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Traffic below recent highs; surging fuel cost a dampener

Domestic passenger traffic for Jul’21 came in at 5.0mn, up 61% MoM as reported by DGCA. Indicative passenger traffic for Aug’21 suggest further improvement in traffic by 34%+ MoM. Domestic air traffic has shown improvement post decline in infection cases from Jun’21. However, the traffic remains way below the 7.83mn seen in Mar’21 (per day PAX at 0.2mn vs pandemic highs of 0.31mn). Traffic is currently down to around 50% of pre-COVID levels. ATF prices continue to remain high and are up 59% YoY and 35% YTD21 to average INR70k/kl+. DGCA has further hiked the minimum fare band by 11-13% from 13th Aug’21 to cushion the impact of higher fuel prices.

The cap on number of domestic flights that airlines are permitted to operate has been increased from 65% to 72.5% from 13th Aug’21 until further order. Domestic PLF for Jul’21has shown improvement MoM across airlines with Indigo’s PLF at 66.2% (+3.5ppt MoM) and Spicejet’s PLF at 74.6% (+3.6 ppt MoM). Indigo reported market share came in at 58.6% in Jul’21 vs a peak market share of 60.4% (in July’20) during the pandemic as competition struggled to stay air borne.

We believe that the chances of any material consolidation in the industry remain slim. Air India with c.13.4% domestic market share continues to run operations smoothly - not having lost material market share during the pandemic - even as GoI ensues its search to find a buyer for the same. While a sale would turn fat into muscle, increasing competition for incumbents, ‘no-sale’ is most likely to mean continued GoI patronage in line with other lossmaking PSUs. Spicejet, has shown no signs of weakness in operations even as balance sheet continues to await the Boeing compensation.Further, the carrier aims to raise upto INR25bn through QIP to streghthen the balance sheet.

GoAir rebranded itself ‘Go-First’ as the airline will now focus on ultra low cost business model amid pandemic headwinds. Media articles suggest that Tata group increased stake through c. INR 3.0 bn fund infusion in Air Asia India – Its domestic market share stands at 3.3% currently. Indigo’s share price at CMP not only factors in the improving (expected) momentum in passenger demand but also factors in a favourable change in competitive landscape, ignoring the sharp rise in brent. The stock trades at expensive ~9x FY23E EV/EBITDAR – re-iterate SELL.

* Traffic shows improvement but remains way recent highs:

Domestic passenger traffic for Jul’21 came in at 5.0mn, up 61% MoM. Air traffic has shown improvement post decline in infection cases from Jun’21. However, the traffic remains way below the 7.83mn seen in Mar’21 (per day PAX at 0.2mn vs pandemic highs of 0.31mn). Traffic is currently down to around 50% of pre-COVID levels.

Indigo witnessed domestic PAX growth of 72.3% MoM to 2.9mn in Jul’21. Spice Jet reported PAX growth of 62.3% MoM to 0.5mn. Air India reported PAX growth of 30.4% MoM to 0.7 mn while other domestic carriers reported PAX growth of 54.1% MoM to 0.9 mn. Mass vaccination, resumption of business travel and improvement in leisure travel would be the key trigger for revival of traffic.

* Indigo below its peak market share:

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 58.6% in Jul’21. 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 13.4% and b) Go Air with lows of 3.8% in July’20 and currently at 6.8%. Domestic PLF has shown improvement MoM across airlines with Indigo’s PLF at 66.2% (+3.5ppt MoM) and Spicejet’s PLF at 74.6% (+3.6ppt MoM).

* ATF price continues to remain high; some relief post increase in minimum airfare and capacity cap:

ATF prices continues to remain high and are up 59% YoY and 35% YTD21 to average INR70k/kl+. Brent crude prices are up 45% YoY and 29% YTD21 to USD66/bbl. DGCA has further hiked the minimum fare band by 11-13% from 13 th Aug’21 to cushion the impact of rising fuel prices. The price capping was put on domestic flight operators to keep the ticket prices in check due to the limited number of flights.

The cap on number of domestic flights that Indian airlines are permitted to operate has been increased from 65% to 72.5% from 13 th Aug’21 until further order. DGCA has further suspended scheduled international commercial passenger services till 31 th Aug’21. International scheduled flights may be allowed on selected routes on case to case basis.

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