Reasons Behind Aviation Sector Under Performance

company overview

  • Establishment: Royal Airways-promoted SpiceJet is an airline company, which was earlier known as Modiluft. It was started in 1984. It was among the first private companies that stepped into the Indian aviation sector. Further, in May 2005 Royal Airways changed its name to SpiceJet.
  • Business Model: The airline was launched with an objective to deliver the lowest air fares with the highest consumer value, to price sensitive consumers. SpiceJet follows the Low Cost Carrier (LCC) business model on the lines of the most successful LCCs globally. It provides the lowest cost per unit amongst Indian LCCs.
  • Market cap = Rs. 4,685 Cr, small cap company. It is the 2nd largest company in the Airlines sector. Currently, the company enjoys a market share of over 12%.
  • Business Details: 100% business in Air Transport Services SpiceJet has chosen a single-aircraft-type fleet, which allows for greater efficiency in maintenance, and supports the low-cost structure. And when it came to selecting this single aircraft fleet, SpiceJet has opted for the new-generation Boeing 737-800s with winglets and Boeing 737-900ER. These aircraft allow for safe, comfortable and efficient flying and are ideally suited for short to medium-haul flights in Indian conditions.
  • Spicejet’s new generation fleet of 15 Boeing 737-800 / 737-900ER aircraft are backed by cutting-edge technology and infrastructure to ensure the highest standards in safety and operating efficiency.
  • Global Alliance: The Company has alliance with some of the best names known globally like Honeywell, Weber Seats, etc, to ensure highest safety standards. SpiceJet provides services to cities namely Ahmedabad, Bagdogra, Bangalore, Chennai, Coimbatore, Delhi, Goa, Guwahati, Hyderabad, Jaipur, Jammu, Kochi, Kolkata, Mumbai, Pune, Srinagar, Varanasi and Vizag.
  • Flat financial performance in Dec 2018. Score has improved to -4 from -17 in last 3 months.

Spicejet slips 8% as India grounds Boeing 737 MAX 

Why Spicejet Stock is Falling?

Reasons

2 incidents of Air Crash of Boeing 737 MAX 8

  1. Ethiopian Airlines Boeing 737 MAX 8 has crashed, killing all 157 people on board. Many countries grounded the aircraft following the Ethiopian Airlines crash. Australia barred all 737 MAX planes from its airspace while US authorities ordered Boeing to improve anti-stalling software and the model’s manoeuvring system.
  2. Lion Air jet of the same model crashed in Indonesia in October, killing 189.

Issues with Boeing 737 MAX

There was a software issue in Boeing 737 MAX model. Whenever a flight takes off, it should attain a stable and horizontal position smoothly from its upside phase. In this process of stabilization the aeroplane Boeing 737 MAX model was experiencing a downside turn and thus has crashed twice. Spicejet is having 12-15 such models of Boeing 737 MAX.

Prohibition on Boeing 737 MAX by India and its impact on Spicejet Stock

  • India has grounded Boeing 737 MAX being operated by airlines in the country after about 15 countries banned the aircraft following two deadly accidents within a span of five months. 
  • Shares of Spicejet slipped 8% and a hit an intra-day low of Rs 72.50 on Wednesday morning [13 March 2019]. on fears that grounding of Boeing 737 MAX aircraft will hurt the airline’s revenue and profitability.
  • The shares of the airlines had closed at Rs 78.80, down 5.29% on 12 March 2019.
  • The scrip hovered at Rs 74.85, down 5.01% at around 09:37 am, while the benchmark BSE Sensex was up 0.23% at 37,623.46. 
  • DGCA [Directorate General of Civil Aviation] has taken the decision to ground the Boeing 737-MAX planes immediately. These planes will be grounded till appropriate modifications and safety measures are undertaken to ensure their safe operations. As passenger safety remains on the top priority.
  • The shares of Spicejet opened at Rs 74 on BSE [13 March 2019] against its previous closing of Rs 78.80.

ABOUT aVIATION SECTOR

  1. High uncertainty in the aviation sector is the Oil prices. Revenues and profits of aviation companies largely dependent on the oil prices. Fluctuations in the oil prices impact directly on the profit margins of aviation stocks.
  2. If there is a stability or downside move in the oil prices, then aviation sector would be better sector. Aviation sector is a cyclical sector. Also it is a domestic consumption driven sector. As the aspiration class is increasing continuously, the aviation sector is expanding day-by-day.
  3. Due to Government initiatives like UDAN, where Tier-2, Tier-3 cities will also be connected with aviation sector. It is also a positive sign for aviation companies.
  4. Due to its cyclical nature, the aviation sector will experience upward-downward phase in coming 5-7 years. Therefore we cannot take an aviation stock on radar for long-term.
  5. Though fundamentally the aviation sector is positive, but its cyclicality is going to impact in the short-term.

summary

  • Spicejet Ltd. is the 2nd largest company in the Airlines sector with market share over 12%. Spicejet had opted for Boeing 737-800/ 737-900 ER aircrafts in operations.
  • India has grounded Boeing 737 MAX being operated by airlines in the country after about 15 countries banned the aircraft following two deadly accidents within a span of five months.
  • Shares of Spicejet slipped 8% and a hit an intra-day low of Rs 72.50 on Wednesday morning [13 March 2019]. on fears that grounding of Boeing 737 MAX aircraft will hurt the airline’s revenue and profitability.