ADVERTISEMENT

Grounding Of Boeing 737 Max Expected To Help IndiGo The Most

The grounding of aircraft will only further lower capacity as two large airlines have cut daily flights.



An aircraft operated by IndiGo, a unit of Interglobe Enterprises Ltd., is seen from a control tower as it takes off at Indira Gandhi International Airport (IGI) in Delhi, India. (Photographer: Prashanth Vishwanathan/Bloomberg)
An aircraft operated by IndiGo, a unit of Interglobe Enterprises Ltd., is seen from a control tower as it takes off at Indira Gandhi International Airport (IGI) in Delhi, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

India’s move to ground Boeing 737 Max 8 aircraft will drive up ticket prices and is expected to benefit IndiGo the most as the low-cost carrier has no Boeing aircraft in its fleet.

The reduction in seat capacity is expected to push ticket prices up by 20 percent, Sharat Dhall, chief operating officer of the business-to-consumer segment at Yatra Online Pvt Ltd. told Bloomberg. That, JPMorgan said in a note, will be favourable for industry yields, including for IndiGo, in the March-June period.

The grounding of aircraft will only further lower capacity as two large airlines have cut daily flights. InterGlobe Aviation Ltd., which runs IndiGo, has been cancelling 30 flights a day because of pilot shortage, while Jet Airways has been forced to cut flights as lessors have so far grounded its 37 aircraft for non-payment of dues.

IndiGo, the largest domestic carrier with a 43 percent market share, uses Airbus A320neo and A320ceo. Only two Indian carriers—SpiceJet Ltd. and Jet Airways (India) Ltd.—have Boeing 737 Max 8 in their fleet. SpiceJet has 13 operational, while the beleaguered Jet Airways has five.

The Potential Impact

SpiceJet is expected to witness the biggest impact, according to a report by Edelweiss Securities. It’s has the most sensitive earnings before interest, taxes, depreciation, amortisation, and restructuring or rent costs, with a potential impact of 27.7 percent in the next financial year, the brokerage said. Jet Airways follows at 12.8 percent.

The exact impact, however, will be different as the airlines could receive some compensation from Boeing, depending on the agreements. When IndiGo had to ground some of its planes due to engines issues, it had received compensation from Pratt & Whitney.

Other than the existing aircraft in their fleet, SpiceJet and Jet Airways have also placed orders for more than 120 Boeing 737 Max 8. If the ban results in cancellation of orders, that would hurt their expansion plans and increase rental costs of aircraft in secondary lease market, said JPMorgan.