Aviation sector soars new high in FY18

We believe despite cost pressure, aviation sector is poised for growth based on lowering cost of air travel and growing middle-income population.

Mar 29, 2018 11:03 IST India Infoline News Service

In FY18, aviation sector continued to grow driven by hike in airfare (due to capacity constraints) amid strong passenger growth.

Passengers carried by domestic airlines during Jan-Dec 2017 were 117.2mn as against ~100mn during the corresponding period of previous year, thereby registering a growth of 17.3%, according to Directorate General of Civil Aviation (DGCA). The first two months of 2018 also saw 22% yoy passenger growth. Hence, monthly PLFs for major airlines have been on constant rise.

Indigo maintained highest market share of ~40% followed by Jet Airways, Air India and SpiceJet at 14.3%, 13.3% and 12.6% respectively during FY18 (data available till February 2018).

The year witnessed several flight disruptions due to faulty engines. In March 2018, DGCA directed Indigo and GoAir to ground 11 Airbus 320 neo planes due to Pratt & Whitney’s faulty engines. It led to cancellation of ~480 flights by Indigo and ~120 flights by GoAir till March 30, 2018.

Monthly PLF is on continuous rise for leading airlines
Jan-17 Dec-17 Jan-18 Feb-18
Jet Airways 86.8 88.5 88.7 90.4
Indigo 90.0 90.8 89.7 91.8
SpiceJet 93.6 95.6 95.0 96.3
                                        Source: IIFL Research, DGCA

We expect that recurring issue with A320 planes could impact Indigo's revenues for a brief period. Meanwhile, temporary market share loss of Indigo will benefit competitors such as Jet Airways and SpiceJet.

Aviation turbine fuel (ATF) contributes about 30-35% of airlines’ cost of operations. The ATF prices increased sharply since July 2017 trailing the Brent crude price increase. The ATF prices averaged around Rs56,450 per kilolitre in Q3FY18, ~12% higher than the year-ago period. The price surge has affected operating margins in the sector. 

We believe despite cost pressure, aviation sector is poised for growth based on lowering cost of air travel, growing middle-income population and capacity constraints in other public transport services such as Railways. In addition, government’s “UDAN” (Regional Connectivity Scheme) scheme aiming at connecting small cities to metro cities at affordable prices will support overall growth. The scheme is expected to add 1.3mn new passenger seats across new networks. Also, fleet modernization by the airlines will protect their profits despite ATF price pressures.

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