>INDIA AIRLINES: Strong traffic growth (MERRILL LYNCH)

■ On track to clock highest annual traffic
Indian airline passenger traffic at 3.91 mn for Feb represented 15.7% YoY growth, broadly in line with our expectations. Industry, however, witnessed sequential decline of 5% mainly due to seasonality. Airline seat factors were largely unchanged. Indian aviation sector is set to clock the highest annual traffic for FY10 and may marginally beat our BofA-ML FY10 estimate of 45.4mn passenger. We see upside to traffic forecasts from existing 15% over FY10-12, which should partially offset cost pressures related to customs &excise duty hike and new service tax imposed on the air travel.

■ Jet leads charge; gains share
Jet (including Jetlite) increased dominance adding 1% share. While legacy carriers like Jet and Kingfisher gained market share, surprisingly low-cost carriers including Indigo lost market share along with the NACIL.

■ Demand supply growth rates remain favorable
During the month, supply (ASKMs) increased ~10% YoY while demand (RPKMs) increased ~16% YoY. We expect industry traffic to register secular growth of 15% annually, exceeding expected increase in supply (8-10% CAGR).

■ Rising oil prices could delay turnaround
Jet Kero prices have already witnessed an increase of 14% over last one month.
Further strengthening in crude will have adverse impact on profitability of airline companies. Each 1% increase in the fuel prices would negatively affect FY11 EBITDAR by ~2%.

To read the full report: INDIA AIRLINES