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Traffic trends up but below recent highs; higher fuel cost a dampener

Domestic passenger traffic for Aug’21 came in at 6.7mn, up 37% MoM as reported by DGCA. Indicative passenger traffic for Sep’21 suggest further improvement in traffic by ~3% MoM to 6.9mn. Domestic air traffic continues to show improvement post decline in infection cases from Jun’21. However, the traffic remains way below the 7.8mn seen in Mar’21 (per day PAX at 0.23mn vs pandemic highs of 0.31mn). Traffic is currently down to around ~40% of pre-COVID levels. ATF prices continue to remain high and are up 61% YoY and 10% QoQ to average c. INR70k/kl. DGCA has raised the cap on number of domestic flights that airlines are permitted to operate from 72.5% to 85.0%.

Further, the faircaps will be reviewed every 15 days vs 30 days earlier. Domestic PLF for Aug’21 has shown improvement MoM across airlines with Indigo’s PLF at 74.0% (+7.8ppt MoM) and Spicejet’s PLF at 79.6% (+5.0ppt MoM). Indigo’s reported market share came in at 57.0% in Aug’21 (-1.6ppt MoM) 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.13.2% domestic market share continues to run operations smoothly - not having lost material market share during the pandemic - GoI received bids for divestment which are currently under scrutiny. 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 has recently received shareholders’ nod to raise upto INR25bn through QIP to streghthen the balance sheet.

GoAir has received INR20bn infusion from its promoter - Wadia group ahead of its IPO. It has recently rebranded itself ‘Go-First’ as the airline will now focus on ultra low cost business model. Media articles suggest that Tata group increased stake through c. INR3.0bn fund infusion in Air Asia India – Its domestic market share stands at 5.2% 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 10.4x FY23E EV/EBITDAR – re-iterate SELL.

* Traffic shows improvement but remains way below recent highs: Domestic passenger traffic for Aug’21 came in at 6.7mn, up 37% MoM. Air traffic has shown improvement post decline in infection cases from Jun’21. However, the traffic remains way below the 7.8mn seen in Mar’21 (per day PAX at 0.23mn vs pandemic highs of 0.31mn). Traffic is currently down to around 40% of pre-COVID levels. Indigo witnessed domestic PAX growth of 30.1% MoM to 3.8mn in Aug’21. Spice Jet reported PAX growth of 28.0% MoM to 0.6mn. Air India reported PAX growth of 80.8% MoM to 0.9mn while other domestic carriers reported PAX growth of 41.4% MoM to 1.0 mn. 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 57.0% in Aug’21 (-1.6ppt 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 13.2% 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 74.0% (+7.8ppt MoM) and Spicejet’s PLF at 79.6% (+5.0ppt MoM).

* ATF price continues to remain high; DGCA raised capacity cap: ATF prices continues to remain high and are up 61% YoY and 10% QoQ to average c.INR70k/kl+. Brent crude prices are up 65% YoY and 47% YTD21 to USD76/bbl. DGCA has increased the cap on number of domestic flights that airlines are permitted to operate from 72.5% to 85.0%. Further, the fair caps will be reviewed every 15 days vs 30 days earlier. The price capping was put on domestic flight operators to keep the ticket prices in check due to the limited number of flights. DGCA has further suspended scheduled international commercial passenger services till 30th Sep’21. International scheduled flights may be allowed on selected routes on case to case basis.

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