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The Stock Prices of Indigo Aviation

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This article mentions about the stock prices of IndiGo Aviation which recently crashed down to its 16- month lowest after the company declared its Q 1 (or June Quarter) financial report 2017- 2018 which showcased a decline in the company’s net profit by 97 %.

As the world experienced a significant rise in the prices of Crude Oil, which played a huge role in the operating cost of all transportation related companies, thus it also had a direct impact on the aviation sector as well. Therefore, bringing about a bearish phase in the same. Due to this, IndiGo suffered the most as the company had also faced losses in Foreign Exchanges which added up to the increased costs for the company to work on.

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According to the article, such a downfall was majorly seen as the fuel expenses of the company shot up by 54 %, which in turn rose the per passenger cost by 89 % for the company and since they functioned in a price sensitive market, they could not increase their prices after a significant point. Due to which, the company had to reduce their profit margins to the minimum in order to survive.

The company’s net profit crashed down by 97 % from Rs. 811.14 crore to Rs. 27.79 crore, that is from 20 % of total revenue to 0.5 % of total revenue, even after there was a strong rise of 20 % in domestic passengers from 11.8 million to 14.1 million. This was the sharpest fall the company had experienced since it had been listed as a public company.

Apart from the profit drop, the share prices of the company were also weighed down by the Resignation of its Full Time Director and President, Aditya Ghosh.

The resignation was announced and approved on the 27th of April, 2018 and thus the resignation of Mr. Aditya Ghosh from the position effective from 31st July, 2018. His resignation bought a dent in the share prices of InterGlobe Aviation (Indigo) by 11 % the day the information went public.

After a series of negative outcomes from the company namely huge reduction in profits, resignation of a high ranking executive and a loss of Rs. 250 Crore in foreign exchanges, the market sentiment for the stock prices of IndiGo Aviation went negative and thus bringing about a bullish phase.

Approach to improve the situation

As the company foresaw that if the prices of Crude Oil do not improve soon enough the situation could prospectively get worse for them and they predicted that they might end up having a net loss in their 2018- 19 annual financial analysis reports, which in turn will have a drastic effect on their share prices and the company’s reputation in the aviation sector. The executives of the company structured a plan to increase their business in the International routes along with full scale optimisation of present routes. Following which, they placed an order for 75 additional aircrafts from Boeing designed to travel on long routes and higher fuel efficiency. All these planes will be put in use by December, 2018 as soon as delivered by Boeing.

Doing so will increase the supply of aviation routes available to the consumers, thus fulfilling the present demand needs in the sector and also create a provision for the possible rise in demand in the future. Due to which they will be able to reduce the equilibrium price in the market.

By assigning more aircrafts in International Routes, the company will be able to cater a whole new category to travellers who will be requiring a different kind of services made available for themselves. Thus, opening up a gateway of new opportunities for themselves and even give them an upper hand over their competitors as they will be able to enter into the international aviation earlier than them and even create a better hold of the market over the period of time.

The top level executives of the company have also started to develop a more economic and efficient technology and routes for their currently established aviation routes. Due to which the Cost per passenger per kilo metre will be reduced such that future situations of the aviation fuel prices can be adjusted along with the planned profit margins as per the management. The Cost per passenger per kilometre will be drastically reduced if the fuel efficiency (or mileage) provided by an aircraft can be increased. Additionally, opting of the shortest possible route to reach a destination will reduce the fuel consumption to its bare minimum. Therefore, the company will be able to reduce their price hikes followed by a competitive advantage and increase their passengers base (Demand) effectively.

The company also plans on temporarily terminating the least yielding air routes, that are the routes with the least number of passengers boarding the aircraft, or reduce their number of fights on that particular route for a short period of time in order to reduce down the unnecessary expenses and prospective losses being incurred through those particular routes.

Investor’s perspective

As the article, talks about some various aspects affecting the share prices of InterGlobe Aviation and suggest on how the investors should react to it. I strongly feel that the prices of the crude oil are still going to rise further as the Saudi Arabia as a source for the supply of crude oil are getting more expensive due to the increased Duty Taxes and constantly rising oil prices due to prospective future shortage of the resource. Whereas, the Indian Oil Suppliers are going through a huge deal of shortage of the natural resource themselves too.

For example, RPL (Reliance Petroleum Limited) subsidiary of RIL (Reliance Industries Limited) are looking forward to shut down its operations in one of the sectors of the Krishna Godavari Basins as the natural oil and gas resources from that location was exhausted. The KG-D6 (Krishna Godavari- Dhirubhai 6) block of the basin reported for 20% rise in reliance’s oil production.

Therefore, since the prices of their basic raw material isn’t improving which would make the situation worse for them and the future plans of the company don’t assure much stability, I would predict that the company’s shares might go further down in the near future due to the reasons mentioned above.

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