Thursday, July 13, 2017

Air India parts may take time to digest, but IndiGo is one for the long haul

With domestic passenger traffic crossing the 10-million mark for the first time in a month of May 2017 and passenger load factor touching a new high of 88.9 percent, Indian carriers look set to fly high. The aviation industry, though highly competitive, is experiencing a sweet spot thanks to benign fuel prices and an increase in passenger traffic driven by middle-class affluence. In this environment, we believe that the players having excellent networks and performance along with sound financials are well placed.

Interglobe Aviation, better known as IndiGo, the market leader in the domestic skies, is now aiming big with its announced intent of acquiring Air-India’s international operations, along with Air-India Express. Is it being too ambitious, or is the cherry-picking of parts of the national carrier a well-considered strategy that will generate value in the long run?

India’s domestic traffic registered a growth of 20 percent compounded over FY14-17, gaining market from the railways where rail upper class passenger traffic registered a meagre growth and rail non-suburban passenger traffic witnessed a decline.

The industry is building additional capacity and has placed orders for as many as 829 aircraft (current fleet size is 498). As per a report from IDFC, 251 additional aircraft will be added to the fleet by FY20, translating into a capacity increase, as measured by ASKM (Available Seat Kilometers), of 15 percent compounded over FY17-20. This additional capacity is expected to serve a 17 percent increase in passenger traffic.

The industry has witnessed load factor growing from 78.8 percent in FY15 to 81.7 percent in FY17. Load factor is estimated to be stable at around 80 percent with additional capacity and passenger growth.
13/07/17 Nitin Agrawal/Moneycontrol