Time to stay calm. We consider the recent pause in volume recovery less relevant and expect secular growth drivers to help air travel volumes return to pre-Covid levels in FY2023. We expect Indigo to report healthy and durable spreads from FY2023 given benign medium-term outlook for crude and competitive intensity. A potentially adverse year for air travel in FY2022 would only work in Indigo’s favour. We reiterate ‘buy’ with an unchanged Rs 1,870 Fair Value.
Covid-19 a shot in the arm for the secular theme of modal shift: The focus on safety after the pandemic would accelerate the shift to air from rail. Return to a fully dynamic pricing environment would help airlines reap such benefits.
Discovery of new domestic routes is another secular theme: Just to put some perspective, the new routes launched during FY2017 added ~8% to volumes in FY2020. Such support would continue over FY2021-23 timeframe. For instance, a single airport in Darbhanga (Bihar) has breached into the top-50 airports in its first month of operation in November 2020.
Limited share of metro-to-metro routes: Such routes account for a modest 20% share of demand where some part of travel may get obviated. In October 2020, such traffic reached modest 33% of pre-Covid levels versus 45% levels for the remaining traffic.
Limited share of international travel to US/Europe for Indigo: Of the 24 destinations that Indigo covers, majority travel happens for visiting family and friends. Pure leisure travel accounts for minority share. Indigo does not operate flights to the US and Europe at present.
Recently released annual reports of Indigo’s peers suggest a negative spread (excluding forex) of Rs 0.25-1.05 per ASK for FY2020 versus nil spread for Indigo.
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