Airline stocks fly as global oil prices soften
Shares of aviation companies in India have been taking-off over the past few weeks as global oil prices seem to soften.
On May 5, 2017, global oil prices dropped to nearly five-month low as concerns on global oversupply wiped out all of the price gains since OPEC's move to cut production.
Since then, shares of aviation companies like Jet Airways, Interglobe Aviation (IndiGo) and SpiceJet have gained.
A Reuters report said, “Crude is now back to levels last seen before the Organisation of the Petroleum Exporting Countries (OPEC) and other producers said they would cut output by almost 1.8 million barrels per day (bpd) during the first half of the year in a bid to tighten the market.”
Lower crude oil prices comes as an opportunity for aviation firms, as they expect reduction in jet fuel prices which accounts for nearly 50% of airlines' operating cost. There are directly linked with international crude prices.
The aviation turbine fuel (ATF) prices has increased by 38% year-on-year and 11% quarter-on-quarter (QoQ) basis in fourth quarter ended March 31, 2017, as per ICICI Securities.
Ansuman Deb, research analyst, ICICI Securities said, “Q4FY17 is likely to be the bottom for airline margins as cost tailwinds come back from Q1FY18. As such, valuations will not depend on this quarterly performance. Yet, Q4FY17 will provide insights to how airlines fare in a relatively adverse scenario in their ability to pass on higher costs. ”
By end of FY17, fuel cost is expected to reach at Rs 1,808 crore for IndiGo, higher by 77% year-on-year (YoY) and 8.2% on quarter-on-quarter (QoQ) basis.
Jet Airways is estimated to record fuel cost of Rs 1,542.3 crore, up 54.4% yoy and 7.9% qoq. While for SpiceJet, it is expected to be at Rs 542.6 crore, up 65.1% yoy and 14.5% qoq.
This is not a good sign as operating expenses for airlines will be higher which would mean pressure on profitability.
Fall in crude prices continue meant aviation stocks of airlines in India rose.
Interglobe Aviation has risen 3.20% since April 19, 2017 while Jet Airways gained 12%.
SpiceJet rose a third in last three weeks.
Analysts at Zee Business said, "There has been a good recovery in oil prices due to OPEC-led production cut. We expect the OPEC production cut which is scheduled to end by June 2017, will be extended to cover all of the year, or even into 2018."