>Spice Jet (KARVY)

● ATF prices no more a concern: Aviation turbine fuel (ATF) prices are down by ~60% from its peak in August 2008 providing a major relief to the aviation players. Fuel cost is the single largest cost accounting for around 40-50% of the overall operating cost for the aviation companies.

Currently, the average fuel price in the 4 metros (for March2009) is Rs30/ litre and we believe that the ATF prices have more or less bottomed out. We expect the ATF prices in FY10E to be around 25% higher from the current levels on account of positive movement in crude oil prices and weakening of rupee against the dollar.

● Slowdown in passenger traffic: Domestic passenger traffic was down by 5% in 2008 as against 33% growth reported during 2007. Slowdown in passenger traffic in 2008 was on account of higher fares due to higher fuel prices and the general slowdown in the economy. Even though fuel price have come down, difficult economic condition still remain a matter of concern in FY10.

Slowdown in passenger traffic has negatively impacted the seat factor thereby leading to higher
fares. During January, air fares were brought down substantially through various promotional offers and discounts but that proved to be of little help in stimulating the demand. We expect the current airfares to prevail during FY10 and with all players cutting down capacities; seat factor is expected to show small improvement in FY10.

● Weakening rupee to put pressure: Weakening of rupee against the dollar over the past few weeks is expected to put some pressure on the aviation industry. Part of airlines expenses including lease rentals, expat salaries, spare parts and maintenance are dollar denominated and weakening of rupee against the dollar would increase the expenses for the airline players. SpiceJet is not expected to add capacity during 2009 and in May2010 it would be eligible to fly on international routes. Accordingly we expect the company's load factor to improve in FY10. In our FY10E, on account of lower fuel price estimate, we have already factored in a dip in average airfares over our FY09E and load factor of 67.8%. We continue to maintain our price target of Rs16 and rate the stock as Outperformer.

To see full report: SPICE JET