Contrarian: Wilbur Ross Bets on an Indian Airline
Wilbur L. Ross Jr.’s latest deal, an $80 million investment in the flailing Indian airline SpiceJet, announced on Tuesday, is hardly earth shaking, but the idea behind it is typically contrarian.
Mr. Ross has decided that high oil prices have hit bubble territory, a bubble that should pop in the next 12 months. “We’re looking at everything that has been hurt by fuel” for deals, he said in a phone interview.
To that end, his firm, W.L. Ross & Company, which has an estimated $7.9 billion in assets under management, has bought stakes in railroad freight companies in Europe. It is looking at refineries, gas station chains and even the struggling United States airline industry.
“The fundamentals don’t justify an oil price over $100” a barrel, Mr. Ross said. “It is the nature of bubbles that they expand farther and last longer than anyone logically imagined” he said, but “they always reverse.” Exactly when the oil price bubble will burst is still unclear, but it could be within the next year, he said.
On Tuesday, SpiceJet said that Mr. Ross’s firm would invest 3.45 billion rupees, or $80 million, in the company, a three-year-old, low-cost airline whose stock has dropped more than 50 percent this year. Mr. Ross will take a seat on SpiceJet’s board and said he could invest more if necessary. SpiceJet’s shareholders include the Dubai investment company Istithmar and banks including BNP Paribas , HSBC and UBS .
Rising fuel prices are crippling India’s airline industry, which had been one of the world’s fastest growing. Until this year, India’s airline passenger traffic was rising more than 20 percent a year, quadruple the world average, because of new, low-cost carriers that competed aggressively for passengers and a booming economy that put more money in consumers’ pockets.
But oil prices have forced airlines to raise fares at the same time that inflation and higher gas prices are eating into fliers’ wallets. Some passengers are going back to rail travel as prices rise. In June, domestic airline passenger numbers fell by 4 percent compared with the same month a year earlier, the first drop in three years, according to India’s aviation ministry.
Whether or not oil prices are in a bubble, the influence of financial investors to calm markets is debatable as prices traded above $146 a barrel this week before retreating slightly. Many oil analysts and economists predict that prices will continue to climb because of rising demand from emerging markets, while a handful contend that a rush of investment cash is artificially inflating prices.
Opinions in the market are sharply divided. In May, the Goldman Sachs oil analyst Arjun N. Murti said oil might hit $200 a barrel in the next two years, while economists at other banks, like Lehman Brothers, are predicting that prices will drop.
On Tuesday, oil prices fell sharply, closing down $6.44 a barrel, in trading on the New York Mercantile Exchange.
Mr. Ross cited several factors as signs that prices are artificially high, including the lack of lines at gasoline stations, falling consumption in the United States and steady but low worldwide growth in oil demand that he says will fall as subsidies collapse. “I just don’t see this as a long-term phenomenon,” he said of the elevated prices.
Mr. Ross has made his reputation on contrarian calls. For example, he bought into the steel industry in the United States when almost no investor would touch it. He sold his consolidated steel company for $4.5 billion, about twice what he paid for the assets. He also snapped up a Japanese bank when it was saddled with bad loans in 2000 and sold it for a profit. Recently, Mr. Ross has been looking at financial companies in the United States and paid $1 billion in March for a stake in a bond insurance company.
The airline industry is in the midst of a merger boom, as deep-pocketed carriers buy weaker rivals. The India market has had too many players, Mr. Ross said, and further consolidation is coming. “That will be constructive for the industry and for SpiceJet,” he said.