An IndiGo aircraft prepares to land at Chhatrapati Shivaji International Airport in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)  

Investors Find IndiGo Better Bet Than Peers Despite Engine Woes

InterGlobe Aviation Ltd., parent of India’s largest airline IndiGo, remains investors’ preferred stock among peers despite engine troubles grounded its flights in March.

IndiGo has outperformed Jet Airways Ltd. and SpiceJet Ltd. so far this year despite cancelled flights, a weaker rupee and higher fuel prices.

Investors Find IndiGo Better Bet Than Peers Despite Engine Woes

The budget carrier cancelled close to 935 flights in the second half of March after the Directorate General of Civil Aviation grounded its aircraft with Pratt & Whitney engines. Its impact is on passenger traffic is still not known as the regulator hasn’t released the data yet.

The rupee has depreciated by nearly 2 percent and fuel prices have increased by 7 percent. A weaker rupee and rising oil prices are a negative for aviation companies as most of their costs are dollar-denominated and fuel costs are equivalent to a third of their revenue.

Why IndiGo Outperformed

Passenger Growth

IndiGo’s passenger growth was better than its listed peers’ in January and February after six consecutive subdued months. The airline added 20 percent and 25 percent more passengers, respectively, over the same months last year. In the second half 2017, IndiGo’s passenger growth lagged that of Jet Airways or SpiceJet due to delay in capacity addition.

Investors Find IndiGo Better Bet Than Peers Despite Engine Woes

The recent grounding of A320 Neo planes will again impact the passenger growth in March. That would be limited as its nearest competitors have a 90 percent plus passenger load factor or capacity utilisation.

No Financial Impact

Financial impact of a potential slowdown in passenger growth will be borne by engine maker Pratt & Whitney. IndiGo had said in earnings conference calls that if had received credits for similar engine troubles and flight disruptions in the past.

Capacity Addition

The domestic passenger growth in the last one year has been around 17 percent on an average, with IndiGo benefiting the most. The company inducted the highest number of aircraft to support this jump.

Investors Find IndiGo Better Bet Than Peers Despite Engine Woes

The company was also able to maintain a healthy passenger load factor of 88-90 percent during the period.

The domestic passenger traffic is expected to grow 15 to 20 percent in India in the next three to five years. To benefit from it, the three listed airliners have plans to induct new aircraft, with IndiGo expected to add the most.

Investors Find IndiGo Better Bet Than Peers Despite Engine Woes

Cost Efficient

In a price-sensitive market, rising fuel prices and rupee depreciation could impact SpiceJet and Jet Group more as IndiGo has been more cost efficient. IndiGo’s cost per available seat kilometre was Rs 3.3 in the December ended quarter, at least 13 percent lower than its nearest listed competitor SpiceJet.

Investors Find IndiGo Better Bet Than Peers Despite Engine Woes

Unit costs may fall further as the newer Airbus A320neo and A321neo aircraft that the company has been buying are 15 percent more fuel efficient than their predecessors. Though the fuel costs have risen 7 percent, these are not expected to impact airlines.

The delay in capacity addition is working in favour of all airline companies as that has kept airfares at a high level in the peak quarter (April to June). The rising aviation turbine fuel prices will not directly hurt, as these companies are able to pass on the increase in cost to customers.
Deepak Jasani, Head of Retail Research, HDFC Securities

Air India

Interglobe Aviation Ltd., IndiGo’s parent, was the first carrier to express interest in debt-laden Air India. Yet, yesterday the budget airline said won’t consider buying it under the current plan as it doesn’t have capability to acquired and successfully turn around all of Air India’s operations.

The government said it will sell 76 percent in the airline, along with 100 percent in its low-cost arm Air India Express and 50 percent in the ground handling unit. A potential buyer will have to take on more than half of the Rs 54,000 crore debt. The government plans to retain the remaining 24 percent in the airline.

From day one, IndiGo has expressed its interest primarily in the acquisition of Air India’s international operations and Air India Express, Aditya Ghosh, president at InterGlobe Aviation, said in a statement. “That option is not available under the government’s current divestiture plans for Air India.”

Brokerages Divided

Opting out of Air India was the “wisest thing to do” by IndiGo, according to Motilal Oswal. The homegrown brokerage considered the move as a since it removes the overhang of a successful acquisition and the post-acquisition integration of Air India.

But there were some others like SBICAP Securities that felt Air India would have been “great value buy for IndiGo”. The brokerage expects the stock give up some of the gains on the current development.

Given the current eligibility criteria to bid for Air India, we believe competition for this asset would be limited. It would had provided a lucrative bid price and great value buy for IndiGo.
SBICAP Securities