Aviation stocks are not flying in 2021. On a year-to-date basis, shares of Inter Globe Aviation Ltd and Spice Jet Ltd have declined by about 1.6% and 18%, respectively. In comparison, the broader Nifty 500 index has risen by about 7%. Inter Globe runs IndiGo, India’s largest airline.

One factor that’s weighing on sentiments for aviation stocks is the rising trend in crude oil prices. Average aviation turbine fuel prices across four metros have been recently increased by 7%. Of course, this doesn’t bode well considering that fuel costs form a big proportion of operating costs for airlines and, therefore, can weigh on profit margins. For perspective: in financial year 2020, fuel costs as a percentage of revenues stood at 34.8% and 37.4% for Inter Globe and Spice Jet, respectively.

Moreover, it’s not as if demand recovery is exciting with the month of March turning out to be rather slow. In a report on 15 March, ICICI Securities Ltd analysts said: “Weekly average daily fliers came in at 243,636 in the week ended 13 March versus 264,312 in the week ended 6 March.”

Note that average daily passenger traffic in February stood at 277,230, according to the broking firm. “The recent dip in weekly fliers could also be partly due to rising covid cases, especially in Maharashtra. Weak trend in March can impact the earnings of airlines,” said ICICI Securities’ analysts.

Some analysts expect yields, a measure of pricing for airlines, to improve during the March quarter vis-à-vis the December quarter. Indeed, if yields turn out to be better in the March quarter, the extent to which it will offset higher fuel costs remains to be seen.

But even after this quarter, there is trouble in the skies for airlines. As Varun Ginodia, analyst, Ambit Capital Pvt. Ltd, said: “We expect the government to remove fare caps by end-March-mid-April and, once that happens, a fare war looks imminent. Lessors would also start to demand their dues as they gave the time until end-March to weaker airlines.”

“This could pave the way for long pending sector consolidation towards end-2021,” he added.

Meanwhile, investors will closely watch how passenger traffic shapes up. Here, rising covid-19 cases could play spoilsport on travel demand. While positive news flow on vaccination helps, it may not be enough for aviation stocks to take off.

Source: Live mint