In analysts of IIFL Capital Services recent report, they had highlighted that YoY growth of domestic passenger traffic is coming off, down from +20% YoY in H1FY24 to high single-digit growth in Nov. The industry situation from a supply perspective has been favourable so far, with capacity growth (ASK) averaging 10%. GoFirst’s bankruptcy and SpiceJet’s ‘capacity cuts’ have partly off-set the capacity growth of other carriers. However, SpiceJet has secured equity funding of Rs23bn, which may help the company get past balance-sheet issues and possibly scale up capacity. If SpiceJet is successful in adding capacity, analysts of IIFL Capital Services may see industry capacity growth outpacing demand growth. Unless volume growth stays strong, this may lead to pressure on load factors and/or fares. Fall in crude should support profitability in the near term, but medium-term profitability will depend on whether the favourable demandsupply equation sustains.
Domestic traffic growth has moderated:
Domestic passenger traffic has decelerated from +20% YoY in H1FY24, to +10% Oct and +8% in Nov. Analysts of IIFL Capital Services estimate December volume growth to be at 8-10% YoY. They recently trimmed their FY24 domestic passenger traffic growth to 12% vs 15% earlier.
GoFirst’s bankruptcy, SpiceJet’s capacity cuts supported demandsupply balance so far:
GoFirst filed for bankruptcy in May 2023 and ceased operations. SpiceJet’s capacity is declining 40% YoY. On the other hand, Indigo’s domestic capacity has been growing at about 20% YoY. Other carriers (excl. Indigo, GoFirst, SpiceJet) are growing capacity at ~30% YoY, mainly driven by Akasa. Overall, the average YoY capacity growth in the industry post GoFirst’s bankruptcy has been about 10%. Against 10% capacity growth, volume growth was close to 20% till Sep, supporting YoY improvement in load factors. In Oct and Nov, capacity growth and volume growth converged. Demand-supply balance may turn adverse if
SpiceJet adds capacity aggressively:
The benefit from GoFirst bankruptcy will enter the YoY base in May. If SpiceJet starts adding capacity aggressively, the industry level capacity may start increasing at more than 10% very soon. If volume growth does not stay strong, it may lead to pressure on load factors and/or fares.
SpiceJet reported losses in Q2FY24; Equity raise may support capacity growth:
SpiceJet reported revenue of Rs14.3bn in Q2FY24, down 29% YoY and 27% QoQ. Although gross margin (revenue, less fuel) was higher YoY, there was significant negative operating leverage due to the sharp fall in revenue. Now that SpiceJet has secured equity funding of Rs23bn, the company may look to scale up operations.
Indigo’s market-share gains may pause:
Indigo has been the biggest beneficiary of the financial troubles at GoFirst and SpiceJet. Indigo’s market-share has improved from 56-57% in the early 2023 to 63% in recent months. If Indigo’s capacity growth rate comes off due to P&W engine inspections, and other carriers add capacity, the upward trajectory of Indigo’s market-share may take a pause.
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