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Red alert for aviation stocks
Thu, 30 May Pre-Open

At Equitymaster, we would not touch aviation stocks with a barge pole. The sector just refuses to do away with fundamental follies.

Even while the Indian aviation sector is witnessing reasonable volume growth, domestic airlines have been incurring huge losses. Besides the rising price-war, there are other problems plaguing the industry like high fuel costs (aviation turbine fuel - ATF), high cost of capital and steep taxes. Among these, ATF costs form the largest portion of the operating costs. Over and above that, currency depreciation too has impacted these carriers.

Kingfisher Airline is a classic example in this case. The rising costs and high debt burden resulted in the loss of flying permit for the airline. The debt-ridden carrier has been grounded since October 2012 after the employees continued to go on strikes over unpaid wages. On the other hand the government has been supporting the ailing national carrier Air India with tax payers' money.

According to Mint, the report released by CAPA (Center for Asia Pacific Aviation) states that the debt of the Indian aviation industry has increased by 8-9% in FY13 alone to US$ 14.5 bn. Of this, Air India holds approx 60% of the total debt. Needless to say, the high debt levels have severely impacted the profitability and hurt shareholder returns of listed players.

Financials as on Mar 2013 (FY 2013)
(Rs m) Spice Jet Jet Airways Kingfisher Airlines*
Sales57,145 163,683 5,013
Net Profit(1,910)(4,855)(28,794)
Gross Debt16,781 88,211 86,331
Annualized based on 9 months data
Source Ace Equity and Company reports

Challenges and steep losses accompanied by weak balance sheet have been stigma for Indian airline companies. The airlines are adopting various cost control measures. Consolidation has become one more feature for this industry. The government''s step to allow FDI (Foreign direct investment) upto 49% in the Indian airlines has paved the way for much-needed equity infusion into Indian airlines. These initiatives are likely to help airlines which are tiding over high costs and negative profits. The Jet Airways and Etihad deal, for instance, is expected to bring down the operating cost and subsequently help the debt.

But on the other hand, more competition will also come in with liberalized FDI norms. Air Asia''s JV with Tata fits the case here. Increase in number of players will further increase the price war.

To conclude, we believe that Indian airlines still have long way to go in order to restructure their debt heavy and loss making businesses. But if the debts keep on mounting then the day is not far when most airlines will go the Kingfisher way.

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