Airlines stocks in India, have hit a rough patch amid rising Covid-19 pandemic associated lockdowns and travel restrictions across the country. All commercial passenger flights which were suspended in the country from March 25, to curb the spread of the novel coronavirus were resumed only on May 25 after a 2-month halt.
Budget airline SpiceJet’s share prices are currently hovering around the Rs. 55 levels, while market leader Indigo’s share prices are trading at around Rs.1080 levels.
The above chart depicts SpiceJet share prices over the past 1-year period
Compared to this, just a year back, the share prices of SpiceJet and Indigo were trading at around Rs.145 and Rs.1664 levels respectively.
The above chart depicts Indigo share prices over the past 1-year period
At current levels, SpiceJet and Indigo share prices are trading at significant discounts compared to their share prices a year ago. This has brought a significant question across the minds of many investors – are they value buys or falling knives?
To help you resolve this dilemma and make an informed decision, here's a detailed analysis.
Despite favourable oil prices, SpiceJet and Indigo Share prices may take some time to recover
Before the crash in global oil prices, this year, aviation turbine fuel prices in India have been among the highest in the world. With oil prices crashing on account of low global demand and price war among oil-producing nations, aviation turbine fuel prices have also come down substantially, providing some relief to airline companies in India. Aviation turbine fuel (ATF) accounts for as much as 40% of the costs incurred by airlines in their daily operations.
Should you include SpiceJet and Indigo shares in your portfolio?
To find out the answer to this question, let's go back a little in history. Fifteen years back, Jet Airways was the number one, airline company in India. Today the company exists only on paper, unable to find a suitable buyer despite several attempts.
The bankrupt airline, which was grounded in April 2019, owes over Rs 8,000 crore to various banks. In June 2019, The National Company Law Tribunal (NCLT) had admitted the insolvency petition filed by the lenders' consortium led by State Bank of India against Jet Airways.
Total liabilities of Jet Airways exceed over Rs. 26,000 crore, including Rs. 10,000 crore of vendor dues, Rs. 8,500 crore along with interest owed to the lenders, over Rs. 3,000 crore in salary dues, and over Rs. 13,500 crore in accumulated losses over the past few years.
Kingfisher Airlines, another high-flying airline which started operations in 2005 came to a grounding halt in 2012 after mounting debt. The crash of the company also brought the downfall of the company’s founder and flamboyant liquor baron, Vijay Mallya. Once known as the ‘King of good times’ he is currently battling legal cases against him filed by lenders over non-payment of dues and financial mismanagement.
The state-owned airline, Air India too has a mountain of piling debt. The only reason it has still managed to stay afloat till date is timely financial help from the government.
As per to publicly available data, the national carrier posted a provisional net loss of ₹8,556.35 crores in 2018-19 and the airline’s accumulated losses have ballooned to about 69,575.64 crores in the last ten years.
An attempt by the government to privatize the debt-laden national carrier in 2019 had failed as there were no buyers.
Global outlook for the aviation sector looks grim
According to a recent forecast made by the International Air Transport Association (IATA), airlines across the world are set to lose as much as $84 billion in the current year due to the Coronavirus pandemic. The association also said that with most of the world's airliners currently parked revenue is expected to decrease to $419 billion from $838 billion last year.
Don't just look at SpiceJet and Indigo Share prices. Look at their business models and sector in which they operate.
The airline business is a risky business with high capital expenditure and low yields.
Here are a few reasons why airline business is very risky in India:
Intense competition among airlines in India to capture market share has resulted in cut-throat competition and slicing of fares which results in less operating margins.
Deprecation of Rupee
With Indian Rupee falling to around Rs. 75 levels against the dollar, aircraft lease rentals have become costlier. It has also increased the cost of aircraft maintenance, ground handling and parking charges abroad.
High taxes on Aviation turbine fuel (ATF)
ATF prices in our country are among the highest in the world. The reason behind this can be attributed to the 11% excise duty charged by central government and up to 30% state-level taxes levied by the state governments.
Flying routes under route dispersal guidelines (RDG)
According to government rules under route dispersal guidelines (RDG), airlines are required to operate a certain percentage of flights on smaller routes. Government’s intention behind this rule is to establish connectivity with remote and less accessible areas such as Jammu & Kashmir, Andaman & Nicobar Islands, North-Eastern India, Lakshadweep and airports in Himachal Pradesh and Uttarakhand. Airline companies in India, however, have been claiming that flying on such routes are unviable and affect their overall profitability.
During the last few years, the aviation industry in India has emerged as one of the fastest-growing sectors in the country. India currently ranks fifth in the world in terms of domestic civil aviation and is expected to become the third-largest air passenger market by the year 2024.
Covid-19 may have put a temporary speed-breaker to India’s aviation industry which has enormous growth potential. With growing purchasing power among the middle class, air travel would definitely become the preferred mode of transport in the next few years.
However, unless the issues affecting the profitability of airline carriers like bringing ATF under GST regime, freedom to opt-out of non-profitable routes, high taxes and airport charges are taken care of, airline carriers in India will continue to bleed financially.
So rather than considering a dip in SpiceJet and Indigo share prices as a reason to invest, look at the overall picture of the aviation sector in India to make an informed decision.
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