Shares of InterGlobe Aviation Ltd are down 10% so far in calendar year 2022. InterGlobe manages the airline IndiGo.
Admittedly, the subdued sentiments for the stock can be attributed to the sharp rise in crude oil prices. Although Brent prices have fallen below $120 a barrel, there are uncertainties due to the ongoing Russian-Ukrainian conflict.
But amid the dark clouds, one metric should provide comfort and that’s yields, a pricing metric for airlines. With the decrease in covid cases and the decrease in travel restrictions, there is an increased demand for travel. “Weekly average daily flyer count was 341,000 during the week ended (WE) March 12, 22 compared to 324,000 on WE March 5, 22,” ICICI Securities analysts said in a report.
After subdued demand in January and February due to the Omicron variant of the coronavirus, analysts at Credit Suisse Securities (India) Pvt Ltd observe that the strength seen in March is well ahead of seasonality. “Our passenger fare yield estimates are again very strong, similar to November-December 2021. As a positive indicator, far travel (30-day) yields are also strong. March 2022 returns are approximately ₹4.5,” Credit Suisse analysts said in a report dated March 11. Even so, the March quarter (Q4FY22) as a whole is expected to post weak results. Credit Suisse analysts expect a return of about ₹3.9-4 at T4.
Note that during the December quarter (Q3FY22), IndiGo reported a return of ₹4.41, registering a 19% YoY increase, supported by healthy domestic demand due to seasonality and international air bubble agreements. During the third quarter earnings call, IndiGo management said it believes in delivering returns of ₹4+ regularly.
Nonetheless, IndiGo is expected to post losses for the full year. For the nine months ended December, IndiGo reported a net loss of approximately ₹4500 crore. Nevertheless, pent-up demand, the resumption of scheduled international flights and favorable seasonality in Q1FY23 mean a good start for FY23. It also helps the price environment that the June quarter is usually seasonally strong.
But, of course, higher fuel costs are a concern since these costs make up a large portion of airline operating expenses. According to Credit Suisse, “at $120/barrel crude, at yield levels of Rs 3.90, the company will have no profitability and will have to accept price increases in the range of 45 to 50 paise, or 10 to 12% to offset the cost push”.
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