Aviation industry subdued, IndiGo and SpiceJet our preferred investment bets

New Delhi, December 26, 2017: The industry has been clocking double-digit growth for the past 40 months and the trend continued in November with the industry witnessing 16.9 percent (YoY) growth during the month. Though the performance of the industry, on all parameters except load factor, was down when compared to October 2017, mainly because October was the festival month, which led to better performance.

Operating Statistics for November 2017

Mkt share

IndiGo – Coming out of the engine trouble

With the engine problem of the A320neo aircraft coming to an end, IndiGo maintained its market share at around 39.5 percent in November 2017. The company had grounded 13 aircraft due to the engine issues earlier, most of which were in the sky since October. This resulted in a stable performance in November 2017.

IndiGo failed to register double-digit growth in passenger traffic after maintaining it for last three months. However, its load factor witnessed an expansion of 340bps (MoM) according to moneycontrol.com.

SpiceJet – came to its normalcy

After riding high at the expense of Indigo (engine issue), things had come to normalcy for SpiceJet in October 2017 and the trend continued in the month of November 2017 . Though it witnessed a meagre fall of 50bps (MoM) in the market share, it saw a significant fall in passenger growth (700bps), ASK (1050bps) and RPK (940bps).

Jet – at a standstill

Jet Airways continued to struggle to gain market share. It gained 30bps (MoM) market share in the month of November, and is far from the high of above 20 percent market share that it achieved in July 2014.

Jet witnessed double-digit passenger growth (18 percent YoY) in the month of November 2017. Its RPK witnessed a loss of 400bps (MoM), ASK was down by 670bps (MoM) whereas its load factor increased by 690bps.

Jet continues to face turbulence compared to its peers. The company posted a disappointing set of numbers for the quarter ended September 2017 marred by an increase in fuel and other operating expenses.

However, the management of Jet in the recent analyst meet indicated that they are working towards cost optimisation which is currently highly inefficient when compared to its peers due to higher employee, maintenance and selling cost.

In addition, the management indicated that B737-max aircraft, which are about to join Jet’s fleet, are 15 percent more fuel efficient than the current aircraft and the company has also improved its aircraft utilisation. These initiatives will help Jet in catching up with its peers but we doubt if it would impart any competitive advantage.

GoAir, a small player in Indian Skies in terms of its market share, is showing signs of coming out of the engine issue similar to IndiGo. Though its market share was flat, its passenger traffic witnessed a decline of 450bps (MoM) leading to a fall of 530bps in RPK and 430bps in ASK. We believe GoAir would continue to perform business as usual.

Continue to like IndiGo and SpiceJet

While taking note of these developments, we continue to reiterate our preference for IndiGo and SpiceJet.

IndiGo, the market leader in domestic skies, continued its mojo as is evident from a strong set of 2QFY18 numbers. IndiGo posted a very strong all-around performance with significant growth in revenue from operations and reported a strong profit after tax. We continue to like the business on the back of operational efficiencies, capacity addition plans, and multiple growth drivers.

SpiceJet also posted a very good set of Q2FY18 numbers driven by year-on-year improvement on all operating parameters: yield (up 5%), load factor (continue to be above 92%), ASKM (available seat kilometers) (up 25.6%), RPKM (revenue passenger kilometer) (up 24%).

Indigo and SpiceJet, in our opinion, have got all the right ingredients that are required to navigate at a higher altitude in the Indian aviation sector.

We retain our accumulate recommendation on IndiGo and buy recommendation on SpiceJet as was mentioned in our earlier notes.

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