Strong INR, lower crude prices, better fares to aid Q1FY18 profitability of airlines

Key Highlights: 

• Air fares seen downward pressure in Q1
• Crude prices have corrected more than 15% in USD terms
• ATF price declined 5% QoQ in Q1FY18

India Inc has commenced Q1FY18 earning season and for aviation companies, analysts feel that the quarter could be result in strong earnings.

ICICI Securities said, “Stronger Rupee, lower crude (Q-Q) and better fares is a triumvirate of tailwinds which has eluded the sector for long but is likely to play out in Q1FY18. The hopes of having such a quarter in Q3FY17 were spoilt by the effect of demonetisation.”

Motilal Oswal report said, “Our one-month forward fare tracker for 11 routes shows an upward trend in fares over a seasonally strong 1Q. We believe yields for airlines (IndiGo and SpiceJet) would improve QoQ in 1QFY18.”

In 4QFY17, airlines’ fares faced downward pressure due to seasonal weakness. Average fares of SpiceJet witnessed a sequential decline of 1.2% yoy compared to an increase of 1.1% for Indigo and 1.5% for Jet Airways, as per ICICI Securities report.

ICICI expects Jet Airways and SpiceJet to report growth ranging between 1% - 5% in average fares in the first half of financial year 2017-18.

While crude prices have corrected more than 15% in USD terms from the average in 4QFY17. Prices are down 10% even compared with the FY17 average.

Joseph George of IIFL said, “The benefit of crude below $48 per barrel would largely be a flow-through to the bottom line.”

He added, “Relative balance in the demand-supply equation and an already high load factor imply that domestic carriers may retain bulk of the fuel cost savings.”

Lower crude oil prices comes as an opportunity for aviation firms as they expect reduction in jet fuel prices which accounts for nearly 50% of airlines' operating cost. There are directly linked with international crude prices.

In 1QFY18, ATF price stood at Rs 52.7 per litre - which has declined by 5% from Rs 55.4 per litre in 4QFY17 but increased 16% from Rs 45.4 per litre in 1QFY17.

Additionally costs equivalent to 20-25% of revenues have linkage to USD, namely lease rentals, aircraft maintenance, landing fees, interest costs, and employee costs. IIFL said, “Rupee appreciation will bring down these cost lines.”

Going ahead, as per Deb, Available Seat Kilometre (ASK) is seen to grow by 22% yoy for Indigo, 16% yoy for SpiceJet and 9% yoy for Jet Airways in Q1FY18. 

During April - May 2017, total capacity measured by ASK was 17% in domestic segment and 64% in the international segment for Indigo. While for SpiceJet domestic ASK increased by 20% and international by 2% and for Jet Airways growth was 7% (domestic ASK) and 10% (international ASK). 

Deb added, "The increase in share of international segment for IndiGo is a new trend, also evident in their passenger distribution  Higher ASK growth of IndiGo in the int’l segment will relieve a lot of capacity pressure in the domestic market and give support to the domestic yields."