Aviation sector faces double whammy of high oil prices and low passenger traffic in Q2FY24

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The aviation sector is facing a double whammy of high crude oil prices and declining passenger traffic in the July-September quarter of fiscal year 2023-24 (Q2FY24), according to analysts.

Airline yields are declining significantly in Q2, with airfares contracting 12% on a sequential basis. Additionally, crude prices are trending upwards, which is likely to result in marginally higher aviation turbine fuel (ATF) prices for airline companies in Q2.

So far in Q2FY24, Brent crude prices have surged 20% to $94 per barrel, pushing average ATF prices up 6.8% from the previous quarter. This could impact aviation companies’ near-term profitability if they do not have the right pricing power mix.

On September 1, state-run oil companies hiked jet fuel prices by 14%, raising the price to Rs 1.12 lakh per kilo litre in Delhi, the highest in 9 months.

Demand-wise, passenger traffic dropped 3% month-on-month (MoM) to 12.1 million in July, and has remained flat on a MoM basis so far in August due to the monsoon season.

Individually, the passenger load factor (PLF) of Air India dropped 400 basis points (bps) MoM in July, while SpiceJet’s PLF declined 420 bps MoM, and Indigo’s PLF slumped 720 bps MoM, during the same period.

In August so far, too, all airlines, except SpiceJet, reported PLF below 90%. July was the weakest month in terms of load factors over the past five years (excluding Covid times), according to a report by Kotak Institutional Equities.

However, analysts at Kotak believe that the shift to international travel could limit pressure on yields, especially for Indigo, which dominates 63% of the domestic market share.

They added that the large and remunerative growth runway in international flights should imply higher spreads for airlines. Interglobe Aviation, which operates low-cost carrier Indigo, is well-placed internationally based on the success of its code-share and brand equity.

On the other hand, Gaurang Shah, Senior Vice President at Geojit Financial Services, asserts that the upcoming festive and holiday season could reverse muted passenger traffic trends going ahead.

In the April-June quarter (Q1FY24), Interglobe Aviation’s yield per passenger fell to Rs 5.18 from Rs 5.24. The company’s total debt, meanwhile, rose 18 percent year-on-year (YoY) to Rs 46,291 crore.

For SpiceJet, passenger revenue per available seat kilometer (RASK) surged 26 percent in Q1FY24 led by a 22 percent rise in yield and a 4 percent load factor.

On the bourses, shares of Interglobe Aviation skid 2.2 percent in the past one month, while shares of SpiceJet jumped 22 percent after the low-cost carrier settled dues with Credit Suisse.

From an investment standpoint, AK Prabhakar of IDBI Capital suggested investors warrant caution on the overall sector in the near-term, and said that Interglobe Aviation could be a favourable bet if it corrects further down the line.

In Q2FY24 so far, shares of Interglobe Aviation have slipped 8.6 percent, whereas shares of SpiceJet jumped 41 percent. On Monday, September 18, Interglobe Aviation shut shop at Rs 2,399 apiece, up 0.3 percent, and SpiceJet at Rs 38 per share, down 1.3 percent.



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