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We have seen a strong traffic recovery as domestic pax has likely to have grown by 63% QoQ to 30.7m in Q3FY22. However, the pace of recovery moderated in Dec-21. Recovery in the coming months hinges on impact which Covid 3rd wave has on travel. Domestic ATF prices are up 12.1% QoQ to Rs78.9/ltr. So the companies would be looking to increase the fares to partly pass on higher fuel expenses and hence we have factored 4%/7.6% QoQ increase in RPK yield in Q3 for IndiGo/SpiceJet. Cargo business is likely to improve further for both companies, driven by strong demand. Overall, with improved traffic, we expect losses for both companies to contract QoQ and expect IndiGo/SpiceJet to report losses of Rs3.8bn/Rs4.4bn in Q3FY22.

Strong traffic recovery in Q3FY22 led by festive season; near term disruption in store

In Q3FY22, domestic pax traffic has shown a strong recovery and we expect it to have grown by 63% QoQ to 30.7m. However, the pace of recovery moderated in Dec-21 as average daily traffic grew moderately by 3% MoM to 358k (87% of the pre-Covid levels of 410k). Post resumption of operations in May-20, peak average daily traffic was seen in Dec-21. The domestic industry is currently operating at 93% (2789 departures/day in Dec-21) of the pre-Covid capacity of 3,000 departures/day. We see high risk of disruption in traffic due to an impending third wave of Covid.

Domestic ATF prices rose 12.1% QoQ; yields likely to strengthen

In Q3FY22, domestic ATF prices grew sharply by 12.1% QoQ (up 76% YoY) to Rs78.9/ltr, led by 8.4% QoQ rise in brent crude to USD79.4/barrel. Our fare tracker for top 25 routes across Metro to Metro, Metro to Non-metro and Non-metro to metro routes indicates fares in seven-day forward booking window grew by 5.3% QoQ while fares in 2-month forward booking window grew 7.4% QoQ in Q3FY22. Having said that, the absolute fares are quite different in both the booking windows (7-day ahead fares are 89% higher than 2-month ahead fares). So the actual movement in yields would be driven by the QoQ change in proportion of tickets booked in each of these booking windows

Domestic capacity cap removed in Oct-21; international travel ban extended

DGCA has removed the domestic capacity cap w.e.f 18th Oct-21 driven by the sharp recovery in domestic traffic. DGCA had previously capped the capacity at 85% (of summer schedule of 2020). Also, DGCA has further extended the ban on international commercial flights till January end. Dedicated cargo flights and flights under the bilateral air bubble pacts with select countries will continue to operate.

IndiGo: Losses to contract materially QoQ led by strong traffic recovery

We expect IndiGo’s net loss to contract sharply QoQ from Rs14.4bn in Q2FY22 to Rs3.8bn in Q3FY22, led by sharp traffic recovery (up 52% QoQ). We have factored 4% QoQ rise in ticket yield to Rs4.36 (up 17.6% YoY) which will offset the sharp rise in domestic ATF prices (up 12.1% QoQ). Our estimates build in FX MTM loss of Rs236mn (FX gain of Rs342mn in Q2FY22) on capitalized operating leases due to 12ps depreciation in INR against USD during Q3FY22. We expect ASKM/RPKM to grow 35%/27% QoQ with load factor of 79.2% (71.1% in Q2FY22). We expect RASK to improve 11% QoQ to Rs3.99 led by improvement in load factor (up 810bp QoQ). Revenue is likely to grow sharply by 50% QoQ to Rs84.3bn. We estimate EBITDAR of Rs14.1bn. Maintain REDUCE.

SpiceJet: Loss to reduce QoQ with improved traffic; cargo operations to remain strong

We estimate loss of Rs4.4bn for SpiceJet in Q3FY22, lower than loss of Rs5.6bn in Q2FY22, led by improved traffic (up 86% QoQ). We factor 7.6% QoQ rise in ticket yield to Rs4.16 which will offset the sharp rise in domestic ATF prices (up 12.1% QoQ). We factor cargo revenue of Rs5.6bn in Q3FY22 (vs estimated revenue of Rs5.3bn in Q2FY22) led by strong cargo demand. We estimate adjusted RASK (ex-freighter, finance income and 737 Max claim accrual) at Rs3.91 (up 14% QoQ). We expect revenue to grow 61% QoQ to Rs21.6bn with EBITDAR of Rs1.36bn in Q3FY22. Maintain REDUCE.

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