistent and fastest growth in domestic passenger traffic. The service sector, for which the aviation industry is the bone, is still growing faster as compared to both industry and agricultural sectors in India.
02/05/17 G Chokkalingam/DNA