Indian Aviation Industry In Sweetest Spot, Elara Capital Says

The Indian aviation industry is potentially in the sweetest spot led by strong domestic demand, along with accommodative government policy and a benign fuel outlook, according to an Elara Capital report.

The domestic air traffic, which grew at a compounded annual growth rate of 20 percent in the last three years, is expected to maintain the same growth trajectory in the coming five years, the brokerage said.

Governments intention to make flying affordable and convenient through its new Regional Connectivity Scheme UDAN, and weak fuel prices due to global crude surplus is further going to boost the fortunes of airline companies, the report added.

UDAN aims to fly new 300 million domestic passengers annually by 2022 and 500 million by 2027. Aviation turbine fuel prices have corrected 40 percent in the last three years and will remain weak due to rising supplies from the U.S.

InterGlobe Aviation

InterGlobe Aviation Ltd. (IndiGo), which dominates a market share of 40 percent, has the largest order book of 430 A320Neo fleets, of which 22 has been delivered and rest will be done till 2026. This large order book ensures that the company would increase its passenger carrying capacity at 20 percent over the next three years, the report said.

This would also help the company to get discounts on maintenance, aircraft purchase and rentals to keep costs under control. The brokerage house also expects IndiGo’s domestic market share to rise up to 43 percent by financial year 2019-2020.

Highlights:

• Fuel efficient A320Neo would reduce fuel consumption by 15-20% by FY20.
• Earnings before interest, tax, depreciation and amortisation and rental cost (EBITDAR), and profit expected to grow at a CAGR of 29 percent and 40 percent over FY17-20.

SpiceJet

SpiceJet Ltd., which is the fourth largest airline carrier in India, is expected to maintain its passenger load factor above 90 percent mark for the coming two years. Passenger load factor indicates the performance of a travel company and SpiceJet has been able to maintain this at above 90 percent level for more than two years.

Company’s fleet order book of 275 is the second largest among domestic airlines and this would help the company retain its 13 percent market share.

Highlights

• EBITDAR and profit expected to grow at a CAGR of 29 and 44 percent over FY17-20.
• After bankruptcy in 2015, company has successfully re-build its brand with highest on-time performance of more than 80 percent in FY17.

Jet Airways

Jet Airways Ltd., which focuses more on international routes compared to domestic, is expected to see its EBITDAR under-perform compared to peers like IndiGo and SpiceJet. The airline has domestic market share of 18 percent, while international market share of 39 percent among the domestic players.

Jet Airways has an order book of 75 Boeing 737-Max aircraft, most of which will be deployed for international routes indicating a further drop in domestic market share to close to 13 percent by FY20.

Highlights:-

• EBITDAR and profit expected to grow at a CAGR of 13 percent and 7 percent over FY17-20
• Weakest balance sheet among peers. Net Debt to EBITDA stands at 4.5 times as compared to 1.5 times of SpiceJet and IndiGo is cash positive

This story had earlier carried incorrect target price and potential upside value of Jet Airways and Spice Jet in the chart.