Oil prices fall, but high debt a worry for airlines

India’s aviation companies whose fuel expenses form nearly half their revenues haven’t been able to benefit from crude oil prices, which fell steeply in the past one month. The stock prices of Jet Airways and SpiceJet, for instance, have given, on an average, 6 per cent returns whereas Bloomberg World Airlines Index appreciated 25 per cent during the same time.

The impact of falling crude oil prices on large US-based airlines is on predictable lines. Stock prices of these airlines show negative correlation to any movement in crude oil prices. But it’s dramatically different for Indian carriers — stocks of Indian airline companies move down ( not up) when crude prices soften.

At present, the stock of SpiceJet has zero correlation with movement in crude oil prices while United Airlines has –0.21 correlation with the movement in crude oil prices. A correlation captures the movement of two variables: if the reading is 1, it means both variables move in lockstep, while reading of -1 means that both variables move in opposite directions.

There are two reasons for low investor interest in India’s aviation companies. First, their negative net worth implies that the liability of the company is higher than its assets. At the end of FY14, Jet has a negative net worth of Rs 4,288 crore while SpiceJet has a negative net worth of Rs 2,028 crore at the end of September 2014 quarter.

High debt on their balance sheet is another worry. Jet, for instance, has a debt of Rs 8,615 crore at the end of FY14 while SpiceJet’s debt at the end of September quarter stood at Rs 1,486 crore. Given this, investors are shying away from these stocks.