Airlines have soared but yet to exit turbulence

Airlines are expected to get some respite in Q3FY23 as fuel prices are likely to be lower.
Airlines are expected to get some respite in Q3FY23 as fuel prices are likely to be lower.


Given the expected increase in capacities, investors will closely watch the trajectory of passenger load factors.

The Indian aviation sector did not see much disruptions to demand in CY22, in spite of fare hikes. Yield, a measure of pricing, was healthy, implying the market absorbed the higher air fares. The strength in yields was supported by a robust domestic demand environment led by a surge in leisure and corporate travel. Besides, international travel resumed after a two-year hiatus.

As the chart alongside shows, the number of passengers carried by domestic airlines in 2022 gradually inched closer to the pre-covid (2019) levels. In fact, in December, domestic passenger traffic surpassed 2019 levels, according to the ministry of civil aviation.

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Graphic: Mint
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Graphic: Mint

Consequently, in the half-year ended September (H1FY23), InterGlobe Aviation Ltd’s average yield stood at 5.15. This is roughly 34-36% higher year-on-year (y-o-y) and versus H1FY20 levels. InterGlobe runs IndiGo, India’s largest domestic carrier by market share.

But the sector faced other problems. An unfavourable combination of elevated fuel prices and a depreciating rupee resulted in a turbulent path for airlines. In H1FY23, aviation turbine fuel (ATF) as a percentage of operating expenses rose sharply for IndiGo and SpiceJet Ltd, eroding their profits. A weakening rupee against the dollar added to the pain since fuel is imported. According to rating agency Icra Ltd, ATF prices witnessed a y-o-y increase of 52.7% in 2022. This, coupled with a weaker rupee hardened yields by 30-35 % over pre-covid levels.

However, airlines are expected to get some respite in Q3FY23 as fuel prices are likely to be lower, albeit sequentially. Moreover, the festive and holiday season traditionally sees an increase in passenger traffic. “Based on actual trends till November 2022 and estimates from daily traffic trend of 417,000 witnessed in December 2022, we expect industry domestic passenger to increase by 19% quarter-on-quarter to about 36 million in Q3 FY23," said analysts at ICICI Securities in a report on 3 January.

Against this backdrop, yield is expected to remain strong. In the case of IndiGo, analysts at Credit Suisse Securities (India) expect this measure to be about 5.75 in Q3. Along the same lines, ICICI notes that historically, Q3 fares have been higher than Q2 by 8% between FY16 and FY20. As such, IndiGo can be expected to turn profitable in Q3, but that would not offset the losses worth around 2,650 crore seen in H1.

ATF prices are expected to head southward in the coming months. But fares or the yield is unlikely to see a significant y-o-y rise as airlines might pass on the benefit of fall in ATF prices, said Mitul Shah, analyst, Reliance Securities.

Besides yield and ATF prices, investors in airline stocks would do well to track how the competitive landscape evolves in 2023. With the entry of Akasa Airlines and the merger of Vistara with the Tata group, the impact on IndiGo’s market share remains to be seen.

In November, IndiGo’s market share stood at 55.7%, according to the Directorate General of Civil Aviation. Sustenance of its market share and a healthy balance sheet has aided investor sentiments towards the stock, which has risen nearly 36% from the pre-covid highs seen on 24 January 2020. On the other hand, SpiceJet’s stock fell 67% from the high seen on 1 January 2020.

To be sure, passenger load factors (PLFs) are inching up. Given the expected increase in capacities, investors will closely watch the trajectory of PLFs. Also, rising covid cases globally could hamper the recovery in passenger traffic.

Besides, a potential global recession is a looming risk. Further, any aggravation in geopolitical tensions may keep ATF prices volatile.

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