Aviation Update

Increase in aviation fuel price and onslaught of spot fare offers from Indian (Airline) are expected to limit the benefits from an otherwise seasonally good quarter for the aviation industry. We expect Jet Airways to be hit by Indian’s price war, which would also lead to loss of market leadership, while SpiceJet will likely post all-time high margins on the back of continued cost reduction. Airlines increased fuel surcharge by Rs150 in mid-Q1FY08, boosting average realisations, while the rupee appreciation led to lower cost/ASKM since ~50% of the expense is directly or indirectly denominated in foreign currency. International routes continued to record high realisations for Jet Airways, though load factor was lower on account of seasonality.

Fuel surcharge increased to reflect the rise in ATF prices I
Increase in ATFprices led to a rise of Rs150/ticket in the fuel surcharge component levied byairlines during Q1FY08. In contrast, ATF prices increased an average 3.8% over the preceding quarter. Fuel surcharge has been further hiked Rs50/ticket beginning July ’07 after ATF prices rose further 2.8%.

Rupee appreciation to positively impact bottomline
Almost half the expenses of airlines are denominated in foreign currency including lease rentals, expat pilot salaries, ATF prices (correlated with crude), maintenance etc, while only ~19% of
the revenue is US dollar denominated for Jet Airways. Foreign currency revenue share is negligible for other domestic airlines. On the back of ~7% depreciation in US dollar/rupee exchange rate, we believe airlines’ bottomlines have been positively impacted during Q1FY08.

Spot fare offer by Indian dampens sentiment
In a bid to boost its market share during the quarter, Indian re-launched spot fare for last minute bookings at fares as low as Rs600/ticket (excluding tax and surcharges). This led to a lower load factor share for other major airlines such as Jet Airways.

Reiterate BUY on Jet Airways and SpiceJet
International routes continued with their excellent performance trend with realisations maintained in excess of Rs15,000/ticket for Jet Airways in spite of seasonality affecting the load factor. SpiceJet successfully continued with its cost reduction strategy reaching operating cost/ASKM of Rs2.34, very close to break-even. We believe improving industry fundamentals leading to favourable pricing environment will take SpiceJet to the realms of profitability.

Source: I-sec Research