IndiGo: Capacity addition, lower costs should lead to market share gains
Limited downside for IndiGo from current levels
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Drop in fuel prices, easing competitive intensity, and market share gains are expected to help InterGlobe Aviation (IndiGo) improve its profitability in the coming quarters. While fuel prices are down sharply over the past three months, tariffs, too, have seen an uptick. Brokerages believe that fares have started registering a growth over the year-ago period after registering a decline earlier. Yields or ticket revenues per seat km had declined by about 9 per cent in the June and September quarters. Garima Mishra of Kotak Institutional Equities believes that shift of the festival season as well as capacity cuts because of competition on certain routes could be the potential reasons for yield improvement.
Crude oil prices, which had hit a high in early October, have come down over 30 per cent since then. Given that this is the biggest cost item for aviation companies, accounting for over 40 per cent of revenues, a fall in fuel prices has a bearing on profitability. What acts as an additional tailwind for the airline companies is the strengthening of the rupee against the dollar. A strong rupee not only helps keep fuel costs lower, it helps bring down maintenance and lease costs. Further, the payment on dollar denominated debt, too, becomes cheaper to service.
Crude oil prices, which had hit a high in early October, have come down over 30 per cent since then. Given that this is the biggest cost item for aviation companies, accounting for over 40 per cent of revenues, a fall in fuel prices has a bearing on profitability. What acts as an additional tailwind for the airline companies is the strengthening of the rupee against the dollar. A strong rupee not only helps keep fuel costs lower, it helps bring down maintenance and lease costs. Further, the payment on dollar denominated debt, too, becomes cheaper to service.