Effect of Rising Crude Oil Prices on Indian Airlines Industry

High Growth Trajectory : Indian Airlines Industry

The Indian Civil Aviation Industry is among the top 10 globally with a size of around US$ 16 billion. The aviation industry presently supports about 0.5 percent of the India’s GDP. This sector caters to about 150 million passengers daily, with the potential to grow further.  By 2020, traffic at airports in India is anticipated to reach 450 million. India would be the third largest aviation market by 2020. The aviation sector today supports 56.6 million jobs and produces over US$ 2.2 trillion of the global gross domestic product.

The main business of Airlines industry is to transport paying passengers and freight by air along regularly scheduled routes, typically by airplanes but also by helicopter. There are a total of 22 airlines which are operational in India as of 2015. The PSU in Aviation sector are Air India (100% holding by Government of India) and Pawan Hans ( IPO of Pawan Hans is expected to happen in 2017 or 2018 ).

Listed companies in India’s aviation sector are SpiceJet , IndiGo Airlines and Jet Airways . Major Private Players are Air Asia, and Vistara. There are extensive experiments in India.  India aims to become the third-largest aviation market by 2020 and the largest by 2030. The Civil Aviation industry has ushered in a new era of expansion, driven by factors such as low-cost carriers (LCCs), modern airports, Foreign Direct Investment (FDI) in domestic airlines, advanced information technology (IT) interventions and growing emphasis on regional connectivity.

General Problems with the Aviation sector

Being a capital intensive industry with high fixed and constant costs and variable revenues, Indian Aviation sector has most of the time been tabooed by global investors because of the successive losses faced by the industry over the past few years, high debts and high operating leverage. And then comes regulatory barriers which discourage the new entrants or participants in the industry.

The key customer segment of Indian Aviation industry includes regular airline travelers, business travelers, non – business customers, budget conscious and urgent travelers.

The most prominent demand driver of the industry is the “Crude Oil Price”. The global crude oil prices have jumped 37 per cent, crossing US $50 a barrel.

Jet fuel constitutes over 40% of an airline’s operating cost and even a slightest increase in the ATF prices means drastic decrease in the company’s profitability.

Aviation Turbine Fuel or Jet Fuel Price was increased on June 1st by a steep 9.2% .

This was the fourth straight monthly increase in rates on global cues. ATF price in Delhi was increased by 9.2 % to Rs 46,729.48 per kilolitre.

You do not need to be an Expert to predict that ATF price to keep on rising in near future also. Look at the below graph. (Source : EIA )

Picture of WTI Spot Price FOB (Dollars Per Barrel)

Graph of WTI Spot Price FOB (Dollars Per Barrel)

The rising crude oil price will certainly bring inflation to Indian economy which will ultimately result in more rate cuts by Reserve Bank of India.

The Indian Rupee will fall making dollar more costly. The fall in Rupee also means high fixed and constant costs in the aviation sector and the revenues generated may be quite minimal.

A hike in crude oil price will result in falling demand for airline tickets as consumers tend not to spend on air travel. At the same time, fixed costs, constant costs, operating and maintenance costs will start to soar high. The salaries and pensions of air stewards and pilots will again see massive cuts. In such situation, it can also happen that less profitable routes may get closed down for a while.

Current Status of 3 Major players in Indian Airlines Industry

The scrip price of Indigo closed at Rs.990.95 on 8th June, 2016 as against previous day closing price of Rs. 1004.60 at BSE. Around 38,862 volume was traded today at BSE.  Whereas, the scrip price of SpiceJet closed at Rs. 62.90 as against the previous day previous which was Rs. 62.35 at BSE. The volume traded on BSE of SpiceJet stood at 9,871,268. The company’s current market capitalization as on today stood at 37.11 billion. The market capitalization for Jet Airways as on today stood at 62.59 billion shares. With 228,071 volume traded today, the company’s stock price closed at Rs. 551 today as against previous day closed price which stood at Rs. 552.25.

Image of Spicejet Stock

Graph of Indigo Stock

Graph of Jetairways stock

Conclusion

We have already achieved the Target on Jet Airways of Rs. 550 . It came way too much earlier than we thought… 🙂

We do not see any catalyst to push the aviation stock upward.  (Fed Interest Rate & Brexit could be something to keep a eye on.)

Crude Oil today touched $51.55 a barrel, highest since eight month high. This is the wonderful opportunity to go Short on all the three companies.

Short Jet Airways Future on every upmove.

As Spicejet & Indigo are not available in the F&O market, those could be used for Intraday trading for shorting.

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