Valuations reflecting multiple positives for airlines major IndiGo

IndiGo has delivered impressive operating performance in the past six quarters as it navigated cost and capacity challenges. It has managed to mitigate the impact of faulty engine-related groundings. The airline has also managed costs related to grounding, expensive secondary leasing, increasing airport charges, and pilot compensation inflation and delivered stronger yields and spreads. IndiGo's capacity ASK (available seat kilometre) has grown at an annual rate of 11 per cent over the past five years. It has an order book of 980 aircraft and fleet size is expected to hit 600-plus by 2030.

India is a very underpenetrated aviation market, which means a strong growth outlook. IndiGo is adding A321XLRs by 2025, followed by the addition of A350s (widebody) in 2027. It has entered the Business Class segment. The structural situation could help it become a global aviation leader.

While strong FY24 spreads may not be sustainable as capacity constraints ease, but spreads will be sustained at healthy levels.  The fleet supply situation should improve, and IndiGo has better cost structures compared to peers.

With widebody A350-900 aircraft, IndiGo will start operations on long-haul routes in CY27 and double its capacity by CY30, according to management. It has just announced a business class offering, ‘IndiGo Stretch’ to be operational from mid-Nov’24. Its new loyalty programme, IndiGo Bluchip, will allow members to accumulate IndiGo BluChips on every flight, starting Sep’24. It has an order for A350-900 aircraft, with deliveries expected to start from CY27. This will help it to enhance connectivity to southern Europe and potentially the EU and US.

The fleet will double by the decade's end, adding one aircraft weekly on average in the quest to make indiGo a global leader and India to become a global aviation hub. The Indian aviation market is underpenetrated, with one of the lowest domestic/international seats per capita and only 6.5 per cent of Indians holding passports. This provides headroom for growth. Indian aviation passengers could increase from 225 million in FY24 (70 million international) to 510 million by FY30 (160 million international).

Indian airlines placed 32 per cent of total Boeing and Airbus aircraft orders in CY23. IndiGo, which aims to operate 550-600 aircraft by CY30, placed an order of 500 aircraft in CY23 (of the total of 1,124 aircraft ordered by Indian airlines). India is expected to be the third largest in terms of fleet size by CY35.

The fleet expansion could be backed up by a capacity expansion drive in airports, with the number of airports likely to reach 220 from 140 in CY19. Various greenfield and brownfield airport expansions are underway, with Jewar (Noida) and Navi Mumbai nearly operational.

IndiGo served 106.7 million customers in FY24, with a net increase of 63 aircraft. The company has eight strategic partners with a 27 per cent international share in terms of ASKs in FY24. The management is pushing global brand awareness to capture a larger share of the global market.

The revenue per ASK over cost per ASK is the spread for airlines and IndiGo had a spread of around 58 per cent which was well above its historical average of 42 per cent. It could see some normalisation as supply constraints ease and competition (Air India-Vistara is also ramping up) hots up. But it should still be capable of managing 45-plus. Analysts are still upgrading earnings forecasts for the next few financial years. The share price has seen a rapid run-up, however, and the positives may be reflected in the valuations.