The coronavirus epidemic is leading to cancelled conferences and international holidays and, as a result, lower passenger load on international flights. According to an initial impact assessment from International Air Transport Association, the coronavirus outbreak could cause demand for air travel to fall for the first time since the global financial crisis, with operators in Asia-Pacific the worst hit.
Not surprisingly, shares of InterGlobe Aviation Ltd, which runs India’s biggest airline IndiGo, have been turbulent. On Friday, InterGlobe shares fell almost 11% in early trade, as fears of the virus gripped global financial markets.
For IndiGo, the international portfolio is growing fast, and there is an increasing risk to this business with the virus continuing to spread. In a report on 27 February, analysts at JM Financial Institutional Securities Ltd wrote: “International air route mix remains 19% in IndiGo making it susceptible to the coronavirus outbreak."
Note, about 50% of IndiGo’s incremental capacity has been deployed on international routes in recent quarters. In its December quarter earnings conference call, the InterGlobe management had said: “International is a bright spot in our system as both capacity and margins continue to expand simultaneously." Of course, things have changed dramatically in the past month, and things may clearly not be as bright anymore.
For InterGlobe investors, there are other worries as well. After all, the stock has dropped by over 31% from its 52-week high on 30 September on NSE. “At its highs, IndiGo’s valuations were highly stretched," said an analyst, requesting anonymity, adding that the benefits from the Jet Airways debacle fell short of expectations.
Operationally, there hasn’t been much to cheer about. The airline’s engine troubles and maintenance costs have been higher than anticipated in the last two quarters, taking a toll on profit. “The impact of a rising cost structure (which is expected to remain elevated in the near term) on earnings will cloud stock performance until it starts normalizing," wrote analysts at SBICAP Securities Ltd in a report on 27 January.
What’s more, concerns related to corporate governance haven’t gone away, despite multiple clarifications by the company.
Unfortunately, the outlook isn’t bright. According to the JM Financial report, average fares for IndiGo and SpiceJet have fallen by 20% year-on-year in January-February 2020. “This will lead to moderation in yields going forward, adversely impacting the earnings in 4QFY20," it added. The broker maintains airfare trends for four key routes, using average daily fares for bookings two week forward.
Simply put, these unpleasant mix of events may mean it will be a while before investors hop on to the InterGlobe stock’s flight for rewards.