Are investors finding “new love” in the turbulent aviation sector?

Written by: Sunil Fernandes
Published: Wednesday, June 27, 2012, 9:29 [IST]
 
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Are investors finding “new love” in the aviation sector?

For the last few years, the aviation industry was treated as a pariah, ostracised by virtually all classes of investors.

The last few months have seen government apathy changing to sympathy with a few favourable policy changes. This may now have paved the way for renewed investor interest in the aviation sector.

According to a news report in the Economic Times, LKP Finance has bought convertible debentures of Kingfisher Airlines aggregating Rs 160 crores. However, the real story is not the debenture "buy out", but the hefty premium that LKP Finance is willing to pay for a stake in the company.

LKP Finance has bought debentures, which get converted into shares at a price of Rs 23, against the Kingfisher Airlines current share price of Rs 13.10 on June 27, 2012. Why would an investor want to pay a premium for the shares of a cash strapped airline? LKP Finance is amongst the oldest broking houses in the country and can certainly discern on the value one needs to pay for a stake.

Another news report this time in the Business Standard reveals that both Etihad Airlines and Qatar Airways are eyeing a stake SpiceJet. Again, SpiceJet is a loss making domestic carrier.

Similar unconfirmed reports of an equity stake in Jet Airways has been doing the rounds.

Things looking up, but turbulence remains

The new found interest amongst investors could be on account of the fact that things maybe looking up for the sector, though it would be too early to say the industry is out of the woods. The government has initiated quite a few changes in the aviation sector over the last few months.

Recently, the government allowed the aviation sector to raise working capital resources through the external commercial borrowings (ECBs) route to the tune of $1 billion, where the limit for individual airline companies would be $300 million. This would give companies in the industry access to cheap borrowings from abroad. And, easy access to money is something that is most welcome for a cash strapped industry.

The government has also permitted Kingfisher Airlines, Spicejet, IndiGo to directly import 12.65L kl aviation turbine fuel (ATF). In fact, fuel costs account for 40% of the operating costs of an airline and imported fuel is likely to provide costs savings to the airline industry.

Interestingly, the prices of crude oil have also dropped to a new 18 month low, which would automatically make the cost of imported ATF cheaper (provided rupee stops falling).

Airfares have also been steadily rising. For example, the busy routes like Mumbai-Delhi-Bangalore have seen a hike in fares of almost 30-40% in the last few months. Even domestic carriers that fly international routes have hiked their fares, which should improve margins and pare losses.

Clearly, things are getting better, if not worse for the aviation industry. It certainly would continue to need government support in the form of favourable policy changes, to withstand any turbulence. At the moment, at least a take-off has happened.

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