Rising fuel costs could put IndiGo's yields under further pressure

The company could, however, increase its market share due to supply constraints

Rising crude oil prices, slowing passenger traffic growth, and falling yields have affected the country’s largest airline, InterGlobe Aviation (IndiGo). 

Some of these concerns were reflected in the stock’s performance on Friday, when it fell over 3 per cent in trade, even as the benchmark Sensex was down less than 1 per cent. 

Crude oil prices, which hit a 14-month high and are up 80 per cent since November 2020, are the key headwind for the stock and the sector. Fuel accounted for 39 per cent of IndiGo’s overall costs in FY20 and any sharp rise will impact its ability to increase prices in an environment where pace of demand growth has been slowing. 

What will compound its problem is the seasonality factor as volumes tend to be low in this quarter. 

After 15-21 per cent month-on-month growth in November and December, growth slowed to 6 per cent in January and about 9 per cent in February. 

Load factors, too, declined to 69 per cent in January, compared with 72 per cent in December. As demand growth has been sustained by the visiting friends and family segment, which is price sensitive, it will be difficult for IndiGo to increase prices without volumes getting impacted. 

It was the lack of pricing power in the December quarter (Q3) that led to weak yields and muted revenue performance. The improved availability of vaccines, pent-up demand, and revival in corporate travel should boost demand in Q1FY22, say analysts. 

Though there are some headwinds, analysts continue to bet on IndiGo as they expect it to gain market share on supply constraints and weak competition. Analysts at ICICI Securities expect the company to gain share once the government lifts the cap on capacities (the 80 per cent cap will continue till FY21 end). Besides, with recovery of traffic, more lessors will require cash payments and there could be capacity restructuring by weaker airlines. The capacity cuts could also occur because of higher crude prices, they add.

IndiGo is expected to replace several of its older aircraft (A320ceo), which could keep the near-term supply situation tight. The company’s market share rose 40 basis points month-on-month to 54.3 per cent in January. However, investors should await further gains, improvement in volumes and yields before considering the stock.