Does Cape Town mean anything in India? Plus keep one eye on some airlines

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By admin February 10, 2015 22:21

Does Cape Town mean anything in India? Plus keep one eye on some airlines

The Delhi High Court today reserved its order on BBAM’s attempt to get its five aircraft back from SpiceJet. Chief Justice G Rohini and Justice Rajiv Sahai Endlaw heard the case of SpiceJet Vs B&B Air Acquisition (BBAM). BBAM sought to force the Directorate General of Civil Aviation (DGCA) to cancel the Certificate of Registration (CoR) on its five 737s leased by SpiceJet, thus grounding them. The lease agreements were in fact terminated in December 2014 due to non-payment as reported here but SpiceJet has not released the aircraft. After the termination of the lease agreements, BBAM went to the High Court in December 2015 to speed the de-registration of the aircraft and to get the DGCA moving on the matter. Following that the DGCA then wrote to SpiceJet on the 9th January 2015 asking it to return the Certificates of registration (CoRs) as well as deactivate the transponder mode S codes of the five aircraft, but to date SpiceJet has not returned the certificate nor deactivated the transponder codes and it is in fact still operating the aircraft! The DGCA has proved itself to be about as effective as a wet paper bag (again).

The Indian government has stated in recent weeks that it will move to align with the Cape Town Convention and the Aviation Protocol that India signed up to, introducing the necessary provisions for leasing companies to reclaim leased aircraft from defaulting Indian carriers within five working days from the date of filing application for de-registration but when is this actually going to happen? It is clear that the DGCA and the courts are waiting for a legislative framework to work within. But as mentioned here three weeks ago: SpiceJet is not in bankruptcy protection so it should hand back aircraft at once – it has no grace period under Cape Town.

We here warned you all about SpiceJet a fair few years ago, now lessors are stuck in yet another battle to extract aircraft from India.

But hold on a minute! As another Indian carrier burns lessors a long line of aircraft lessors forms-up to lease into Air India. Indeed there is a real fight going on for Air India’s business. Now although it is clear that Air India is never going to fail as it is government backed, are lessors really sending the right message here? One Indian regulatory official this week told us here at Airline Economics – “Look, lessors cannot be that worried about Indian aviation as they all want in on Air India.”

It is a fact that if Air India were to receive no lessor interest then the required legislation would be being pushed through by the DGCA now, but in the event the Air India interest from lessors across the globe has left the Indian government with little need to act fast on SpiceJet.

But it is not all bad news in the Indian market – Jet Airways this week announced a profit. Jet Airways has posted a net profit of $0.5 million in the third quarter of FY2014/2015 from a $46 million loss for Q3 a year ago. This is its first quarterly profit since 2012.

The figures for the quarter are impressive indeed: Revenue for the quarter was up 9% at $875m from $807m year on year, while passenger numbers rose 10.4% to 5.8 million, with load factor up 5.2% to 82.1%. This in short means that revenue is keeping pace with passenger growth – this is something that is so very hard to do in the Indian market. Jet states that the improvement was the result of optimizing the network to have tighter domestic and international network integration, plus synergies with partner carriers – That is Etihad. In actual fact Etihad has done far more than pump cash into Jet to turn it around. Codeshare traffic directly from Etihad Airways rose 93% to more than 314,000 in the third quarter. Thus Etihad was, is, and remains, the driving force behind the Jet Airways turn to profit. Etihad alone is feeding the Indian carrier with passengers and cargo. All the same is it very good news that a profit is being made without need for large-scale price reductions. Look-out for the next quarterly results to see fuel price benefits flowing through the books.

Many investors at this time are looking at the American market wondering what is going on: American Airlines has reported that total revenue passenger miles for January fell 2.8% to 16.8bn, causing load factors to slip back to 78.2% as weak demand in the APAC region took its toll. As a result Q1 PRASM is forecast to be down between 2% and 4%,with Q1 fuel costs of $1.81 per gallon, all conspiring to generate a forecast pre-tax margin of 12%-14% from the previous guidance of between 13%-15%.

But it is not only international travel that is causing a slight slide. Southwest announced it flew 8bn revenue passenger miles in January, up 8.6% from a year ago, Passenger numbers were up 6% year on year at 10m for January 2015 but the carrier also announced that load factor had slipped to 75.1% on the back of a 10.2% increase in capacity. So as the US market shows signs of slowing, is Southwest about to get caught out with too much capacity?

Then of course there is Spirit Airlines (SAVE). Shares of Spirit Airlines have fallen of late by over 12%. The release of November traffic figures came with a warning from Spirit that margins will suffer in the upcoming quarter. On this Raymond James downgraded Spirit from outperform to market perform and removed its price target of $85. The stock sold off as much as 16% following this to  $70.19, before rebounding to finish at $73.77.

So is Spirit on the way down or is this an opportunity to buy-in for a mid-to-long-term play on SAVE? We here think it is the latter. The figures for November actually showed that although the market in the US is showing signs of slowing with load factors falling back Revenue Passenger Miles (RPMs) at Spirit were up 15.7% year on year and up 18% year-to-date. Spirit also did not lower guidance for revenue or earnings, only margins which have been guided back to 20% for Q1 2015. This is by no means a poor show. In fact much of the damage to Spirit comes from low fuel prices as it means competitors suddenly have the ability to lower its prices to match those of Spirit, but we have seen little of this in play in the US market luckily. So, if we go on good old valuation metrics to decide of Spirit is undervalued or not we have to turn to forward P/E. Spirit has a forward P/E of only 16.39, well below its earnings growth rate. Furthermore, it has a PEG below 1 and it is remember a growing company so this is very low. Spirit is undervalued and investors should take note and buy-in now. In fact passenger yields in the US show small year-end gains as fares in other regions fall further. Air travel growth remained strong in December and air freight demand sustained recent gains. Growth in available seats accelerated in December, but is still below the pace of growth in demand, which should support aircraft utilization rates.

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By admin February 10, 2015 22:21