It’s been a turbulent phase for India’s aviation industry. The disruption in operations of two airlines, Jet and Air India apart, the industry is facing a double whammy — sliding load factor and high ATF prices.
Most airline companies are saddled with high debt which they contracted in the past to fund their aggressive capex programmes and to tide over operational losses.
In Q1 this year, business class traffic fell 24% YoY. For the same period, traffic fell 5% compared with the same period last year. This forced airlines to offer discount fares in a desperate attempt to boost their load factor.
Simultaneously, the industry cut its carrying capacity by 8% in the first quarter but it was just not enough. Despite the troubles which the industry has encountered, aviation stocks seem to have suddenly caught the fancy of investors and traders.
In the past one month, aviation stocks were up 23-66% when the Sensex rose just 4% during the period. The big run-up has been in Jet Airways India whose stock price is up 66% while the Kingfisher Airlines and SpiceJet stocks rose by 23% and 44%, respectively.
The rally has been accompanied by a spike in trading volumes of each of the listed aviation stocks. All the listed entities, Jet Airways India, Kingfisher Airlines and SpiceJet, have recorded a rise of over 300% in their volumes during the past one month.
The sharp increase in trading volumes has, however, been accompanied by a fall in the delivery — the proportion of shares bought to be held for a while. This means that the increase in trading volumes is mainly accounted for by day traders and margin traders — those who buy shares on margin to take advantage of a short-term buoyancy in the stock price.
This does raise a question mark as to whether the recent surge in share prices of these aviation stocks would be sustained. Once traders meet their price target, they would start selling which may trigger a fall in price.
Alternatively, negative newsflow may trigger them to start booking profits early, which may also precipitate a meltdown. Airlines have announced fund raising plans to stay afloat. Jet Airways plans to raise $400 million through a QIP to overseas investors while Kingfisher Airlines intends to raise $175 million from overseas investors.
All this makes fresh exposure to these stocks a risky proposition at current levels. Existing investors may be better off taking advantage of the current price and booking profits.
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