Saturday, 18 June 2022

Aviation Sector - Indian Markets Report

Indicative passenger traffic for May’22 implies an increase of 8.8% MoM. Early trends for June
indicate similar traffic monthly rate - averaging ~0.37mn daily, similar to prepandemic levels. Last
reported domestic PLF for Apr’22 witnessed a decline MoM across airlines with Indigo’s PLF at 79.7%
(-1.3ppt MoM) and Spicejet’s PLF at 85.9% (-1.0ppt MoM). However, utilisation levels are expected
to improve in May/June in tandem with traffic strength. JM fare tracker indicates a ~9% increase in
fares QoQ (limited routes). However, ATF prices have more than doubled YoY and are up 36% QoQ in
1Q to average a record c.INR123.3k/kl. Spot ATF prices now stand at an all-time high of INR143.4k/kl
spot. Further, INR has depreciated by ~5% YTD / 3.5% QTD to ~INR78 spot. This will further adversely
impact airlines given ~70% of costs are dollar denominated. Despite taking a significant price
increase, Airlines may be required to take further hikes to offset the surge in ATF price, possibly
reaching a point of demand elasticity in travel industry.

The aggregate market share of TATA group backed airlines stand at 22.1% as of Apr’22 (last
reported). The recent acquisition of Air Asia by Air India is likely to provide greater synergies and
improve competitiveness going forward. Competitive intensity in the Airlines sector is expected to
intensify with the addition of Akasa Air and Jet Airways. We believe Indigo’s share price at CMP
adequately factors the improving (expected) momentum in passenger demand. Further, the stock is
likely to remain under pressure given 1) increasing competitive intensity in the airlines industry 2)
margin pressure given surge in ATF prices / INR depreciation 3) decision of Rakesh Gangwal to
reduce his 36.6% stake in the company over the next 5+ years which is likely to cap stock
performance. A 5% movement in crude oil is expected to impact EBITDAR by ~8.5%. The stock
currently trades at 7.1x FY24E EV/EBITDAR – re-iterate SELL.

 Daily passenger traffic back to pre-pandemic levels: Indicative passenger traffic for May’22
implies an increase of 8.8% MoM. Early trends for June indicate similar traffic monthly rate -
averaging ~0.37mn, similar to pre-pandemic levels. Last reported domestic PLF for Apr’22
witnessed a decline MoM across airlines with Indigo’s PLF at 79.7% (-1.3ppt MoM) and
Spicejet’s PLF at 85.9% (-1.0ppt MoM). However, utilisation level is expected to improve in
May/June in tandem with traffic strength. JM fare tracker indicates a ~6% increase in fares
QoQ (limited routes). 
 Indigo witnesses market share gains: Indigo witnessed market share gain during Apr’22
despite increasing competitive intensity from TATA group backed airline companies. The
market leader’s share has grown to 56.7% in Apr’22, up 230bps MoM. Tata group companies
witnessed market share loss by 230bps MoM to reach 22.1%. 
 ATF prices at all time high levels: ATF prices have more than doubled YoY and are up 36%
QoQ in 1Q to average a record c.INR123.3k/kl. Spot ATF prices now stand at an all-time high
of INR143.4k/kl spot. This is likely to adversely impact profitability of Airlines. Despite taking
a significant price increase, Airlines may be required to take further hikes to offset the surge
in ATF price, possibly reaching a point of demand elasticity in travel industry.