FDI In Aviation: Who Has A Better Advantage?

Finally the government has come to rescue the Indian aviation sector by allowing for 49 per cent FDI. As such, the otherwise bearish investors have turned very positive and all the three listed stocks in the sector are currently witnessing an upward momentum on the bourses. The company-wise scenario in the aviation sector is so different that one cannot adopt a general view, given the fact that the individual financial situation of each company has to be taken into consideration.

The listed entities in the aviation sector are currently plagued by high debt. Together these companies carry Rs 19,900 crore of debt and a negative net worth, thanks to the highly leveraged balance-sheet of Kingfisher Airlines (KFA). Each of these companies posted losses in FY12 with a strong negative financial performance. This performance has been ignored by the markets this year with Spice Jet and Jet Airways showing over 100 per cent gains while Kingfisher Airlines made a comeback from its yearly low of Rs 7 to its CMP of Rs 13.

We believe that currently Spicejet (SJ) has a better balance-sheet among the three listed airline companies. KFA and Jet Airways (JA) together carry Rs 19,053 crore of debt with the latter posting a debt of Rs 11,030 crore. The issues in front of KFA have been very damaging to the sector. The airline, which has grounded aircrafts, demanding creditors, possibility of debt restructuring, liquidation of properties, staff going on strike, etc, seems more vulnerable in its business and financial performance. KFA carries a debt of Rs 8,023 crore and paid interest of Rs 2,328 crore as against JA’s Rs 1,005 crore. This is despite the fact that JA has more debt than KFA.

KFA’s financial performance has been far from satisfactory in the last eight years with each year being a financial drain. In fact, in FY12 it has once again posted operating loss. Its cash position by March 2012 at Rs 182 crore is not even sufficient to meet its one quarter’s interest payments. On the other hand, both Jet Airways and Spicejet have got into a profitable zone in the first quarter of the current fiscal. Spice Jet is carrying negative net worth though.

Another angle worth considering is that the promoters of Kingfisher have pledged 90 per cent of their shares while in the case of Spicejet this amounts to 39 per cent. Jet Airways is currently a pledge-free company. If one studies the market-cap and debt, Spicejet is the only company which has surplus market-cap while the other two airlines have more debt than their market-cap. The industry, along with its ballooning debt, is also suffering from high fuel costs and strong rupee depreciation.

Due to the several issues plaguing it, KFA may not be able to bargain the best with foreign investors. Spicejet, according to news reports, is already in talks with Gulf Airlines. The status of the same is currently unclear but one can safely assume that the FDI announcement has come at the right time for Spicejet, as is reflected in its share price. Jet Airways may also be preferred for proposed FDI by any foreign airline company.