Published on 14/03/2019 11:25:59 AM | Source: ICICI Securities Ltd

Aviation Sector - International segment offers strong growth options By ICICI Securities

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International segment offers strong growth options

The international segment of Indian aviation holds strong growth promise for Indian airlines. The first leg of the growth will be realized as Indian airlines gain more parity in passenger and freight share in the international segment (as of 2018, Indian airlines held 40%/21% of International traffic/freight). The second leg of growth would be driven by market share gain by low cost business model of Indian airlines like IndiGo/SpiceJet/Go Air. IndiGo remains best placed to use these growth options with the strongest balance sheet, highest domestic market share and globally experienced management team. The weak position of dominant Indian incumbents in the international market and increasing A321 deliveries can also aid Indigo. However, it remains to be seen whether IndiGo goes full throttle with a wide body aircraft order. We estimate that If IndiGo were to reach 20% market share of the international Indian traffic by next 5 years, it could generate additional ~Rs10bn earnings.


* Indian airlines slowly gaining more share of international traffic:

The passenger share of Indian airlines in the Indian international traffic has steadily increased from 30% to 40% over the last decade. This will further increase with more international focus of IndiGo, Vistara, Go Air and Air Asia. As of 2018, the major international player currently is Emirates (9%). Jet Airways had 13% passenger share in 2018.  International freight share still dominated by foreign airlines: The Indian airlines handle only 21% of the total international freight which could be improved in the future if more wide body aircraft is inducted by Indian airlines. Among foreign airlines, large cargo shares are held by Emirates (12%), Qatar Airways (11%), Cathay Pacific (8%) and Lufthansa (5%).

* 20% international market share can lead to additional ~Rs10bn of earnings to IndiGo.

If IndiGo were to reach 20% of the international Indian traffic by next 5 years, it could generate additional ~Rs10bn earnings to IndiGo. This is based on assumptions of ~10% CAGR in Indian international traffic and the ability of IndiGo to register a PAT margin of ~5-6% in the international segment. The same is achievable considering the lower fuel taxes and better pricing available in the international segment. As a case in hand, Air Indian Express (almost 100% low cost international carrier), registered 9%/6% PAT margins in FY16/17.

* Is it time for a big wide body order for IndiGo?

The 40% Indian share of international traffic is served by mostly narrow body (320/737 fleet) while a large wide body fleet is operated only by Air India. Considering the undercapitalized nature and relative limitations of dominant incumbent Indian international airlines, it seems a right time for IndiGo to put a big order for wide body fleet and induct it over a time which can be used to acquire the landing rights and network requirements. This will transform the balance sheet advantage of IndiGo into a long term operational moat, much akin to the domestic segment.

* Indian long haul market has compelling potential.

Almost 50% of the traffic of Middle Eastern airlines is carried forward to Europe and USA. Adding that to the direct destination traffic data of Europe and North America, ~40% of the total international passenger of India is long haul in nature, i.e. travelers to either America or Europe. As the total international air market for India grows by 10% CAGR, the domestic network advantage will be monetized by Indian carriers in the international market. IndiGo has already expressed interest to start low cost long haul operations. 


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