Are airline stocks set to fly high?

After a cool off in oil prices, the Indian aviation sector got another shot in the arm when the government removed cap on air fares, just ahead of the festive season. Airfares for domestic travel almost doubled on key metro routes, ahead of the long Diwali weekend.
 
While a non-stop round trip between Mumbai and Delhi usually costs Rs 12,000, the fares touched Rs 23,000 on October 19.
A one-way ticket to Mumbai from Delhi on October 21 was selling for Rs 12,000 to Rs 29,000, and a one-way ticket from Delhi to Bengaluru was costing Rs 8,000 to Rs 25,500.
The air fare surge did dent demand mildly. Air traffic fell from a peak of 402,697 air passengers, recorded on October 4, to 360,000 air passengers recorded between October 19 and 25. This was, still, higher than those recorded in 2020 and 2021.
 
Analysts expect this surge in air fares, coupled with pent-up demand, to support revenue.
 
Vinod Nair, Head of Research, Geojit Financial Services says, pent-up demand holding well for airlines. Increased ticket prices, moderated fuel costs to improve airline profitability. Recovery trends look sustainable. Expect airlines to report better earnings in H2FY23. 
 
Broadly, rating agency CRISIL expects air passenger traffic volume to recover to the pre-pandemic level for the full fiscal in FY23 itself. According to the agency, in the first five months of this fiscal, domestic traffic stood at 92% of the corresponding period in FY20, while international traffic was at 75%. “This cements our confidence for a return to near-double-digit growth next fiscal, reads a CRISIL note. 

However, Icra expects recovery only by FY24 as prolonged geopolitical tensions, and volatile crude oil prices may keep leisure travel in check.
 
Nonetheless, the country is projected to have 40 crore air travellers, including domestic and international, by 2027.
The government is planning to invest about Rs 95,000 crore for greenfield as well as brownfield airport projects.
 
Analysts say IndiGo remains the only investment-worthy player, but with risks involved.
 
AK Prabhakar, Head of Research, IDBI Capital believes, only IndiGo has sustainable business model. SpiceJet has financial, operational challenges. Akasa Air, Tata Group airlines to threaten IndiGo’s leadership. Airlines won’t have pricing power in long-run. 
 
On Friday, Q2 results of Maruti Suzuki, Tata Power, Dr Reddy’s Labs and Vedanta will be on investors’ radar. Markets will react to the ECB’s interest rate decision, and await Bank of Japan’s monetary policy outcome.