Aviation flying high: What are the safe bets there?

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Aviation flying high: What are the safe bets there?

The industry is witnessing 75-80% load factor with high yield, explained Nikhil Vora, Managing Director, IDFC Securities. The stability in the sector he said was seen along with continued passenger growth in the coming months. "The space is also seeing business class travel picking up," he added.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Nifty BSE | NSE 23/05/12 Are Mutual Funds betting on Nifty? Other Stocks in this news SpiceJet | Kingfisher Airlines |

The aviation has been growing with the passenger traffic rising 14% for the seventh straight month in July. The domestic traffic too surged to 41.61 lakh for the said month. The industry is witnessing 75-80% load factor with high yield, explained Nikhil Vora, Managing Director, IDFC Securities. The stability in the sector he said was seen along with continued passenger growth in the coming months. "The space is also seeing business class travel picking up," he added.

Being bullish on Jet Airways and SpiceJet , Vora said Kingfisher was underperforming on the back of rising debt.

Here is a verbatim transcript of the exclusive interview with Nikhil Vora on CNBC-TV18. Also watch the accompanying video.

Q: Give us a quick snapshot of how things have moved in terms of passenger traffic and who stands in the ratings between Jet and Kingfisher and SpiceJet?

A: The growth in the segment continues pretty unabated as you have looked at the last six-nine months. On a monthly growth numbers, you have seen close to around 13% growth in passenger traffic even in the last month. Our sense is that the growth trend should continue for the balanced part of the year.

In terms of market segmentation, I think there has not been too much of a differential in terms of market share gains or positioning that you have seen earlier. Jet continues to maintain its leadership, whereas Kingfisher and Spice and Indigo for that matter, these four aviation guys, have done fairly well, give or take couple of percentage points. So, I think the sense is that aviation as a business is now starting to have lot more stability than what we have seen in the historic past. With traffic count continuing to increase at a significantly higher yield curve that you have seen in last year, I think the profitability of the business is starting to ebb up.

Q: Given the kind of passenger traffic demand you are seeing, how much of that has been met or is being met by constant capacity additions or is there still a gap, which can see some hardening of yields?

A: It is very heartening to note that atleast for the last one year, the players in the business have seen very calibrated increase in supply and they have not gone berserk in terms of new additions or new supply creation in the near-term. I am presuming that over the next year or so, it will start to generate as we move forward. But as of now, there is a calibrated increase in supply. That is likely to be around 8% or in the current year. In the possible future, which is next year, I think it slows around 11-12%. Given that the demand growth is fairly stable at that 13-15%, I think absorption of that supply seems to be a comfortable level to look at.

Most of the players in industry are reporting 75-80% load factors at a yield which is significantly higher than what we have seen in the couple of years. So, our sense is that for once the inherent profitability of the business will come back, which we have not seen in the last four years. You will see a fair state of return on capital, which one has not seen in the historic past. So, I think the good part of this entire uptick in traffic and revival that we have seen is that supply side disruption has not happened in a material manner.

Q: While Jet and Spicejet have been strong outperformers, Kingfisher has not participated in the aviation rally. On bad days, it is at Rs 50, on very good days it is Rs 60, but essentially in that band, do you think it can rise above its balance sheet concerns to participate in the rally of the other listed players?

A: I think firstly when one has a bullish stance on aviation, it is very difficult to segregate one player out and say that that is a real outlier. Jet, we are extremely bullish of the scale of the operation and the international operation which is a very relevant and dominant in Jet, over 60% right now.

Spicejet has been by far the most efficient aviation company in India along with Indigo, which remains in the private domain right now.

Kingfisher has been dogged by concerned on debt and debt free structuring and equity capital raised in Kingfisher and possibly also the overhang that foreign direct investment (FDI) right now still not permitted in aviation. So, our sense is that if there is any government regulatory changeover, which seems to be again likelihood, Kingfisher will also participate in the rally in a meaningful manner. But clearly the industry is back on track.