Jet, Air India to gain more from lower crude prices: CAPA

Speaking about the benefits of fall in crude prices trickling into ATF prices and in turn benefiting airlines, Kapil Kaul of CAPA said it would definitely benefit the airlines since it is a single cost that has a bearing on their financials. However, the benefits may not be as expected to because the transparency of ATF pricing in India is not very clear and all the benefits may not be passed on.However, international airlines and those that have international operations are sure to gain from the fall in ATF prices, said Kaul in an interview to CNBC-TV18. According to him Jet Airways and Air India would stand to benefit more than other domestic operators.When asked about when he expected Jet Airways to turn profitable, he said although FY15-16 numbers would be better than FY14-15 but they still have structural issues and challenges in terms of their business model. According to him it would turn profitable in next 12-18 months.Similar is the case with SpiceJet, which has a challenge in terms of ensuring significant capitalisation. More capital would allow them to invest back into airline. Expansion for the company is likely to happen from third quarter. So, again 12-18 for real turnaround to happen, said Kaul.Answering a query on Indigo IPO he said, it is a positive for the airline and would help structurally rerate the sector. However, one should not directly compare Jet Airways and Indigo because Jet’s focus is more on international operations while that of Indigo is domestic. Moreover, Indigo is planning big expansions and Jet is not in trying to play catch up for domestic operations, said Kaul.

Below is the transcript of Kapil Kaul’s interview with CNBC-TV18's Sonia Shenoy and Anuj Singhal.Sonia: How much will the fall in crude prices aid many of these aviation companies in the quarters to come?A: One is not sure that the current prices will remain for the next few quarters, that is number one. The second is that there is no transparency in pricing in aviation turbine fuel (ATF) in India. So, the full benifits are not passed on to the airlines, especially in the domestic but the fall in ATF since October has been significant especially from Q4 of last fiscal, though the fall was much more than the benefits that were passed on to the airlines but drop in ATF is significant because almost 50 percent of the cost of operation is fuel. It is the very single cost item that has a tremendous bearing on the airlines' financials. So, we would expect that the benefits of the crude falling would happen but not to the levels that is expected because as I said there is no transparency in ATF pricing. So, one doesn't know how the pricing of ATF is structured but benefit of falling ATF is a good news for the airlines as has been in the last two to three quarters. 

Anuj: Jet Fuel prices are down 33 percent from peak while in rupee terms the raw material prices might be down even more but there have been more benefits being passed to the ATF prices than for example petrol and diesel and for international operations of course there are better options for airlines like Jet Airways. Do you think this tailwind is significant enough for some of these aviation companies to report consistent profit if we assume that this kind of crude regime is going to continue?A: For international yes I would think because international structure is very different both from pricing and capacity perspective, already there is no sales tax on the international operations. So, any fall in crude prices moves directly to the international operation of airlines. So, that will be positive for the airlines which have significant international operations.However in case of domestic, firstly the pass on is not complete and secondly, whatever benefits of fuel that we have got over the last two three quarters has been negated by a very below cost and very low yield pricing. So, airlines resort to a pricing regime which completely negates the benefits of fuel and we continuously see one airline or the other bringing pricing actions to the extent it almost completely erodes the benefits that lower ATF pricing gives.So, I am skeptical about domestic operations though any benefit on ATF will go directly to their bottom-line as well. Since the international price structure is different, so the benefits on the international operations of Jet and Air India would be more significant but domestic whatever benefits gets passed on gets negated by a very low yield in environment and the pricing actions which further erode yields and then that to some extent completely compensates the benefit that ATF gives.Sonia: Jet Airways is actually up about nine percent today. But, even in the quarter gone by, the company reported a big loss in earnings before interest and taxes (EBIT) of almost Rs 350 crore. When do you think a company like Jet Airways can make it into the black?A: Their FY15-FY16 numbers would be much better than FY14-FY15 numbers. But, Jet clearly has a structural issue apart from a massive recapitalisation that it requires. It still has challenges with their domestic business model.  But their international business model is seeing significant upswing, because last fiscal, forthe international operations, Jet carried almost 75 percent of the incremental traffic carried by Indian carriers. So, international is very different for Jet and domestic is very different for Jet and most of their challenges over the last few years, were largely small challenges in the domestic and the competitive environment that is in domestic. So maybe about one or two years, maybe 12-18 months or 24 months before a real turn around in Jet is structured. Though there is work in progress and there is much more structure right now than what was available, what was there about a year back. But it will take a while for them to restructure their business and turnaround. I would say we are roughly about almost closer to two years before all the benefits of Jet’s restructuring would come. But, the ATF price would be more beneficial to them on the international side. Anuj: We will soon have Indigo as a company. There was a time Jet Airways was a clear number one. Now, Indigo is the clear number one. Do you see Jet making an effort to catch up with Indigo in terms of market share or that will not be their game now?A: There is no comparison between Indigo’s domestic and Jet’s domestic because for Indigo out of their 96 odd aircrafts, almost 86 are in the domestic and 10 are international. And almost entire traffic that they carry is domestic. Meanwhile, Jet is conservative in their domestic expansion. I do not see them expanding in domestic. Their focus is more international and that too short-haul international distance like Abu Dhabi and maybe other middle Eastern points. Indigo has a specific expansion plan for the next two years. So, the distance between Jet’s market share in the domestic and Indigo’s market share would remain significant. I do not think Jet is trying to catch up. They have almost capped at domestic expansion or very moderate domestic expansion, while indigo is going almost an aircraft a month starting from the time it has come in. Therefore, it is a different story both at Indigo and Jet.Sonia: Finally, one word on SpiceJet, you were telling us that it will take at least 12-18 months for a company like Jet to turn profitable. SpiceJet has been through issues of its own for a very long time now but now things seem to be changing with Ajay Singh coming in. What is your own view on how long will it take SpiceJet for its market share and its profitability to recover?A: SpiceJet has been a remarkable transformation from almost operational closure to now becoming stable and as time passes and as capitalisation is structured more stability would come. So, there has been a significant work in progress. The challenge before SpiceJet is to ensure that a significant capitalisation happens and happens soon. That will allow them to invest back into the airline and also to some extent expand because till they don't get their capitalisation. I am not very sure that they would get the support from leasing companies till the leasing companies become more confident about leasing to SpiceJet. SpiceJet is work in progress. Capitalisation will happen, the oil prices would give them benefit and as I said and have been saying that Indigo will structurally help rerate the sector which will make it easier for SpiceJet to raise funds.

