Airlines - Nov air traffic: Jet gains from Kingfisher loss; Edelweiss

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Growth in domestic aviation traffic remained robust despite the tough economic environment. With 5.4mn passengers, November witnessed a strong growth of 13.4% YoY albeit slower than high teens observed in last few months. Expectedly, Kingfisher lost the market share by 270bps MoM and 550bps YoY following its exit from several routes. Jet Airways (JAL) emerged as the key beneficiary, snapping up most of the market share gains. The average yield hike of 20%, effective from the first week of November, seems to be holding on. We maintain Buy on Jet Airways given that it is best positioned to benefit from potential weakness in oil prices. 

Strong demand continues, but downside risks remain

Domestic passenger traffic registered a growth of 13% YoY as the 5.4mn strong traffic was the second highest in the history of Indian aviation. Considering the current tough economic conditions, the growth is commendable. However, this is slower than the 17%-22% growth observed since June’11. We remain cautious on the demand outlook given the current weak economic environment.

Kingfisher’s loss is Jet’s gain, Indigo shares top slot

Kingfisher’s passenger traffic of 0.76mn (-19% YoY and -16% MoM) in Nov 2011 is a 3-year low for the company which was forced to cut down capacity to cope with mounting losses. JAL has been able to grab the opportunity with a traffic growth of 15% YoY and 13% YoY. Jet gained 220bps MoM (vs 270bps lost by KFA), clearly emerging as the biggest beneficiary of the former’s troubles. Our channel checks suggest that Jet has seen an influx of corporate bookings as a fallout of the series of flight cancellations announced by KFA. Indigo which became the largest domestic carrier in Sept 2011 shared the top slot with JAL (excluding Jetlite) with a market share of 19.8%.

High yields sustain in busy season

Most of the carriers undertook an average 20% yield increase in the first week of November which seems to be holding on. Cancellation of certain routes by Kingfisher during October 2011 was followed by its passengers shifting to other carriers which eventually helped sustain high fares. 

Maintain Buy on Jet Airways

JAL has a dominant market share among corporate travelers, a low price elastic segment. With KFA (the only other alternative apart from the national carrier) announcing a series of flight cancellations, Jet has emerged as the key beneficiary as reflected by the November market share gains. Further, a 20% rise in fares in November augurs well for the profitability in Q3. We have built in a 5% YoY fall in oil prices and a 5% rise in yields in FY13 for JAL. We maintain our target price for JAL at INR400 based on 7.25x FY13 EV/EBIDTAR.