Aviation - Air India toes the line by hiking fares :: Edelweiss

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Recent media reports suggest that Air India (AI) has raised fares. This implies that the national carrier has abandoned its earlier strategy of undercutting competition to regain market share after the recent employee strike (May 2011). The fare hike is in line with our view that post attaining its pre-strike 15-16% market share in October 2011, the airline has no incentive to keep fares artificially low. We believe this move will induce some rationality in industry fares considering the current high cost environment. We view this as a positive development and believe that 20% plus hike in fares taken by all industry players at the beginning of November 2011 is expected to sustain in the current busy season. Jet Airways (JAL), considering its 25% market share and prominence among business class passengers, stands to gain the most.

Event: Air India falls in line with industry, hikes fares

With AI’s market share at 16.6% (domestic) in October 2011 versus 15.4% in April 2011, the airline’s market share is back to the pre-strike level. Media reports suggest that as the airline’s market share has stabilized, it has also effected a hike in fares, in line with other industry players. Our analysis suggests that fares in general have increased by 20-25% across all routes/sectors. This is positive for JAL and for the industry in general considering the current high cost environment.

Our view: Fares to remain high during ongoing busy season

With all industry players upping the ante considering the ongoing high oil prices and losses suffered during Q2FY12, we believe current fare hikes will sustain for the entire ongoing busy season. We continue to value JAL at FY13E EV/EBIDTAR of 7.25x and maintain our target price of INR400. We maintain ‘BUY’ recommendation.