The Indian aviation industry staged a strong comeback with the passenger traffic exceeding the pre-covid levels in most of the months in 2023.
Data from the Directorate General of Civil Aviation showed that the number of passengers carried by domestic airlines from January to November rose over 5% compared with the pre-covid times (2019) primarily driven by the demand-supply dynamics.
December has also seen strong traffic to date with average daily passengers at 442,000, ICICI Securities noted. “If we extrapolate the trends seen in December, total December traffic would be about 13 million,” the brokerage said in a report on 17 December. This is in line with the level before covid period.
However, on a year-on-year basis, traffic in December indicated a mere 2% growth. In fact, November saw a single-digit drop (9%) after 20 months. “Slower growth in passengers could be combination of high air fares, constrained capacity,” said analysts at Jefferies India in a report on 15 December.
The Indian aviation market is facing supply chain issues. Earlier this year, Go First’s operations were suspended due to faulty engines supplied by Pratt & Whitney. InterGlobe Aviation Ltd, which runs IndiGo, India’s largest airline by market share, has also been affected by this issue. IndiGo estimates grounded aircraft to be roughly 75 by FY24 end.
However, IndiGo gained at the expense of Go First with its market share hitting an all-time high of 63.4% in July and September. This boosted investor sentiment with the IndiGo stock surging nearly 48% in 2023 so far.
“(As such) We believe the next trigger for the (IndiGo) stock will emerge basis clarity on the supply chain issue. There has been continuous news flow around the same but we believe that airlines should be able to chart a clearer path if the original equipment manufacturer (Pratt & Whitney) is able to adhere to stated roadmap,” said analysts at ICICI Securities in a report on 17 December. It is encouraging that IndiGo stuck to its capacity growth guidance of over 15% in FY24.
Meanwhile, falling aviation turbine fuel (ATF) price is acting as a tailwind. After falling 6% in November, ATF price has declined further by 5% sequentially in December. Still, the average price of fuel in the December quarter is higher by nearly 11% against the September quarter. Spot jet fuel suggests ATF price may slip further sequentially next month, said Jefferies.
Moreover, healthy demand trends would continue to support yield, which is the revenue a carrier earns per passenger per kilometre. IndiGo expects the yield in Q3 to be on the same level as last year, which was at a multi-quarter high of ₹5.38.
But for FY24 as a whole, yield is likely to drop year-on-year. Nuvama Research hosted CAPA India where the specialist aviation consultant said it expects yield to decline by 3% in FY24. This is due to the normalisation in airfares, which would be offset by the further grounding of aircraft expected in the second half of FY24 (H2FY24). The fall also stems from the weak yield seen last quarter.
CAPA India has raised its guidance for passenger load factor from 80% to 85% in H2FY24 as planned capacity inductions have not materialised as expected, and demand momentum continues. While H2FY24 looks promising for the Indian aviation sector, a further deterioration in the supply-side situation could be a dampener.