Market share gains likely for IndiGo as SpiceJet, Jet Airways face problems

Airline expected to profit from problems faced by its peers

The InterGlobe Aviation (IndiGo) stock has gained 17 per cent since the start of the month due to operational and financial problems of its competitors Jet Airways and SpiceJet. 

While Jet Airways is struggling to restructure its debt and get additional funds, SpiceJet has been forced to ground some planes (Boeing 737 Max) due to technical problems.

Analysts at Edelweiss Securities believe that the impact on SpiceJet, due to the grounding of 13 737 Max aircraft, will be more with a 28 per cent impact on operating profit in FY20 compared to Jet Airways, which has grounded five planes. However, some of this could be offset given that Boeing is expected to compensate for loss on revenues due to grounding of the aircraft.

IndiGo is expected to benefit the most from the troubles at its rival airlines. The company is expected to deploy higher percentage of new capacity (Airbus 320/321 Neo) to consolidate its position in the domestic market. Analysts expect the airline to gain 11 per cent in operating profit due to demand shift towards it from the two airlines. Rising yields on account of increasing fares should also help improve IndiGo’s top line. 

For the month of February 2019, airfares in the 0-7 booking window were up by about 14 per cent over the peak December 2018 air fares on top nine routes, according to analysts at Prabhudas Lilladher. While Indigo is the clear beneficiary of the problems of its peers, rising fuel prices will continue to keep profitability under pressure. Analysts at HSBC say short-term profitability for the sector could continue to face challenges as oil prices remain high. Furthermore, demand has softened due to increasing fares. 

The analysts, however, add that the sector will benefit in the long run from improving infrastructure, fleet upgrade, maturing demand and slowing capacity growth. What should benefit IndiGo is not just improving market share in the domestic market but also increasing focus on international operations. 

ICICI Securities estimates that the airline could generate Rs 1,000 crore of additional earnings if its share of international traffic increases from 7 per cent now to 20 per cent over the next five years.