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Post-COVID recovery hits an air pocket

* The recent spike in COVID-19 cases in India weighs heavily on the Aviation sector, with flyers confidence tanking, leading to further delays in the recovery of demand. Daily passenger demand dropped by ~13% to ~246,600 passengers in the last week of Mar’21 (v/s the last week of Feb’21 – when the peak was recorded), resulting in no MoM improvement in traffic (still down ~37% to pre-COVID levels). In Apr’21, demand further fell by ~5% from the last week’s average of Mar’21 to ~233,000 passengers per day.

* As per our airfare tracker, yields in Mar’21 increased by 2-5% MoM, but down 13- 14% QoQ in 4QFY21. This is despite the upward revisions in the floor of airfare bands in Feb’21 by 10% and again in Mar’21 by 5%.

* The aforementioned two anomalies are in line with our Jan’21 report (Deep-dive analysis – airfares and passenger demand) and could be answered with rapid vaccination in the country, reviving confidence and thus demand. A spike in crude oil prices during 4QFY21 has further added to the negative sentiment.

* Currently, around one-third of total states in India have imposed further lockdowns/restrictions – but operations in the sector have not been curbed. We keep our assumptions unchanged for now, with estimates of traffic recovering to pre-COVID levels by end of 3QFY22E. We reiterate our neutral stance on INDIGO – with the possibility of further delays in the recovery to pre-COVID levels.

Non-metro routes are leading the recovery

* As per the recently concluded winter CY20-21 schedule (exhibit 6), North and East India is leading the recovery (back to 58-62% of pre-COVID levels), while West and South lag behind (47-52% of pre-COVID levels). The share of metro-to-metro routes has fallen to 20% (from 23% last year), while the share of connectivity to non-metro routes has increased (exhibit 5).

* As highlighted in Exhibit 3-4, the percentage mix of flights and passengers has moved away from dominant Western and Southern region to the North and Eastern region of India. Share of aircraft movement in the Western and Southern region decreased to ~53% in FY21 v/s ~57% in FY20, while passenger share fell to ~50% from ~56% respectively.

Yields to improve as more regional airports are connected

* Airfares in India peaked at the end of Oct’20 (up ~50% v/s Jan’20), led by imposition of airfare bands by MoCA as airline operations restarted after the lifting of COVID-related lockdown norms. Since then, fares have failed to sustain (as soon as passenger demand touched ~50% YoY in Nov’20). That said, airlines have formulated a plan to cope with falling yields and have expanded their connectivity to Tier II, III and RCS routes in last 3 months.

* INDIGO to start 22 new flights (Feb) 14 new flights under RCS (Mar)

* SJET to launch 21 new routes (Jan) 24 new domestic routes (Feb)

* In Jan’21, INDIGO had announced to set up seven new regional bases (at Leh, Darbhanga, Kurnool, Agra, Bareily, Durgapur, and Rajkot). These new flights would aid better yields for the airline as it further diversifies the route mix away from metro-to-metro routes (where the fares have already peaked). Factoring in the aforementioned, our INDIGO model builds in yields of INR3.9 for FY22-23E (at ~5% premium to FY16-20 average).

* For the summer schedule of CY21, the ministry has connected four new regional airports (Bareily, Bilaspur, Kurnool and Rupasai). In the last week, it inaugurated 22 new routes under the RCS. That said, only ~40% of the total RCS routes awarded (in the last four years) has commenced operations, providing a huge opportunity for the airlines.

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