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Demand set to jet as airports & fleet spike

India’s aviation demand has decelerated from 14% average annual growth in FY14-19 to 7% in H2FY24-H1FY25, led by headwinds – delivery issue at Boeing, grounding of InterGlobe Aviation’s (INDIGO IN) Pratt & Whitney (P&W) engine-fitted fleet and constraints at major airports. But demand is set to strengthen (12% CAGR in FY25E-28E) from FY26 due to addition of new airports in Delhi and Mumbai by April’25 (Source: Mint; Times of India) INDIGO’s P&W aircraft returning to operations and terminal expansion in Bengaluru, Chennai, Ahmedabad and Kolkata by FY27-28. So, expect INDIGO to benefit from the above-mentioned tailwinds – Upgrade to Buy.

Expansion at major airports to drive growth; no possibility of over-supply beyond FY28: Per Airport Authority of India (AAI) data, for top-seven airports, weighted average utilization peaked at 90% in H1FY25. Given the addition of new airports and terminal upgrades, airport capacity should support a 12% demand CAGRin FY25E-28E. Per pasttrend, post the new airport in Goa and addition of a second runway in the Bengaluru airport, respective demand grew 23% and 9% in a year, outperforming pan-India growth by 1,445bps and 838bps, respectively.

Do not expect over-supply beyond FY28 as constraint at major airports may re-emerge (excluding Delhi, Mumbai, Ahmedabad). So, India needs at least 12 more ‘+10mn passenger capacity’ airports to maintain +10% demand CAGR in the next decade. China not only has ~300% more airports that handle +10mn passengers versus India but also that the share of such airports to overall (at 15%) is double that of India.

Large orders to drive fleet addition; return of P&W fleet from Q4, near-term edge for INDIGO:

Since FY21, large carriers have proven their ability to adjust retirals to balance supply, while exploiting sizeable +1,600 orders to capture strong demand growth. Also, per INDIGO’s Q2FY25 call, aircraft on ground (AOG) should drop from the present high60s to mid-40s by Q1FY26. Given the more than three-month delay in Boeing’s 737Max ramp-up plan led by a strike at its plant, monthly aircraft delivery to Air India would be ~four in H1CY25E (four in H1FY25; >six in H2FY24), which would help INDIGO gain market share.

Indian carriers continue to gain share in international traffic; shift from long-haul railway AC traffic to help double aviation traffic:

Expect international traffic (20% of CY24 traffic) to post a 12% CAGR in FY25E-28E, but Indian carriers should post a CAGR of ~14% as ~25% of their international slots are not utilized. Given the rising number of short/mid haul flights and wide-body delivery, slot utilization for Indian carriers would outperform. Also, as per our estimates, railway traffic for AC seats for a >12-hour long journey was 162mn in FY24, similar to domestic traffic for aviation at 150mn. A shift away from railway traffic could prop aviation demand 2x in the long-term (as and when the aviation industry adds capacity).

INDIGO – Upgrade to BUY; TP raised to INR 5,309:

We upgrade INDIGO to Buy from Sell led by strong demand CAGR through to FY28E, given capacity expansion at major airports and the return of P&W fleet, even as competitors face constraint to aggressively add capacity. We raise FY25E/26E/27E EPS estimates by 2%/27%/15% and upgrade FY27E EV/EBITDA-based TP to INR 5,309 (from INR 3,847), on one-year forward EV/EBITDA of 10.0x (from 8.0x). Key risks to our call is jump in crude oil prices to above USD90/bbl and delay in return in operations of AOG fleet.

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