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IndiGo Unlikely to Gain Share as Rivals’ Business Plans Take Off

IndiGo Faces Challenges Amidst Resurging Competition

Source and Citation: Original reporting from unnamed author via ET Bureau, published January 5, 2024.

Analysis for a Layman

InterGlobe Aviation owns and operates IndiGo, India’s largest airline, securing over 60% of the domestic passenger market share. After the closure of its smaller rival Go First in May 2023, IndiGo rapidly gained market share and witnessed increased profitability.

Recent Developments

However, the scenario changed in November, with IndiGo’s market share dropping back to 61.8% from its peak of 63.4% in September. This decline is attributed to the recovery of rivals SpiceJet and Air India/Vistara under the Tata Group, who have overcome past operational issues.

IndiGo Unlikely to Gain Share as Rivals’ Business Plans Take Off

Impact on Retail Investors

Retail investors in InterGlobe Aviation may face challenges as the competitive landscape intensifies. Despite the capacity expansion, the growth estimates for revenue and profit are moderating.

Lower Fares

While lower fares may sustain or boost passenger load factors, yields are expected to be under pressure, impacting IndiGo’s earnings per share trajectory. Investors are advised to moderate return expectations, focusing on dividends and buybacks.

New Investors

New investors may consider waiting for corrections closer to long-term valuation averages before accumulating stocks.

Impact on Industries

For India’s aviation sector, increased competition is beneficial for passenger growth and airports. The industry may experience positive impacts similar to the telecom sector’s cutthroat rivalry, encouraging efficiency and innovation.

Expanded Connectivity

IndiGo’s expansion of routes and planes, along with competitors, will support regional connectivity, making flying more affordable and expanding the total passenger base.

Short-Term Profitability

However, fare wars between IndiGo, Air India, and others may affect industry profitability in the short term. Only well-capitalized carriers will be able to endure losses from discounted pricing battles.

Long Term Benefits & Negatives

In the long run, increased competition can lead to positive impacts, mirroring the telecom sector’s growth after intense rivalry. Viable newcomers force incumbents into higher efficiency and innovation, potentially quadrupling airline travel penetration.

Sustainable Margins

Post-price war shakeout, survivors can coexist with better load factors and asset sweating, ensuring sustainable margins alongside larger volumes and sales.

Challenges

However, the sector involves significant fixed costs, and losses accumulate quickly in discounting wars. Many casualties are expected before stability returns. Price-insensitive business travel may shrink, and foreign carriers may gain share in global long-haul routes.

Short Term Benefits & Negatives

In the short term, passengers benefit from resumed fare discounts, offering more flight choices at cheaper rates. However, this return to intense competition dims profit hopes for IndiGo and rivals alike.

Profitability Concerns

Despite the influx of aircraft in 2023-24, analyst forecasts of revenue and earnings growth are muted due to lower yields. Stocks like InterGlobe may experience de-rating as analyst EPS and target revisions occur.

Market Dynamics

Incumbents are hesitant to order newer, cost-effective planes, fearing compatibility issues with market dynamics. Lifting battered balance sheets back to health also faces challenges.

Focus on Market Share

Listed carriers may focus on protecting market shares through sacrificing margins, hoping to regain pricing power post-consolidation in the future.

In summary, while passengers enjoy immediate benefits, both IndiGo and other players in the aviation sector brace for challenges in the short term, with the hope of stability returning in the long run.

Companies Impacted by IndiGo’s Market Share Stagnation

Indian Companies:

Gaining:

  • SpiceJet (SPICEJET): Increased funding and resolved pilot shortage could allow SpiceJet to capture a larger market share, potentially targeting IndiGo’s budget-conscious customers. Positive sentiment around SpiceJet’s revival might boost its stock price.
  • Akasa Air (Not publicly traded yet): Akasa’s improved pilot situation and potential fleet expansion could allow it to solidify its position in the low-cost market, potentially taking some share from IndiGo. Positive developments for Akasa might attract investor interest when it eventually goes public.
  • Tata Group Airlines (AIRINDIA, AIICLA, VISTARA): IndiGo’s focus on defending its share might leave gaps for Tata Airlines to fill, particularly in premium segments. Improved overall domestic aviation growth can benefit all airlines, including Tata Group. Strengthening of the Tata brand in aviation could positively impact their airline stocks.

Losing:

  • InterGlobe Aviation (INDIGO): Stagnant market share and potential revenue slowdown might raise concerns about the company’s future growth. Lower Ebitda margin expectations could further dampen investor sentiment, potentially leading to a stock price decline.
  • Other Budget Airlines (GOLAIR, TRUJET): Increased competition from SpiceJet and Akasa could put pressure on smaller budget airlines, impacting their market share and profitability. Negative sentiment surrounding IndiGo’s struggles might spill over to other budget carriers.

Global Companies:

Gaining:

  • Aircraft Manufacturers (Airbus AIR, Boeing BA): Increased capacity addition in the Indian aviation sector over the next year could lead to higher aircraft orders, benefiting major manufacturers like Airbus and Boeing. Positive outlook for Indian aviation might bolster their stock prices.
  • Aviation Fuel Suppliers (BP BP, Exxon XOM): Increased air travel demand driven by domestic expansion could lead to higher aviation fuel consumption, benefiting major fuel suppliers.

Losing:

  • Foreign Budget Airlines (AirAsia Group AAH): Increased competition in the Indian budget segment could make it harder for foreign budget airlines like AirAsia to gain a foothold. Negative news about IndiGo might indirectly cast a shadow on other budget airlines operating in India.
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