Crude oil prices are on the rise, and two industries — aviation and paints — are caught right in the middle of the storm. With fuel costs soaring and production expenses climbing, these sectors are within the choppy waters. For businesses, it’s a race to balance costs without losing customers, and for investors, the big question looms: how will this impact returns?
Let’s understand the ripple effects and see what’s at stake for these crucial sectors and those invested in them.
In aviation, fuel costs make up 30-40% of operating expenses. That’s massive! Now, with aviation turbine fuel (ATF) prices in India rising by 26% over the last three months, including a sharp 14% hike in September 2023, airlines are dealing with a major hit to their budgets. What happens when costs rise? Either ticket prices go up, or profit margins shrink — sometimes both. But raising fares isn’t easy, especially when passengers are price-sensitive. If ticket prices climb too high, demand could drop, and that’s not what airlines want.
Here’s an eye-opener: every cent increase in jet fuel price per gallon adds $40 million to the annual fuel bill of a major US airline. Think about that in the Indian context. IndiGo and SpiceJet are already feeling the heat — stock prices for these airlines dipped when crude prices spiked. Airlines may look at strategies like capacity optimization, hedging fuel costs, or renegotiating contracts, but those are longer-term solutions. For now, higher crude prices are a clear headwind for the sector.
Now, let’s talk paints. Crude oil derivatives form the backbone of this industry, making up 55-60% of production expenses. These include resins, solvents, and even titanium dioxide, a key ingredient for white paint. So, when crude prices rise, production costs spike too. Paint companies usually try to pass on these costs to consumers, but frequent price hikes can hurt demand. After all, who wants to pay more for a can of paint every few months?
The numbers tell the story. Asian Paints’ shares dropped by 2.7%, Berger Paints fell over 4%, and Kansai Nerolac Paints slipped nearly 3% after the oil price surge. That’s because investors are concerned about shrinking profit margins. Morgan Stanley has flagged this issue too, maintaining an ‘underweight’ view on top paint stocks and highlighting potential downside risks.
But there’s a silver lining. Paint companies have historically shown resilience. They’ve managed to keep margins in check by optimizing costs and passing on some price increases to consumers without hurting demand too much. That’s something worth keeping an eye on.
So, what does all this mean for you as an investor? For aviation, the short-term outlook is challenging. Rising fuel costs combined with limited pricing power make profitability a tough nut to crack. The paints sector faces margin pressure too, but it has a track record of navigating such situations better.
The big question: should you avoid these stocks? Well, that depends on your investment strategy and risk tolerance. If you’re looking for short-term gains, the outlook is murky. But if you have a longer horizon and trust in these industries’ ability to adapt, it might be worth monitoring how they handle the challenges.