IndiGo stock continues to languish despite a hike in airfares

Despite a hike in air fares through a fuel surcharge, shares of InterGlobe Aviation (IndiGo) continue to languish, falling 23 per cent from its 52-week highs over a month ago. While the move to hike prices by Rs 200-400 based on route length is positive it is not enough to overcome the steep yield declines witnessed in the March quarter. 

Yields in the March quarter fell 5.5 per cent over the year-ago quarter and 10.5 per cent over the December quarter. 

Analysts at JP Morgan say that the price rise would cover about 65 per cent of the cost inflation (over FY18 levels) related to higher crude oil prices and a weaker rupee. 

A 10 per cent increase in ATF prices and similar rupee depreciation could result in 12-13 per cent decline in operating profit excluding rental costs and 24-37 per cent fall in net profit. 

 
ATF prices in Q1FY19 so far are 20 per cent higher than the FY18 average.

Analysts say, typically, the rest of the industry follows the leader because it has the highest market share and the lowest cost base. However, competing airlines continue to offer attractive rates on select routes and this could be an issue for IndiGo. The company has in the past indicated that it will match competitor fares though the current hike means it is focusing on improving profitability. Though strong demand growth and the rising costs indicate that competitors should follow IndiGo, the airlines will also have to mindful of the reaction price hikes have on demand.

IndiGo had highlighted competitive prices in the period before departures as the reason for the yield pressures in the March quarter. In an earlier note, Citi Research indicated that with significant capacity addition planned by airlines in the second half of FY19, competitive intensity is expected to escalate further and, in the process, yields will remain subdued.  

In the near term the company will also look at sorting out the recurring issue with Pratt & Whitney engines with one more engine snag reported this week. The induction of Neos is important given that Indigo expects to cut its costs further with the fuel efficient planes. Any further delay in replacing the engines and disruption will lead to loss of market share.


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