IndiGo flies high as rivals gather

Worsening the supply scenario in the peak summer season is the suspension of operations this month of peer Go First, creating additional near-term tailwinds. This would mean healthy yields, a measure of pricing. In the March quarter (Q4FY23) earnings call held last week, IndiGo’s management said it is seeing year-on-year improvement in yield in Q1FY24. Note that in Q4, IndiGo’s yields were higher year-on-year at ₹4.85, but fell by nearly 10% sequentially due to seasonality.

“According to our airfare tracker, the 30-day domestic forward prices are up by 12% quarter-on-quarter in Q1FY24 till date and the 15-day prices are up by 20% quarter-on-quarter in Q1FY24 till date,” said a report by Motilal Oswal Financial Services on 19 May.

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IndiGo noted a change in consumer behaviour as the 0-15 days booking category is seeing an increase in demand from leisure travellers. There is a possibility that IndiGo could further gain market share.

Latest data from the Directorate General of Civil Aviation shows IndiGo’s share rose to 57.5% in April, up 70 basis points sequentially.

The airline’s peak share in 2022 stood at 58.8% in July and it may surpass the same in May due to Go First suspending operations, said Prateek Kumar, analyst at Jefferies India in a 19 May report. Go First’s market share stood at 6.4% in April.

In FY24, IndiGo targets passenger volume to touch 100 million, representing a growth of nearly 17% year-on-year. IndiGo aims to add 40-50 aircraft in FY24 on the base of 304 planes as of March-end. The company expects available seat kilometers to grow north of mid-teens this fiscal year. This is reassuring in the context of global engine supply crisis, said analysts at ICICI Securities. The number of IndiGo’s grounded aircraft is in the high 30s currently due to shortage of spare engines. It is working to mitigate this issue.

On the cost side, fuel prices are declining, which bodes well for margin. Also, “amid aggressive expansion plans by airlines, there were concerns on talent crunch, which would result in high employee costs. But this woe is likely to have abated to a certain extent as Go First’s insolvency would ease talent availability problem,” said Jinesh Joshi, an analyst at Prabhudas Lilladher.

Further, IndiGo’s plan to expand in the international market is good for profitability. According to the company, cost per unit is comparatively lower for international operations.

All said, IndiGo is currently on a strong footing with a healthy balance sheet. Investors seem to be factoring in the optimism adequately. IndiGo’s shares have risen by around 36% in the last one year and are hovering near their 52-week highs of ₹2,332.95 apiece seen on Thursday.

To be sure, while IndiGo has reported a net profit of ₹916 crore in Q4, this could not compensate for the losses incurred in the first half of FY23. Thus, IndiGo closed FY23 in the red with a net loss of about ₹317 crore.

Note that there are risks from the rising competitive intensity in the domestic aviation sector with the entry of Akasa Air and resurgence of the Air India group. Investors should keep a close tab on the impact of rising competition on IndiGo.

While Jefferies expects spreads to remain elevated in FY24 and has raised its earnings estimates, it maintains an underperform rating on the IndiGo stock on medium-term concerns on rising competitive scenario.