High passenger traffic, dip in oil prices continue driving aviation sector’s profitability

Domestic passenger traffic in March is likely to rise by 9.4 percent on month to 132 lakh, comfortably surpassing pre-COVID levels, JM Financial said.

Higher passenger traffic and a fall in crude oil prices in recent months continued to aid the aviation sector’s profitability. The trend is likely to have continued in January-March of this year, according to a report by JM Financial.

Domestic passenger traffic in March is likely to rise by 9.4 percent on month to 132 lakh, comfortably surpassing pre-COVID levels, JM Financial said in the report. During March 2022, the number of passengers who boarded a flight was 106.2 lakh, according to data by the Directorate General of Civil Aviation (DGCA).

Greater passenger traffic in March is likely to culminate into higher passenger load factor, which could continue aiding the performance of companies such as Indigo, Air India, and others. Passenger load factor (PLF) is an indicator that measures the percentage of available seating capacity that is filled with passengers in an airline.

In February, Indigo’s PLF increased by over 5 percent on month, while that of Air India’s rose by nearly 2 percent. The trend is likely to have continued in March as well.

The increase in traffic comes at a time when DGCA approved 22,907 flights per week between March 26 and October 28, which is 10 percent lower than the corresponding period in 2022.

“The dips in weekly flights come at a time when passenger numbers are surpassing pre-COVID figures. This should likely aid PLF’s across airlines,” according to the report.

Taking into consideration favourable conditions for the aviation sector, Indigo’s market share increased slightly in February as compared with the previous month, JM Financial said.

Adding to these fundamentals is the current weakness in global crude oil prices, which has significantly lowered rates of aviation turbine fuel (ATF). “Lower ATF prices during 4Q (down ~7% QoQ) coupled with stable currency should likely aid profitability albeit not as high as 3Q,” JM Financial said.

Additionally, ATF demand in India is expected to rise 17 percent on year to 86.1 lakh ton in the next fiscal year beginning April, according to the country’s oil ministry.

Brent crude prices on Intercontinental Exchange have slipped 8 percent since the beginning of March as macroeconomic worries escalated following the collapse of Silicon Valley Bank.

There are fears that the ripple effects of the collapse of Silicon Valley Bank in the US could be felt in other sectors as well and hit economic activities, lowering demand for crude. This could further lend support to the aviation sector in India as the country imports around 85 percent of its oil needs.

“The aviation sector remains well placed given tailwinds of high domestic air passenger traffic and weaker crude environment,” JM Financial said.

“Indigo is likely to benefit from improving demand conditions. However, Rakesh Gangwal’s stake sale will continue to weigh on the stock even as business fundamentals witness an improving trajectory,” according to the financial service group.

Brokerage firm Motilal Oswal had recently reiterated their ‘Neutral’ rating on Indigo’s stock with a target price of Rs 2,110 apiece.

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