{"id":1482,"date":"2020-07-17T00:04:00","date_gmt":"2020-07-16T18:34:00","guid":{"rendered":"https:\/\/blog.tickertape.in\/?p=1482"},"modified":"2023-05-17T13:28:37","modified_gmt":"2023-05-17T07:58:37","slug":"should-you-invest-in-aviation-stocks","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/should-you-invest-in-aviation-stocks\/","title":{"rendered":"Should you invest in aviation stocks?"},"content":{"rendered":"\n<h2 class=\"wp-block-heading\"><\/h2>\n\n\n\n<p>India\u2019s first commercial air carrier started in 1932 and, a few years later, it was nationalised. Till the early 1990s, there were only two players in the market \u2013 Air India and Indian Airlines. However, post the <strong>Liberalisation, Privatisation and Globalisation (LPG) reforms<\/strong> in the early 1990s, various players entered the industry, and the composition at present is as under:<\/p>\n\n\n\n\n\n<p><\/p>\n\n\n\n\n\n<p><\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"628\" height=\"311\" src=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/image.png\" alt=\"Domestic market share of airlines\" class=\"wp-image-1483\" srcset=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/image.png 628w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/image-300x149.png 300w\" sizes=\"(max-width: 628px) 100vw, 628px\" \/><figcaption>Source: DGCA, Crisil Research<\/figcaption><\/figure><\/div>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"616\" height=\"304\" src=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/image-1.png\" alt=\"\" class=\"wp-image-1484\" srcset=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/image-1.png 616w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/image-1-300x148.png 300w\" sizes=\"(max-width: 616px) 100vw, 616px\" \/><figcaption><em>Source: DGCA, Crisil Research<\/em><\/figcaption><\/figure><\/div>\n\n\n\n<p>Out of the players mentioned above, Indigo (Interglobe Aviation Ltd.) and SpiceJet (SpiceJet Ltd.) are listed on the stock exchange.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_66_1 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tickertape.in\/blog\/should-you-invest-in-aviation-stocks\/#Broad-Trends\" title=\"Broad Trends\">Broad Trends<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tickertape.in\/blog\/should-you-invest-in-aviation-stocks\/#Financial-Analysis\" title=\"Financial Analysis\">Financial Analysis<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tickertape.in\/blog\/should-you-invest-in-aviation-stocks\/#Operating-costs-for-airlines\" title=\"Operating costs for airlines\">Operating costs for airlines<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.tickertape.in\/blog\/should-you-invest-in-aviation-stocks\/#Fuel-cost\" title=\"Fuel cost\">Fuel cost<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.tickertape.in\/blog\/should-you-invest-in-aviation-stocks\/#Foreign-exchange-expenditure\" title=\"Foreign exchange expenditure\">Foreign exchange expenditure<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.tickertape.in\/blog\/should-you-invest-in-aviation-stocks\/#Aircraft-lease-rentals\" title=\"Aircraft lease rentals\">Aircraft lease rentals<\/a><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.tickertape.in\/blog\/should-you-invest-in-aviation-stocks\/#Impact-of-Covid-19\" title=\"Impact of Covid-19 \">Impact of Covid-19 <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.tickertape.in\/blog\/should-you-invest-in-aviation-stocks\/#To-invest-or-not-to-invest\" title=\"To invest, or not to invest\">To invest, or not to invest<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Broad-Trends\"><\/span>Broad Trends<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The industry has promising growth due to the following\nfactors:<\/p>\n\n\n\n<ol><li>India is currently the <strong>7<sup>th<\/sup> largest market<\/strong> in terms of passengers and is expected to climb to the <strong>3<sup>rd<\/sup> spot by 2023<\/strong><\/li><li>Rising working population and income will boost demand for air <a href=\"https:\/\/www.tickertape.in\/blog\/effective-money-saving-travel-hacks\/\">travel<\/a> <\/li><li>Barriers to entering into the industry are high \u2013 substantial capital investment, licensing, etc.<\/li><li>The closest substitute is railways, though railways are affordably priced than air travel (price differential of INR 3.2 per km on an average), the latter, however, is a faster mode of transport<\/li><li>Air travel in India is highly under-penetrated and will give existing players considerable room to grow <\/li><\/ol>\n\n\n\n<p> <\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Rank <\/strong><\/td><td><strong>Country <\/strong><\/td><td><strong>Penetration<\/strong><\/td><\/tr><tr><td>32<\/td><td>UK<\/td><td>2.28<\/td><\/tr><tr><td>35<\/td><td>USA <\/td><td>1.87<\/td><\/tr><tr><td>45<\/td><td>Malaysia <\/td><td>1.44<\/td><\/tr><tr><td>61<\/td><td>Japan<\/td><td>1.1<\/td><\/tr><tr><td>87<\/td><td>Russia <\/td><td>0.59<\/td><\/tr><tr><td>102<\/td><td>Brazil <\/td><td>0.44<\/td><\/tr><tr><td>103<\/td><td>China<\/td><td>0.44<\/td><\/tr><tr><td>149<\/td><td>India <\/td><td>0.11<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p><\/p>\n\n\n\n<p>Looking at the above, an initial reaction would likely be \u2013 why not <a href=\"https:\/\/www.tickertape.in\/blog\/why-should-you-prioritise-investing\/\">invest<\/a> in <a href=\"https:\/\/www.tickertape.in\/blog\/airlines-share-price-in-nse\/\">airline stocks<\/a>? With Kingfisher shuttered and Jet Airways and Air India in a soup, Indigo and Spicejet have nothing prima facie that can stop them for soaring high in the sky (pun intended).