Shares of InterGlobe Aviation Ltd, which runs India’s largest airline IndiGo, rose 7% on the NSE on Wednesday after the government announced that scheduled commercial international passenger services would resume from March 27 with the start of Summer Schedule 2022, After a gap of about two years. The excitement is understandable coupled with the suppressed demand for travel.
For IndiGo, this means increased deployment of capacity. “Prior to the outbreak of COVID-19, IndiGo’s international passenger travel accounted for 20% of the capacity in terms of available seat kilometres. Currently, the stake is less than 5%. After resumption of international flight, this contribution is expected to improve gradually,” said Mitul Shah, Head of Research, Reliance Securities.
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According to IndiGo’s annual report, international revenues accounted for around 19% of total revenue in FY15. International passenger flights were suspended on 23 March 2020. However, the airlines operated international flights under an air bubble arrangement. The resumption of scheduled commercial passenger flights is expected to increase capacity utilization and improve revenue.
Still, progress is likely to be slow. “The use of international passenger aircraft is expected to be low initially, but eventually, it will reach 100% of international capacity,” Shah said.
In its December quarter earnings (Q3FY22) call, IndiGo’s management had said that the easing of international travel restrictions would increase its usage to 13.5 hours per day, up from around 10.7 in Q3.
Yield (a measure of pricing for airlines) tends to be relatively better in the international segment. Overall, IndiGo’s returns up 19% year-on-year in Q3 4.41 The arrangement of the international air bubble and healthy domestic demand helped.
According to management, the opening up of capacity is likely to reduce international yields. However, an increase in aircraft usage will result in a reduction in unit cost. As such, reduction in COVID cases, withdrawal of travel restrictions and growing vaccinations around the world augurs well for the travel industry.
Nevertheless, crude oil prices have bounced, with Brent prices above $125 a barrel. This will impact margins as aviation turbine fuel forms a major part of airlines’ operating expenses. In such a situation, the airlines can increase the fares to deal with the rising cost. This may have an impact on demand. Moreover, amid the Russia-Ukraine conflict, the rupee has also devalued, which creates upward cost pressure for airlines.
Investors seemed to be seeing these difficulties as IndiGo shares have fallen 15% so far in 2022, despite the bounce on Wednesday.
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