We called it before anyone – If you followed us then you would be 71% up – In addition; more news on the Delta refinery bid and has Vijay pulled it off?

By Victoria April 13, 2012 16:04

We called it before anyone – If you followed us then you would be 71% up – In addition; more news on the Delta refinery bid and has Vijay pulled it off?



Followers of this news service sometimes take a bet on the calls we make and we pride ourselves on getting the gambles correct well in advance, and so it is we are pleased to announce that the very first call that we made back in late 2010 and then again every six months since has come to spectacular fruition: UK based aerospace and defence parts supplier Umeco Plc has received a £274m bid from US company Cytec which the Umeco board has recommended. This values the company at 550p a share. This news saw Umeco Plc shares gain 48% yesterday in trading. Those that took our recommendation would have made a 71% margin to date from the point where we told you all to get in at.

This service wrote an extensive paper on the benefits of Umeco Plc back in 2010 with a great deal of inside information to hand which went out via Aerospace Investment Journal. Our recommendation was based upon detailed knowledge as mentioned at the time. Umeco is not unique – with the current civil aircraft order backlog all suppliers are showing value.


Other stories that we have been ahead on and now follow are moving at pace too – Among these is the Delta refinery purchase. It now transpires that Delta Air Lines may partner with JP Morgan to help run the ConocoPhillips’ idled 185,000 barrel per day Trainer refinery if the carrier decides to purchase the plant, CNBC reported on Wednesday. Under the proposal Delta would purchase the refinery for $100 million to $200 million, and JP Morgan’s commodities team would finance the refining process, including purchasing and shipping crude from overseas. Delta would then buy the jet fuel from JP Morgan at a wholesale rate, and the bank would sell the other products made by the refinery into the market. In addition, and significantly, at least two oil companies have partnered with Delta in a swaps arrangement in which they would give the airline jet fuel in exchange for some of the other fuel produced by the refinery. The deal is by no means a sure thing however as there are other bidders for the refinery.

Trainer is on the brink of closure due to the high cost of crude oil and waning fuel demand. The plant makes a higher percentage of jet fuel than any other refinery on the East Coast, accounting for a third of the jet-kerosene capacity for the region. There are many other refineries in the same position across the globe including in the UK as mentioned before and thus for good or bad if airlines wish to move in this direction then this is their window of opportunity. The gamble for them is of course nothing short of huge on this type of deal and the logic is only sound so long as oil/jet fuel is increasing in value and of course also depends on the proposition of mass supply to market of viable bio-fuels. If the latter were to become the norm within the next five years than anyone refining jet fuel might be caught out as the bio-fuel price range will be in the £85 “a barrel” equivalent and that is before any benefit from ETS (if it is still going) write-offs for using the same.

Continuing the theme of today it would be wrong of us not to mention good old Vijay and his Kingfisher Airlines – I have to say that there is distinct possibility that the overdue but now auctioned removal of routes and international services combined with Indian government relaxation of red tape could well mean that Kingfisher is ready to move forward?

We should not underestimate the political pressure Vijay has managed to place on the Indian government to make regulatory concessions. Mentioning that he may already have a foreign airline partner by his side, perhaps a cash-rich one, not paying his airline employee’s salaries until the very last moment, both examples of pressure points he has managed to create for the Indian government to clear the FDI policy on aviation which we can argue is of singular immediate benefit to Kingfisher alone.

Jet Airways seems well funded, with Naresh Goyal in no mood to raise fresh equity as he sits tight on a promoter holding of over 80% in his airline. Indigo is well on track with its IPO plans and a time-tested, profitable expansion plan. Spicejet’s largest shareholder, Kalanithi Maran is in no hurry to either cash-out or launch aggressive expansion plans given the airline is making money. Wadia-controlled GoAir has always been in a wait-and-watch mode, with little or no muscle power to impact regulatory norms, particularly given its size.

This leaves Kingfisher Airlines — the only one that is not only bleeding but requires a massive revamp and equity infusion. Having exhausted all fund raising options, roping in a foreign airline is Mallya’s only way out it would seem.

For those who think that the cash-strapped Kingfisher Airlines will have no takers, consider this: Kingfisher Airlines has a fleet comprising 12 owned aircraft, owns substantial prime slots on trunk routes like Mumbai-Delhi and had a market-share of around 29% prior to shrinking its operations. Kingfisher has tactfully given up unprofitable slots in smaller cities or excess ports, and is expected to find them vacant once if it resumes full-fledged operations. And now, by leveraging this crisis, it has not only managed to cut excess flab but has also cut down non-profitable route operations besides re-negotiating high-cost lease rentals while returning expensive wide body aircraft.

The timing of all this too leads me to think that Vijay is Teflon man as he has not planned events but reacted to them (slowly) up to this point. But as Indian growth slowed and inflation rose and political scandals weakened the government over the past 12 months, he was able to create political leverage to a point where he is now (if the government goes along with foreign ownership deregulation) in a point to win the day and at a point where even this news service has to sit back and say – Hey Kingfisher could be a good bet! Despite a depreciating rupee, excess capacity, low fares and an outstanding debt of about Rs 7,000 crore and accumulated losses of Rs 6000 crore, Kingfisher is attractive for any airline keen to get a foot in the door of the Indian aviation market as this is a singular opportunity of the moment with first mover advantages. This means it might well be a good (very high risk) investment to get in now if you do not mind taking a possible wipe-out on the same – for the sole reason that to many foreign airlines this is an opportunity not to be missed.

Caution though: Before allowing foreign airlines to invest in Indian carriers, the Indian government has come up with a number of hurdles to date.  Any proposal by any foreign carrier will be approved on a case-to-case basis by the government. Even after a foreign carrier has invested in an Indian one, majority control might need to remain with a resident Indian company. And, the board of directors of the target airline should continue to have two-thirds of its members as Indians. Vijay will no doubt be trying to get these points amended right now.


Look to LAN as the airline of the moment………

By Victoria April 13, 2012 16:04
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