Analysis: Indigo second quarter FY2018 results: soaring high

India’s largest domestic carrier, IndiGo, reported its second quarter results of the fiscal year 2017-2018 (Q2FY18) yesterday. It was a result that surpassed expectations.

IndiGo Q2FY18 results snapshot (in ₹) comparisons to Q2FY17

  • Revenues ₹5,506 crores (up 13%)
  • Costs ₹4,741 crores (up 14.2%)
  • EBITDAR ₹1,581 crores (up 61.8%)
  • Profit before tax (PBT) ₹7,645 (up 333%)
  • Profit after tax (PAT) ₹551 crores (up 294%)
  • Revenue per available seat kilometre (RASK) ₹3.52 (up 12.6%)
  • Cost per available seat kilometre (CASK) ₹3.01 (up 0.7%)
  • Capacity (measured in available seat kilometres) 15.1 billion (up 13%)
  • Performance (measured in revenue passenger kilometres) 12.7 billion (up 15.4%)
  • Passenger load factor 84% (up 1.8 percent points%)
  • Yield (fares realised) ₹3.52 per kilometre (up 12.6%)

Financial performance showed strong top-line growth

As reported in our earlier analysis of IndiGo’s first quarter FY2017-18 results, Indigo is well positioned to capitalise on market growth. Financial performance was driven by market growth, better yield management and also a strong focus on cost control.

Interestingly the second quarter is traditionally a weak quarter for airlines. Most airlines tend to schedule their maintenance in this quarter to reduce capacity. This was the case for Indigo as well and the weakness is seen in the comparative analysis with the prior quarter as below:

Line item Q2FY18 Q1FY18 % change
Revenue (₹ crores) 5506 5955 -7.5%
EBITDAR (₹ crores) 1581 1961 -19.4%
RASK (₹) 3.52 3.83 -8.1%
Load Factor 84% 88% -4.5%
CASK (₹) 3.01 3.08 -2.3%

The higher yields in the second quarter indicate that more people are flying and the aviation growth story of India remains strong.

Costs were kept in line

Total costs as compared to the same period last fiscal year grew by 14.2% against a capacity increase of 13%. Fuel costs rose by six per cent, driven by increases in aviation turbine fuel (ATF) costs. However, Indigo focuses on “managing what you can control”; as such, the airline’s cost control shows in the 2.3% reduction in cost per available seat kilometre (CASK).

IndiGo’s CASK of ₹3.01 is one of the lowest amongst Indian carriers. A low CASK is important driver in a price sensitive market like India. Without a tight control on costs, competitive situations can quickly see airlines pricing themselves below cost. India is seeing a convergence between LCC pricing and that of full-service carriers, and this can rapidly spiral in to a dangerous situation.

Operational issues of A320 NEOs addressed

IndiGo confirmed that all its NEO aircraft are now flying and the total fleet as of the end of the quarter comprises of 141 aircraft including 24 NEOs. The more fuel efficient A320neo’s constitute 17% of the Indigo fleet and this is providing the airline a positive effect on fuel burn and its resultant costs.

For the quarter engine manufacturer Pratt & Whittney also provided compensation. While exact details of the compensation are not disclosed, Indigo confirms that the compensation related to NEO groundings, delivery delays and also loss of profitability due to delayed induction has been received. Additionally, Indigo only confirmed that the compensation received was included both in revenue and cost items. Estimates indicate that this compensation was in the range of 150 – 200 crores for the quarter.

As per IndiGo, the PW1100 Geared Turbo Fan engine issues will take between 15 and 18 months to resolve. Until then, the focus is to ensure adequate availability of spare engines.

Change of fleet strategy

Indigo has signalled a change in fleet strategy where it will now own aircraft outright rather than using a sale and leaseback model. This is indicative of three aspects:

  1. Addressing capital costs
  2. Confidence that the A320NEO technology is here to stay
  3. Reduction in overall cost

With aircraft ownership the airline will take the aircraft on their balance sheet. This is similar to a Lufthansa or British Airways strategy that bets on the continuity of the aircraft and technology thus recovering the capital costs much faster, after which the asset remains on the balance sheet. Compared to a sale and leaseback where the cash outflows are higher and there is no asset at the end of the lease term. As a first step, this quarter also saw the institutional placement of 33.5 million equity shares which generated ₹ 2,479 crores. IndiGo confirms that majority of this amount will be used towards purchase of aircraft.

For the ATR72 turbo-prop regional fleet, Indigo has also indicated that that majority of the aircraft will be taken on the books. We believe this is due to the ATRs having a different liquidity profile in the markets where sale and leasebacks may not be as profitable.

GST impact on the ownership versus the sale and leaseback is under consideration.

Launch of ATR regional operations on track

IndiGo is all set to launch ATR operations from December 2017. The ATR72-600 induction will see the overall CASK for the airline go higher. However, we expect the airline to generate additional revenue by the creation of additional connections within its sizeable network, and recover the higher costs of the ATR operations.

IndiGo has announced the routes for the first three ATRs it will induct. Based out of Hyderabad, utilisation will be at the current levels of the A320 i.e. 11 to 12 hours per day. Additional destinations will include those not serviceable by a A320 jet or those smaller stations not financially viable by the A320 operations.

Between December 2017 and 2019 IndiGo expects to take delivery of 21 ATR aircraft, which will comprise five per cent of total capacity.

Grand ambitions

The grand ambitions of IndiGo are emerging. Not content with being the strongest domestic carrier, IndiGo is fast expanding into related markets.

The core low-cost domestic airline is well established providing a strong foundation i.e. passenger feed and connections. Adding the ATRs puts the regional piece of the puzzle in place. The final part, will be the long-haul low cost flying.

If IndiGo’s bid for Air India international operations is successful, it fast-track long-haul operations with specific assets like slots and traffic rights. Read our analysis on why Indigo bid for Air India.

Even if the bid is unsuccessful, IndiGo’s foray into the long haul market will just be more gradual.

In summary

There seems to be no stopping IndiGo. We commend Indigo on constantly evaluating the marketing and making tactical and strategic changes towards creating a stronger and larger airline. Aspects such as managing the the Pratt and Whitney issues and change in strategy towards aircraft ownership are proof of the same, and great are the results.

Stay tuned for updates.

About External Analyst

The writer(s) are external experts. Bangalore Aviation may not agree with the views expressed by the author. Authors prefer to remain anonymous for a variety of reasons but mostly since they are not authorised by their employers to express their views publicly on the record.

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