Jet Air,SpiceJet seen profitable: BofA-ML

The domestic aviation industry is struggling with nearly Rs 1 lakh crore in debts,led by the state-run Air India that is sitting on a debt pile of over Rs 67,000 crore,followed by the market leader Jet Airways Group,which has a debt of Rs 14,500 crore,while the crippled Kingfisher Airlines had nearly 15,000 crore in debt and accumulated losses.

The investment bank has also increased its price target on full service carrier Jet Airways to Rs 480 from Rs 210,and to Rs 42 for low cost airline Spicejet from Rs 21 8212; nearly a 30 per cent upside potential for both the counters.

Last week,the country8217;s largest carrier Jet Group had reported a profit of Rs 35.4 crore after being in the red for the past five quarters in the June quarter,against a loss of Rs 123.2 crore a year ago,on the back of higher yield and cost management.

Similarly,Spicejet also reported Rs 56 crore surprised profit after five quarters of losses in a row,on the back of improved capacity,cost-cutting and better realisation. The profits came after five successive quarter of losses,against a loss of Rs 71.96 crore in the June quarter of last fiscal.

8220;The unexpected profits posted by Jet and SpiceJet last week have raised hopes for a turnaround in the ailing airline industry after its carriers lost a combined over Rs 10,000 crore last year,8221; BofA report said.

The report further said,8221;compared to our earlier estimates of under 10 per cent y-o-y increase,we expect a much stronger under 15 per cent expansion in yields for the industry this year.

This is despite the economic weakness and solely led by slower supply growth of 5-6 per cent against our earlier forecast of under 10-12 per cent growth,better pricing discipline among financially weak carriers.

8220;Higher ticket prices and slowing economy should see the traffic slow but still more than match the supply growth 5-6 per cent in FY13 estimate against under 17 per cent CAGR over the past decade,8221; the report said.

On the much-delayed FDI,the report said even if foreign airlines are allowed to pick up stake in the domestic carriers,Kingfisher may not attract interest by anyone.

On the second largest airline around three quarters back,the Kingfisher,the report said,8221;one of the key investor concerns has been that Kingfisher will likely be able to get the necessary funding post changes in the FDI policy. This would enable it to stabilise operations and bring back its grounded capacity.

8220;However,given the large outstanding debt and vendor payments we believe this to be unlikely. We see Jet by virtue of being a full service carrier as a key beneficiary of Kingfisher8217;s pullout.8221;

On who will fare better in terms of earnings,the report said 8220;in our view Jet has more levers in terms of earnings improvement as apart from the domestic yield recovery. It would also gain from international route rationalisation and likely induction into a Star Alliance or Sky Team.8221;