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Rival Indian airline stocks rise on grounding of Jet Airways

Despite the smaller field, slowing demand and volatile fuel costs remain risks

Jet Airways' exit from the Indian market is expected to boost rivals, but other headwinds remain.   © Reuters

MUMBAI (NewsRise) -- The fall of Jet Airways has lifted shares of India's two other listed airlines to fresh highs as investors bet that the exit of a major competitor would swell profits for the rest.

Not so fast, say some analysts. Capacity is rising quickly and fuel prices are so volatile that any upturn could be short-lived, HSBC Securities said recently.

Airfares in India have surged 12-15% in the past four to five months as cash-starved Jet Airways, mired in losses, began to cut back on flights. Its entire fleet of 119 aircraft was grounded by mid-April, allowing rivals such as IndiGo and SpiceJet to cash in.

Shares of InterGlobe Aviation, the parent of IndiGo, have surged more than 38% year to date with the stock hitting a record high of 1,716 rupees ($24.60) at the end of May.

Those of the smaller SpiceJet have gained more than 46% in the same period. By comparison, the benchmark Sensex has risen 8.9%.

"The closure of Jet Airways has positively transformed the market dynamics," aviation consulting company CAPA India said in a note earlier this month. "This fiscal year could mark a turning point for the sector."

With many flights at full capacity and a larger share of the market, profits for both carriers are expected to rise. For example, between January and May, IndiGo expanded its market share to 49% from 42.5%.

The consensus earnings forecast for IndiGo has more than doubled since January, while that for SpiceJet has jumped 56%.

Overall, CAPA expects the industry, which includes six major carriers and three smaller ones, to turn to profit for the first time since the consultancy started tracking the industry in 2003. GoAir is the now the third-largest carrier after IndiGo and SpiceJet. The latest entrant is Vistara, jointly owned by India's Tata Sons and Singapore Airlines.

HSBC, however, said the sweet spot for airlines is temporary.

"Investors appear to be ignoring a number of medium- to long-term risks, which could hit profits," it said in a report last week. It cited volatile currencies, rising fuel prices and the strong rebound in capacity among reasons.

While air travel in India has grown close to 20% each year, among the highest rates in the world, its airlines have long struggled to make a profit. Stiff competition has damped airfares even as carriers expanded their fleet, taking on debt. A lack of airport infrastructure and more recently, rising fuel prices, have added to the pressure.

Before Jet Airways, there was the case of Kingfisher Airlines, which went bankrupt in 2012 leaving unpaid dues worth billions of dollars.

Analysts say the exit of Jet Airways has given airlines a reprieve and some time to reassess their plans as rising airfares take a toll on air travel.

Air passenger traffic barely grew 3% last month after falling for the first time in more than five years in April.

CAPA expects domestic air passenger traffic growth of less than 5% this fiscal year, down from the 14-16% it forecast in February.

Meantime, both IndiGo and SpiceJet are bulking up their fleet and expanding routes. Last week, IndiGo launched 12 new direct flights connecting cities in the east and the north, including Kolkata, Gaya and Varanasi, starting August.

Earlier this week, Vistara increased its flight network by 50%, adding 62 routes.

HSBC expects the industry's total seat capacity to grow 4%-5% and the total fleet size to rise 30% this fiscal year.

The increase may soon revive price competition and shift the focus to the long-term profitability of the sector, HSBC said.

It estimates IndiGo and SpiceJet to grow profits by a more modest 20% to 25% this year.

--Dhanya Ann Thoppil

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