Lower crude prices, strong demand to support IndiGo earnings upgrades

Easing crude oil prices, strong demand and IndiGo's expansion plans are expected to boost earnings, while lower fuel costs could improve margins across the aviation sector

The stock of the country’s largest listed airline, InterGlobe Aviation (IndiGo), was the biggest gainer in the Sensex, surging 4.7 per cent on Thursday.

 

It rose 11.6 per cent over the past week on expectation that easing crude oil prices, steady demand and robust outlook will reflect on its financials.

 

SpiceJet, too, was up 2.7 per cent in trade as the sector is very sensitive to fuel costs but as those come down, the financials look less stressed.

 

Given the multiple long-term structural growth drivers of the country’s  aviation market, IndiGo being the market leader, is expected to benefit the most.

 

At IndiGo's analyst meet in early June, the management highlighted plans to reach available seat kilometres (ASKM) or annual capacity of 300 billion. It plans to also increase the share of owned and finance-leased aircraft to 30-40 per cent of the fleet, and raise international ASKM share to 40 per cent by FY30.

 

IndiGo also aims to expand its forex hedge cover to 33 per cent of net balance sheet exposure.

 

It is targeting a fleet of over 550 aircraft, 200 million passengers, and over 3,000 daily departures by FY30. The ASKM target implies 15 per cent annual capacity growth over FY26-30.

 

The end of the West Asia conflict should trigger lower fuel prices and enable international expansion.

 

IndiGo's international ASKM share has increased from 16 per cent in FY16 to 32 per cent in FY26. The international network was 44 destinations and 150 plus routes in FY26. The induction of A321XLRs, and widebodies supports long-haul expansion.

 

IndiGo aims to increase the share of owned and finance-leased aircraft from 20 per cent of fleet in FY26 to 30-40 per cent by FY30.

 

Ownership may help redeploy capital (₹51,700 crore of cash as of FY26) prudently, and reduce forex exposure associated with lease payments.

 

In FY26, the net forex exposure was $9 billion, with net hedge cover of 15 per cent. Balance sheet exposure is hedged with tenures of up to five years. Given exposures to dollar-denominated lease liabilities and maintenance, earnings volatility will be reduced by increasing the net hedge cover to 33 per cent. Moderation in crude prices should lead to earnings upgrades in the FY27 estimates.

 

Air traffic has expanded from 37 million passengers in FY05 to 246 million in FY26, and industry projections indicate the market could more than double by FY35.

 

Improving connectivity, with 90 per cent of Indians living within 100 kilometres of IndiGo-served airports, and increasing affordability should drive growth.

 

Government policy is an enabler with a rapid rollout of the airport network, and initiatives such as GIFT City aircraft leasing, which has already facilitated $5 billion worth of aircraft leases.

 

Domestic aviation operations saw relief through a recently-announced 20 per cent cap on aviation turbine fuel (ATF) price hikes, though international operations are market-linked.

 

Airlines have access to a ₹5,000-crore credit facility, although this is interest-bearing.

 

The domestic maintenance, repair and operations (MRO) industry will register an 11 per cent annual growth through 2035. Facilities like Safran’s India MRO centre would be capable of servicing 300 LEAP engines, reducing dependence on overseas maintenance.

 

IndiGo is likely to carry over 120 million passengers in FY27 — it carried 123 million in FY26.

 

The airline is among the top-10 global carriers in on-time performance rates, and has one of the lowest cost structures. The network includes over 650 direct routes. It has the world's largest order book, including XLRs and A350s. Overall, Indian airlines have outstanding orders for over 1,700 aircraft.

 

The company is also investing in an in-house MRO facility in Bengaluru, the GIFT City leasing platform, and IndiGo Ventures.

 

Cargo is becoming an important revenue stream. Cargo volumes have grown from over 360,000 tonnes in FY24 to above 450,000 tonnes in FY26, with volumes expected to increase by 1.5-2 times by FY30.