We expect the aviation sector to clock another subdued quarter with combined EBITDAR/PAT falling 8%/71% y-o-y on rising oil prices and subdued yield expansion. Moderate increase in fares in the face of rising costs has ensured robust domestic pax growth of 21%. Load factors continue to remain healthy at >85%. While airlines have raised prices a tad in Q1 to pass on higher costs, we envisage muted yield expansion for our coverage universe. In the near term, we envisage fuel prices to remain elevated and we revise up FY19/20 Brent forecast to $70/68.
Consequently, we lower FY20E earnings for our coverage factoring higher jet fuel prices. Spicejet (SJET), with renewed focus on profitable growth, will continue to relatively outperform. Indigo, with a strong balance sheet and higher proportion of fuel-efficient aircrafts, is better placed to ride near-term turbulence. Jet Airways (JAL) is likely to face near-term pressures till benefits of cost savings kick in.
Domestic passenger surge sustained its impressive momentum —up 26% y-o-y in April before cooling off to 17% in May. QTD pax growth stands at a healthy 21%. While QTD domestic capacity (ASKM) has risen 19%, revenue passengers flown (RPKM) has grown at 20.5% after a slight slowdown in May. Consequently, QTD PLFs continued to improve, rising 140bps y-o-y to 88.6%. We estimate Indigo, SJET and JAL (standalone) to report PLFs of 90%, 95% and 82%, respectively.
Indigo had indicated in Q4 that it has seen unusual yield pressures in the lucrative 0-15 day short-term booking window, which it expected to reverse by Q1 end. We believe, SJET, with its relative strength in regional routes, will enjoy relatively greater pricing power.
Following an 11% rise in crude, Indian ATF prices have jumped 8% q-o-q (27% y-o-y). However, in July ATF price has corrected 3% M-o-M, indicating some short-term respite. Fuel cost constitutes 40% of overall expenses of an airline and we expect sustained pressure on profitability on higher fuel expenses and INR depreciation. A 10% swing in ATF impacts Indigo, SJET and JAL’s EBITDAR 13%, 15% and 22%, respectively.