Clearer skies will help IndiGo, but oil a worry
PremiumResumption of scheduled commercial flights may mean better revenues and capacity use for IndiGo
Shares of InterGlobe Aviation Ltd, which runs India’s largest airline, IndiGo, rose 7% on Wednesday on the NSE, following the government’s announcement that scheduled commercial international passenger services would resume from 27 March with the start of the summer schedule 2022, after a gap of nearly two years. The excitement is understandable with pent-up demand for travel.
For IndiGo, this means a rise in deployment of capacity. “Before the covid-19 outbreak, IndiGo’s international passenger travel accounted for 20% of capacity in terms of available seat kilometres. At present, the share is less than 5%. After the resumption of international flying, this contribution is expected to improve gradually," said Mitul Shah, head of research at Reliance Securities.
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International revenues were around 19% of total revenues in FY20, according to IndiGo’s annual reports. International passenger flights were suspended on 23 March 2020. However, airlines operated international flights under air bubble arrangements. The restart of scheduled commercial passenger flights is expected to increase capacity utilization and improve revenues.
Even so, progress is likely to be slow. “The international passenger aircraft utilization 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 relaxation of international travel restrictions will increase its utilization to 13.5 hours per day from about 10.7 in Q3.
Yield (a measure of pricing for airlines) tends to be relatively better in the international segment. Overall, IndiGo’s yield in Q3 increased by 19% year-on-year to ₹4.41 helped by international air bubble arrangements and healthy domestic demand.
International yields are likely to come down as capacity opens up, according to the management. However, increasing aircraft utilization will reduce unit cost. As such, a reduction in covid cases, withdrawal of travel restrictions, and increasing vaccination across the world bode well for the travel industry.
Even so, crude oil prices have surged, with Brent prices at more than $125 per barrel. This would weigh on margins as aviation turbine fuel forms a major chunk of the operating expenses of airlines. As such, airlines might increase fares to cope with rising costs. This may impact demand. Moreover, amid the Russia-Ukraine conflict, the rupee has also depreciated, which creates upward cost pressures for airlines.
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Investors seemed to be taking note of these difficulties given that, despite the jump on Wednesday, IndiGo’s shares have declined by 15% so far in 2022.
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