Rising oil prices increase turbulence for IndiGo and SpiceJet stocks

The landing for Indian aviation stocks InterGlobe Aviation Ltd and SpiceJet Ltd has become more difficult. Benchmark Brent crude oil prices rose above $90 a barrel on rising tensions between Russia and Ukraine, the former being one of the world’s largest oil exporters.

If the situation worsens further, oil prices are likely to rise even further. This is worrying for investors in airline stocks, as aviation jet fuel (ATF) accounts for a significant portion of operating expenses.

Furthermore, expectations for the next EU budget are also low. According to one analyst, who spoke on condition of anonymity, “Reducing value added tax (VAT) on the ATF and lowering customs duties on repairs are among the few wishes of airline operators . However, these should not be stifled by the government in the next budget, as it continues to prioritize other more drastically affected sectors. Such a ruling could provide relief in the form of an input tax credit.

Going forward, reviving demand and operating at full capacity will remain the main driver for airline actions. Here, the pace of recovery has recently slowed in the domestic market. In a January 24 report, ICICI Securities Ltd said, “The weekly average daily flyer count was 168,000 during the week ended (WE) January 22, 2022 compared to 192,000 in the WE of January 15, 2022. “

Given the imminent threat of the third wave of covid-19, the Directorate General of Civil Aviation (DGCA) has extended the suspension of scheduled international commercial passenger services until the end of February 2022. Of course, it helps that The restriction does not apply to international all-cargo operations, which have saved airlines’ lives amid the pandemic. Robust growth in e-commerce due to pandemic-induced restrictions and increased demand for medicines and vaccines has prompted major airlines to use idle passenger planes to transport cargo, thus offsetting to some extent the weak demand of passengers.

Even so, IndiGo and SpiceJet suffered losses due to the pandemic. After suffering a massive loss in FY21, IndiGo and SpiceJet’s net loss for the six months ended September amounted to around Rs4,600 crore and Rs1,300 crore, respectively. As of September 30, both airlines had negative net worth.

Thus, the December quarter should improve. In a January 14 report, HSBC analysts said: “We expect a net loss of Rs310 crore at IndiGo and a loss of Rs170 crore at SpiceJet; so on a sequential basis the numbers should be much better.”

In the past year, shares of IndiGo are up 18% compared to a drop of around 20% in shares of SpiceJet. Investors believe IndiGo’s stronger balance sheet holds it in good stead. However, a difficult operating environment and a potential increase in competitive intensity with new entrants such as Akasa Air are the main near-term worries for airline stocks, which may well keep investor confidence low. .

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Steve R. Hansen