Nitin Agrawal
Moneycontrol Research
Highlights:
- Yield improvement on the back of grounding of aircraft resulting in reduced competition and lower capacity
- Recent rise in oil prices may hurt companies' performance in upcoming quarters
- Passenger growth needs to be constantly monitored
- Prefer IndiGo in the space
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In light of recent events - Jet Airways' perilous situation and the controversy surrounding 737Max aircraft - it can be said that the aviation sector is going through a turbulent phase.
As per Moneycontrol's airfare tracker, fares for major routes have witnessed a sharp surge in spot airfares for ticket booked 7-15 days before the date of travel as compared to same period last year.
Airlines, which operate over 1,700 flights every day, have been forced to rejig their schedules due to repair work at the Mumbai airport leading to increase in ticker prices.
Cancellation of flights
Apart from rescheduling of flights due to Mumbai airport runway, each airline carrier has got its own problems leading to cancellation of flights. InterGlobe Aviation (IndiGo) has cancelled more than 30 flights a day due to shortage of pilots. For Jet, many planes are grounded due to non-payment to the lessors and it has been using only 70 aircraft out of a fleet of 123 aircraft.
Also Watch: 3 Point Analysis | IndiGo to gain from other airlines’ woes
Recent unfortunate event of crash of Boeing 737 MAX in Ethiopia has led to the ban of the use of this aircraft across many countries and India is one among them. This has affected the listed players viz: SpiceJet and Jet Airways which have 737 Max type of aircraft in their fleet. SpiceJet's 12 Boeing 737Max aircraft have been grounded in a fleet of 76 aircraft.
Holiday season
Further, we believe that rising airfare should sustain as we approach summer holiday season, which is seasonally a peak season for airlines.
Rise in airfare is beneficial for airline companies as it leads to increase in yields. However, there are some challenges which the companies in the space have started facing.
Passenger demand – moderate due to rise in yields
India is a very price sensitive market which is evident from the moderation in the passenger growth (17.2 percent year-on-year) in the 9M FY19 compared to passenger growth of 18.9 percent (YoY) in FY18. In fact, it witnessed a single digit YoY growth of 9.1 percent primarily due to significant increase in the fare. Elevated levels would continue to lead to decline in passenger growth.
What has been a big worry for airline companies is the significant rise in the oil prices, which softened to around $52 per barrel in December 2018 from high of $87 per barrel in October 2018 before rising again. Crude oil prices have spiked more than 25 percent in last three months and have reached the level of $67 per barrel. As per news reports, Saudi continues to push oil prices higher by reducing the output.
We believe IndiGo, the leader in domestic skies with a market share of 39.9 percent, will be the main beneficiary of all the challenges being faced by SpiceJet and Jet.
Jet has been under liquidity strain on the back of mounting debt and losses it has been posting due to higher fuel prices. The company has been struggling to perform well operationally as well. In fact, it has been losing market share to its competitors which stood at 13.9 percent as of December 2018, much lower than the high of above 20 percent that it had achieved in July 2014. Further, grounding of its aircraft due to non-repayment to lessor would add to its woes. And, grounding of SpiceJet's 737 MAX would give the leader an opportunity to strengthen its market share.
In fact, IndiGo has the required capacity to cater to the rising number of passengers as it has aggressively adding capacity. In Q3 FY19, the company added nineteen aircraft to its fleet taking its fleet count to 208. Capacity grew 38.6 percent (YoY) in Q3 FY19. The management sees its capacity growing by 34 percent (YoY) in the final quarter of FY19.
Apart from this, problems at Jet Airways would lead to waning of fever-pitch competition that is expected to bring in pricing power to the leader, which would strengthen the financial performance of the company.
Valuation
In terms of valuation, IndiGo is trading at 4.7 times EV/ projected FY20 EBITDAR (earnings before interest, tax, depreciation, amortisation and rent), which we believe is reasonable given the expectation of significant increase in yields. Having said that, crude oil prices need to be closely monitored as it is the largest cost component for the company and adverse movement in it could hurt the operating profitability of the company.
IndiGo is well placed to retain its leadership position in the Indian aviation sector. We advise investors to accumulate it in a staggered manner.
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