Investors in the InterGlobe Aviation Ltd stock have little to complain about. The shares have risen as much as 24% so far in 2023. In the past three quarters, the aviation company reported profits. InterGlobe runs the IndiGo airline, India’s largest by market share.
Unfortunately, a slew of factors that aided IndiGo’s performance recently, are losing steam. As the chart alongside shows, the price of aviation turbine fuel (ATF), which forms a significant portion of an airline’s operating expense, is on the rise. “Since the June quarter (Q1FY24), the trend reversal in crude/global jet fuel has reflected in higher domestic ATF prices, which have been hiked by 2%/8% for July/August, with a likelihood of another hike in September,” wrote Prateek Kumar of Jefferies India in a report on 23 August.
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Given this, it is likely that IndiGo’s fuel cost per available seat kilometre (Cask) could be higher in Q2 versus ₹1.60 in Q1FY24. Further, the trajectory of other expenses is a factor to track as Cask excluding fuel and forex was higher by nearly 10% year-on-year in Q1. “This cost inflation could remain sticky amid expansion spree by competition,” according to Kumar.
In any case, Q2 is a seasonally weak quarter for the Indian aviation sector, which means yield, a measure of pricing, would be subdued during the quarter. In the Q1 earnings call, IndiGo had said it is seeing a larger kind of sequential dip in yields this time around.
Now, while IndiGo clocked an all-time high market share of 63.4% in July, its passenger load factor dropped to 83.7% from 90.9% in June. This fall is higher when compared to some of its peers. This could be a function of fleet additions by IndiGo. The airline has guided for a 25% year-on-year and a 6% sequential growth in capacity in Q2. Analysts point out that the company is trying to boost its occupancy by offering more discounts. In this backdrop, investors will closely observe how IndiGo’s spreads, a profitability measure, will move going ahead. Spread is the difference between revenue per available seat kilometre and Cask. There are bright spots, though. For one, rising traction in international travel augurs well for IndiGo’s spread. The airline had noted that cost per unit is comparatively lower for international operations.
“Q1FY24 data for international travel involving India suggests about 900 basis points (bps) swing in market share in favour of domestic carriers. Almost all key international airlines, barring Singapore Airlines, have lost market share,” said analysts at Kotak Institutional Equities in a report on 28 August. Here, IndiGo has been the biggest beneficiary, adding 760 bps to gain a market share of more than 17%, they added. IndiGo aims to increase the share of international capacity to 30% by the end of FY24.
Another boost to profitability could come from the demand supply dynamics, which continue to be favourable for the sector. Demand continues to remain healthy, but supply side constraints persist. “With fresh issues being discussed in Boeing as well as Airbus, it is more than likely that recovery in aircraft supply will be delayed,” said analysts at ICICI Securities in a report on 28 August.
As things stand, IndiGo’s shares are down by nearly 10% from their 52-week highs of ₹2,745.10 apiece seen in July. A rude surprise on profitability in Q2 could dampen investor sentiments. “Sharp drawdown in profitability quarter-on-quarter leaves limited scope of upgrades, in our view,” said the Jefferies report. Hereon, fuel price movement remains crucial. In the medium term, how competition pans out in the domestic aviation market is worth tracking.