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Indicative passenger traffic for Sep’22 implies a marginal increase on a monthly basis to 10.3mn, with recovery close to ~89% of pre-covid levels. Early trends for Oct’22 indicate a daily passenger traffic rate - averaging ~0.37mn vs ~0.34mn in Sep’22. We expect operations across airlines to pick up in 3QFY23, post a seasonally weak 2Q on account of the festive season. Last reported domestic PLF for Aug’22 witnessed an increase MoM across most airlines with Indigo’s PLF at ~78% (+0.5ppt MoM) while Air India’s PLF increased to 74% (+3ppt MoM). ATF price in 2Q averaged 5% higher QoQ to INR129k/kl. However, ATF price is averaging INR 118k/kl in 3QTD down 9% QoQ post recent correction in crude prices. Rupee depreciated by ~3% QoQ during 2QFY23 and ~3% in 3QTD, this will have an adverse impact on profitability given ~70% of costs are dollar denominated.

India’s Aviation industry is likely being consolidated towards two large players (Indigo ~58% and Tata Group ~24%) as smaller competitors are struggling with cost over-runs and liquidity challenges, while new entrants will require some time to build a commendable fleet size. Further, Air India has embarked on an ambitious five year transformation plan ‘Vihaan.AI’ to establish itself as a world-class global airline and increase its market share to at least 30% vs current 8.5%. In line with its expansion plan, Air India is looking to raise USD1bn and induct 30 leased aircraft from Airbus and Boeing into its fleet starting Dec’22. Indigo’s share price has corrected ~25% from its peak on the back of higher ATF prices, increased competitive intensity and ~11% YTD depreciation in Indian Rupee – JM thesis for SELL rating. The stock’s performance has remained muted over 1m/ 6m/ 1yr/ 3yr with stock prices down 9.7%/ 8.2%/13.6%/ 0.1% respectively. However, expected pick-up in operations during a seasonally strong 3Q and correction in crude prices will likely benefit the sector. Our sensitivity analysis suggests a 5% correction in crude prices will likely increase EBITDAR by 7% and fair value by 9%. However, Rakesh Gangwal’s decision to reduce his 36.6% stake in the company over the next 5+ years will likely cap stock performance in the near-medium term.

 Daily passenger traffic improves marginally in Sep’22 :   Indicative passenger traffic for Sep’22 implies a marginal increase on a monthly basis to 10.3mn, with recovery close to ~89% of pre-covid levels. Early trends for Oct’22 indicate a daily passenger traffic rate - averaging ~0.37mn vs ~0.34mn in Sep’22. We expect operations across airlines to pick up in 3QFY23, post a seasonally weak 2Q on account of the festive

Tata Grp. airlines gain market share: Indigo’s market share declined during Aug’22 to 57.7% (-1.2ppt MoM) while Tata group company’s market share increased to 24% (+0.6ppt MoM). Vistara continues to enjoy the second largest market share at 9.7% (+2.2 ppt YTD). Air India has embarked on an ambitious five year transformation plan ‘Vihaan.AI’ to establish itself as a world-class global airline and increase its market share to at least 30% vs current 8.5%. In line with its expansion plan, Air India is looking to raise USD1bn and induct 30 leased aircraft from Airbus and Boeing into its fleet starting Dec’22.

ATF prices to continue to remain at high levels despite recent correction: ATF price in 2Q averaged 5% higher QoQ to INR129k/kl. However, ATF price is averaging INR 118k/kl in 3QTD down 9% QoQ post recent correction in crude prices. Rupee depreciated by ~3% QoQ during 2QFY23 and ~3% in 3QTD, this will have an adverse impact on profitability given ~70% of costs are dollar denominated.

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