FDI in aviation to boost ailing industry, says Antique

Jet Airways as well as SpiceJet came up with good performances in the first quarter of FY13. Vikram Suryavanshi of Antique Stock Broking is quite happy with the quarterly results of these two companies and feels it is important to watch how they maintain yields and load factor. If they successfully manage these, there would be a strong case for rerating the industry, Suryavanshi told CNBC-TV18.

Suryavanshi believes foreign direct investment (FDI) in aviation will help the ailing aviation sector to boost its balance sheets. Moreover, the government's role in introducing policies favouring the sector will have a positive impact on the ailing companies.

Below is the edited transcript of the interview on CNBC-TV18.

Q: Take us through the key parameters or maybe a comparison between the performance of Jet and SpiceJet. How do you think both of them did operationally and which one do you think came out with a better performance this quarter?

A: We have seen very strong improvement in the first quarter operational numbers. We have seen almost 33% growth in Jet's domestic revenue while SpiceJet's revenue growth is 55%. In terms of growth rates, SpiceJet has really done well and even been able to improve its market share from 14% to around 18.6%.

In terms of load factor also SpiceJet has done around 80%. If you look at Jet, domestic load factors are around 75%. Both have improved but, I think SpiceJet has operationally done really well and even in terms of EBITDA margin which used to be in single digits, it has moved to almost 18-19% and it is really encouraging.

If you look at this industry, there are two major problems - one is very high taxes on the ETF and second is the pricing discipline. We are clearly seeing signs that they have got huge confidence in terms of pricing discipline and that gives a strong confidence. We have to wait and see how they maintain these yields and load factor. If that happens, there is a strong case to rerate this industry.

Q: While it is a bottom-line profit for both the companies after four or five quarters, it is also because of other income. It is because of sell and leaseback money that they have got and this is not really an operational income for the companies. Would you think it is very tenuous coming into the black and things can topple over?

A: What you mentioned is true but, the fourth quarter losses were very high. It was close to Rs 200-300 crore losses per quarter. Even if you remove this, they are still breakeven. Basically, they have turned around from almost Rs 200 crore losses to a breakeven level by addressing one parameter in this quarter and that’s pricing discipline.

Now that the industry is mainly run by four players and there has been a pricing discipline from a very sub-optimal level, they are holding prices. Secondly, we are looking at delta from fuel prices. We have very discretionary prices for domestic and international operations.

So government can do away with some of the taxes which are very high in the domestic market. I think there is a huge delta which can play in for these companies because sensitivity with fuel is very high.

In case of SpiceJet, even Rs 1 change in fuel levies will have almost Rs 40-45 crore change in bottom-line and that is Re 1 EPS. What we are looking at is that pricing discipline has come into the system and now with government support, if some taxes on fuel is reduced, they can maintain a huge margin at the bottom-line. That is what we are looking at from the industry.

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Q: How exactly are these particular airlines functioning at this point in time? What would your sense be in terms of the urgency or the requirement of FDI in retail considering that maybe there are lesser players in the market hence, they can function more efficiently. Is there a need for FDI in aviation at all?

A: As of now, operationally companies are trying their best. They have reduced cost, but beyond a point there has to be support or policies which we think the industry is lacking. There are particularly high taxes.

In terms of strengthening the balance sheet, FDI by foreign aviation companies will obviously give them one more option to strengthen their balance sheets. Currently, they are not allowed and they are the only potential player left for these guys to bring in strength to their balance sheets.

So in cases like SpiceJet, there could be a positive impact for this kind of a development. Apart from that the regulatory environment will also support in getting a good valuation and some tax rationalization will help them to get very good valuations.

Q: You are caveating every sentence by saying tax rationalization. It’s not as if it is on the anvil at all. FDI will only boost your balance sheet and give you some equity, but operationally if you have to make money and be sure that you are making money you have to have tax rationalization.

It's not as if the airport authorities are looking at reducing their tariffs or their charges anytime soon. It is not looking as if ATF prices are going to come down anytime soon. I am questioning the viability of the industry altogether. If taxes are where they are, charges are where they are, prices of ATF are where they are, can the Indian economy at this juncture really give airline companies a higher price in terms of air tickets to be able to bridge all these taxes or are you saying a rerating is actually contingent upon charges falling, either ATF charges or taxes or airport charges?

A: We are looking at most of the issues, particularly high fuel cost and all that. They have been able to address it by arranging the fare prices. We have seen almost 24%. They have increased the prices in case of SpiceJet, around 9-10% in Jet Airways. So they have been able to raise the prices and hold on. That has helped them to absorb the cost pressures in this quarter and turn positive.

But now if you want to go beyond that and they are still maintaining very good yield or passenger load factors are quite healthy, they have to win the half battle curve that we are seeing in terms of price discipline.

In terms of taxes, it is really very high and if you want to pass it on, then again you have to go for very high pricing and it may impact their load factor. Basically, what we believe is that from their side they have brought about pricing discipline and operational efficiency.

Now, an additional role from the government could take the industry to the next level. We are really bullish in terms of demand and we have seen a very healthy growth rate in the aviation sector where penetration level is very low. If you take a 3-4 years view, people are talking 2-3% growth in this sector.

We can't really afford to let this sector shut down and the industry is trying to bring back the pricing discipline. I think a helping hand from the government will really help the sector.