Turbulences ahead for IndiGo, SpiceJet?

InterGlobe Aviation and SpiceJet have had a hard landing on the bourses so far this calendar year. 

Shares of IndiGo airlines have tumbled 10 per cent on a year-to-date basis, while those of SpiceJet have crashed 30 per cent. 

In comparison, the benchmark S&P BSE Sensex has slipped 5 per cent, and the BSE MidCap index 7.4 per cent, and the SmallCap index 10 per cent, during the period.

However, analysts don’t see clear skies for the two players going forward. Rising crude oil prices and entry of Akasa Air and Jet Airways cast a spell on their prospects.

Ajit Mishra, VP-Research, Religare Broking, says long-term growth story intact as demand touching nearly 70% of pre-Covid levels. However, new entrants may lead to price war, he says adding that crude price at $120 per barrel and increased competition are not ideal situation for incumbent listed airlines. He expects pressure on margin and profitability going ahead.

Brent crude is testing $123 per barrel mark in the international markets, after staying range-bound within $105-110 per barrel for the better part of May. 

According to analysts, airlines have, historically, revised air fares based on the supply situation. Thus, an upward revision in fares, if any, may be some time away. But, there are caveats.

Founder and CEO of Martin Consulting, Mark Martin says airlines are not going to absorb any more rise in cost since they haven’t recovered the losses they suffered during the pandemic. Factors favouring fare hike are higher crude oil prices, refining costs (up nearly 55%), insurance costs and ground handling costs. Air fares will rise by at least 25 per cent, he indicates.

Meanwhile, Rakesh Jhunjhunwala-backed Akasa Air is mulling the launch of its commercial operations by July. 

Jet Airways’s air operator certificate, too, was revalidated by the aviation regulator Directorate General of Civil Aviation in May. 

With these developments playing out, Ansuman Deb of ICICI Securities believes the road ahead for incumbents will be to keep maximising yields and try keeping costs low. Some of the cost savings, including cut in salaries will reverse now, which will push up expenses further. However, route-specific innovations will be critical from here on.

Speaking to Business Standard, Independent Market Analyst Ambareesh Baliga said airline stocks are not wealth creators. Currently, bias remains positive due to demand revival. However, margins faltering due to rising crude prices, he said adding that competition is heating up with Akasa Air, Jet Airways. He said it's a great time for customers on likely price war, more seats’ availability, but not a good time for investors. Airlines may struggle with profitability unless crude prices corrects sharply.

Surely, airlines are in the soup as soaring fuel costs bite into their profits, while increased competition dents prospects of fare hikes. The near-term outlook, therefore, remains under pressure.

Meanwhile, Thursday's trading session could be marked by volatility as investors will adjust their positions ahead of the weekly F&O expiry. That apart, stock-specific action and global cues will dictate the market trend.