Strong passenger traffic, improving yields support IndiGo's flight

However, rising crude oil prices could offset top line growth and impact margins

The stock of the country’s largest airline, IndiGo, was up 7 per cent over the last couple of trading sessions on expectations that strong passenger volumes, improving yields and no restrictions on sale of stake by promoters would boost prospects and investor sentiment.

Analysts at Credit Suisse who have an outperform rating on InterGlobe Aviation (IndiGo) believe that the company could turn profitable in the December quarter on the back of strong yields and traffic improvement with load factors for the sector at near pre-covid levels.

For the week ending December 4, passenger traffic at 357,000 which is 89 per cent of the pre-pandemic average (April 2019-February 2020). There has been a decline in passenger traffic as compared to the week ended November 27 which at 374,000 (93 per cent of pre-Covid levels) was the highest levels of traffic since the start of the pandemic and about. While the number of fliers fell on a sequential basis, the impact of Omicron remains limited till date, according to analysts at ICICI Securities. Passenger load factors (PLF) of major airlines have risen and are over 75 per cent on average; IndiGo’s PLF has rose to 78 per cent in October this year as compared to 74 per cent in September.

The other trigger for the stock is an extraordinary general meeting called by the company which could amend the company’s Articles of Association leading to the removal of restrictions on transfer of promoter shares. Both promoters had the first right of refusal if either of them wanted to sell their stake to a third party. While the move does not end the tussle between promoters, removal of restrictions is considered positive by brokerages.

Though improvement in pricing and higher load factors should aid yields, the street will keep an eye out for the movement in crude oil prices. After falling from a peak of nearly $86 per barrel on October 26 to $68 a barrel earlier this month on Omicron and slowdown worries, prices have jumped back over $75 and would pressure on profitability.

The entry of new players in CY22 could add to the competitive intensity in the sector which is struggling with high debt and below capacity operations.

While demand is expected to stay strong as Omicron fears fade and load factors should improve, investors should await consistent improvement in passenger traffic as well as stable pricing before considering the stock which is down 16 per cent from its peak in mid-November.