Airline stocks take off on crude fall, US nod for Jet

MUMBAI: Lower fuel bills due to a steady decline in crude oil prices and indications of airfares being raised have sent stock prices of aviation companies soaring over the past few sessions. But brokers tracking the stocks say that long-term investors are still wary of the sector.

The sharp rise in these stocks, of late, could be mainly due to interest from hedge funds — a class of foreign funds known to target stocks promising quick returns in the short run — they said.

Deccan Aviation shares on Friday crossed its public issue price of Rs 148, touching a high of Rs 150 before closing at Rs 147.70, a gain of 18% over the previous close.

Sentiment for the sector has also been boosted by Jet Airways, receiving approval from the US government to commence flights to that country, something the company has been trying for more than a year now.

“Outlook for the sector has improved a bit as the companies are now not at each other’s throats (over airfares) as they had been till a few months back,” said a broker. “But the moment they revert to predatory pricing, the stocks will be hammered again,” he said. According to Bloomberg data, 12 of the 15 analysts tracking Jet Airways have a bearish view on the stock. In case of Deccan Aviation, all four analysts tracking the stock have a sell call.

Aviation companies have been bleeding due to a combination of high fuel bills (due to high crude oil prices) and intense competition, resulting in these stocks underperforming the broad market by a wide margin.

Airline companies may have better pricing power now that oil fuel bills are shrinking. But there is unlikely to be an across-the-board hike in airfares, because such a concept is no longer applicable in the complex world of airline revenue management. Most airlines have moved to a dynamic pricing model, where fares are changed, literally by the hour, depending primarily on demand and competition.

Air fares are in fact controlled by a group of computers that use linear programming models to run revenue management systems. The pricing of seats in a particular flight is tracked from the time a flight is opened up for booking (which could be a year in advance) and can be changed several times till the flight is fully booked. Still, there are signs of improvement in the sector. Low-cost carrier Air Deccan has been able to improve its on-time performance significantly in the last one year and has also been able to keep costs under check.

The on-time performance of the airline, which means that the aircraft has taken off within 15 minutes of the scheduled departure, has improved from around 50% in January this year to 87-88% in October, the company says. Another plus point for Deccan is its apparent success in controlling costs. The cost per available seat kilometer (ASKM) was Rs 3.26 during the quarter ended September ‘06, according to the company.

The corresponding figure for Jet Airways, a full service carrier, was Rs 4.2. Corresponding figures for other carriers are 5.5 cents/ASKM for Ryan Air and 6.2 cents/ASKM for Southwest. The difference could be due to newer aircraft that Deccan is currently flying, lower margins for booking agents and absence of services like food and water on flights. Therefore, a drop in ATF prices, triggered by the sharp fall in crude oil would have a greater impact on Deccan’s bottomline.