Interglobe Aviation: Kotak Institutional Equities rates IndiGo’s parent company ‘buy’, says demand suited to fleet expansion

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New Delhi | Published: March 19, 2018 2:22:04 AM

While the grounding of additional A320neo planes is a negative, it is unlikely to lead to material operational disruption; TP unchanged at Rs 1,500.

airlines sector, airlines industry, indigo. asia, middle eastMost of India’s international traffic is bound towards Africa/Middle East and Asia, mostly to destinations with a flying time of 3-5 hours from India.

India’s airlines are set to increase their fleet count by 14% over FY2018-25. Capacity constraints at metro airports over the next 2-3 years may lead to deployment of part of the incremental fleet on non-metro routes or international routes. Strong growth in traffic on non-metro routes over FY2013-18 and the possibility of market share gain by IndiGo on international routes lends us confidence that enough demand exists to absorb IndiGo’s 20% capacity CAGR over FY2018-2020. Retain Buy.

India’s airlines to increase fleet capacity at a CAGR of 14% over FY2018-25

Data on aircraft fleet addition shows that Indian carriers will increase fleet size at a CAGR of 14% over FY2018-25. We note this capacity addition is based on: (i) disclosed firm aircraft order book, (ii) assumption that new fleet is incremental and is not simply replacing older aircraft, and (iii) exclusion of any additional aircraft hiring carried out by airlines from the short-term leasing market. Of the incremental 835 aircraft to be added, 450 would be added by IndiGo alone, with SpiceJet and GoAir (131 aircraft) following suit.

Dependence on non-metro domestic airports and international routes to increase 76% of total air passengers were handled by the top-10 airports in FY2018 (till January 2018), compared to 78% in FY2013, suggesting continued high dependence on a few airports. Further, most of these airports are operating at very high capacity utilisations, implying that near-term passenger growth at some of these airports may be limited.

Mumbai is a case in point where no additional slots are available, and the new airport at Navi Mumbai may not be operational at least for the next couple of years, leading to limited passenger volume growth at this airport. Our analysis of expansion plans of top-10 airports indicates that these airports are set to increase capacity at 13% CAGR over 2018-22, barely keeping pace with aircraft fleet addition. Further, most capacity growth will be back-ended, implying that airlines will focus on non-metro routes, UDAN routes, and also increase their focus on international routes. Robust passenger volume growth over FY2013-18e at non-metro airports lends us confidence that these airports can continue to see robust demand.

Neo update: DGCA orders grounding of 8 aircraft

DGCA ordered IndiGo last week to ground 8 of its A320neo aircraft which were fitted with one or more of a particular serial number of P&W engines (3 planes with both faulty engines were grounded in February 2018). While additional grounding of aircraft is a negative, P&W’s latest announcement of a fix for these particular aircraft should boost supply of modified engines, and should not lead to a material operational disruption. Further, revenue loss to IndiGo will be made good by P&W. The GTF engine is expected to clock the 1 million hour milestone by end of 2018, by which time we believe most issues pertaining to the engine would be resolved. Retain Buy with an unchanged target price of Rs 1,500.

14% CAGR for fleet addition over FY18-25

Data available from aircraft manufacturers shows that India’s four leading airlines – IndiGo, Jet Airways, SpiceJet and GoAir have together placed orders for 835 aircraft, with deliveries staggered till FY2025. On an existing base of 558 aircraft, this implies FY2018-25 CAGR fleet addition CAGR of 14%. The strong 14% fleet addition will require greater aircraft handling capacity at airports, some of which are already operating at high capacity utilisations. Capacity at some of the top-10 airports by number of passengers handled has already been exhausted; most of these airports are undergoing capacity expansion which would come through only in the next 2-4 years leading to limited passenger growth at some of these airports. In the absence of granular airport wise capacity data, we have relied on updates from AAI, private airport operators and other industry updates to assess current capacity and capacity growth.

International operations can provide an additional growth avenue

Most of India’s international traffic is bound towards Africa/Middle East and Asia, mostly to destinations with a flying time of 3-5 hours from India. We believe LCCs, with their large narrow-body aircraft order books, may look to serve these routes in the near future.

More Neos to be grounded

IndiGo will ground six additional neo aircraft. These aircraft have been fitted with one P&W engine of a particular serial number. The grounding of these aircraft will lead to operational difficulties in the near-term. However, P&W’s latest announcement that a fix has been found, and that it will seek EASA and other regulatory approvals shortly leads us to believe that the issue may be short-lived. That said, we expect all of P&W issues to be resolved only by CY2018-end, by which time the engines would have completed a million hours of flying time.

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