Airline Stocks

Why they may once again become the darling of investors …

Most of us had virtually written off airline stocks a few years ago. High fuel prices, hostile operating environment, tough competition and poor airport infrastructure was taking its toll. That seems to be changing. It is not about oil prices alone, but a lot more…

Yes, ATF prices are headed lower…

 That is, of course, the key. Fuel cost accounted for over 50% of the operating cost of an airline and therefore it had high sensitivity to fuel prices. With global crude prices low and likely to stay low, the amount of subsidy burden that ATF had to bear is reducing. This trend is likely to sustain. Suddenly, the airline operating model looks a lot more viable as compared to a time when crude was quoting at above $100/bbl and the domestic ATF pricing was steep and skewed. That is the big sustainable benefit for airlines.

Big thrust on airport infrastructure

The government has promised a big thrust to infrastructure. Bringing more airports into the flyable quality automatically expands the market for airlines. Also improved infrastructure will ensure quicker turnaround time at larger and smaller airports. This is a must if the airline model in India has to be profitable. If the government manages to drastically improve the airport infrastructure across India in the next 5 years, the benefits for the airline sector could be humongous. This will directly add to their profitability and reach.

More people are likely to fly…

In terms of an explosion in demand, the airline sector is in a real sweet spot. India’s GDP at $2 trillion is likely to grow at nearly 8% for the next 5 years. If GST gets implemented, then add another 2% to this number. This could lead to tremendous dissemination of purchasing power across India. With the government working on improved airport infrastructure, this higher buying power of consumers will directly translate into more airline seat demand from small and medium towns. That provides a ready-made platform for airlines to expand their canvas.

Lessons from Indigo…

Indigo has proved that it is possible to create and sustain a profitable airline model in India. The airline industry realizes that there is room for many more Indigos to survive and thrive in the Indian market. According to estimates, the airline market is likely to grow three fold in the next 10 years. That opens up a huge arena for other aviation players like Jet, SpiceJet, GoAir, Vistara and Air Asia to create profitable business models in India. Oil prices may move up but these airlines can be allowed to hedge in global markets. Finally, we may see airlines emerge as a viable investment option in India. ©

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