Aviation stocks fly on excise cut, but party may not last long

How much difference will an excise duty cut from 14% to 11% in aviation turbine fuel (ATF) make for Indian airlines?

Sure, it’s a relief for airlines, but hardly a life-changing move.

Aviation stocks fly on excise cut, but party may not last long

Data on Indian Oil Corp. Ltd’s (IOC’s) website showed ATF prices in Delhi fell 2.6% on Thursday following the tax cut. Santosh Hiredesai, analyst at SBICAP Securities Ltd, said adjusted for the ad-valorem impact on ATF prices, the full-year benefit for listed airlines will be ₹743 crore.

The listed airlines are InterGlobe Aviation Ltd that runs IndiGo, Jet Airways (India) Ltd and SpiceJet Ltd. Their shares climbed 5-9% in the last two days—on Wednesday, in anticipation of the tax cut and, on Thursday, over the announcement and some broader correction in crude oil prices.

But here’s the deal. For the remaining period of FY19, the benefits will be about ₹372 crore, says Hiredesai, who estimates full-year cumulative losses of these three airlines at ₹4,530 crore. As you can see, the gains from the current changes in tax rates are small.

As another analyst points out, even as the duty cut is sentimentally positive, it’s not big enough to pull airlines such as Jet Airways out of their current troubles.

According to IOC, the average ATF price in Delhi so far in FY19 was at ₹68,150 per kilolitre. The last time when ATF prices averaged closer to this was in FY14 at ₹71,000 per kilolitre. However, global crude oil prices, in US dollar terms, are much lower this year compared to FY14. Brent crude prices averaged $76 a barrel so far in FY19, lower than $107.56 in FY14, according to Bloomberg.

One reason why ATF prices in rupee terms are close to FY14 levels is due to the sharp weakening of the Indian currency against the dollar. On Thursday, the rupee touched a fresh low of 74.46 to the dollar.

How did the airlines perform in FY14? IndiGo’s pre-tax profit fell 52% year-on-year to ₹474 crore. Jet Airways’ consolidated pre-tax loss was at a massive ₹3,411 crore, while SpiceJet had a pre-tax loss of ₹1,003 crore.

In the June quarter, all three airlines’ profits were squeezed dry. While the costs were high (crude plus rupee depreciation impact on other dollar-denominated costs), fares weren’t rising adequately. The leaner September quarter results are unlikely to bring good news.

In all likelihood, all Indian airlines are expected to post Ebitda (earnings before interest, tax, depreciation and amortization) losses in Q2FY19, ICICI Securities Ltd said in a 9 October report.

“While demand remains robust, the ability to make profits in a rising cost environment will depend upon the ability to raise fares, which will require deceleration in planned capacity addition,” added ICICI Securities.

Given that costs remain high, investors should stay tuned to management comments on airfares when the September quarter results are announced. Good news on that front will ensure aviation stocks enjoy steady levels. Else, consider this party owing to the excise duty cut pretty much over.

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