Relief to Aviation Stocks as Flights can Resume Operations, but with some Caveats

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When the pandemic first broke out, one of the first forms of travel to see a ban was the airline sector. In light of this, the shares of airlines fell sharply. Even billionaire investor Warren Buffett, chairman of Berkshire Hathaway sold all his stock citing concern.

Come May 25th, shares of InterGlobe Aviation Ltd and SpiceJet Ltd saw a rise on Thursday after the government allowed flights to resume in a calibrated manner from 25th May 2020. There are quite a lot of restrictions in place but investors are relieved nonetheless as airlines can finally restart their operations after 2 whole months of being off-duty. For starters, these airlines are allowed to operate almost a third of their approved summer schedule capacities. Resuming operations is preferred over being grounded, but the many restrictions imply that available seat kilometers (ASKs) and revenues will be much lower this year.

“Even if flight operations are resumed, it will not be able to stimulate enough passenger traffic given how the virus ain’t showing no signs of dwindling,” as per a report by CARE Ratings Ltd on 20th May. “Passenger traffic will decline by at least 30% during FY21 as there will be some apprehension in traveling,”.

The government has also set a plug on fares with a fare band of lower and upper limits for the next three months. Investors have to monitor another big cost, which is aircraft lease rentals. Restarting operations will lead to the resumption of lessor payments.

Analysts from JM Financial Institutional Securities Ltd reported that “The various initiatives taken by airline companies like reduction in staff cost, renegotiating of lease rentals and the various government reforms announced so far, has not helped in the face of blockage of revenue.” They estimated a monthly cash-burn rate of ₹200-1100 crore.

“ The ascribed FY22E enterprise value/EBITDAR (Earnings before interest, tax, depreciation, amortization, and lease rentals) multiple (for IndiGo) is lowered to 7x (vs 7.5x earlier), because of the increase in risk to earnings if demand contraction for travel continues spanning for multiple years,” as said by JM Financial.

The airline sector is one of the hardest hit during this crisis, only time can tell how and when the economy will rise back to its former glory.

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