Despite volcanic ash and Bharat bandhs, which threatened to clip the wings of airlines coming out of recession, carriers may be ending the fourth quarter on a good note. A comparison between the three listed players, Kingfisher Airlines, Jet Airways and SpiceJet, shows the trend is definitely on an upswing — the three have a market share of 26 per cent (Jet Airways and JetLite together), 23 and 11.9 per cent respectively, according to the Directorate General of Civil Aviation (DGCA) figures.

Jet Airways is expected to break even in FY11 in domestic and international operations. The carrier, which gets 56 per cent of its revenues from international operations, has also seen its international operations stabilising, with most international routes breaking even.

Similarly, Kingfisher has also made a foray into the international market and has launched operations on eight international routes recently, while SpiceJet is planning to go global from June onwards. While it looks like the increase in passenger traffic might help airlines in offsetting the effect of high aviation turbine fuel (ATF) prices, the large debt on the books of the biggies could be a spoiler. Jet Airways has debt of about Rs 14,000 crore, while Kingfisher owes over Rs 6,000 crore.

HSBC Global Research mentions that Jet Airways is looking to cut its interest cost by lowering high-cost debt through selling a plot of land in Mumbai, a sale and leaseback of its fleet and raising funds by equity dilution. This restructuring is expected to show benefits in FY11.

It has also been reported that both Jet and Kingfisher are looking at raising Rs 2,000 crore through qualified institutional placements and other instruments to bring down debt.

The DGCA figures showing the percentage change over the month, indicate that demand has grown faster than the capacity. “These figures indicate improved yields and capacity utilisation for the aviation industry. If you look at any airline’s biggest expenses, it would be ATF and their interest burden. If the yields of the carriers are better than the effect of ATF, then Q4 will be better than Q3,” says Gokul Chaudhri, partner, BMR Advisors.

According to Centrum Research (January 5, 2010), SpiceJet’s improved operational performance would result in a turnaround, that is, it may report its first full year of profit in FY11E (estimated). Factors that would likely contribute to the turnaround are expected to be the recovery in domestic pax traffic and its rationalised capacity. The report further says that despite a likely dilution of 109 per cent, SpiceJet’s restructured balance sheet will possibly be leaner with near zero debt.

An analyst at Centrum Research had earlier said that despite rising crude oil prices, the impact has been offset to a large extent by the hardening of the rupee vis-a-vis the dollar. However, if airlines raise prices, operators may see a fall in loads as the sector is price-sensitive. Jet had earlier mentioned that it will be raising its airfares by 10-15 per cent. Airlines have been adding capacity since last July to meet the rise in demand.

While Jet and SpiceJet have both recorded a profit in the third quarter of about Rs 106 crore and almost Rs 109 crore, respectively, Kingfisher is still in the red with a loss of about Rs 420 crore. Analysts expect Jet and SpiceJet to turn profitable in FY11, while Kingfisher will take longer to break even.

Chaudhri from BMR Advisors believes there are four factors that will shape the fourth quarter. “Capacity utilisation, yields, hardening of the interest rate and increase in ATF are four factors that will determine Q4 results for the aviation industry,” said Chaudhri. However, he cautioned that the cumulative effect of these may be positive or negative and can be determined only after the results are actually out.

 Source: Business Standard

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