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Soaring fuel price challenge recovery 

Domestic passenger traffic for Jan’22 came in at 6.4mn, down 43% MoM impacted due to the onslaught of Omicron variant. Indicative passenger traffic for Feb’22 suggests an improvement in traffic by ~19% MoM to 7.6mn. Domestic air traffic continues to improve with daily PAX data coming in at 0.3mn+ indicating a recovery of ~75% from pre pandemic levels. ATF prices continue to remain high and are up 57% YoY and 16% QoQ to average c. INR86k/kl. Domestic PLF for Jan’22 has been impacted MoM across airlines, with Indigo’s PLF at 66.6% (-13.6ppt MoM) and Spicejet’s PLF at 73.4% (-12.6ppt MoM). Indigo’s reported market share came in at 55.5% in Jan’22 (+0.7ppt MoM) vs a peak market share of 60.4% (in July’20) during the pandemic when the competition struggled to stay air borne.

DGCA’s decision to extend suspension of scheduled international flights will continue to impact airline company’s capacity utilisations. Pent up demand and above normal international yield aided overall yield in 3QFY22. However, change in competitive landscape post Air India’s acquisition by the TATA group likely to normalise yields going forward. The Government is mulling to bring ATF under the gambit of GST, this is likely to benefit Airlines in the long run. However, Airlines currently face a challenging time ahead on account of record high ATF prices, which are likely to increase further on the back of geo-political tension between Russia and Ukraine. We believe Indigo’s share price at CMP factors the improving (expected) momentum in passenger demand. Despite a price correction of ~15% in the last week, we believe there is further room for correction on account of 1) higher ATF prices which will impact margins and 2) decision of Rakesh Gangwal to step down from the board as he reduces his 36.6% stake in the company over the next 5+ years is likely to cap stock performance. The stock trades at expensive 9.0x FY23E EV/EBITDAR – re-iterate SELL.

Domestic traffic on a rebound:

Domestic passenger traffic for Jan’22 came in at 6.4mn, down 43% MoM impacted due to the onslaught of Omicron variant. Indicative passenger traffic for Feb’22 suggests an improvement in traffic by ~19% MoM to 7.6mn. Domestic air traffic continues to improve with daily PAX data coming in at 0.3mn+ indicating a recovery of ~75% from pre pandemic levels. Indigo witnessed domestic PAX decline of 42% MoM to 3.6mn in Jan’22. Spice Jet reported PAX decline of 41% MoM to 0.7mn. Air India reported PAX decline of 34% MoM to 0.7mn while other domestic carriers reported PAX decline of 48% MoM to 1.5 mn.

Indigo’s market share normalises:

Indigo witnessed a peak market share of 60.4% (July’20) during the pandemic as competition struggled to stay air borne. The market leader underwent a trend reversal since then, with current market share at 55.5% in Jan’22 (+0.7ppt MoM). The primary market share gainers in the domestic circuit were a) Air India with a low of 6.8% in July’20 and currently at 10.2% and b) Go Air with lows of 3.8% in July’20 and currently at 9.9%. Domestic PLF has declined MoM across airlines with Indigo’s PLF at 66.6% (-13.6ppt MoM) and Spicejet’s PLF at 73.4% (-12.6ppt MoM).

ATF prices remain elevated on account of on-going geo-political tension:

ATF prices continue to remain high and are up 57% YoY and 16% QoQ to average c. INR86k/kl. Brent crude prices are up 55% YoY and 28% YTD22 to USD92/bbl. The Government is mulling to bring ATF under the gambit of GST, this is likely to benefit Airlines in the long run. However Airlines currently face a challenging time ahead on account of record high ATF prices, which are likely to increase further on the back of geo-political tension between Russia and Ukraine.

Rakesh Gangwal steps down from Indigo board:

Rakesh Gangwal decided to step down from the board as he intends to reduce his 36.6% stake in the company over the next 5+ years. Gangwal has stepped down from the board as he did not want to hold access to unpublished price sensitive information while he began reducing his stake in the company.

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