Looking to invest in airline stocks: Here’s what experts say

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Updated: December 22, 2017 10:30:34 AM

This year has been one of the best years for aviation industry so far, and shares of major listed players have shown remarkable outperformance. Industry experts and top market voices alike say that the profitability in the sector is highly dependant on oil prices.

Sanjeev Prasad of Kotak Institutional Equities says that the profitability of the aviation sector must look up going forward. (Image: Reuters)

The current year has been one of the best years for aviation industry so far, and shares of all major listed players have shown remarkable outperformance. Industry experts and top market voices alike say that the profitability in the sector is highly dependant on oil prices.  Hedge fund manager Samir Arora of Helios Capital says that the aviation industry is highly dependent on oil prices. He also pointed out that Warren Buffett had initially stayed away from the sector, as the airline space is saddled with high fixed costs, and commodity prices remain unpredictable.

Warren Buffett had also shared his love for the aviation sector. In an annual letter to shareholders, he wrote, “I must admit I have developed some tolerance, bordering on enthusiasm, for that practice now that Berkshire has made large investments in America’s four major carriers.” He had made investments to the tune of $10 billion in American Airlines Group, Southwest Airlines, United Continental Holdings and Delta Air Lines – through his company Berkshire Hathaway.

Samir Arora said that through this investment, Warren Buffett might be looking for disciplined returns, as opposed to rapid  growth. Earlier this year he had said in a conversation with ET Now: “The US markets reward discipline, while the Indian markets reward growth… it does not make sense for the Indian investors to mimic Warren Buffett.”

However, the marked outperformance of the shares in the current year has led experts to say that the best performing airline stocks globally is Spicejet. Notably, Spicejet shares have risen by more than 160% in the year so far. In July this year, Bloomberg reported that Spicejet was the best performer globally. “Two and a half years after SpiceJet Ltd was forced to ground its entire fleet on its inability to pay a mere $2.2 million in fuel bills, the budget airline has become the world’s best-performing airline stock — with $26 billion in plane orders to boot,” said the report.

Track live stock prices: Interglobe Aviation, Spicejet

In an interview to ET Now, Sanjeev Prasad Co-Head and Managing Director, Kotak Institutional Equities said last month,  “The industry structure is pretty nicely concentrated, between the top four players. IndiGo is at 40%, other three are at 13-17% each. You have 85% market share concentrated among the four players. Jet and Air India, the third and fourth are keen on improving their balance sheets, which is a great thing. The profitability of the sector must look up going forward, right now it appears to be fine.” In the same interview, the expert pointed out that he’s betting on shares of IndiGo from the space. “ Indigo is a good stock to own. It’s a play on the entire consumer discretionary space,” he told the channel.

Interglobe Aviation shares were trading at Rs 1,161, up by more than 1.95% on Friday morning. The shares have returned more than 38% in the year so far. In comparison, the BSE Sensex is up by 26% in the same period. For the latest quarter, IndiGo reported a 294% increase in net profit to Rs 551.55 crore, as compared to  Rs 139.85 crore in the same period a year ago, helped by credits received from manufacturers for aircraft delivery delays and grounding, besides better revenue management. Currently, IndiGo has about 38% of the domestic aviation market with about 141 planes and 913 daily flights.

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