IndiGo, SpiceJet face Omicron risk in 2022

Market


The recovery trends in domestic air passenger traffic data tell us that the underlying demand is robust. With the easing of the second covid wave restrictions, traffic has improved consistently in recent months. Analysts expect traffic in December to show improvement over November.

Ashish Shah, analyst, Centrum Broking Ltd, said: “December passenger traffic is at 90-95% of pre-covid levels. One could argue that it is the December effect (seasonally strong period) but the fact is that traffic has improved and is resilient.”

Upward journey

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Upward journey

While this augurs well, rising cases of the Omicron variant of coronavirus are a looming near-term threat to the pace of recovery. If restrictions are imposed again, it may potentially lengthen the journey to reach pre-covid levels, which in turn, could weigh more heavily on smaller aviation companies. “As we enter 2022, the impact of the Omicron variant of coronavirus requires close monitoring. Unfortunately, this also coincides with the lean March quarter. But if Omicron doesn’t spoil the party, Q4FY22 should be a decent quarter and losses of aviation companies might drop significantly,” added Shah.

As things stand, 2022 is set to be all about going back to normal operations. Note that scheduled international commercial passenger flights were supposed to start from 15 December. However, following the Omicron scare, the ban on international flights has been extended to 31 January. As investors keep a tab on the development, crude oil price continues to remain a key variable to track for airlines as fuel forms a huge chunk of operating costs. Currently, Brent crude oil prices are firm, although they have declined from their October 2021 highs. Overall, so far in 2021, Brent crude oil prices have risen by around 50%.

The coming year is expected to see the launch of Akasa Air. Besides, Jet Airways is expected to resume operations. This indicates that the industry will remain competitive. “The moot question is whether competitive pressures will worsen, but it’s too premature to comment on it now. Even so, the theory of fares rising may not play out in 2022. Currently, fares are healthy owing to the government’s fare regulation,” said Shah. As such, investors will watch the impact on yields (a measure of pricing for airlines) whenever the fare regulations are withdrawn.

Separately, Air India’s integration with the Tata Group would be interesting to watch. Meanwhile, despite the troubles in the sky, IndiGo’s investors have had a decent year, with the stock appreciating 16% in 2021. IndiGo’s relatively better balance sheet and large domestic market share (54% in November) hold it in good stead. But further sharp upsides may be difficult. “We continue to believe that the IndiGo stock is fully pricing in a strong recovery in CY22,” said analysts from Edelweiss Securities. But, sentiments for smaller and more vulnerable peer SpiceJet have remained poor, with the stock falling by 28% so far this calendar year.

Understandably, the pandemic has meant both firms have incurred losses. In FY21, net losses of IndiGo and Spicejet stood at 5,800 crore and 1,000 crore, respectively. FY22 is set to be another painful year. For the half year ended September, net losses of IndiGo and Spicejet were about 4,600 crore and 1,300 crore, respectively. As of 30 September, both airlines had negative net-worth.

Edelweiss has a ‘hold’ rating on stocks of SpiceJet and IndiGo with target prices of 70 and 1,986 per share, respectively; on Tuesday, the stocks closed at 2,001 and 68 apiece, respectively, on the NSE. Investors will watch for signs of consistent recovery in 2022, which could help a safer landing eventually.

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