After three challenging loss-making quarters, the December quarter (Q3FY23) was expected to be a good quarter for InterGlobe Aviation Ltd, aided by weather. InterGlobe operates IndiGo, India’s largest airline by market share. net profit of the company 1,418 crore, with a net loss of Rs. 1,586 crore in the September quarter, which was better than expected. But this was not enough to cover the losses incurred in the first half of FY23. Thus, for the nine months ending December, the loss of Indigo is 1,233 crores.
Nevertheless, a strong December quarter performance would mean that the deficit for FY23 could be lower than earlier estimated. IndiGo’s management has said that bookings for the current March quarter are strong, though the returns will reflect the impact of the weather. Against this backdrop, IndiGo expects to become operationally profitable in FY2023, excluding the impact of foreign exchange losses.
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The March quarter is a seasonally weak one for the Indian aviation sector, and that is why passenger volumes by airlines are expected to be down sequentially. A report by Centrum Broking said, “Domestic traffic remains resilient with an average of 404,000 passengers per day in January 2023 (down 3% month-on-month against an average of 415,000 passengers per day in December 2022).
This would mean pressure on yields, which is a pricing parameter for airlines. While IndiGo expects this metric to fall sequentially, it maintains that the yield will be higher than pre-Covid levels. Motilal Oswal Financial Services said, “As per our airfare tracker, 30-day domestic forward prices were down 13% month-on-month in January 2023 and 15-day prices were down 22% month-on-month.”
Meanwhile, the softening in the prices of Aviation Turbine Fuel (ATF) is going to give relief. Centrum reported that domestic ATF costs are down 6.3% sequentially in the March quarter so far. There was a sequential decline in the December quarter as well. “The recent drop in ATF costs has provided an opportunity for airlines to lower fares and stimulate demand,” Centrum said.
As such, the demand trend has been encouraging. Data from the Directorate General of Civil Aviation (DCGA) showed that the number of passengers carried by domestic airlines increased by 9% sequentially in December. Compared to 2019 levels, December traffic is down by just 2.2%.
In fact, strong demand helped push Indigo’s yield to multi-quarter highs 5.37 last quarter. In international markets, the airline operates at 105% of its pre-Covid capacity. International services now contribute 23% of the capacity in terms of available seat kilometres. Indigo aims to take this share to 30% in the coming year, which will aid overall yield.
IndiGo expects capacity to be 15% higher in FY24. By the end of December the strength of the fleet was 302. Of this, 238 were fuel-efficient New Engine Option (Neo) aircraft, giving IndiGo a cost advantage. As of December-end, IndiGo’s cash balance stood at 21,924.7 crores. This is helpful amid the entry of new airlines and rising competitive intensity. According to DGCA, this poses a looming threat to the airline’s market share, which stood at around 55% in December. But Indigo noted that consolidation in Indian aviation augurs well for the sector.
To be sure, ATF prices need to be tracked closely given their volatile nature. Also, adverse currency fluctuations are detrimental to earnings. Negative developments on these two factors will weigh on sentiment for the stock, which is down about 9% from its 52-week high. 2,282.10 seen in February last year.
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