IndiGo to limit spreads in FY23 citing rising Brent crude prices, report suggests

As the government has increased the allowable flying capacity to 85% in September 2021 from 50% in June 2021, the broking firm said that there are incremental positives on recovery with daily passenger count improving from 62,000 in May 2021 to 231,000 in late September 2021.

New Delhi: Broking firm ICICI Securities report on Monday suggested that IndiGo airlines may limit spreads in Financial Year 2023 citing rising Brent crude prices among several other factors. The report suggests the InterGlobe Aviation (IndiGo) to limit expanding to new air routes saying, "Entry of new players, delay in recovery of international travel, longer absence of high yielding corporate travel and low cash balance do not provide any rationale for increase in multiples."

"Our earnings cut is driven by higher Brent crude prices of US$65/bbl (barrel) in FY23 compared to US$60/bbl (barrel) earlier and current Brent crude prices of US$78/bbl (barrel)," adds the report.

As the government has increased the allowable flying capacity to 85% in September 2021 from 50% in June 2021, the broking firm said that there are incremental positives on recovery with daily passenger count improving from 62,000 in May 2021 to 231,000 in late September 2021.

The weekly daily fliers came in at 231,000 in the week ended (W.E.) 25 Sep'21 vs 235,000 in the week ended 18 Sep'21. For the week ended 25 Sep'21, the average number of departures flat at 2,038. The number of fliers per departure declined marginally to 113 vs 114 in the prior week. With 269,902 passengers, September 26 saw the highest number of passengers in the month.

"These have been well backed up by improving Passenger Load Factor (PLF)s of 70%/72% in Aug/Sep'21 as festive season firms up. Improving vaccination count, controlled covid cases and pent-up travel demand remain micro positives. Indigo has been able to reach new highs of the domestic market share at 56% in FY22-TD (Till Date) compared to 48/55% in FY20/FY21," stated the report.

The broking firm further said, however, there are multiple headwinds including - (1) high Brent crude prices (currently at US$78/bbl), (2) no sight of international travel recovery. This segment was supposed to be approximately 25% of the total capacity of most Indian airlines buy FY23 and hence, create an oversupply in the domestic market and (3) most airlines are being able to work with lessors on lease payment restructuring and hence, no structural supply cuts are in the offing. Short-term capacity cuts remain tactical measures.