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Q3FY21 preview: Breaking even?

Passenger number is estimated to be 10.6mn and 2.8mn for IndiGo and SpiceJet respectively in Q3FY21 on the basis of traffic data. We derive ASK by matching stage length and reported PLFs for October/November. We factor-in 10%/5% sequential increase in fares in Q3FY21 for IndiGo/SpiceJet in lieu of seasonally strong quarter. Ancillary revenue in Q3FY21 is expected to remain strong at Rs9.5bn/5.5bn for IndiGo/SpiceJet compared to Rs5.3bn/4.1bn in Q2FY21. For SpiceJet we continue to factor-in Boeing compensation of Rs1.4bn per quarter. ATF price increase (to Rs44,234/kl in Q3FY21 vs Rs42,855/kl in Q2FY21) will be partially offset by favourable currency (Rs73.8/USD in Q3FY21 vs Rs73/USD in Q2FY21). Basis of these parameters, we factor loss of Rs1.65bn and 153mn for IndiGo and SpiceJet respectively in Q3FY21. Our estimates do not include Ind-AS related forex driven movement in lease obligations.

We have factored-in Rs400 higher average fare for IndiGo than for SpiceJet in Q3FY21 compared to Rs550 in Q2FY21.

Key considerations in the sector continue to be balance sheet strength, sustainability of demand, and sustainability of ancillary revenues.

While demand has been good daily passenger count touched 270k in the first week of January), the daily weekly average remains sub-250k and short of pre-Covid level of 400k. Balance sheet of most players other than IndiGo require capital infusion. If Boeing compensation for Max grounding is below expectations (which could be the case going by US Department of Justice ruling meted to Boeing). Ancillary revenue momentum can be disrupted with return of belly cargo, but vaccine transportation can be a big opportunity.

Competitive intensity picking up, Government fare floors / capacity restrictions are of help to weaker airlines: instance of fares sales announcements and increasing frequencies on profitable new routes have started to appear in the media. However, the government has extended timelines for fare and capacity restrictions, which are of help to weaker airlines as of now

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