Airline Stocks Take-Off as IndiGo Leads the Sky

“Carriers have grounded hundreds of jetliners and are asking thousands of employees to take voluntary unpaid leave in a race to cut costs as cancellations outpaced bookings.”

These were the talking points that most economists, investors, and media personalities continued to repeat when the entire travel and tourism industry was on its way to bust. They even said it in television interviews and at conferences.

These activities showed that Indian airlines were struggling and needed to do something.

While losses kept mounting, Interglobe Aviation (IndiGo), was the first airline to show resilience with its low-cost structure and wide network.

The company is currently taking up its most ambitious initiative. In June 2023, the world's largest plane maker Airbus secured the biggest aircraft order from none other than IndiGo.

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It sealed a multibillion-dollar deal to sell 500 narrow-body planes to IndiGo. The total value of this deal is expected to be around $50 billion!

Following these developments, the company clarified that the above move aligns with its growth strategy and expansion in international destinations. IndiGo has informed that it will start direct flights to six new destinations in Africa and Central Asia, including Nairobi, Tbilisi, and Tashkent, this year.

The company's shares are trading near their 52-week high levels, and it shouldn’t take a genius to figure out why.

IndiGo Share Price Chart

Source - BSE

Where It All Started…

Stories of failed beleaguered airlines are plenty. And this has been going on for over three decades. Still, the domestic players are yet to break the shackles.

In 1990s, it was EastWest and Damania. What followed was Kingfisher’s collapse which you probably already know, and then it was Jet Airways.

The gains for IndiGo started coming in when Wadia-group firm Go First informed exchanges that it couldn’t fly from May 2023. After not meeting its financial obligations, it filed for insolvency resolution, blaming U.S. company Pratt & Whitney's "faulty engines" for grounding 50% of its fleet.

The next day, it soothed nerves by applying to voluntary insolvency resolution proceedings before the National Company Law Tribunal (NCLT).

And ever since the collapse of Go First, it has been all about IndiGo and its moat.

Competition eased in the low-cost airlines segment, which gave IndiGo control over airfares.

In a way, the Indian airline market could soon become a duopoly as IndiGo and Tatas virtually control the market.

What about IndiGo’s financials?

They look impressive now that the company has reported a good FY23 performance. Once growth lagged, IndiGo implemented some cost rationalisation measures for consequent quarters.

It already had a big fleet and everything else to run smoothly, but the volumes needed to improve. As expected, domestic and international passenger volumes increased while a fall in crude oil prices further fuelled the growth prospects.

Mind you, this could change quickly. Crude oil prices play a crucial role for airlines as it is the main product used to manufacture aviation turbine fuel, where a 50-60% fluctuation could be considered normal. Just take a look at the image below that shows the fluctuation in fuel expenses over quarters and years:

Source: Investor Presentation, BSE

Even if something dramatic like the above does happen, IndiGo has a market share of almost 60%.

The combined three airlines of Tata are next in line, and then there’s SpiceJet. The smaller players get affected first (and hard), and IndiGo might not be hurt as badly as expected solely because of crude oil price fluctuations.

Smaller players lose their appetite for expansion due to mounting losses and intensifying competition. This factor, alone, spells the death knell of most aspirants. – That’s what former Kingfisher Airlines’ Vice President has to say.

What Investors and Traders Can Do?

For a moment in the sky, IndiGo looks so strong that it might go on to beat Warren Buffett’s industry predictions. You don’t want to replicate the entire Buffett portfolio because his views against airline companies over the last decade have struggled. (He sold his airline stocks near the market bottom in a panic while choosing to buy gold near its all-time high back in August 2020).

As of March 2022, IndiGo had a fleet size of 275. This number went up to 304 by the end of March 2023. In FY24, the goal is to reach the 350 mark.

The company wants to double its current fleet size to more than 600 aircraft by 2030. And this can be potentially possible, with the airline just placing a historic order with Airbus.

The deal is important for IndiGo (and the entire aviation industry) as it ensures the company will have an uninterrupted supply of new aircraft for the coming decade.

Let’s wait and watch to see if the Indian aviation industry and the company go through blue skies or face heavy thunderstorms en route.