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Corporate Nov 27, 2012

Why Kingfisher’s fall is good for Indian airline sector

By Arjun Parthasarathy

The fall of Kingfisher Airlines has benefitted Jet Airways. Kingfisher, which was once India's leading airlines in terms of market share, has shut down operations due to lack of funds while Jet Airways is going strong on domestic and international sectors.

Jet Airways share price has doubled over the last one year while Kingfisher Airlines' share price has halved in the same period. Investors who had bought Jet Airways when Kingfisher was looking to go down in 2011 have reaped handsome gains. Table 1 shows Kingfisher's fall and Jet's rise.

Table 1: Market share and share price of Kingfisher and Jet

The reason for Jet Airways doubling in value over the last one year is not the change in fortunes of the airline industry in India

The reason for Jet Airways doubling in value over the last one year is not the change in fortunes of the airline industry in India. Jet has consistently made losses every quarter except for one quarter, the first quarter of 2012-13 for the last seven quarters. The losses, however, have fallen sharply over the last one year, with Jet's second quarter 2012 loss at Rs 100 crore against a loss of Rs 713 crore seen in the second quarter of 2011-12.

The Indian airlines industry is affected by high fuel prices with oil prices staying unchanged at higher levels on year-on-year basis as of November 2012 and a weakening rupee, which has fallen over 7 percent on year. As of September 2012, the traffic also witnessed a 9.9 percent fall on year.

The fall of Kingfisher Airlines forced the govnt to open up the sector to FDI, and this opening is one of the primary reasons for the share prices of Jet Airways and Spice Jet to gain smartly over the last one year. Debarka Banik/Flickr

The outlook for the sector has definitely improved post the fall of Kingfisher Airlines. The reason is that an industry, which saw inherent weakness due to various factors, including poor government policies and due to the bailout of the ailing Air India by the government, required consolidation. Kingfisher's fall brought about that much-needed consolidation. The fall of Kingfisher Airlines helped other airlines, including Indigo and Spice Jet, gain market share and work more profitable routes.

The fall of Kingfisher Airlines also forced the government to open up the sector to FDI, and this opening is one of the primary reasons for the share prices of Jet Airways and Spice Jet, the two listed airline companies to gain smartly over the last one year.

Jet Airways is in advanced talks with the Abu Dhabi-based airlines Etihad for a stake sale. The rumour going round is that Etihad could value the company at Rs 9,400 crore, which is almost twice the current market capitalisation of Rs 4,800 crore. If the rumours are true, the sharp rise in valuations of Jet reflects the change in fortunes of the Airline industry in India. The market had almost written off the industry last year when it took down valuations of all Airline companies on the back of many worries, including profitability and debt.

Kingfisher Airlines' loss is the airline industry's gain. SpiceJet, the other listed airline, has seen its share price almost double over the last one year on the back of improved market share and on the back of stake sale talks.

Indigo, if it lists now will also get good valuations given its leadership status on the industry. Kingfisher's promoter Vijay Mallya will be regretting his misfortune but his misfortune has become the fortune for other airlines. It is regrettable to see a high flyer fall from grace but as that fall is helping the industry as a whole it is seen as the best thing that happened to the airline industry.

Arjun Parthasarathy is the Editor of www.investorsareidiots.com a web site for investors.

by Arjun Parthasarathy

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