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Jet revival uncertain; overall yields to rise
We interacted with a leading aviation expert to get an understanding on recent trends and the future outlook of airlines given grounding of Jet Airways & its possible revival. The interaction further strengthened our positive stance on the prospects of LCCs. We believe that 1) Retention of key airport slots remains crucial to Jet Airways’ (JAL) successful revival 2) Price band in D-90 to D day are expected to tighten leading to higher yields & profitability 3) Domestic passengers & capacity could grow in tandem leading to better control over yields 4) Alliances/Code shares with strong international players’ are vital to IndiGo’s international strategy & 5) Boeing 737 Max is expected to fly by 1st half of 2Q20. Given the uncertainty relating to JAL’s survival & moderation of domestic pax & capacity growth, we expect higher fares to improve profitability of IndiGo & SpiceJet. Retain BUY on IndiGo & SpiceJet with TP of Rs1,623/- and Rs135/- respectively.
* Retaining slots key to JAL’s revival:
JAL’s biggest asset remains its slots in the heavily constrained Mumbai (40-50% of total slot pairs) & Delhi (20-25% of total slot pairs) airports. Approximately 40-45% of total traffic originates in either of these airports. However, with JAL’s operations suspended, DGCA has temporarily reassigned JAL’s slots for up to a period of 3 months. Retention of these slots to remain a key for any successful revival in future.
* Air fares to rationalize in couple of months; yields to remain high:
With JAL suspending operations, ~13% (as on Jan’19) of domestic capacity operated by JAL was flushed out leading to high airfares. As the incumbents foresee to fill this vacuum in next 6-8 months, airfares are also expected to rationalize in the coming months. However, the price band between Departure minus 90 to the actual Departure day is expected to narrow down enabling overall higher yields for the airlines. The flash sales (eg. Rs899/-) which had become very prominent over the past 12-18 months might become few & little.
* Domestic Pax/ Capacity growth to moderate:
Domestic passenger traffic grew at a CAGR of ~20% over FY14-18. However recent capacity constraints have caused air fares to spike thereby impacting growth (14% YoY in FY19). With the incumbents looking to fill the vacuum created by JAL, capacity is expected to grow at 0-5% in FY20. While FY19-22 capacity & pax traffic is expected to grow 10-15%, it shall enable better yields for airlines.
* IndiGo well placed to grow internationally:
With a domestic market share of ~47%, IndiGo is likely operating on its most profitable routes in the country. It is safe to say that any incremental capacity deployed domestically shall be either less profitable or making an outright loss. Therefore, we believe IndiGo is well placed to leverage its large domestic network to fuel its international growth. Alliances/Code shares with strong international players like Turkish Airlines remains the key to success.
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