Airline stocks dropped in yesterday bullish market

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In the quarter ended September, all three listed entities made massive net losses and registered negative operating profit margins, as high as 18 per cent. Jet Airways Q2 net losses surged quarter-on-quarter to Rs 714 crore from Rs 123 crore in the June quarter. On a year-on-year basis the airline slipped into negative territory, from a positive of Rs 10 crore profit in the previous corresponding quarter. On the other hand, Kingfisher’s net losses mounted close to Rs 470 crore and SpiceJet reported Rs 240 crore of loss.

The managing director of a foreign brokerage firm says, “The airline industry across the globe is not known for minting money. If one cannot run the business, better sell it off or shut it down rather than make losses on a continuous basis.” He states, airline business cannot be run because of promoters’ ego, they need to find a solution to the crisis and not plead to the government.

When asked if cheaply available airline stocks were a good buy, he warns: “Absolutely not. Investors better stay away from the counter, as the companies do not have any commercial principle.” When an investor does not know how to evaluate a company, as various parameters to access the growth remain unanswered, why would one put money on the counter, experts ask.

Debt Problem
There is a fundamental problem with the sector's players. "It is not that higher aviation turbine fuel is the only factor making airliners bleed. Rather, the bigger trouble is with the business model of the companies. There is a need to re-examine and tweak the existing models which could fetch money for them," explains the managing director. A combination of factors, including money spent on customer care and routes taken by the airline could work out.

Currently, debt on airliners' balance sheets is huge. Government-owned Air India has an overall debt of around Rs 40,000 crore, Jet Airways is struggling with its Rs 13,000 crore, while Kingfisher has a burden of Rs 6,500 crore.

Note to Investors - INvestors and traders can keep close watch to news and latest happenings about this sector and once any reforms comes then these stocks will gain but for time being the outlook looks bearish.

Aviation stocks have lost about10 % of their values in the past few sessions. As no clarity emerged despite government intervention, shares of domestic airliners shed their recent gains. Moreover, market experts say, foreign direct investment (FDI) in the sector may not work for the ailing industry.

Interestingly, the decline has come at a time when domestic benchmark indices have rallied close to 4% over recent sessions.
Shares of Kingfisher Airlines declined 14 % from the recent peak of Rs 27.75 to close at Rs 23.85 on Thursday. Those of SpiceJet dropped 17 % while Jet Airways dipped 11 %.

According to market participants, there is no point in continuing a business where promoters are finding it difficult to make money. They preferred to stay away from the sector, as there are no visible parameters to restore growth. The chief investment officer of a foreign fund house says, “The only way out for the sector is consolidation. At least one bleeding player needs to go out to bring the industry back on the growth track.”