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Airfares strong but demand decelerates

Combined PAT at INR 23.4bn in Q4FY24E  

We expect Elara Aviation universe – InterGlobe Aviation (INDIGO IN) and SpiceJet (SJET IN) – to report a combined adjusted PAT of INR 23.4bn in Q4FY24E versus INR 33.2bn in Q3FY24 and INR 6.2bn in Q4FY23. As per Directorate General of Civil Aviation (DGCA) data, Q4FY24 domestic demand was up only 2% YoY while domestic capacity fell ~1% YoY, which led to a 5% rise in airfare. FY25 may witness muted demand growth in H1 due to grounding of ~75 fleet for INDIGO and pilot issues at Vistara. Then we expect domestic market to see oversupply in H2FY25 when INDIGO’s 75 grounded aircraft may fly again while the competitors may continue to add fleet @10% of total domestic capacity.

Domestic passenger traffic witnessed muted 2% YoY growth in Q4E

Based on DGCA data, we estimate domestic demand to have increased merely by 2% YoY in Q4E from 9% YoY in Q3, which is a negative surprise, versus 18-52% YoY in Q3FY23-Q2FY24 – higher airfare owing to supply shortage is dragging demand growth despite robust GDP growth YTDFY24. The industry’s passenger load factor (PLF) may be at 89% in Q4FY24E versus 87% in Q3FY24 and 86% in Q4FY23.

Yield likely to improve YoY                                     

Revenue per passenger KM or yield may jump 5% YoY in Q4FY24E, led by lower capacity addition, which may impact demand growth, while average airfare at INR 5,731 has continued to be near historical-high.

INDIGO to post adjusted PAT of INR 20.6bn in Q4FY24E 

We expect INDIGO to post an adjusted profit of INR 20.6bn in Q4E versus INR 30.5bn in Q3FY24 and INR 6.7bn in Q4FY23. We expect passenger volume to improve 2% QoQ and 3% YoY with PLF at 87.2% in Q4FY24E versus 84.2% in Q4FY23.

SJET to report adjusted PAT of INR 2.8bn in Q4FY24E

We expect SJET to post an adjusted PAT of INR 2.8bn in Q4FY24E versus a loss of INR 477mn in Q4FY23. In Q4FY24E, passenger volume may dip 18% YoY and 4% QoQ on account of a decrease in fleet size.

Our view: Stay cautious

We retain Reduce on INDIGO, given the anticipated pause in market share growth and potential margin dip in H2FY25. However, we are bullish on the Aviation sector in the long-term (from FY26) as we expect FY23-28 domestic passenger traffic CAGR at ~12-15%, led by government focus on improving air connectivity beyond tier 1/2 cities, large order book of domestic carriers (1,606 outstanding order book as on December 2023; ~350 net deliveries expected in the next five years) and higher capacity addition at existing key airports in metros.

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