Airlines need more than mere traffic
3 min read 21 Mar 2023, 09:07 PM ISTAccording to ICICI Securities Ltd, average daily passengers in March so far stood at 426,000 (largely in line with February 2020 levels) versus 423,000 in February 2023.
PremiumThe Indian aviation industry is seeing a solid recovery in recent months after facing several headwinds since the pandemic began, including elevated costs due to higher fuel prices and rupee depreciation. Monthly data by the Directorate General of Civil Aviation shows that the number of passengers carried by domestic airlines in February stood at 12 million. This is lower than the pre-covid levels (February 2020) by only 2%. But also note February 2020 had an extra day as it was a leap year.
The momentum can be expected to continue this month as well. According to ICICI Securities Ltd, average daily passengers in March so far stood at 426,000 (largely in line with February 2020 levels) versus 423,000 in February 2023. The broking firm said considering average daily departures have risen sequentially in March, passenger load factors should also remain healthy.
In this backdrop, the March quarter is likely to be strong for listed airlines such as InterGlobe Aviation Ltd and SpiceJet Ltd. InterGlobe runs IndiGo, India’s largest domestic carrier by market share. However, while the yield would remain healthy, it is expected to show the impact of seasonality as the December quarter (Q3FY23) is the strongest for aviation. Yield is a measure of pricing.
But IndiGo and SpiceJet are expected to end FY23 in the red owing to the large losses incurred in the fiscal first half that saw skyrocketing fuel prices and rupee depreciation. Though this was offset to some extent by the profits made in the December quarter. Even so, IndiGo’s and SpiceJet’s net losses in the nine months ended December stand at ₹1,233 crore and ₹1,520 crore, respectively. Fuel costs have softened from the peaks, and this should aid earnings in FY24. There are other tailwinds, too. “Demand growth would be higher than capacity addition, which would support yield. We estimate 20% year-on-year growth in domestic passenger traffic in FY24 to 165 million," said Sabri Hazarika, analyst at Emkay Global Financial Services Ltd. FY24 would be the year when domestic passenger traffic will surpass FY20 levels of 141 million, he added.
True, the recent large order by Air India and expected new capacity additions by other airlines would aid supply but this would happen over a period of time. In the near term, though, yield may benefit from supply constraints.
But investors in airline stocks need to watch out for increasing competitive intensity. Airlines are likely to see pricing pressures from rising competition. Also, “Yield is likely to be relatively softer than the highs seen in FY23 with crude oil prices coming down. Moreover, FY23 saw a surge in pent-up demand with increasing mobility," said Hazarika. For perspective, IndiGo’s yield touched a multi-quarter high of ₹5.37 in Q3.
To be sure, a potential fall in IndiGo’s market share on account of competitive intensity would dampen investor sentiment. IndiGo’s market share dropped from roughly 59% in July to 56% in February. Moreover, IndiGo’s co-promoter stake sale is an overhang for the stock. In 2022, Rakesh Gangwal decided to reduce his nearly 37% stake in the airline over five years.
The IndiGo stock is down 14% from its 52-week high of ₹2,180 apiece seen last month, despite the expected gains from lower crude prices. While the company’s healthy balance sheet helps, investors should watch for volatility in fuel prices. IndiGo enjoys a formidable leadership position in the fast-growing Indian aviation sector. “This position would, however, face headwinds in the medium term, as old/new players add capacity in the commoditised low cost carrier segment, likely reflecting in profit headwinds, even as lower fuel aids near term," said a Jefferies India report dated 15 March.
