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MOSL: AVIATION-Fare uptick visible in a seasonally strong 1Q-Sequentially lower ATF prices, strong INR to support profitability

​Aviation: Fare uptick visible in a seasonally strong 1Q; Sequentially lower ATF prices, strong INR to support profitability further

• Fare uptick visible: Our one-month forward fare tracker for 11 routes shows an upward trend in fares over a seasonally strong 1Q. We believe yields for airlines (IndiGo and SpiceJet) would improve QoQ in 1QFY18. In 4QFY17, airlines’ fares faced downward pressure due to seasonal weakness; IndiGo’s yield declined ~5% YoY and SpiceJet’s yield declined ~8% YoY.
  
• Domestic passenger growth slipped below 20% YoY; industry at peak PLFs: Domestic passenger growth rate slipped below 20% YoY recently, primarily due slower capacity addition in the domestic market. Average passenger growth for April-May was 16.4% YoY (v/s 22% in FY17), driven by 14.8% YoY growth in ASK (v/s 20% in FY17). Average RPK grew ahead of ASK at 16.7% YoY (v/s 22% in FY17) due to increased PLF at 87.2% (84.4% in FY17). We believe slower domestic capacity addition and peak load factor in a seasonally strong period should allow airlines to exercise some pricing power.
  
• Lower ATF prices and strong INR to support profitability: In 1QFY18, ATF price declined 5% QoQ (from INR55.4/liter in 4QFY17) and increased 16% YoY (from INR45.4/liter in 1QFY17) to INR52.7/liter. INR appreciation along with lower ATF prices and increased air ticket fares should result in sequentially higher profitability for airlines.