Analyst Corner: Indigo exits Nov at closer to 65% of pre-Covid levels

Sweet November. Modal share gains from rail are giving a meaningful fillip to volumes of air travel and that of Indigo in specific. This has helped Indigo exit November at closer to 65% of pre-Covid levels of passenger volumes even as overall long-distance air-conditioned travel is at modest 45% y-o-y levels. Load factors for air travel have also likely crossed 80% levels recently, suggesting return of business travellers. The risk to industry dynamics from reduction in flying by past frequent air travellers is receding.

November was a telling month in terms of shift of traffic to air from rail. Rail volumes in the exit week were at one-third of pre-Covid levels while the market leader in Indigo was potentially at two-thirds of pre-Covid levels. The corresponding numbers for the entire month were a bit more normalised at ~40% and 60% of pre-Covid levels of demand for rail travel and Indigo, potentially impacted by surge in volumes related to festive season demand and inability of air travel to service the same – note that increase in capacity limit for airlines to 70% of pre-Covid capacity levels came only a couple of days prior to Diwali.

Our assessment of the change in number of domestic air travellers per flight suggests that daily average load factors for air travel as a whole have potentially crossed 80% levels in the exit week of November. A higher load factor typically leads to a faster breakeven for airlines. It also suggests the return of business travellers that is helping add momentum to recovery in air travel volumes. Based on our assessment, the market leader in Indigo is already close to operating at the 70% capacity cap. This is typically an indicator of the regulator considering the next set of increase in capacity limit. The recent rise in Covid-19 cases may defer the increase in capacity limit for now.

However, considering the safety steps taken by airlines and the curbs they put on community transmission of Covid-19, we expect a higher capacity cap to get announced soon.

The meaningful shift of share to air from rail has happened largely on account of Covid-19. Modal share gains by air from rail (if extrapolated) can add 20% growth to air travel volumes. Such share gains can thus help protect industry dynamics (demand-supply and such pricing) from the event of select classes of frequent fliers reducing instances of air travel. We note that the Indian market is different from the rest of the world in context of a dominant share of traffic comprising sticky VFR or ‘Visiting Friends and Relatives‘ passenger travel. 15% share of corporate tie-ups in overall domestic air travel of 15% (as per market leader) is the sub-set that may see meaningful reduction in travel.