Published on 17/07/2017 12:19:39 PM | Source: ICICI Securities

Aviation Sector Update Summer full of promise - ICICI Sec

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Summer full of promise

Reason for report: Quarterly results preview

Q1FY18 is expected to be a strong quarter for Indian airlines. Sequentially, ATF prices were down by 5%, Rupee was stronger by 4% and Q1 is a seasonally strong quarter. These tailwinds should create a solid base for Q1 earnings. Our ground checks indicate improvement in fares, especially during April and May. A slower aggregate domestic traffic growth of ~15% compared to the erstwhile run rate of ~20% also creates an enabling environment of improving yields. Higher international capacity share of IndiGo (13% in Q1FY18 compared to 9% in Q1FY17) is a distinct trend in this quarter, which should benefit its yields. However, in line with the capacity growth, highest PAT growth is expected for IndiGo (26%), followed by SpiceJet (14%). Jet is expected to report ~47% decline in PAT following lower rental income and lowest increase in capacity, further exacerbated by continued weakness in the middle east traffic. As recent developments remain dominated by corporate actions with IndiGo’s expression of interest in Air India, possible news of stake sale in Jet and overhang of court case on SpiceJet, the earnings in Q1FY18 will give a reality check on valuations.

* IndiGo to continue on strong volumes/improving yields. Bulk of the domestic passenger growth has been captured by IndiGo which is expected to register a passenger growth of 29% based on 21% increase in capacity in Q1FY18 on a Y-Y basis. This is also aided by stronger PLFs of IndiGo at 87%/91% during April/May. We factor Y-Y decline of ~5% in average fares for IndiGo during Q1FY18, compared to 6%/16%/14%/11% Y-Y decline in Q4/Q3/Q2/Q1FY17. Sequentially, relatively lower growth in capacity, lower domestic traffic growth and higher international share of Available Seat Kilometre (ASK) should aid the aggregate yields of IndiGo. Other income should improve Q-Q with currency benefits. Incentives will also increase post induction of 3neos in Apr-Jun’17. The neo intake has been slower than expected with persistent engine troubles. The company has strategically aimed to meet it’s ASK guidance by increasing its international share.

* Yield performance of SJet will be tested. Yields of SJet have been relatively better than IndiGo but the premium shrunk during 2HFY17. We believe that higher international share of IndiGo (13% in Q1FY18 vs. 9% in Q1FY17) pose further risk to this premium. We factor 19%/4% increase in ASK and 20%/6% in Pax on a Y-Y/Q-Q basis in Q1FY18. We factor 1% Y-Y decrease in fares for SJet in Q1FY18; compared to 3% decline Y-Y in Q1FY17, 5% increase Y-Y in Q2FY17 and 7% decline Y-Y in Q3FY17 and 1.5% decline Y-Y in Q4FY17.

* Jet performance will depend upon int’l segment. Standalone Jet is likely to record +10% /2% increase in ASK Y-Y/Q-Q but pax growth is will be at +10%/+1.5% on a Y-Y/Q-Q basis. We factor 3.5% increase in average fares Y-Y in Q1FY18 compared to 1.6%/1.6%/4%/6% Y-Y decline witnessed in Q4/Q3/Q2/Q1FY17 respectively. The int’l segment remains under extreme pressure due to slower demand in Middle East. The sharp drop in rental incomes will result in sharp drop in earnings. The rental income is slated to drop from ~Rs6.2bn in FY17 to Rs400mn in FY18.

 

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