Jet, Indigo, Spice fly higher on NY day as OMCs bring down ATF prices

The first day of the new year in the markets definitely belongs to the aviation companies as they recorded fresh 52-week high on Friday. A new year gift from the oil marketing companies (OMC) as they slashed prices of aviation turbine fuel (ATF) by a steep 10 per cent, made the aviation stocks to cheer even as Jet Airways was trading just before the lunch hours at Rs 759 and two no-frills airliners, Indigo and SpiceJet were trading at Rs 1362 and Rs 84, respectively making new highs in last one year. Thanks to the OMCs, prices of ATF in Delhi touched its five-year low at Rs 39,892.32/kilolitre in the morning of the first day of 2016 helping the investors in the stocks of Jet Airways, Interglobe Aviation and SpiceJet celebrate amid much cheer in the Dalal Street.

If one asks this question whether the end-users, the fliers have got the benefits—the answer is a straight no. Fares between Kolkata and Pune in economy class for January 1 stands at over Rs 10,000/ticket which is much higher than the normal fare offered in this sector even in the days of higher ATF prices. But then, slash in ATF prices on Friday may bring down even the airfares soon, if the industry experts are to be believed.

A recent Moody’s analysis reveals, airlines globally have spent around 35 to 40 per cent less in the year 2015 in comparison to their expenses on fuel in 2014. While the airlines globally spent US $ 70 billion on ATF in 2014, they may have spent not more than US $ 40 billion. Indian aviation companies also did not shy away from this sudden windfall even as crude was hovering at around US $ 37/barrel on January 1, 2016. Airlines globally spent around 40-45 per cent of its operational costs in fuel and a lower price ATF can be the biggest reason for them to smile, broadly. Jet Airways, Indigo (Interglobe Aviation) and SpiceJet stocks rose between 8 to 14 per cent intraday on Friday during the first half of the trading even as Sensex did not look moving very investor-friendly.

Industry experts claim, Indian aviation stocks should show further rise if crude continues to move in the range of US $ 32-50 if the government comes out with transparency in ATF pricing, something that has been lacking so far creating confusion in the aviation sector and also in the calculation sheets of the investors. While the airlines having exhaustive international operations tend to gain from lower pricing of ATF which no doubt benefits mainly Jet Airways and Air India, full benefits from a lower ATF price unfortunately are not yet passed on to the airlines having emphasis on domestic operations.

A report prepared by global consultancy major, PWC says, “airlines are also rethinking fleet management in the wake of reduced oil prices. Carriers may opt to keep older planes operating longer and/ or lease older aircraft that otherwise would have been decommissioned.”  That’s because airlines could shy away from spending to acquire more efficient planes, like the 737 Max or the A320neo, which would use about 20 percent less fuel. “Consequently the older fleet becomes more valuable while fuel prices remain low. There could be an adverse impact on Boeing and Airbus, if airlines opt to delay orders for new aircraft,” the report mentions.

Boeing or Airbus may be somewhat hit to present crude prices and volatility, but for sure, aviation companies are happy with the new crude price level and as a double bonanza, they get their new year gift as Indian OMCs slash ATF prices. “In the wake of an extended period of financial challenges, airlines stand to gain significant benefits from even unexpected periods of reduced fuel prices, which in the short term have resulted in increased profits and forecasts for improved stock prices,” adds the PWC analysis.

Tailpiece: Heard at a city airport this morning—‘acche din aagaye kya, finally!’ In respect of aviation stocks, it seems to be true, at least for now.