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India’s air passenger traffic growth continues to be resilient with Q4FY23 showing strong numbers despite being a seasonally lean quarter. Domestic pax in FY23 would be ~136mn, slightly above our earlier estimate of 135mn; while going by Mar-23 run-rate, FY24 could easily hit our 165mn estimate with a high chance of bettering it. Against our 15% medium-term pax CAGR, net fleet addition (despite Air India’s mega order) should be 10-11%, thereby keeping theoretical supply lower than demand, which would support PLFs and yields. Fuel costs have come down further with crude as well as jet kero prices correcting, while improving diesel margins of Indian OMCs could lower ATF marketing margins as well. The recent commentary by airlines, industry bodies, and MoCA officials implies a strong outlook for the Indian aviation sector, as is evident from new order announcements, regulatory approvals w.r.t. wet-leasing, and airport infra development. Indigo, with its dominant position, low-cost leadership, and running order book of 487 aircraft, is best-positioned to capture the sectoral drivers. The summer schedule with ~20% lower flights YoY for other airlines as a whole vs. 3% growth for Indigo implies the latter is well placed in terms of near-term capacity availability, despite 34 AOGs (102 for the industry). We reiterate Buy with a TP of Rs2,600.

Indian passenger traffic growth relentless: Domestic pax recovery continued in Q4FY23 despite it being a seasonally lean quarter with Jan/Feb/Mar recording 0.41/0.43/0.44mn daily pax. Hence, the quarter would see a 9% QoQ increase (up 54% YoY) in pax. This also implies Q1FY24 to be even more robust, led by the holiday season. Going by historical March versus succeeding fiscal year run-rate, FY24 could at-least be ~161mn (near our 165mn estimate) and can reach up to ~177mn pax. International pax growth should be even better. Based on our GDP multiplier approach, we estimate total five-year pax CAGR of 15%+, i.e., by FY28.

Capacity to be under control, supporting PLFs and yields: We note that Air India’s 470 aircraft order coupled with 40-50 additional near-term leased planes implies ~50 gross additions annually, based on a 10-year delivery period. However, the sizeable mega order of narrow-body deliveries could take a couple of years at least, while the existing fleet of Air India, AI Express, and Air Asia (166 total) is 10+ years old, which requires replacement. Hence, net additions are likely to be lower (we expect 30 net addition p.a. in the near term and 40-50 afterwards). Indigo, in turn, should see 30-40 p.a. – although depending on demand, it could delay re-deliveries. Assuming other airlines are also adding up, we estimate India’s total fleet to grow from ~680 currently to ~1,150 by FY28, registering an 11% CAGR. This should support PLFs and yields, amid a better demand CAGR.

Fuel cost pressures continue to ease: Based on the recent cool-down in Brent and jet kero refining margins, we estimate ATF prices to fall further by 5% in Apr-23 (could be higher if OMCs reduce their ATF margins, given healthy diesel income now). While the recent quick fall could be attributed to global markets, ATF prices spiked last year due to the Russia-Ukraine war and we expect its impact to subside. For Indigo, a 5% lower ATF price leads to Rs22/share EPS gain, ceteris paribus.

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