<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Financial-Analysis\"><\/span>Financial Analysis<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Here\u2019s the catch &#8211; a dominant force that sways the pendulum on the other side of the scale is the highly sensitive cost of operating for airlines in India.<\/p>\n\n\n\n<p>Before deep diving, here\u2019s a snapshot of the Revenue and Net Profit (Profit After Tax) for Indigo and Spicejet for the last five years:<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"480\" height=\"288\" src=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/image-3.png\" alt=\"\" class=\"wp-image-1486\" srcset=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/image-3.png 480w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/image-3-300x180.png 300w\" sizes=\"(max-width: 480px) 100vw, 480px\" \/><\/figure><\/div>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"480\" height=\"293\" src=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/image-4.png\" alt=\"\" class=\"wp-image-1487\" srcset=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/image-4.png 480w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/image-4-300x183.png 300w\" sizes=\"(max-width: 480px) 100vw, 480px\" \/><\/figure><\/div>\n\n\n\n<p>In both the companies, though the Revenues are increasing\nYear-on-Year, the Net Profit is highly volatile. <\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Operating-costs-for-airlines\"><\/span>Operating costs for airlines<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>To understand the difference in the movements of both, let us first dissect the total costs incurred by airlines. <\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"462\" height=\"242\" src=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/image-5.png\" alt=\"\" class=\"wp-image-1488\" srcset=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/image-5.png 462w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/image-5-300x157.png 300w\" sizes=\"(max-width: 462px) 100vw, 462px\" \/><\/figure><\/div>\n\n\n\n<p>Major cost components are fuel costs, aircraft rentals and foreign exchange expenses. A discussion on the same is hereunder:<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Fuel-cost\"><\/span>Fuel cost<span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>Indian airlines\u2019 fuel cost as a percentage of total costs is among the highest in the world. Airlines require Aviation Turbine Fuel which is a derivative of <a href=\"https:\/\/www.tickertape.in\/blog\/low-crude-oil-prices-reasons-and-effect-on-india\/\">crude oil<\/a>. Here are the price movements of both in recent years. <\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"480\" height=\"288\" src=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/image-6.png\" alt=\"\" class=\"wp-image-1489\" srcset=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/image-6.png 480w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/image-6-300x180.png 300w\" sizes=\"(max-width: 480px) 100vw, 480px\" \/><\/figure><\/div>\n\n\n\n<p>Just like any other <a href=\"https:\/\/www.tickertape.in\/blog\/commodity-in-economy\/\">commodity<\/a>, the laws of demand and supply affect crude oil prices. The OPEC cartel also influences oil prices considerably as they control significant crude oil supply in the world. Now your question would be that crude oil, in turn, affects the prices of petrol, diesel and is a significant raw material for a lot of industries, then why this phenomenon is peculiar to the airlines industry? To answer this question, we will have to look at the changes in airfare in recent years:<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"622\" height=\"131\" src=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/image-8.png\" alt=\"\" class=\"wp-image-1529\" srcset=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/image-8.png 622w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/image-8-300x63.png 300w\" sizes=\"(max-width: 622px) 100vw, 622px\" \/><figcaption>Source: DGCA, company reports, Crisil Research<\/figcaption><\/figure><\/div>\n\n\n\n<p>We don\u2019t see the airfares increasing because the airlines\nare engaged in price wars. This means that they do not pass on the increase in\ncosts to their customers, fearing that potential customers will fly with\ncompeting airlines. <\/p>\n\n\n\n<p>I know what you are thinking \u2013 why not hedge? For the uninitiated hedging means locking the price beforehand, so that irrespective of the market price, you pay the price agreed previously. Majority airlines in India do not hedge because prices fluctuate heavily (if the market price is INR 100 and your locked-in price is INR 75, then, of course, you walk away happily; but if the market price turns out to be INR 50, you are doomed). It seems that the airlines don\u2019t want to let go of the opportunity of this lower market price and hence are willing to go all in. <\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Foreign-exchange-expenditure\"><\/span>Foreign exchange expenditure<span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>Here&#8217;s a look at the US\/INR exchange rate in recent years<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"534\" height=\"222\" src=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/image-7.png\" alt=\"\" class=\"wp-image-1493\" srcset=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/image-7.png 534w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/image-7-300x125.png 300w\" sizes=\"(max-width: 534px) 100vw, 534px\" \/><figcaption><em>Source: xe.com<\/em><\/figcaption><\/figure><\/div>\n\n\n\n<p>With the INR depreciating (weakening) against the dollar, this further adds to the airlines\u2019 woes as 60-70% of their operating costs are dollar-linked (fuel, maintenance, etc.)<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Aircraft-lease-rentals\"><\/span>Aircraft lease rentals<span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>Airlines pay 15-20% of their total costs for leasing aircraft. These rentals are spiked particularly for airlines that have started leasing fuel-efficient aircraft. <\/p>\n\n\n\n<p>This inherent industry dependency on externalities for managing costs is a major reason why a few wrong strategic moves can lead to airline companies resorting to emergency landings (pun intended) \u2013 examples being Air India, Kingfisher, Jet Airways etc. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Impact-of-Covid-19\"><\/span>Impact of Covid-19 <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Sadly airlines will not be able to fly past Covid-19 that easy and are already reeling under its brunt. Though the sharp dip in crude oil prices would have substantially helped the airlines save fuel cost, the demand destruction will outweigh the benefits. A recent Crisil research report estimates that Indian airlines are looking at INR 1.1 &#8211; 1.3 lakh crore revenue loss over the next three financial years (including the current fiscal) due to lower capacity utilisation arising from travel and visa restrictions. The passenger traffic is unlikely to get back to pre-pandemic levels any time soon. Also, airlines are currently facing a double whammy \u2013 though the revenues have dipped, significant expenses are fixed, such as aircraft lease rentals, maintenance expenses, employee expense, etc. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"To-invest-or-not-to-invest\"><\/span>To invest, or not to invest<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The objective of the above discussion was not to scare you from investing in airline stocks, but being cautious about it. Maybe, you don\u2019t want to miss out on the wave; then you can buy these stocks but also keep a tab on what\u2019s happening \u2013 in the airline industry, airline companies and particularly the <a href=\"https:\/\/www.tickertape.in\/blog\/volatility\/\">volatility<\/a> in crude oil that would impact ATF prices. For all such latest updates, please keep checking our articles on this blog.<\/p>\n\n\n\n<p>If\nyou have these stocks in your portfolio, you got to watch it just like you\nwatch the sugar in your diet \u2013 not necessarily harmful, but the quantity consumed\n(in this case, the number of stocks purchased &amp; their price movements) requires\nattention. <\/p>\n\n\n\n<p>To\nsum it up, would like to leave you with Richard Branson\u2019s (founder of Virgin\nAtlantic) quote, \u201cIf you want to be a Millionaire, start with a billion dollars\nand launch a new airline.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Indian aviation industry has shown promising growth. However, if you are planning to invest in this sector there are other variables you should be looking at. Read more<\/p>\n","protected":false},"author":35,"featured_media":1525,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"no","_lmt_disable":"no","footnotes":""},"categories":[9,1749],"tags":[31,16,15],"acf":[],"modified_by":"Harshit Singh","jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/07\/Airline-invest.png?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/1482"}],"collection":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/users\/35"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=1482"}],"version-history":[{"count":13,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/1482\/revisions"}],"predecessor-version":[{"id":12711,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/1482\/revisions\/12711"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/1525"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=1482"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=1482"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=1482"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}