However, SpiceJet in my assessment the expansion though they are planning to do an expansion from quarter three what you would see mostly from next fiscal. But they are making significant progress, I mean from where they were in December to where they are now is a significant progress though it would take a while but we may be still again 12-18 months from a real turnaround of SpiceJet to happen.Anuj: Vistara has made nice strides in their limited flights that they operate. So, do you see them scaling up operations over the next few months and years and secondly do you see a second round of sort of price wars between these airlines companies which could again have a bit of negative impact?A: As Vistara is concerned its expansion is as per their business plan. They were looking at about 20 aircraft inductions in the first three to four years of their business. They have inducted six, I would expect three more to come by September. There would be about nine aircraft by quarter three and then they would scale up to twenty in the next 12 to 18 months from quarter three. So, their expansion is in line with their business scales.Obviously there are issues with respect to the 5/20 and if the 5/20 goes then the expansion especially in the international will become more miserable. But Vistara is going as per their business plan and as their scale improves and their networth improves and becomes more competitive you would see significant traction in their load factors and we are expecting their load factors quarter three onwards to stabilise over 65 to 70 percent as their network improves. So Vistara is working in progress as their network becomes more competitive their load factors will become stable and their P&L will improve significantly. Anuj: Any kind of risk for further price fall as cost stabilise at lower levels?A: The risk is always there because there are airlines which are significantly undercapitalised and till they do not get the capitalisation, they would do pricing actions to raise cash. And I would think that the pricing actions would continue in the near-term. I do not see them going and as the crude falls, ATF prices fall, the need for more pricing actions would be seen. But, because as I said, whatever benefits that the ATF gives you, most of the airlines almost compensated by reducing their fares. So, it is going to be good for consumers. We do not see any changes in the pricing regime. they continue to be focused on low yield environment and I do not see the change.Sonia: I know you have read through the draft red herring prospectus (DRHP) of Indigo and there is so much interest in this IPO. What is your own view on how investors should approach this particular IPO? Do you see it be successful? And also on the profitability, if you go through the fine print of the DRHP, you realise that a lot of Indigo subsidiaries have actually been loss making. Do you think that has impacted the profitability of the company?A: First of all, the profit this year, they have given a nine profit. Our estimate for them which is roughly about 150-175 million by FY15 which we think that will be the profits this fiscal. I do not know which subsidiaries of Indigo, Indigo does not have any subsidiaries, so I do not know.Sonia: Of InterGlobe.A: I do not think there is any accrual for Indigo because of InterGlobe subsidiaries. To the best of my knowledge, most of the InterGlobe subsidiaries are making profit. But it does not directly impact revenues of Indigo. So, Indigo’s IPO is positive. As I said, that it is structurally going to rerate the sector and I think you should be in line with their expectations.