Last Updated : May 23, 2020 06:36 PM IST | Source:

Resumption of flight services a positive, but the sky looks hazy for airline stocks

Brokerage firm Centrum Broking believes that one-third of scheduled capacity is a reasonable starting point for the sector given that demand is likely to remain low.

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Domestic flights are set to resume from Monday, May 25. In an order issued on May 21, the Ministry of Civil Aviation (MCA) has said that the operation of domestic flights can resume from May 25 onwards.

The ministry has issued standard operating procedures (SOPs) that airlines need to follow.

While domestic civil operations will commence from May 25th, international operations remain suspended. The operations would begin with one-third of the approved capacity for the summer schedule and would be ramped up based on the experience after opening up.


As per the government guidelines, the present order is valid till August 24, 2020 during which fares would be regulated with a floor and a cap based on the flying time.

The sector - which has been struggling for many quarters on the fronts of revenue and decline in profit - continues to wait for the government stimulus to get some relief as the lockdown triggered by coronavirus has posed the question of their survival.

Finance Minister Nirmala Sitharaman did announce some structural reforms a few days ago but no stimulus or package was announced for Indian airline companies that are currently surrounded by various operational and existential challenges.

Some positives

Many see the resumption of domestic operations as a major relief for the aviation players which seems true.

Brokerage firm Centrum Broking believes that one-third of scheduled capacity is a reasonable starting point for the sector given that demand is likely to remain low.

"Experience of other countries which have gone through the COVID-19 lockdown and restart process indicate that after 3-4 months of the peak of virus spread the airlines are operating or likely to operate at about 50 percent of the capacity," said Centrum.

Airlines could have significantly benefitted from the relatively higher ticket prices at this juncture. Could the regulation of ticket prices deal a blow to them?

"The price regulation is a political necessity at this time and as long as it does not prevail beyond this extraordinary period, we do not see it as a de-rating factor," Centrum said.

Centrum pointed out that while low load factors and absence of ancillary revenue streams would mandate a higher than historic ticket yield, low fuel prices also bring down the threshold yield requirement.

"Overall the price caps don’t seem to be imposing hardships for the industry on a per aircraft basis. At the company level obviously the profitability would remain impacted due to the curtained operations," said the brokerage.

Hazy sky

Airlines, globally, are struggling with the issue of falling demand. Globally, various airline companies have withdrawn their earnings guidance indicating uncertainty in the aviation industry.

In the 55th annual general meeting (AGM) of Berkshire Hathaway on May 2, Warren Buffett had said he was wrong about valuing airline stocks and revealed that Berkshire had dumped its entire airline stake.

Buffett underscored that the world had changed after the pandemic for the airline industry.

“The world has changed for the airlines. And I don’t know how it’s changed and I hope it corrects itself in a reasonably prompt way,” he said.

“I think there are certain industries, and unfortunately, I think that the airline industry, among others, that are really hurt by a forced shutdown by events that are far beyond our control,” he added.

Berkshire had been among the biggest shareholders in the four largest US airlines — American, Delta, Southwest and United.

The sky looks hazy for aviation players.

Brokerage firm Motilal Oswal Financial Services point out that despite the proposed reforms by the government, demand, in the long run, would be a major challenge for the industry and companies need to re-strategise their path ahead.

"We remain keen on hearing management guidance and commentary from Indian companies before taking a leap of faith in the industry and stocks," Motilal Oswal said.

Sameer Kalra, Founder, Target Investing has a negative view on the sector.

"The restart of flights is an experiment of which the result is unknown. Revenues seen in FY20 will take years to return which will hamper cash flow generation, resulting in further cost cuts," Kalra said.

As far as stocks are concerned, Centrum Broking is positive on IndiGo.

"IndiGo with its unrestricted cash balance of Rs 9,410 crore as of December 2019 is in a relatively comfortable position. We have a 'buy' rating on IndiGo with a target price of Rs 1,340 and 'reduce' rating on SpiceJet with a target price of Rs 33," Centrum said.

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First Published on May 23, 2020 06:36 pm