IndiGo leads domestic aviation market amid recovery in passenger traffic

A summary of the latest aviation sector analysis by ICICI Securities, focusing on the domestic traffic trends, IndiGo's market share and operational performance, and the impact of Pratt & Whitney's outlook.

A report by ICICI Securities has analysed the aviation sector in India and its prospects for Q2FY24. It has projected that the domestic traffic will remain stable at around 12-12.5 million passengers per month from June to August 2023, with a slight increase in August 2023 to 12.4 million. It has also forecasted that September 2023 traffic could be 12.2 million, based on the current trends. IndiGo continues to dominate the market with a share of more than 63 per cent, while the Tata Group's combined share is 26.8 per cent as of August 2023.

The report has also highlighted the challenges faced by the sector, such as higher ATF prices and lower PLFs, which could affect the profitability of the airlines. However, it has noted that IndiGo has an advantage over its peers due to its better operational aircraft availability and its ability to mitigate the impact of possible aircraft on ground issues caused by Pratt & Whitney's outlook. The report has also mentioned that OEM compensation could cover the incremental cost of secondary leases for IndiGo. Therefore, ICICI Securities remains optimistic about InterGlobe Aviation's performance and outlook, given the favourable demand and supply situation in India and IndiGo's leading position.

According to the latest data, the domestic air traffic is projected to be in the range of 12-12.5 million passengers per month from June to August 2023. The month of August 2023 witnessed a rise in the total passenger count, reaching 12.4 million, compared to 12.1 and 12.5 million in July and June 2023, respectively. Based on the current trends, the passenger traffic for September 2023 is estimated to be 12.2 million. IndiGo continues to dominate the market with a share of more than 63 per cent, registering 63.4 per cent MoM in August 2023, while the Tata Group's combined share was 26.8 per cent in the same month.

IndiGo's PLF remained subdued for the second consecutive month at 83.6 per cent in August 2023. However, SpiceJet and Vistara experienced an increase of 2.0 and 4.3 per cent, respectively, reaching 90.9 and 91.3 per cent in August 2023. Despite lower PLFs, IndiGo maintained its market share, which indicates its better availability of aircraft and pilots compared to other airlines.

The average ATF prices in Q2FY24TD were 6.8 per cent higher than Q1. This, coupled with lower PLFs, may result in lower margins in Q2, but the contribution of Q2 to the overall profit is usually low (average 12.9 per cent over FY16-FY18).

In view of the increased grounding, IndiGo may consider exploring secondary markets. Pratt & Whitney stated that the average fleet grounding would be 350 at any given time until 2026, while it could reach up to 650 Airbus A320neos at one point in early next year. Lufthansa stated that the accelerated GTF removals are likely to cause an average grounding of 20 of its A320neos in 2024.

In such a scenario, IndiGo's potential grounded aircraft count may increase. To cope with the shortfall at all times, the average grounded fleet may not be sufficient, but the peak grounding level should also be taken into account., said ICICI Securities. As such, IndiGo may opt for A320 ceos from the second-hand market for now.