Record domestic travel in India was expected to translate into bumper earnings for local airlines, but the July-September revenues of India's largest carrier Indigo may be an indication that the bottomline of such firms may be hit by rising costs, capacity, and competition.
The increased expenses of airlines, including on fuel, airport charges, leasing aircraft, grounded planes, along with lower yields are expected to drag down their profits in the coming quarters.
"Rising competition in the Indian market between two large airlines is impacting their ability to dictate prices — this is a major factor for falling domestic yields," a senior Air India executive told Moneycontrol.
He added that with nearly three planes being added every week, capacity expansion is outpacing the growth of domestic air traffic.
"Passenger load factors have fallen in 2024 compared to last year, and while domestic air traffic is likely to climb to record levels in the coming months, load factors are not expected to rise significantly," the executive explained.
He also said that since load factors are not expected to rise despite the growth of traffic, airlines will be looking at premium customers to buttress their bottomline.
"The race for premium flyers will play a significant role in determining the profitability of airlines in the coming years, until airport infrastructure in tier 2 and 3 cities is ramped up," the executive said.
Similarly, IndiGo’s Chief Financial Officer Gaurav Negi, after announcing the airline's Q2 earnings on October 25 had also indicated that demand was expected to slow down in the third quarter of 2024-25 due to the high base of last year.
IndiGo, Negi stated, anticipates a mid-single digit moderation in the Q3 PRASK (passenger revenue per available seat kilometres) compared to last year, when both demand and yields were exceptionally high.
The airline's yield per passenger had already fallen to Rs 4.55 per kilometre in the seasonally weaker September quarter from Rs 5.24 per kilometre in the June quarter as the airline offered discounts to attract customers.
Another senior IndiGo executive pointed out that India may face overcapacity for the next few quarters, but with tier 2 and 3 markets expected to drive growth going forward, the spare capacity would help airlines take advantage of the growing traffic as well.
He added that with Indian airlines expanding internationally, rising revenues from the high-margin international segment will also help boost the profitability of airlines in the future.
Air traffic in India has hit record levels this year. Between January-September 2024, Directorate General of Civil Aviation (DGCA) data shows 11.85 crore passengers took to the skies, nearly 5 percent higher than a year ago.
IndiGo's Chief Executive Officer Pieter Elbers also said last month that the airline’s performance will improve significantly as cost pressures will come down and the festive season would boost traffic.
However, the passenger load factors of Air India and IndiGo, the two largest airlines of the country, were lower in April 2024 compared to April 2023.
While the airline executive was confident that margins would improve, industry experts are not so optimistic.
Ameya Joshi, an aviation researcher and founder of the blog Network Thoughts, told Moneycontrol that domestic traffic may taper going ahead due to factors such as job losses, inflation, and revenge tourism and work from home coming to an end. He added that competition from Air India is impacting IndiGo's ability to dictate fares.
"A monopoly converting to a duopoly puts pressure on the yield, since demand does not double overnight," Joshi explained.
He added that though IndiGo has been holding on to its fares despite lower load factors, but if demand continues to soften the airline will have to switch its strategy to attract more passengers and increase revenues by fare discounting.
Similarly, research bodies and analysts have become cautious about the earnings of Indian airlines.
The share price of InterGlobe Aviation, IndiGo's parent, has continued to decline. Analysts have cut their target price on the stock after the airline reported a loss of Rs 987 crore during the quarter ended September 30, 2024
As of October end, while Goldman Sachs maintained a Buy rating on Interglobe, it had reduced its target price to Rs 4,800. The investment firm noted that the company’s Q2 earnings per share (EPS) came in at Rs -25.7, while the profit before tax (PBT), excluding foreign exchange losses, was Rs -17.3. Both below Goldman's estimates.
Jefferies had also cut its target price from Rs 5,225 to Rs 5,100. It noted that the airline's earnings was below its estimates due to higher costs of grounding.
Of the 22 analysts tracking the company, 16 maintain a 'buy' rating, three recommend a 'hold', and three suggest 'sell', according to Bloomberg data. The average 12-month analysts' consensus price target implies an upside of 26.1 percent.
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