Grounded, for now

Mumbai: The Indian aviation sector, which was growing over 20 per cent a year, was pretty badly hit by the global economic crisis. In 2005-07, most of the operating airlines forayed in to the sector: Vijay Mallya’s Kingfisher Airlines, Kansagra family’s SpiceJet, Interglobe Enterprises-promoted IndiGo Airlines and Wadia Group’s GoAir.
In a zeal to become umber one, they started going all out, and the first round of consolidation took place just before the stock market crash in 2008. Jet Airways bought Sahara Airlines and Kingfisher snared Deccan Aviation. Though this consolidation added capacities to both these players, it has also hurt them.
Being a part of the travel industry, aviation business is highly capital intensive, but cyclical in nature. So analysts are quite wary. There are limited options here. Out of the three listed players, only two airlines – Jet Airways and SpiceJet — are tracked by brokerage firms.
For investors interested in aviation stocks, here are few indicators that can help take a final call.
Crude price: Fuel, or aviation turbine fuel (ATF), expenses form around 40-50 per cent of the total expense. Therefore, the airline business is very sensitive to international crude price movement. Add to that, varied sales taxes, levied by each state government in the range of 4-25 per cent, also act as a dampener.
Economic conditions: In a buoyant economy, business travel is a major revenue generator for airlines as corporates strike annual deals with airlines. Airlines earn well despite giving discounts on these deals.
Debt: An important pointer. Excessive capacity expansion during the boom time meant huge debts on airlines’ books. Jet Airways debt to equity ratio was about 7:1 as on December 2009. And analysts,
Routes: International travel contributes maximum to an airline business. Almost 50 per cent of an airline’s revenue comes from its international business. Reason: Longer flying hours and hence, high ticket prices.
14/02/10 Neha Pandey/Business Standard

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Categories: Indian Aviation- In General Feb 2010