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Painful recovery interrupted

We hosted CAPA India, a reputed global aviation consultant. CAPA India believes the third covid wave (Omicron) could delay industry recovery and thus smaller aviation companies are at higher risk.

i) CAPA forecasts ~90% of pre-covid domestic demand by Mar-22 and possibly ~100% in FY23. International traffic should remain subdued at ~32% during H2FY22 and fully recover only by FY24. ii) While industry fleet shall be flat during FY22, induction of 20% higher capacity efficient NEO/MAX aircraft by several carriers enhances supply side risk. iii) Fare floors and caps are limiting higher losses, enabling flat yields (YoY) during FY22. iv) While balance sheet stress is acute, losses would narrow by 10% to ~USD3.7bn. Urgent funding of USD5bn in 2HFY22 is essential though.

Domestic demand to be back to 100% only by 2HCY2022

Domestic PAX plunged 62% YoY in FY21. CAPA India estimates it would recover by 70% YoY in FY22, but still remain ~30% lower than FY20. It would recover to precovid level not before H2CY22 due to Omicron’s impact. International travel plunged due to the travel ban and shall remain ~70% lower (versus FY20) even in FY22, with likely normalcy by FY24. Cargo has been a strong segment over the last 18 months and revenue is poised to grow in double digits (~20% YoY). CAPA India expects Indigo and Air India group to be the principal players over the medium term. While Akasa is a new entrant in low-cost carriers (LCCs), its major impact would be seen from FY25. While fleet carriers have taken measures to cut down both fixed and variable costs amid covid, further cost optimisation might not be possible hereon.

20% excess fleet supply from CY23 remains a concern

While the industry is expected to induct about 180 aircraft, 80–100 aircraft could retire as they were up for lease renewal and need to be replaced with Neo or MAX aircraft, which are more fuel efficient and incur lower maintenance cost. The industry is expected to be overcrowded in both the FSC and LCC segments. On top of it, a potential third covid wave could hurt the already fragile demand.

Outlook: Multiple challenges before smooth take-off

Fare cap regulation is expected to be removed from Q4FY22, but removing caps/ floor may be more challenging for airlines than it was to introduce them as it would decrease yields. As per CAPA India, Indigo/SpiceJet would incur a loss of INR71bn/INR25bn in FY22. For a smooth functioning of airlines, SpiceJet would require at least USD400mn of fund-raising, Go First plans to raise USD450mn through an IPO by end-FY22 and Indigo shall need a QIP by FY23. Meanwhile, we expect competitive pressure to persist—Tata’s purchase of India’s prime international franchise Air India during a trough cycle, and competition rapidly adding Airbus NEOs would blunt Indigo’s cost edge. We continue to believe that the Indigo stock is fully pricing in a strong recovery in CY22. We maintain ‘HOLD’ on each SpiceJet and Indigo with TPs of INR70 and INR1,986 at 8x FY23E EV/EBITDAR.

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