August 4, 2011 1:45:17 am
The Indian aviation sector was in a sweet spot for the last 18-24 months,when demand was outgrowing supply. This prompted Indian carriers to add capacity aggressively over the last six months. Even though the scheduled deliveries are still less in number,carriers have added capacity using open-market leases. We expect supply to be evenly matched in FY12 and to outgrow demand in FY13. This would likely intensify the competition and lead to a fall in load factors and a fall in yields. We expect both Jet and SpiceJet to post losses in FY12.
Growth in Indian domestic traffic has remained strong over the past two years,showing about 18% CAGR over FY09-11. However,year-to-date FY12,growth has slowed to less than 15%. We expect traffic growth to moderate to a more modest 12% over the next two years. Apart from the higher base,this is due to slowing economic growth,airport constraints at key metros like Mumbai and possible cuts in corporate travel.
After a sluggish capacity addition,Indian carriers led by the LCCs grew their fleet modestly in FY11,which was lower than demand growth. However,over the past six months,domestic airlines have added significant capacity. We expect the capacity growth to be evenly matched in FY12 and exceed demand in FY13. Over the next 12 months,LCCs led by Indigo and SpiceJet are expected to add about 30 planes. Legacy carriers led by Jet Airways are expected to another 10-12 aircraft.
As a result of higher supply growth,load factors for most carriers have been coming off from the recent peaks. We expect load factors for Indian carriers to fall by about 2%-3% over FY12-13.
Yields in recent months have witnessed pressure on account of increasing competition,resulting in irrational pricing by the struggling carriers. Despite higher fuel costs and a subsequent increase in the fuel surcharge,we expect yields to grow by 2-3% over FY12-13. Secondly,a large part of the growth is coming from the price-sensitive LCC segment,where carriers have limited pricing power. Yields are also expected to remain subdued on account of a service tax increase,UDF rise at a few airports and regulatory noise over ticket-price increases during the busy season.
Lack of yield expansion combined with the higher JetKero price has eroded profitability in the industry. Based on global forecasts,we continue to expect a higher ATF price,over the next two years,of about US$120/bbl. Further,factoring in our modest 3-4% yield growth,we do not expect carriers to make profits in FY12 and to only record very modest profits in FY13.
We are downgrading both Jet and SpiceJet to underperform from buy with reduced price targets of R400 (from R650) and R25 (from R76),respectively. We believe the worsening domestic environment will likely push the stocks further down.
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