The aviation industry has made a remarkable comeback from the pandemic and is now poised for explosive expansion.
And the numbers for Indigo look amazing. In 2QFY23, compared to a year ago:
Available Seat Kilometres (capacity) increased by 145%
Revenue Passenger Kilometre (the number of paying passengers multiplied by the distance flown) increased by 232%
Load Factor (occupancy) went to 79.6% from 58.7%
Yield (pricing) went up by 50%
Revenue was up 328%
Additionally, the government has been committed to enhancing India’s air infrastructure. Under UDAN, the Centre plans to add 100 new airports by 2024. This will give a massive boost to India's airline industry, which is already the fastest growing in the world.
And the stock? -17% in the last year. Why doesn't Indigo make for a good investment despite all the high growth?
While the number of passengers (and revenue) increased back to pre-pandemic levels, Indigo still made a loss; its PAT margin was at -8.3% in 2QFY23. This wasn't as bad as the same quarter the previous year, where Indigo’s loss was a little more than its revenue. But still, still a loss!
Fuel prices have gone up dramatically over the last year. Crude is up from US$ 80 a barrel last year to US$ 100 now, after reaching a high of more than US$ 120. Fuel price for Indigo went up from Rs. 63 last year to Rs. 123 last quarter. Fuel accounts for nearly half of Indigo’s total expenses, making everything rather sensitive to oil price movement.
When the rupee depreciates against the US$, it hurts Indigo. In fact, in the last quarter, Indigo was profitable at an EBITDA level with a 5.6% margin. It was high depreciation and foreign exchange losses that led to the loss.
The airline space is one marked by high competition. Consumer choices are usually driven by price and availability, and airlines (especially low-cost ones) play heavily on offering the best prices. However, this often results in losses. With two new players have entered the Indian market (Akasa Air and Jet Airways), and Air India’s restoration under Tata, pricing is bound to suffer.
Despite unsustainably high fuel costs, increased competition, risk on pricing, and potential for continued losses, Indigo is trading at levels seen before the pandemic. At 8x EV/EBITDA, Indigo is expensive given the near/medium-term challenges.
💡 Our View - Despite high growth, and a long runway, there are too many roadblocks for the industry. Sustainable profitability looks far away as the industry grapples with near-term challenges like fuel inflation and medium-term challenges of heightened competition.